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Launch of 2011 PWC/Melbourne Institute AsiaLink Index

28th November 2011  |  Comments  |  Speeches

It is a great honour to deliver this year’s Sir Edward ‘Weary’ Dunlop Lecture – named for one of the greatest Australians, a man whose indomitable courage and humanity in the face of the cruelest adversity was only exceeded by the love for all mankind that enabled him to reach across the bitter memories of war, and build again our friendship with foes and allies alike.

And it’s a pleasure to launch the 2011 PWC / Melbourne Institute AsiaLink Index, which for four years has been in the tricky business of providing objective measurements of changes in one of the nation’s ethereal yet critically important assets: the vast web of personal, political, economic and cultural ties which join Australia and our neighbours.

I’ll return to the Index in a moment, but first let me acknowledge:

The Myer family – including Baillieu Myer, Sid Myer, Lady Marigold Southey – and the  Myer Foundation, whose collective support for AsiaLink and the local arm of the Asia Society is just part of a broader commitment to philanthropy in the national interest that spans 75 years;
Glyn Davis, Vice Chancellor of the University of Melbourne, the Myer Foundation’s partner in AsiaLink;
Mr Richard Woolcott, one of Australia’s most experienced diplomats, and the distinguished  members of the Diplomatic Corps here tonight;
The Honourable John Brumby, former Premier;
And of course the winner of the 2011 Dunlop Medal, Geraldine Cox.
The most important message from this year’s  PWC / Melbourne Institute AsiaLink Index is that during the difficult economic conditions of the past few years, the two-way engagement between Australia and Asia held up much better than our equivalent ties with the rest of the world, which of course include our traditionally most important bilateral relationships.

Much of what drives the AsiaLink index are direct economic linkages (trade, cross-border investment, and research and business development are three of the seven areas it tracks) and as we all appreciate, the economies of the Asia-Pacific showed far greater resilience than those of the North Atlantic during the GFC.  So perhaps this isn’t a surprise.

It is worth noting, however, that since the onset of the crisis some economic indicators of mutual engagement have faltered (for example investment from Asia into Australia fell sharply in 2010).

But there has been a broadly offsetting strengthening of ties in the form of education exchanges, flows of tourists and flows of migrants (where India and China are now two of our three largest source countries).  These are more individually-driven, personal activities where ties are formed or deepened by vast numbers of face-to-face encounters – and in the long run are surely just as important as trade or investment in helping people in different countries better understand each other.

So the AsiaLink Index underlines that engagement with Asia is no longer mainly a matter for business – it’s everybody’s business.

A corollary is that the far more diverse multicultural Australia that has emerged over the past two generations as we’ve drawn closer to the region is itself becoming one of our great competitive advantages – just as similarly diverse societies over history have always gained an edge from their bringing together of varied cultures and contending ideas.

The Premier, Ted Baillieu, highlights this in his contribution to this year’s report, where he explains Fortune magazine ranked Melbourne as one of the world’s 15 “best new cities for business” in part because of this very factor.  To quote:  “Connectivity is vital. One reason Fortune singled Melbourne out is our ‘diverse labour pool’, pointing out that ‘about a third of [Melbourne’s] growing population was born overseas’.  In other words, our multiculturalism gives us a head-start.”

My final comment about the PWC / Melbourne Institute AsiaLink Index is that much of its value is in the broad sweep of what it says about the two decades that it covers, rather than the ups and downs from year to year.

This year’s publication tells us that between 1990 and 2010 Australia-Asia trade increased almost four-fold in real terms, tourist volumes rose four-fold, annual investment flows five-fold, and education movements more than six-fold.  Over those twenty years our society and economy have been transformed as a result, perhaps not as dramatically as parts of Asia, but in fundamental and largely beneficial ways.

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Last month I offered the London School of Economics a view from Australia on the rise of Asia, entitled “Same bed different dreams” – a delightfully cynical Chinese phrase “tong chuang yi meng” which describes the awkwardness of intimacy without empathy, as unsatisfying politically as it is, no doubt, domestically.

It was a long paper more suited for a university lecture hall than a congenial dinner, but its theme was most appropriate for this occasion, for one of the great inspirations from Weary Dunlop’s life was his ability to see the common humanity of all people and to empathise with those from other nations and cultures

My contention is that we have vastly more to gain than to lose from the rise of China, India and the rest of emerging Asia. There are risks and threats to be sure, but they are greatly outweighed by the opportunities.

