World Bank data shows that over the past 50 years the domestic savings rate in Australia fell below the investment rate by, on average, 1% of GDP. Given the long time period, this is not a trivial difference. What stopped the domestic savings rate from being a binding constraint for the rate of investment was an inflow of foreign savings.
In short, one of the reasons that Australia’s standard of living is amongst the highest in the world is because it has been open to foreign investment.
Now to tie the discussion together.
China sits poised to be a major supplier of capital to the Australian economy. This is fortuitous given that an inflow of savings from traditional sources such as the US and the UK can no longer be taken for granted. Governments in these countries are running large budget deficits and this reduces the available pool of savings that can be lent abroad. In addition to a large public debt, other countries such as Japan are also in the midst of a demographic transition that will almost certainly lead to a decline in the savings rate.
If China is eschewed as a source of capital, then our rate of investment will inevitably be less than it could be, with capital intensive sectors of the economy such as mining and infrastructure being the most affected. And less investment means a lower standard of living.
This may be viewed as an acceptable trade-off if, for example, it is considered that Chinese investment poses an unacceptable sovereignty risk. Clearly, proposals for foreign investment need to be considered on a case by case basis, but why Chinese investment, which will inevitably come with government connections, would rarely be in our national interest is not clear. The onus is now on Tony Abbott and the Coalition to make that case.
James Laurenceson is a senior lecturer in economics at The University of Queensland. This article first appeared at The Conversation.
