Introduction

Picture if you can a thriving trading hub on the Australian coast. It uses imported capital equipment and
processes, and temporary migrant labour, to extract and process an abundant natural resource for on-sale
to China. The business brings wealth and prosperity to the local community. Over time, public debate
emerges about whether rewards are being fairly divided between locals and foreigners, and how to manage
ecological degradation.

A mine or refinery in present day Western Australia or Queensland? Could be. But what I have actually just
described are the arrangements for trading in trepang – or sea cucumbers, a Chinese delicacy
– that began around 1700 between the Yolŋu people of Arnhem Land and itinerant fishermen from
Makassar on Sulawesi, part of modern-day Indonesia. By the mid-19th century, the Makassar fleet was
supplying an amazing 900 tons of trepang to China every year.

The existence of such a striking historical echo of today’s debates is less surprising when one
remembers that Australia is home to the oldest continuing culture on earth. For more than
65,000 years this continent has been cultivated by First Nations peoples. In that context, I want to
acknowledge the Gadigal people of the Eora Nation as the traditional owners and custodians of the land on
which we are meeting this evening and pay my respects to Elders, past and present.

I also want to welcome all of you to the A50 forum, an event initiated in 2016 to highlight the
benefits of investing in Australia. There are many important issues to discuss in the current climate,
and the organisers have put together a fantastic program tomorrow, involving government leaders, the
regulatory community and the corporate and financial sectors, to do just that. With such a rich main
course to come, I have no intention of competing. Instead, I offer merely a light starter to put
tomorrow’s discussions in context – reviewing the historical sources of economic growth in
Australia, and the role played by foreign investment.

When economic conditions are as challenging as they are today, it can be easy to forget just how
prosperous modern Australia is. Measures of relative affluence, such as GDP or wealth per head, regularly
place the country in the top echelon globally. Of course, the distribution of that prosperity is far
from uniform – so it would be brave for a new and infatuated stranger to declare Australia an
earthly paradise. But coming as I do from a country whose GDP per head
has been more or less static since the global financial crisis and lies between one-quarter and one-third
lower than Australia’s, I can tell you that cross-country gap feels very real.

How Australia got here is long-debated; this evening I want to discuss three important drivers:

• Its unusually diverse range of resource endowments – below ground, above ground, and beyond the
  seas.
• Its strong but adaptable pro-growth institutions – supporting political, legal, macro and
  microeconomic and financial stability.
• Its longstanding welcoming environment for foreign investment.

Australia’s unusually diverse resource endowments

Many countries have resource endowments of some kind. What is different about Australia is it seems to
have the full set! That diversity can be seen in the evolving shape of its exports over the past
200 years (Graph 1). But it also applies to its as-yet untapped potential.

To see that more clearly, let’s divide Australia’s endowments into three.

Below ground

It is sometimes said that Australia has long relied on ‘old world’ mining exports. But while
it’s true that more than half of today’s goods exports consist of iron ore, gas and coal, that
is not a longstanding feature of the economy. The only significant mining export in the 19th century was
gold – and for much of the 20th century, mining played only a modest part in Australia’s trade
(Graph 1).

More importantly for the future, Australia has large shares of global reserves of many of the minerals
critical to ‘new world’ technology and energy transition industries, with significant headroom
to expand current production (Graph 2), given the right investment and demand conditions.

Above ground

For over 150 years, agriculture – particularly wool – dominated Australia’s goods
exports (Graph 1). While that dominance has now pivoted to mining, other ‘above ground’
resources have grown significantly. In particular, Australia’s human capital ranks
highly globally, bucking the trend of countries with significant commodity dependencies (Graph 3)
and positioning the country well to take advantage of developments in the services and technology
sectors. Indeed, nearly one-fifth of Australia’s total exports consist of services –
principally inbound tourism and education.

But one of Australia’s most significant above ground resource endowments has no physical form at all:
sunlight. Multiplying the intensity of the Australian sun (using the World Bank’s Global Horizontal
Irradiation metric) by its enormous landmass, Australia has the largest assessed theoretical potential
solar capacity in the world – many thousands of times the country’s domestic energy needs.
Estimates of realisable capacity, after allowing for the many practical constraints of real-world power
generation, lie well below this theoretical maximum. But they still suggest there is very substantial
further headroom available, compared to today’s output.