And before proceeding to speak mainly about China and in passing mention India let me simply note that our varied region includes other large, dynamic emerging markets such as Indonesia, Vietnam and Thailand, and sophisticated industrial economies such as South Korea, Taiwan and Singapore that over the past two decades have become as productive and prosperous as the advanced nations.  Their stories (and their futures) are just as fascinating and important as those of China and India.

Our response to this extraordinary economic change, and it is the most profound in our lifetimes, must be clear eyed and founded on facts not ideology – let alone paranoia.

We must recognise that the world is changing dramatically. Consider this.

Thirty years ago China was barely open to the world at all. Since then its economy has grown eighteen fold – an annual average of 10 per cent.  India’s GDP has grown six fold in that time, an average annual rate of 6% per annum, partly reflecting the fact that its economic take off started more than a decade after Deng Xiao Ping commenced the economic reform process in China in 1979.

China is now the world’s second largest economy and will overtake the United States in 2016, according to the IMF;  some analysts argue it has already done so.  And India has this year passed Japan to become the third largest economy, measured in purchasing power terms.

In 1990 the old industrial powers, North America and Western Europe, produced about half of global GDP, but by 2030 their share will decline to a quarter.  Emerging Asia (ex Japan) produced 14 per cent of world GDP in 1990, but by 2030 its share will triple to 44 per cent , with three quarters of that generated in China and India.[1]

So the old trio of the United States, Japan and Western Europe, which used to drive the global economy, is giving way to a new one – the US, China and India.  Forecasting is always perilous, but we can reasonably anticipate these will remain the world’s three largest national economies for many decades.

The pace and the scale of this shift is unprecedented. There has never been a country as big as China that has grown so fast – it took a much smaller Britain fifty years from 1820 to increase its share of world GDP from 5 to 9 per cent and the United States more than 40 years after 1870 to increase its share from 9 to 19 per cent.[2]

But it is important to remember that from a Chinese or Indian perspective this rapid growth in wealth and power is not so much a rise, but a return to the natural order of things.

From antiquity until the middle of the nineteenth century, China and India were the two largest global economies, accounting for about half the world’s economic output.   Their current climb up the GDP rankings restores them to where history and population predicts they should be.

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But changes in the relative economic position of large and powerful nations are seldom smooth or free from anguish.  Americans are still struggling to come to grips with the rise of China in particular, which represents an historically unique challenge to the United States.

And the post-GFC recession in the US, where recovery has been sluggish and unemployment is stuck near 9 per cent has made relative economic performance a hot issue in Washington.  Whatever else it may have signaled, President Obama’s recent speech in Canberra should have left no careful listener in doubt that US domestic politics – especially economic considerations – will be a key shaper of both the content of US policy on China and our region, and, even more so,  how it is presented.

Americans have a deep sense of their own exceptionalism, and since birth have been assured that they will always be the strongest, richest and cleverest nation on earth.

Tom Friedman’s latest book ‘That Used to Be Us’ is eloquent testimony to the growing sense of inadequacy Americans feel as they compare their country to China.  Its title was inspired by President Obama in November 2010:  “It makes no sense for China to have better rail systems than us, and Singapore having better airports than us. And we just learned that China now has the fastest supercomputer on Earth – that used to be us.”[3]

It’s not just President Obama having a Sputnik moment – Americans everywhere feel the core of their economy is being hollowed out.  Their pessimism has a basis: 42,000 factories closed in the United States between 2001 and 2010 and 5.5 million manufacturing jobs disappeared.

Median incomes have been stagnant for years, income inequality has worsened and as we now know all too well easy credit was a financial palliative, allowing households to continue spending more while their wages were flat.[4]

Michael Spence has pointed out globalisation was until recently seen as having a benign impact on the distribution of income in advanced economies, but this is changing:  “As the developing countries became larger and richer, their economic structures changed in response to the forces of comparative advantage: they moved up the value-added chain. Now, developing countries increasingly produce the kind of high-value-added components that 30 years ago were the exclusive purview of advanced economies. This climb is a permanent, irreversible change.”

