By 2025, Asia will account for nearly half of world output. Even under conservative growth scenarios, three out of the world’s five largest economies will be in Asia.
By the same year, income per person in Australia will be in the world’s top 10, up 18% from its current level.
It will be Asia’s economic rise that will underpin Australia’s prosperity.
Such are the bright economic possibilities painted by the federal government’s white paper on Australia in the Asian Century.
The white paper is the natural successor to Ross Garnaut’s Australia and the North East Asian Ascendancy, a report commissioned by the Federal Government in the late 1980s. Both are couched in the same terms: Asia’s economic rise is a great opportunity for Australia, but there is no inevitability about Australian success.
This time around, the white paper emphasises that Asia should no longer be viewed primarily as a source of cheap labour. Rather, what should capture our economic imagination is that it will be home to most of the world’s urban middle class. This group will not only demand our natural resources, but also high value-added manufactured goods, and services such as education and tourism to name but a few.
There is much to like about the white paper.
It focuses on the right part of the world over the right time horizon. Rather than agonising over whether Greece will default, or what China’s growth rate next quarter will be, it focuses on long-term trends about which we can be more confident, and which ultimately are far more important for our national well-being.
Nonetheless, after having perused the document, I had three nagging concerns.
First, in introducing the white paper, the Prime Minister made much of the fact that Australia was embarking on the Asian Century from a position of strength. Unfortunately, such optimism sometimes borders on delusion; we would be better served by a greater sense of urgency.
Our trade links with Asia were trumpeted. Indeed, the white paper undertook to further strengthen these links to account for at least one-third of GDP by 2025, up from the present level of one-quarter. But what about our investment linkages, which are so vibrant with respect to the US and Europe, but which lag so badly with respect to Asia? There was nothing close to even an aspirational numerical target for investment.
The white paper merely observed that “investment links between Australia and the region are low relative to our trade relationship” and contended that “two-way investment links with our region should continue to grow over time”. Can we really simply assume that one day they will catch up?
Asia’s economic rise is not a new phenomenon. Yet according to ABS data, over the past decade the five key countries identified in the white paper – China, India, Indonesia, Japan and Korea – only accounted for 9.6% of the increase in the foreign capital stock in Australia. If Japan is taken out of the calculation, then the number falls to just 3.3%. These figures are alarming and certainly do not constitute starting from a position of strength.
Second, in my view, the white paper tended to understate the challenges that many Australian businesses will face in the Asian Century. It was emphasised that businesses must adapt to the demands of Asia’s emerging middle class and position themselves in the global value chain at the high end. Productivity growth would be fundamental.
This is good generic advice. But even the most productive of Australian manufacturing businesses will struggle to achieve export success in a high exchange rate environment caused by the demand for our natural resources. Remember, unlike minerals production, Australia does not have a near-monopoly on high value-added manufacturing, nor education or tourism — far from it. Yet since 2009, the real effective exchange rate in the US has fallen by 10%, while in Australia it has strengthened by 23%. That businesses outside the mining sector are struggling is plainly evident. In 2008-09, Australia’s exports of elaboratively transformed manufactures — that is, manufactured goods that have a high value added component — totalled $29.5 billion. By 2011-2012, this number had actually fallen to $28.1 billion. During this period, the structure of Australia’s economy and exports became more skewed towards mining, an industry whose output comes with a use-by date attached.
Third, in articulating the types of policies that will be needed to succeed in the Asian Century, the white paper was mostly silent on what will need to be sacrificed. Nowhere was this more clearly seen than in the case of higher education. If higher value added production is to be the name of the game, then clearly that begins with investing in human capital. Consistent with this, several relevant numerical targets were set: by 2025 the proportion of 25 to 34-year-olds holding a qualification at the bachelor level or above will rise by 5 percentage points, the proportion of higher education enrolments from low socioeconomic backgrounds will rise by 3 percentage points, 10 of Australia’s universities will be in the world’s top 100, and so on. In other words, Australian universities will need to produce more teaching and research, and of a higher quality. Yet at the same time, the fiscal target is to achieve budget surpluses, on average, over the medium term. Something has to give.
The economic rise of Asia provides a worthy focus of government policy. Noting the opportunities it provides is the easy part. What comes now — seizing these opportunities and reaping the rewards — is much harder.