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By 2030, China is projected to be at the centre of the world’s economic activity. Just how Australia positions itself will be crucial. Syzmon Kochanski/Flikr

Megatrends: the Silk Highway and the ‘Switzerland’ of Asia

Welcome to The Conversation’s series on megatrends. What are the compelling economic, social, environmental, political and technological changes Australia must grapple with over the coming decades?

In this series, Stefan Hajkowicz explores in more detail some of these issues as part of the CSIRO’s new report, Our Future World 2012.

Today, he discusses the role of Asia in Australia’s fortunes - and whether we are smart enough to become the Switzerland of the region.

One of the things that has fascinated the CSIRO Futures team is a paper published in the journal “Global Policy” by Professor Danny Quah of the Economics Department of the London School of Economics and Political Science.

This paper contains a world map showing the centre-of-gravity of world economy activity each year since 1980 and projected out to the year 2030. The centre of gravity is based spatial extrapolation of GDP at almost 700 locations.

In 1980, the hot spot is in the Atlantic Ocean in between the economic powerhouses of the United States and Europe. By 2010 it’s over Saudi Arabia. And by 2030 it’s firmly between India and China.

The world economy is shifting from west to east and, to a much lesser extent, from north to south. The five year five year outlook by the International Monetary Fund (2012) still has year-on-year economic growth at 8% for the “developing Asia” region compared to economic growth in advanced economies of around 2% to 3%. Sub-Saharan Africa, Northern Africa, the Middle East, Latin America and the Caribbean all have growth rates in the vicinity of 4% to 6%.

The new world economy is being built with BRICs. Data from the OECD show that China and India have contributed 20% of global GDP over the past decade. Staff at Goldman Sachs observe that when China and India are added to Russia and Brazil, the economic output from these countries will exceed the United States by the year 2018. By 2030 the bulk of global GDP will be generated from non-OECD countries.

All this has big implications for Australia. We’re potentially well-positioned to take advantage of the new world economy. But we face some challenges too. On the upside is the potential for increased investment flows and tourist flows out of Asia into Australia.

According to overseas arrival and departure data from the Australian Bureau of Statistics China is the third most common country of residence of short term visitor arrivals into Australia, after New Zealand and the United Kingdom.

Based on current trends, Chinese residents will be the most common visitor to Australia by 2016. There has also been a significant increase in the number of Indian residents visiting Australia over the last decade. In 2000, 41,500 Indian residents visited Australia. By 2010 this grew to 138,700 representing an increase of 235% over a ten year period.

In addition to tourists is the flow of investment money. Over the six year period from 2005 to 2010, foreign direct investment outflows from China to the rest of the world increased from US$12.3 billion to US$68 billion or average growth of 76% per annum.

These data are published in the recent “World Investment Report” by the United Nations. This report also lists Australia as 15th out of 200 countries for its direct foreign investment potential in the future. There are strong prospects that Australian assets will be under increasing demand from overseas investors.

But there are challenges too. As Asia develops, it acquires more sophisticated manufacturing plants, more engineers, lawyers and accountants and more highly advanced science, research and technology capabilities. This means much tougher competition. Things previously made, or services provided, in Australia can increasingly be delivered in developing countries faster, cheaper and to the same quality standard.

Australia will be challenged with finding its niche in a new, competitive and rapidly evolving business landscape. In future decades, we may not always be able to rely on strong minerals commodity prices. We may need new industries.

At the end of this megatrend we ask the cryptic question: Can Australia be the Switzerland of Asia? Switzerland, like Australia, is a small, stable and wealthy economy with a small population within a much larger region. It does not have commodity exports. It has successfully developed niche industries such as financial services, pharmaceuticals, tourism, watches and chocolates. Is there a possibility that Australia might be able to identify and develop new niche industries that feed into Asian markets?

We think it’s a good question to ask. But there are many other valid questions we need to ask. And we’ll need to find answers soon. Australia needs to think quickly and cleverly about its role in the new world economy. Our children and grandchildren need current generations to position Australia well. This will help ensure they enjoy the same, or hopefully better, prosperity than we’ve enjoyed in our lifetimes.

More in the megatrends series:

Biodiversity - going, going.. gone?

Do we really need more from less?

What the future megatrends all Australians need to know about?

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