Technology exacerbates this problem in two ways. Almost every technological advance reduces the demand for labor – whether in accounting and financial functions, logistics or even unmanned dump trucks and loaders at mine sites in the Pilbara.

At the same time information technology and communications are making more sectors and jobs trade exposed.  Many service jobs are becoming globally contestable.  Not just call centres but also financial and legal analysts, programmers, designers,  architects and so on.

The owner of a frock shop used to think she was competing with the boutique across the road or with Myers – now she competes with the whole world.  Online retailers can fulfill an order made in Melbourne from the other side of the world in three or four days.

So globalization and technology are economic forces that are far bigger than any one country, even countries as large and powerful as China or the US.  Yet all too often the shifts they are causing in economic power or the competitiveness of particular industries in Western nations are seen as China’s fault, the consequence of it not playing fair.

And yet advanced economies cannot blame China or the rest of emerging Asia for our own choices.  If bridges and roads and subways in our developed country are not in good repair, that is our problem.  If our young people are leaving school, not only behind their contemporaries in China or Korea, but all too often unable to read and write, then there is another problem for us.  Too often we ask ourselves the wrong question (‘why are we declining relative to China?’) when we should be asking why are we not as good as we can be?

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As Henry Kissinger recently reminded us, history is far from bunk in China “No other country can claim so long a continuous civilisation, or such an intimate link to its ancient past and classical principles of strategy and statesmanship.”[5]

That is why when Deng Xiao Ping opened China up to the world in 1979 he invoked the example of the 15th century Admiral Zheng He who led great voyages across the Indian Ocean. In those days, an open and confident China was the world’s strongest nation. When later emperors closed China off to the world, Deng reminded the hardliners, China became weak and began a decline that ended with 150 years of humiliating invasion, colonisation and exploitation by stronger nations.

A humiliation that in the 20th century included the brutality of the Japanese occupation and rape of Nanjing, and in the 19th, the Opium Wars which were the equivalent of the Medellin Cartel sending a nuclear submarine up the Potomac and threatening, successfully, to destroy the Capitol and White House unless the US disbanded the Drug Enforcement Agency.

China drank deep and long from the well of bitterness and defeat.  And so when Mao Ze Dong announced his triumph from atop Tien An Men in 1949 his first words were Zhong Guo ren min zanqilai le – the Chinese people have stood up.

So it is no surprise that as China becomes richer it seeks to strengthen its military capacity.  Those who interpret this as necessarily meaning a stronger China is a more aggressive one should reflect on that history and recent events.

China lost in the 19th century vast tracts of land in what is now Siberian Russia – the Amurskaya region for example.  These thefts were ratified in unequal treaties in 1858 and 1860.  Recognising that depopulating yet resource rich Siberia may constitute an opportunity in the future, China could have decided to leave those treaties as illegitimate artifacts of its century of humiliation, to be redressed when times were propitious.

Instead it has chosen to renegotiate and settle the Sino-Russian borders with minor adjustments.  Hardly evidence for imminent territorial expansion.

And as Kissinger has also pointed out, unlike the USSR or even the US, China does not seek to persuade other countries to adopt its values, let alone its system of Government.

The central role of trade in China’s prosperity also argues for its rise to remain peaceful.  In 2010 China’s trade was 55 per cent of its GDP – the same as for Britain in the 1870s, the era of the Pax Britannica, and five times larger than trade in the US economy of the 1950s and 1960s when American economic dominance was greatest.  Given the importance of a stable economy in the regime’s legitimacy, China’s rulers themselves have more to lose than almost anyone from conflict that disrupts global economic flows.[6]

The best and most realistic strategic outcome for East Asia must be one in which the powers are in balance, with each side effectively able to deny the domination of the other – a scenario which Hugh White has written about  extensively in the recent past.[7]

With its energy and resource security depending on long global sea lanes, it is hardly surprising that China would seek to enhance its naval capacity. Suggestions that China’s recent launch of one aircraft carrier and plans to build another are signs of a new belligerence are wide of the mark.[8]

In that regard, I disagree with the underlying premise of the 2009 Australian White Paper that we should base our defence planning and procurement on the contingency of a naval war with China in the South China Sea.  Prejudice or wishful thinking is not a substitute for coolly rational analysis.

