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... ings: (1) the failure of exports to grow as fast as imports in most years; (2) declines in our terms of trade; (3) declining competitiveness in many locally made products, and (4) the further growth in foreign debt. As mentioned above, the net income deficit is the main part of the current account deficit. In recent years this deficit has increased from $ 2. 8 billion in 198283 to $ 18. 6 billion in 19992000.
Does a high level of foreign liability matter? The main consideration of whether or not such borrowing is a good idea depends on what we do with the borrowed funds. If they are used to finance the import of consumption items, then we can be seen as living beyond our means, because the time will come when the loan must be repaid with interest and, having added nothing to our productive capacity, the repayment will require a reduction in our current consumption levels. On the other hand, if the funds are allocated to the purchase of items that will raise our productive capacity, then the loan can be considered a proper and productive one. In this latter case, our ability to increase exports or reduce imports would be enhanced, and this would impact directly on our ability to repay the loan. Experts are divided on the issue of whether having a foreign debt is a major problem.
One view is that the current account deficit is no problem because normal economic activity requires borrowing, and that the free floating exchange rates and flexible interest rates will always even out international receipts and payments. They also argue that it is private sector borrowing which makes up the large part of our overseas debt, and that these private sector investors must bear the consequences of any mistakes they make in their obligations to overseas lenders. The opposite view argues that all foreign borrowing imposes an exchange obligation on the Australian economy at some point. As mentioned earlier, if the borrowings are invested in activity which produces future revenue for Australia, then foreign exchange obligations are taken care of.
However, if the borrowings fund consumption then the economy as a whole must service the debt at a later stage. A related effect is that any private sector loan defaults lower a countrys credit rating, increasing the cost of future borrowings. It is also argued that not all foreign debt is private sector owned, in fact the public sector have not ceased to borrow overseas, and do not use borrowings to generate foreign currency earnings. Clark argues that increasing dependence on foreign savings exposes the economy to sudden shifts in market confidence, leads to higher borrowing costs for Australian business and makes the economy more vulnerable to external shocks. He states that overseas investors fear a depreciation in the $A, because of our large foreign debt, and consequently investors believe that any investments in Australia are at risk of falling in value in the event of a depreciation in the $A.
Investors therefore demand higher rates of return on investments in Australia. A result of the higher returns demanded by foreign investors is the direct effect on interest rates for Australians. Our interest rates on government and statutory authority bonds have to be higher than would otherwise be the case in order to attract the foreign savings we need. These costs are then passed on to Australians through higher government charges, taxes, and interest rates. Regardless of whether continuing foreign debt is a problem for the Australian economy it is a fact that Australias net overseas indebtedness has been growing in absolute terms, and relative to the GDP. Stabilizing our foreign debt will be a difficult task.
To achieve this the international community needs to continue to invest in Australia because it is their investment that finances our current account deficit. The time that it takes to achieve stabilization depends on a number of factors. Some of these are exchange rate movements, the level of interest rates on our foreign debt, the composition of the current account deficit (i. e. whether it is made up of borrowings or share issues) and the size of the current account deficit.
Efforts will need to be made to reduce overseas borrowings and to get Australians to save more. Clark argues that we need to: (1) keep our wage increases, inflation and interest rates down near and preferably lower than the rates enjoyed by our major trading partners; (2) encourage more investment in export-expanding and import-replacing industries; (3) provide incentives for Australians to save more, including tax reductions; and (4) further improve the productivity of our workplaces, transport and shipping facilities and management, to boost exports and make imports less competitive and attractive. Even if we do stabilize our level of foreign debt, the size of our current account deficit and level of debt that requires servicing still remains huge, leaving Australia exposed to any downturns in our trading position and at the mercy of world interest rates. BIBLIOGRAPHY Clark, D, 1997, Student Economics Briefs 1998, AFR Books John Fairfax Publications, Australia Ebay, M, 27 February 2001, Speech to the ABARE Outlook 2001 Conference [online] http: web so 270201. html (14 March 2001) Kriesler, P, 1995. The Australian Economy - The Essential Guide, Allen and Unwin Pty Ltd, Australia Lewis, Garnet, Drake, Juttner, Norris, Tread gold, 1998, Issues, Indicators and Ideas: A Guide to the Australian Economy, 2 nd ed, Addison Wesley Longman Australia Pty Ltd, Australia OTHER REFERENCES ABARE 2001, WTO agricultural reforms needed to arrest failures [online] http: web 2 MR.
htm (14 March 2001) ABARE 2001, Record commodity export earnings in prospect [online] http: web (14 March 2001) Gruen, D, 2 February 2001, Australias Strong Productivity Growth: Will it be Sustained [online] http: web feb 01 bu 0201 03. pdf (14 March 2001) Stevens, G, 27 February 2001, Economic Performance and Issues in 2001 [online] http: web ag 270201. html (14 March 2001) Stevens, G, 22 February 2001, Aspects of Australian Economic Performance in 2000 [online] http: web ag 220200. pdf (14 March 2001) Stevens, G, 3 February 2000, The International Economic Outlook [online] http: web ag 030200. pdf (14 March 2001) Stevens, G, 15 October 1999, Trend and Cycle in the 1990 s: Australias Current Expansion [online] http: web Nov% 2099 bu Stevens speech 1199. pdf (14 March 2001)
Free research essays on topics related to: current account deficit, foreign debt, australian economy, productive capacity, interest rates
Research essay sample on Current Account Deficit Foreign Debt