Beyond the sea

Australia’s geographical position, lying as it does a long way from some of its closest partners, is
sometimes said to confer an economic disadvantage – the ‘tyranny of distance’. But as Ian
McLean pointed out, this is too simplistic. During the 19th and a good part of the 20th centuries, a
combination of comparative advantage, rapidly improving transport technologies and ‘colonial
preference’ meant that economic growth was supported by advantageous trading arrangements with the
United Kingdom, despite it being as far away as it is possible to get! In recent decades, the focus of
trade relations has pivoted decisively towards Asia. But Australia has also maintained a broader and
deeper network of political and economic relationships, within and beyond the Asia-Pacific region, with
which to navigate the shifting tides of economic opportunity.

Australia’s strong but adaptable pro-growth institutions

Strong resources alone are rarely sufficient to guarantee prosperity – indeed, the reverse is more
often true, a phenomenon sometimes termed the ‘resource curse’. Donald Horne’s 1964
polemic The Lucky Country predicted Australia would eventually be cursed too. But
60 years on, real GDP per head has more than tripled. That’s not just luck.

Endowments bring opportunity. But harnessing them for a country’s greater good takes something more
– and Australia’s real secret sauce has been its strong but adaptable pro-growth
institutions.

Among Australia’s greatest assets have been its political institutions, its legal system and
its civil service. Australians may debate the merits of its political arrangements from time
to time. But the country regularly scores in the top deciles of objective global measures of liberal
democracy. Through history, Australia has regularly had to make
tough national economic decisions – on squatters’ rights in the 19th century, on the
appropriate balance between agriculture, extraction and manufacturing in the mid-20th century, or on the
appropriate pace of de-regulation in the 1980s and 1990s. In each case, the debate may have been noisy,
drawn out and non-linear – but assisted by Australia’s top-flight legal and civil service, the
outcomes have much more often been right than wrong.

Australia’s macroeconomic framework has also been a clear strength over the past
40 years. Resource-rich countries can suffer significant economic volatility when the prices for
their key outputs adjust – and Australia has certainly had its fair share of this over its longer
history. But today it has powerful shock-absorbers in place to reduce that buffeting. First, unlike most
commodity-exporters, Australia has a fully flexible exchange rate.
Second, the RBA has independent authority for setting monetary policy to achieve a flexible inflation
target that gives appropriate weight to employment outcomes – similar to that in the United States.
And third, gross public debt lies well below that of many other developed countries – not least, it
has to be said, my own country of origin (Graph 4)!

On the microeconomic side, the reforms of recent decades have
left Australia with internationally open and transparent product markets, low
tariffs (Graph 5) and a relatively open capital account.

And finally, financial stability is overseen by a comprehensive set of regulators. The
major banks are liquid and strongly capitalised, there is a well-developed capital markets infrastructure
and domestic non-banks are increasingly interested in coming in alongside overseas investors in onshore
projects as part of joint ventures.

Australia’s welcoming environment for foreign investment

When Walter Wriston, Citibank’s CEO from 1967 to 1984, said ‘capital goes where it is welcome,
and it stays where it is well treated’, he could have been describing Australia. And that matters
– because other than a brief period around the turn of the 20th century, and another around the
Second World War, Australia has run a persistent current account deficit (i.e. drawn on overseas
financing to help fund onshore investment) for most of the past 160 years (Graph 6).

In the early days, that financing sometimes came from rather unconventional sources.

Just north of where we are sitting tonight lies the cove originally known as Melia-Wool, but later renamed
after the businessman Robert Campbell. Campbell built the warehouses you can still see through the
window, to hold the wares of 19th century trade: from sugar and wool to whale oil, sealskins – and
Peruvian guano. He also ran the Sydney branch of the New South Wales
Savings Bank, known colloquially as ‘Campbell’s Bank’. Newly arrived convicts were first
encouraged, and then from 1822 compelled, to deposit any assets they brought with them in the Savings
Bank until ‘their condition was improved by their good behaviour’.

Though many of these deposits were pitifully small, some amounted to real money. For
example, one Thomas Bolton deposited 42 pounds, 18 shillings and 4 pence – roughly
the annual salary of a well-to-do London builder of the time. This money was used to fund local
development. A Savings Bank document from 1824 shows a 100-acre parcel of land near present-day Petersham
passing hands for £100. Today – 200 years on – that land would be worth at least $2
billion: a striking illustration of the scale of change in the Australian economy over that
period.