As I said in London, this is no time for another “long telegram” or talk of containment. [9] It makes no sense for America, or Australia, to base long-term strategic policy on the proposition that we are on an inevitable collision course with a militarily aggressive China.

Yet remarkably, while all of us galahs in the political petshop are talking about the rise of Asia, many are apparently laboring under the misapprehension that while everything can change in the economic balance in our region, nothing will change in strategic terms.

In other words, even though  China is about to become the world’s largest economy and is actually in the centre of East Asia, nonetheless the United States will remain the dominant power in the region, in the same way it has been since 1945 and even more so since the collapse of the USSR in 1991.

Au contraire.

Plus ça change, plus c’est la meme chose is not a sound basis on which to build Australia’s foreign policy.

Rather, our strategic response to the rise of China therefore should be to continue to deepen our engagement with that nation and with our other neighbours, as friends even if not as  allies, and at the same time hedge against improbable but adverse future contingencies, as opposed to seeking to contain (futilely in all likelihood) a rising power.

Of course cool heads are required on all sides. China needs to be more transparent about its goals in the region and on the basis of that build confidence with its neighbours so that misunderstandings can be avoided.

In that light, the decision to host up to 2500 marines at an Australian army base in Darwin could hardly be regarded as a threat to China (just as Australian naval ships exercising with the PLA navy was presumably not regarded by the US as a threat).  After all there are over 60,000 American service personnel including 17,000 marines in Japan and Korea – on China’s doorstep in comparison to Darwin.

China’s prickly reaction reflected not the foreshadowed deployment itself, but the context briefed out by the White House – that that this was part of a strategy to stand up to growing Chinese economic and strategic power, a spin reflected in most media commentary despite being contrary to common sense (not to speak of geographic reality).

It suits President Obama’s domestic agenda to be seen to muscle up to China, even if the additional muscling does not bear too much analysis.  But an Australian Government needs to be careful not to allow a doe-eyed fascination with the leader of the free world to distract from the reality that our national interest requires us truly (and not just rhetorically) to maintain both an ally in Washington and a good friend in Beijing – which is, after all, our most important trading partner and a principal reason why our unemployment rate is half that of North America or Europe.

If extravagant professions of loyalty and devotion to the United States strike a somewhat awkward note for many Australian ears, how do we imagine they sound in the capitals of our neighbours?  And the same may be said in respect of equally extravagant compliments paid to Beijing.  Australian leaders should never forget that great powers regard deference as no more than their due.

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I’ve spoken about how certain strands of Australia’s diplomatic and strategic stance (or at least the way they are presented) appear at odds with our interest in seeing the region in a fashion where there is no single hegemon – where stability is ensured by a power balance rather than a powerful enforcer.

The transformation of our economy by the rise of emerging Asia surely underlines that point.  Asia’s growth has sparked a rapid expansion of global demand for food, minerals, energy and other raw materials, in many cases outstripping supply.  And China’s current stage of urbanisation and industrialisation is resource-intensive, leading  to large rises in the price of two commodities used to make steel (iron ore and coking coal) and three burned for energy (crude oil, gas and thermal coal).

Australia is a net importer of oil, but among the world’s top exporters of the other four resources.  Hence prices for our commodity exports are more than three times higher than in the 1980s and 1990s, and the value of our yearly exports of minerals and energy have increased four-fold in the past eight years in Aussie dollars.

At the same time global prices for manufactures have fallen, a consequence of production scale and efficiency in Asia.  These forces have interacted to push Australia’s terms of trade (the price of exports relative to imports) to their highest in history, although it now appears a long-expected easing is underway; mid-2011 may have been the peak of the boom.

So Asian growth has presented us with a huge windfall in national income.  Since 2003, when the China boom became apparent, Australia’s GDP is up 25 per cent, but national income (which adjusts GDP to account for transfers to foreign investors and changes in our terms of trade) is up 42 per cent.[10]

The boom has been widely discussed; I will make three quick points about it.

The first is that in some ways Australia has little choice but to adjust to accommodate rising demand for resources.  The return of China and India to the centre of the world economy is a powerful force far beyond the control of a small, open market economy.

