Investment and the FTA
At least one reader has asked for my views on the investment aspects of the proposed FTA between Australia and the US. The provisions aren’t that extensive. It appears that the threshold for Foreign Investment Review Board review will be raised, but this will have little direct impact since hardly any proposals are rejected.
The main issue is the “standstill” approach central to the agreement, which allows for the creation of new rights for investors in future, but makes it almost impossible to withdraw rights that have already been granted. This raises the possibility that some future agreement will create a right of foreign investors to seek ‘review’ of decisions they allege to be discriminatory against them. This provision, embodied in NAFTA and the aborted Multilateral Agreement on Investment is said to be justified on ‘level playing field’ grounds, but actually produces discrimination in favour of foreign investors, since domestic enterprises have no comparable rights.
This is a good time to comment on the more general issue of capital market liberalisation, particularly with respect to takeovers. There’s no evidence that the market for takeovers produces anything remotely related to an economically or socially beneficial outcome in general, let alone in the case of international takeovers.
Apart from the general evidence that takeovers are primarily exercises in rent-seeking by the management concerned, there’s the specific problem of the branch-office economy, which I’ve discussed at length. Again for rent-seeking reasons, takeovers typically lead to head offices being relocated in centres such as New York and London, to the benefit of managers and the detriment of both shareholders and the Australian economy. There is no reason to expect benefits from further deregulation of capital markets and especially not from “standstill” commitments that prevent us from ever learning and implementing the lessons of the 1980s and 1990s.
fn1. The most prominent piece of evidence in the Australian debate has been a Centre for Independent Studies paper Bishop, S., Dodd, P., and Officer, R.R. (1987) Takeovers: The Australian Evidence. Sydney, Australia: Centre for Independent Studies. This study found a lot of positive effects from takeovers and is still widely cited. Those who take the trouble to read the original study will find that the main agents of these beneficial takeovers were such contributors to economic efficiency as John Elliott, Alan Bond and Christopher Skase.