Persistent current account deficits can sometimes drive a sense of national angst that you are living
beyond your means, risking a sudden drying up in credit or an unaffordable rise in funding costs.
Australia found itself in a particularly challenging situation between the World Wars, when a combination
of weak growth, over-borrowing in sterling, and the British determination to stick to the Gold Standard
caused the public debt burden to balloon dangerously. In August 1930, Sir Otto Niemeyer – a Bank of
England official, I regret to say – delivered a pretty obnoxious speech to the Melbourne Conference
of Commonwealth and State Leaders in which he warned Australia that ‘cold facts must be faced’,
and that it had two years ‘to get its house in order’ before key debt tranches matured. His
intervention was so profound it caused a split in the Labor Party.

Over the decades that followed, however, governments around the world came increasingly to the view that
persistent overseas borrowing could in fact be sustained so long as it reflected the funding
of profitable onshore investment, or so-called ‘consumption smoothing’ (e.g. by young
households, expecting their lifetime incomes to rise). That view – dubbed the ‘Pitchford
thesis’ in Australia in the 1980s – shaped a raft of policy reforms, including floating the
exchange rate and reducing or eliminating a wide range of capital controls.
External financing switched increasingly from the public to the private sector.

Of course, questions about external sustainability can still arise. After the 2016 Brexit referendum, for
example, the then Bank of England Governor Mark Carney described the United Kingdom’s current
account deficit as relying on the ‘kindness of strangers’ – Blanche DuBois’
memorable last line in ‘A Streetcar Named Desire’.

Australia’s experience in recent decades has been more positive, for at least three reasons. First,
Australia has generated substantial onshore investment opportunities, particularly during the
‘mining boom’ of the noughties. Second, borrowing has been structured in ways that make it
relatively resilient to shocks, being denominated predominantly in (or hedged back to) local currency
(reducing exposure to exchange rate adjustments), and issued at increasingly longer maturities (reducing
rollover risk). But, third, Australia has been through an unusual
period since 2019 of running current account surpluses – exporting rather than
importing capital in net terms, helping to halve the country’s net overseas liabilities
(Graph 7).

These surpluses reflected a number of underlying causes. Part of it was a classic excess of national
saving over investment – with savings boosted by the sharp rise in the terms of trade, the
structural increase in super fund balances and precautionary accumulation during Covid; and investment
growth normalising somewhat after the highs of the mining boom. Australia’s net investment income
also rose for a period as a result of changes in relative asset prices. And capital flows were affected
by mergers and acquisitions.

It is unclear whether such surpluses will persist. The most recent data suggest they may not. But
even if they do, that does not mean Australia’s need for inward foreign investment is a thing of the
past. And that is because a substantial slice of national savings is placed in overseas assets, in order
to diversify risk and return (Graph 8, left hand panel). The super funds alone hold nearly half
their portfolio offshore.

With a substantial pipeline of investment projects waiting to be financed, that leaves many opportunities
for inward investment. Consistent with that, public and private Australian debt remains in strong demand
right around the world (Graph 8, right hand panel). And Australia remains one of the top recipients
of inward foreign direct investment (FDI) globally, when expressed as a share of GDP (Graph 9).

Conclusion

Let me conclude.

No one has yet identified a single golden source of national prosperity. But Australia has come pretty
close. Three key things have helped it navigate massive changes in the global economic and financial
system, generating wealth for its people and ensuring it remains an attractive location for investment in
equal measure:

• Its unusually diverse range of resource endowments – below ground, in both ‘old
  world’ and ‘new world’ minerals; above ground, in human capital, agriculture and solar
  capacity; and beyond the seas, in its geographical position.
• Its strong but adaptable pro-growth institutions – political, legal, macro and microeconomic,
  and financial stability.
• Its longstanding welcoming environment for foreign investment.

Of course, these things are not sufficient to guarantee prosperity in the future: as a small open economy,
Australia relies on the continued functioning of global institutions. And it relies on making the right
policy calls. Tomorrow’s sessions are all about how to do that in the current climate. I wish you
well in those discussions.