Has international borrowing or lending driven Australia's net capital inflow?

Over the recent decades the most significant global imbalances have been between Asia-Pacific economies, with most attention directed to the imbalances of the largest economies, China, Japan and the United States. In contrast, this paper examines how external account imbalances and real long term interest rates are determined in smaller open economies. It first derives the proposition that external imbalances and long term interest rates move together whenever saving-investment shocks are predominantly domestically sourced, but move oppositely when saving-investment shocks mainly emanate abroad. It then shows that in the case of Australia, an Asia-Pacific economy that has borrowed heavily from abroad since the mid 1980's, rising net capital inflow has had a statistically significant negative impact on domestic real interest rates. This suggests that over that time net international lending rather than net foreign borrowing was mainly responsible for the variation in its external imbalance and real interest rates.

Has international trade in saving improved US economic welfare?

Over the past decade international policy-makers have perceived the current account deficit of the world's largest foreign borrower economy, the United States, as a threat to global economic and financial stability. Yet, by bridging the US domestic saving-investment gap, capital inflow that matched the huge US current account deficit also enabled a faster rate of domestic capital accumulation than home saving alone would have permitted. Consistent with the theory of international capital movements, this study identifies and compares the respective contributions of domestic and foreign saving to US gross domestic product per worker over the two decades prior to the onset of the US banking crisis. By revealing that foreign borrowing contributed significantly to raising US output and hence living standards over this period, it adds a new dimension to the debate about global imbalances.

Re-examining the "twin deficits" hypothesis: evidence from Australia

This paper re-examines the relationship between fiscal imbalances and net foreign borrowing. A general analytical approach is first developed which suggests that, other things equal, a rise (fall) in any advanced economy’s fiscal deficit should be fully matched by a rise (fall) in its net foreign borrowing, in accordance with the so-called twin deficits hypothesis. In the case of Australia, one of the world’s largest foreign borrower economies for its size, empirical estimation yields the novel result that Australia’s consolidated budget imbalance and its foreign borrowing were approximately twinned on the basis of quarterly data for 1983–2009, when Australia’s exchange rate floated and international capital mobility was high. This result is consistent with the conceptual framework and suggests that fiscal policy is likely to be ineffective as an instrument for influencing the real economy.

Macroeconomic impact of foreign aid to developing countries

The thesis looks at the macroeconomic impact of foreign aid. It is specially concerned with aid's impact on the public sector of less developed countries < LDCs> . Since the overwhelming majority of aid is directed to the public sector of LDCs, one can only understand the broader macroeconomic impact of aid if one first understands its impact on this sector. To this end, the thesis econometrically estimates " fiscal response" models of aid. These models, in essence, attempt to shed light on public sector fiscal behaviour in the presence of aid inflows, being specially concerned with the way aid is used to finance various categories of expenditures. The underlaying concern is to extent to which aid is " fungible" -that is, whether it finances consumption expenditure and reductions in taxation revenue in LDCs. A number of alternative models are derived from a utility maximisation framework. These alternatives reflect different assumptions regarding the behaviour of LDC public sectors and relate to the endogeniety of aid, whether or not recurrent expenditure is financed from domestic borrowing and the determination of domestic borrowing. The original frameworks of earlier studies are extended in a number of ways, including the use of a public sector utility function which is fully consistent with expected maximising behaviour. Estimates of these models' parameters are obtained using both time-series and cross-section data, dating from the 1960s, for Bangladesh, India, Pakistan and the Philippines. Both structural and reduced-form equations are estimated. Results suggest that foreign aid foreign inflows to the official sector> is indeed fungible, albeit at different levels. Moreover, the overall impact of aid on public sector investment, consumption, domestic borrowing and taxation varies between countries. Generally speaking, aid leads to increases in investment and consumption expenditure, but reduces taxation and domestic borrowing. Comparative analysis does, however, show that these results are highly sensitive to alternative behavioural assumptions and, therefore, model specification.

Tax incentives for foreign direct investment part II : Design considerations

Part I of this article concluded that tax incentives for foreign direct investment (FDI) have become increasingly common over the past 10 years or so, especially among developing countries, and that there is substantial evidence to support the proposition that tax considerations now play an important role in many investment decisions. Countries seeking to attract FDI often feel compelled to offer tax inducements that are at least as attractive as those offered by their neighbours or competitors. Countries do so at a cost, however, and that cost may be substantial. Governments are thus placed in a dilemma - can they afford to cut taxes in order to attract investment, and can they afford not to? The second part of this article assumes that countries, and especially most developing countries, will continue to feel obliged to provide tax incentives. The aim of this part therefore is to examine ways in which those incentives can be made more effective and more efficient, thereby reducing their cost to the host country.

