Sir, John Edwards is remarkably sanguine about Australia's record external economic imbalances (“The politics of Australia's economic problems,” May 5).

He is unfazed by the fact that Australia's external current account deficit has widened to more than 6 percent of gross domestic product. He is unperturbed by the fact that Australia's net foreign liabilities exceed 60 percent of GDP and would seem to be on an unsustainable path.

In Mr. Edwards' view, all is well in Australia since its external current account deficit is a reflection of a rise in its investment ratio, rather than a decline in its savings ratio. A critical point he overlooks is that the bulk of the increase in Australia's investment over the past few years has been directed at its overheated housing market. Such residential investment hardly lays the basis for any meaningful expansion in export capacity.

More troubling still is that a resource rich, commodity-based economy such as Australia's is managing to run an outsized external current account deficit at a time of record high commodity prices and a booming Chinese economy. Should Australian policymakers not be asking themselves what happens to Australia when the commodity boom begins to ebb? Should they also not be asking themselves how sustainable can the Chinese economic boom be when China's investment-to-GDP ratio is already at a staggering 50 percent of GDP and when China's growth is so dependent on ever-expanding exports?

Desmond Lachman is a resident fellow at AEI.