4 June 2001 - Is the Luck Running Out for the Lucky Country?

I tried to buy a home in Australia. Nothing lavish, mind you, just an older house along the coast near Darwin, the largest city in Australia’s Northern Territory. I’ve long been optimistic about the city, largely because of its close proximity to Asia, home to some of the world’s next economic superpowers. I figured I’d rent the house out to locals or to a weary traveler like myself. Even better, maybe my wife Paige and I would use it as a getaway.

Forget it. Foreigners, I’ve discovered, can’t buy land in Australia unless they develop it within one year. That’s right, forbidden. The same goes for an existing home. The only thing we could purchase was a home that hasn’t yet been built.

My would-be home-buying exercise uncovered all kinds of restrictions on foreign investment in Australia, restrictions which did not exist a few years ago.

When told of my experience, a friend who happens to be a Member of Parliament was stunned. Certainly I had misunderstood, Australia not only welcomed but sought out foreign investment, he insisted. Two days later I got a note from him apologizing. As it turns out, Australia’s proclaimed free capitalists had quietly adopted a different position.

In fact, the more Paige and I drove around Australia, the more we discovered an anti-foreign and anti-immigrant leaning. ‘Foreigners – and their money – Stay Home’ too often was the underlying message.

Australia is more multicultural than ever. And getting more so every day: Of its small population of 20 million, immigrants make up the fastest growing group. In fact, the Australian Bureau of Statistics estimates that overseas migration will actually become the only source of population growth within a few decades. That’s part of the problem among some small but influential circles.

When it comes to its population and the current-day demographics issue, Australia is haunted by the legacy of a century-old policy. To supply workers in the 1800s, many laborers were kidnapped and stolen from neighboring islands and nations, a horror known as blackbirding. To fight the practice, the government, at the instigation of the anti-blackbirding church, instituted the White Australia Policy (WAP), an anti-immigration standard preventing non-whites from entering in Australia. While it sounds offensive, the policy was actually a deterrent to racism, passed to fight the slavery and kidnapping that was ravaging the Pacific Islands..

Although an unintended downside, the policy kept Australia’s population from growing. Think about it: Australia is roughly the same size as China, Brazil or the lower 48 states of the U.S. Yet, the population is a fraction of the others. The U.S. government instituted the Homestead Act during the 19th Century, promising land to anyone who relocated to America.

It worked. America was flooded with immigrants, new blooded full of new ideas and new energy to make a new life. The same thing happened in Argentina. Australia, by contrast, chose the opposite route, resulting in today’s incredibly low population.

WAP may have been dissolved in the 1960s and 1970s but its legacy, and the associated consequences, remains. An anti-immigration populist movement, led by Pauline Hanson, is perhaps is the most famous example. The former owner of a fish and chips shop in Ipswich, a city west of Brisbane in Queensland, she heads the One Nation party, a group strong enough to secure three seats in parliament during the last election. Hanson’s party attacks welfare plans to support the Aboriginal culture and lobbies to end foreign ownership of local assets. In general, she shows a general distrust of foreigners, big business and government.

Many well-educated people share her sentiments. Over dinner, a couple told Paige and me they didn’t think the government should allow any more foreigners in to Australia, insisting the country’s natural resources could support no more than 12 million people. Ironically, they, themselves, were immigrants. I reminded them that countries need an influx of people and manpower to maintain the infrastructure and build new and productive industries. The problem would run its course, they opined.

Ideology aside, relations between the locals and the Aboriginal community remain strained. Like the relationship in the U.S. between Native Americans and local Americans, Australia bears a tremendous amount of guilt for how Aboriginals were treated for years. Making amends translates into a great deal of money being devoted to the Aboriginals. The government, in fact, spends nearly three times as much on every Aboriginal’s education as it does for other locals.

While no solution is simple, a better plan would be to make a one-time payment to cover the guilt of all the atrocities and then focus on the future instead of everyone forever being mired in the past.