Tax incentives for foreign direct investment part I : Recent trends and countertrends

According to the conventional wisdom, tax incentives for investment - in particular for foreign direct investment (FDI) - are not recommended. That is the view held almost universally by theorists and by the international bodies that advise on tax matters.' Tax incentives are bad in theory and bad in practice. They are bad in theory principally because they cause distortions: investment decisions are made that would not have been made without the inducement of special tax concessions. They are bad in practice, being both ineffective and inefficient. They are ineffective in that tax considerations are only rarely a major determinant in FDI decisions; they are inefficient because their cost, in terms of tax revenue foregone, often far exceeds any benefits they may produce. Other criticisms are also frequently levelled against tax incentives for FDI - they are inequitable (since they benefit some investors but not others), they are difficult to administer and open to abuse, and they lack transparency. Thus, it is not surprising that ''the standard advice given by institutions like the World Bank and the lMF to developing countries is to refrain from offering tax incentives to foreign investors".2 The purpose of this article is not to question that advice or to challenge the conventional wisdom - except in one respect. Recent evidence does suggest that tax considerations are an increasingly important factor in investment decisions and that special tax incentives have become substantially more effective as instruments for attracting FDI than they were 10 or 20 years ago.3 The first part of this article, published here, examines some of that evidence, reviews some recent trends in national policies towards FDI, attempts to suggest why investment incentives have become more important and more effective, and looks at the pressures that are exerted on governments, especially in developing countries, to compete for FDI by offering special incentives. The second part of the article, to be published in the Bulletin next month, assumes that many countries will continue to offer tax incentives to investors regardless of the best advice, and considers how incentives might be designed in order to increase their effectiveness and efficiency.

Exports, Inward Foreign Direct Investment (FDI) and Regional Economic Growth in China

The relationship between exports and economic growth is strong in developing economies. Both externality effects of exports on the non-exports sector and higher marginal productivity in the exports sector in relation to the non-exports sector play an important role in promoting exports and GDP growth. The underlying theoretical model of FEDER, 1982, is used with the data on the Chinese provinces and it is shown that the economic structure, degree of openness and policy environment have a significant role in the relationship between exports and economic growth.

Foreign Direct Investment and Regional Export Performance in China

This paper investigates the impact of foreign direct investment (FDI) on the export performance of China at the provincial level. First, it presents a theoretical discussion of the impact of FDI on foreign trade, and then an empirical study of the impact of FDI on the export performance of regions in Chin. It has been found that the impact of FDI on exports differs across three macro-regions in China. The effect is stronger in the coastal region than in the inland regions. Although FDI shows a positive and significant impact on exports from the central region, its impact on the western region is found to be insignificant.

Casey: four decades in the making of Australian foreign policy

Richard Casey was involved in shaping Australian foreign policy for over four decades. Casey's attitudes, ideas, policies and actions towards the rest of the world are therefore an important part of a Liberal tradition in Australian foreign policy. To examine Casey's place in the Liberal tradition this article explores Casey's positions on the great international issues of two periods: the 1930s and the 1950s. The conclusion of the article is that three key ideas shaped Casey's foreign policy, and therefore also lie at the centre of the Liberal tradition; firstly, a strong attachment to the idea of the English speaking alliance; secondly, a realist perspective on international affairs; and, thirdly, a consistent strand of anti-communism.

Legal professional privilege and the foreign lawyer in Australia

Legal professional privilege is very important to lawyers and clients alike. It has evolved within the common law world over a period of centuries. In a domestic Australian context the test to establish what attracts advice privilege has become reasonably well settled. However, the increasingly international character of commerce has revealed new challenges. Is the current test appropriate to determine whether advice given outside Australia by a foreign lawyer is privileged? This article considers that question in detail. After examining the historical development of legal professional privilege, the article discusses Kennedy v Wallace (2004) 208 ALR 424 (at first instance) and Kennedy v Wallace (2004) 142 FeR 185 (on appeal). The article concludes that the current test is both capable and appropriate if properly applied.

Southeast Asian perceptions of Australia's foreign policy

This article argues that while the US alliance remains at the forefront of Australian security policy, the deepening of ties between the United States and Australia has the potential to complicate Australia's relations with its Southeast asian neighbours. Moreover, the manner in which the Howard government has attempted to manage this shift in policy has only exacerbated the problem. Australian pronouncements of support for the US policy of pre-emption, the perceived preference of the Australian Prime Minister to take on the role of ‘Deputy Sheriff’, and the unwieldy approach taken by the Australian government in policy announcements pertaining to maritime and security policy have caused unnecessary tension and mistrust between Australia and some Southeast asian states.