As Paul Bloxham at HSBC Australia has pointed out, all the half-trillion dollars or more of approved or anticipated coal, iron ore and gas projects that will utterly reshape our economy over the next decade only add up to about the amount of capital invested in China every three months.  So it is deluded to believe we can protect uncompetitive industries, manage the exchange rate, or somehow stand loftily aside from the current global restructuring, which in any case has been extremely beneficial to us so far.  

My second point is that governments can, however, make decisions in areas such as workplace relations that impede or smooth the movement of labour and capital from one sector to another – and policies to smooth the current structural adjustment are urgently needed.  Governments can also make policy choices that influence whether temporary income from the boom is saved or spent.  The desirability of saving much of what may turn out to be a brief windfall is why I’ve advocated Australia create a new sovereign wealth fund or commit to renewed deposits into our existing one.  Perhaps most importantly of all Governments can invest in the education, the science and the research that will enable us to remain competitive in a converged world where the developed societies can no longer assume they have an advantage in technology or knowledge.

Finally, Australians should not be complacent about the current outlook, or the tremendous 20-year run of prosperity that past economic reforms and the rise of Asia have delivered to us.  The irony of the 21st century resources boom is that it came after two decades of concerted effort to create a more flexible Australian economy capable of efficiently producing and exporting a more diverse range of goods and services, so reducing dependency on commodities.  Ross Garnaut has recently pointed out that growth in China, at least, is likely to become increasingly productivity-intensive and demand for bulk commodities may slow, while rising incomes will increase demand for more sophisticated products and services.  Perhaps India and Indonesia will step into the breach, but we should not assume that.

To conclude, the main challenges for Australian political leaders in responding to the rise of China (and in due course India) are to combat complacency.  Complacency in assuming the current resources windfall will persist forever; or that the strategic and diplomatic posture that served us in the past can and will serve us unchanged in the future; or that it doesn’t matter if our economic and strategic messages to our region are somewhat contradictory.  There are great opportunities for Australia in our ever-closer ties with Asia, and the region’s economic prosperity, but we will need thoughtful, nuanced, consistent and forward-looking policies to make the most of them.

[1] – See William Buiter & Ebrahim Rahbari, Citigroup “Global Economics View – Global Growth Generators” February 2011 http://www.nber.org/~wbuiter/3G.pdf
[2] – See Angus Maddison (2006) The World Economy Volume 2 Historical Statistics OECD p 641

[3] – Tom Friedman & Michael Mandelbaum (2011) ‘That Used To Be Us,’ Farrar, Straus & Giroux, 2011.

[4] – Very well discussed in Raghuram G Rajan (2010) ‘Fault Lines,’ Princeton, 2010.

[5] – Henry Kissinger (2011) On China, Allen Lane, 2011.

[6] – The ratio of exports and imports of goods and services to GDP measures economic openness and integration.  At the peak of Britain’s economic dominance in 1870 this figure was 54 per cent.  British trade to GDP reached 63 per cent in 1913, but fell to half that level by the 1930s.  In the US, trade to GDP was 8 per cent in 1950 and 11 per cent in 1970.  In China trade to GDP was 45 per cent in 2000 and 55 per cent in 2010.  World Bank (2011) World Development Indicators Database; Stephen Broadberry (2001) ‘Openness & Britain’s Productivity Performance, 1870-1990.’ University of Warwick, Feb 2001, p.24.

[7] – White, H, (2010), “Power Shift: Australia’s Future Between Washington and Beijing”, in Quarterly Essay 39.

[8] – “Energy security and trade are China’s paramount maritime concerns.  Maintaining a huge merchant marine fleet, and ensuring its freedom of access and security, will be an ongoing challenge.  Satisfying exponentially rising energy demands in parallel with other burgeoning economies such as India and Brazil will be another.” Brig-Gen. John Frewen, Australian Army (2010) ‘Harmonious Ocean – Chinese Aircraft Carriers and the Australia-US Alliance,’ JFQ 59, Q4 2010.

[9] – The US diplomat George Kennan served as deputy head of the US mission in Moscow 1944-1946. On 22 Feb 1946 Kennan responded to US Treasury questions about the erratic behaviour of the Soviet Union with a ‘long telegram’ of 5,500 words where he described the Soviet world view as ‘insecure’ and ‘neurotic’ and proposed a strategy of ‘containment’ which the Western nations subsequently adopted.

[10] – ABS 5206, June Quarter 2011.

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