As it stands now, all the tension only causes the Aboriginals to isolate themselves even further; it’s difficult even to visit many of the Aboriginal towns. Preserving their culture is wonderful but the Aboriginals would be equally wise to learn the ways of the world and take advantage of its many advances. Forcing children to learn obscure Aboriginal languages almost certainly is a prescription for a dead-end life. I applaud offering those languages to anyone who requests them, but 6 year olds should be learning English or Chinese or something that will help them build bright futures. Great teachers, Internet software designers and brilliant scientists likely live among the Aboriginals. Isolating from the rest of the world won’t let those gems rise to the surface.

Prime Minister John Howard, who heads the current government, preaches an open economy that welcomes foreigners and foreign investment. But that’s hardly the practice. Just this year, the petrol giant Royal Dutch/Shell made a hostile bid to buy up a majority interest in Woodside, Australia’s largest independent oil and gas group. Shell already owned 34 percent of the company and, in fact, supplied much of the seed money and expertise to get the company started.

Surprisingly, the government rejected the bid, saying such a move was “against national interest.” If you ask me, the decision was more political than economic, designed to mollify the prevailing anti-foreign opinions. Other international investors got the message they aren’t welcome.

That’s not good for a country that already has fallen out of favor with international investors. After peaking at 40 percent in 1997, foreign holdings of national government bonds have fallen to near 25 percent. The effects on the economy have been profound: After nine straight years of 4 percent annual gross domestic product growth, Australia’s GDP fell 0.6 percent in the last quarter of 2000. Unemployment has been rising. Inflation is up. The ‘lucky’ country’s fortunes have turned.

The nation’s currency is most impacted by foreign skittishness. Just a few years ago, the Australian dollar was worth about 75 cents to the U.S. dollar. This past March, it dropped under 50 cents. Paige and I loved it because everything was extremely cheap but it’s anything but good news for the economy or Australian citizens. In 2000, the Australian dollar was the second-worst performing major currency in the world, better only than the Turkish lira.

Opinions vary widely on the root of the problems. Some believe it’s an old-economy versus a new-economy problem. Australia, after all, is still a commodity-based culture. Two-thirds of its exports are commodities like wool, wheat, gold and zinc, and it’s the world’s largest producer of coal. I don’t buy that argument: Since I’m optimistic about natural resources, I’d think this would be bullish for the currency.

A new 10-percent Goods and Services Tax (GST) also has been a sore spot, slicing deeply into the traditionally prosperous construction industry. Housing sales, after all, are completely tax free in Australia so many people live and die by real estate, buying, selling and building houses for profit. The GST, however, has made the cost of building homes a bit more expensive. As far as I’m concerned, the whole tax treatment of homes is part of the problem because huge amounts of investment are misallocated to the “home” industry rather than more productive pursuits.

I think the real culprit in the economic lethargy is the nation’s bloated debt. Net external debt hovered between 4 and 8 percent in the 1970s. Since then, it’s grown to nearly 50 percent of GDP.

Many elements share the blame. In the 1980s and 1990s, the public and private sectors borrowed heavily to finance investments. The Olympics may have greatly raised the country’s international profile but the notoriety came at an expensive price. Net foreign debt is about $300 billion with a current account deficit running at more than 5 percent of GDP. Per capita debt is enormous, roughly $15,000 per person. Unless you are willing to open up your borders and attract more people, who exactly is going to pay off that debt?

Clearly other countries carry a great deal of debt — read: United States — and such an enormous total might not be such a problem if foreign capital was flowing regularly into the country. The time comes, however, when one stops lending to countries that show no effort to correct their profligate ways, especially when the debt reaches extreme levels. Discriminating against foreign capital only exacerbates the problem.

Unfortunately, everyone is ignoring the link between currency and living standards. As the currency goes down, the standard of living will start to decline because more and more earnings will be siphoned off to finance the nation’s annual debt payments. Foreign companies will be even less interested in building factories because everything they need to import to operate becomes more expensive.

