Australia and the Second Age of Macquarie

I recently did a lot of thinking about my country's convict heritage and the economics of colonial Australia. In fact, this year marks the 200th anniversary of the governorship of Lachlan Macquarie, the influential early Governor of New South Wales who is sometimes called “the father of Australia.”

The early 18th century is sometimes called “the age of Macquarie,” as the reforming governor attempted to get the colony's institutions right, through the establishment of key public buildings, its own currency and making convicts and ex-convicts (the “emancipists”) stakeholders in the new society.

Naturally, relations with indigenous Australians were important but as we know, fraught with tragedy. As part of his vision, Macquarie put a lot of focus on infrastructure and was keen to foster innovation and entrepreneurship.

In some instances, the very colony of New South Wales (and Van Diemen's Land, later renamed Tasmania) could be called Australia's first public-private sector partnership.

But one thing is for sure: As a small, geographically isolated place, the young colony relied on foreign investment — and Macquarie knew that. As a small exporting nation, with low rates of saving, Australia has always been reliant on foreign investment for its economic development.

In their seminal work “Australia in the Global Economy,” the economic historians David Meredith and Barry Dyster take us through Australia's history of trade and investment, with a recurring theme of openness leading to growth and prosperity. In the 19th and early 20th century, it was Britain that provided nearly all our foreign investment, as we Australians moved from a group of colonies to federation.

British investors funded the infrastructure as Australia built up an export base based on wheat, wool and gold (our original "rocks and crops"). Britain aside, some other players were also investing in Australia. For example, there was interest from Germany. In 1872, the Siemens company supplied the porcelain insulators that were used in the Overland Telegraph line between Darwin and Adelaide.

They were the forerunners of some of the big German companies we know of today on the Australian landscape, such as Bosch in manufacturing, Deutsche Bank in finance and Hochtief (owners of Thiess and Leighton Holdings) in the construction sector.

In World War II, just as Prime Minister John Curtin famously “looked to America” strategically in the war effort, Australia's industry also looked to the United States in terms of foreign investment. U.S. multinationals became major players in manufacturing in post-war reconstruction and in the resurging minerals industry in Australia.

In the 1970s and 1980s, Japan became a major player in Australia. After the economic pact was signed in 1957 — only 12 years after the end of the war — Australia's commodities helped fuel Japan's post-war industrialization miracle. Eventually, the trade links led to Japanese investment in Australia as Tokyo realized how important resource security was to its own economic development.

In today's world, foreign investment to Australia is still led by the United States, UK, Germany and Japan, but we are also seeing some new players on the scene, such as China, India, the ASEAN states and some of the emerging nations.

Of course, China and India receive a lot of attention, but they are still relatively small players compared to the OECD nations. For example, even at the end of 2008, the stock of Chinese investment in Australia was ranked 15th, with the UK and the United States having over 50 times that level.

So what's the bottom line? Foreign investment, from convict times all the way to today, is beneficial to Australia's economy. It helps us build infrastructure, helps us develop our export industries and assists in technology transfer to lock in our future prosperity. We can't rely solely on domestic savings to fund investment.

If we were to do so, as the Treasurer Wayne Swan pointed out recently, we could expect “business investment to fall by about 25%, output initially by 3%, and employment would be around 200,000 jobs lower.”

According to a study by Access economics, foreign-owned firms in Australia accounted for 14% of employment (equivalent to around 1.3 million jobs) and made significant contributions to output (value added), exports and R&D expenditure.

Of course, investment is a two-way street, and Australia's outward investment has become important in demonstrating our skills and capacity in Asia and around the globe. Take financial services, for instance. Macquarie Bank is so well-know globally that, maybe 200 years on, it's the age of Macquarie again (the bank even adopted Lachlan Macquarie's holey dollar as its corporate symbol!).

The Australia and New Zealand Banking Group (ANZ) has also spelled out its vision to become Asia's regional bank, and is putting its resources into action everywhere from India to Indonesia. And the strength of our superannuation industry shows that Australia's financial services sector is very important regionally and globally.

In short, international investment — both outward and inward — is part and parcel of Australia's global engagement with the world and the key to our nation's prosperity and progress.