An aging population not replenished by young blood means high social security costs as well. That’s a particular shame given the fact that Australia is right next to Asia, the biggest market in the world filled with 3 billion energetic people looking to do business, open shops and trade goods.

I already owned shares of a few Australian companies and I actually bought three new companies while I was there. For instance, I bought shares of Bridgestone Australia, the local version of our tire company, whose stock has suffered as a result of problems in U.S. The Australian wine industry is getting better and better so I bought shares of a wine company called Southcorp, which was recently taken over by Rosemount which also owns Penfold, Australia’s most-successful vineyard. I bought shares of a company called Pasminco, a lead and zinc producer that is on the edge of bankruptcy because its management was hedging badly in the futures markets. Still, these investments were special situations, not based on my faith in the future of the economy.

Australia has much to offer. As I said, I’m incredibly bullish about Darwin. (I first wrote about Darwin in my Worth column in November 1996.) Darwin’s a frontier town and moreover, a melting pot, attracting as many cultures as I’ve seen in any city on my trip. Investments are plentiful, from the natural gas fields in waters off its shores to a variety of tourist attractions ranging from national parks to animal reserves. The government recently agreed to extend the Central Pacific Railroad, which currently runs from Adelaide in the south to Alice Springs in the center of Australia, to Darwin, opening enormous opportunities for Australia.

As a tourist, Australia is an incredible place to visit. We drove all around the country and there’s every kind of terrain you can imagine, from mountains to plains to beaches. Fertile green lands dominate Australia’s Eastern Highlands while the Central Lowlands are flat and of little agricultural use. On the Southern coast, we drove along the spectacular Great Coast Road and visited the Twelve Apostles-sandstone rock formations that jut out along the waterline. We visited the Bungle-Bungles and Katherine Gorge, a major attraction that’s like a mini-Grand Canyon.

In Western Australia, we drove through vast stretches of uninhabited lands, interrupted only by kangaroos or a series of linked trucks called road trains barreling down the highway. Western Australia is the country’s largest territory, covering nearly 1 million square miles and towns are often hundreds of kilometers apart. It’s truly another world.

The people we met there were like American pioneers and drifters, who thrived on the isolation of the Outback. The region also is home to plenty of tough characters; this was the first place I’ve ever been offered beer for breakfast. Along many of the roads, meter sticks poke from the ground, measuring the height of the waters during the rainy season. In certain parts, the roads get completely flooded.

In one town, we visited a hotel where all the women were dressed in their underwear. I later learned it was called ‘skimpy’ — many of the bars try to attract customers by having the women, many of whom apparently are flown in from the cities, scantily clad for particular hours of the day.

In the cities, we had incredible experiences. In Darwin, we went to Super V8 races (the equivalent of Nascar in the U.S), which draws a diverse and boisterous crowd. We heard a concert of Beethoven’s 9th symphony by a volunteer orchestra and choir. The performance was the first ever of the piece in the Northern Territory. We attended the Adelaide Cup horse race which is so popular the entire state of South Australia takes the day as a holiday. We visited Perth, Western Australia’s largest city, which is multicultural but provincial at the same time. Most stores and restaurants close at five o’clock because the government believes it’s better for family life. In Melbourne, we experienced Tivoli, a wonderful combination ballet and dance show based on Australia’s last century. Paige and I both fell in love with Sydney, a cosmopolitan city with a modern throb; a safe and clean place where we might even consider living for a while.

From an investor’s perspective, such beautiful attractions are marred by the reality of Australia’s current economic problems, particularly the burdensome debt and currency troubles. Elections are on the horizon and it appears unlikely that Prime Minister Howard’s Liberal Party will win again. But the opposing junior coalition group, the National Party, isn’t likely to do any better. Unless Australia heals its own internal rifts and woos back international investors, the land down under may only be headed further south.