Opening Remarks to Asia Briefing Live Economy and Business Session
Opening Remarks to Asia Briefing Live Economy and Business Session
Dr Martin Parkinson AC PSM
Check against Delivery
In the previous session, we heard from experts on Asia’s strategic landscape and the foreign policy trajectories of key players. In this session, we will focus on the economy and business.
It is clear that the strategic landscape, especially the United States-China dynamic, is having a significant impact on the economies in the region – one that will likely play out over the decades to come, altering the context and environment in which governments, business and citizens take decisions. This is not only a tectonic geopolitical shift — we are also seeing a seismic shift in the role of governments and business. Many of us in this room spent decades trying to build a market environment in our region that was less reliant on governments allocating resources. There is no small irony, and more than a hint of regret, that we now find ourselves spending so much time talking about, and anticipating, the next move by governments of either of the major powers.
Today, I want to focus on three aspects of regional economics: great power competition, technology, and how Australia can take advantage of the opportunities our region offers.
Great power competition
Late last year the former US Treasury Secretary Hank Paulson warned of an ‘economic iron curtain’ descending that could divide the world, if the US and China failed to manage their strategic differences. Since that speech you would have to say the curtain has descended a little further.
Great power competition, such as that between the United States and China, can easily disrupt regional growth. Our region’s economies are deeply interlinked. Most of the tradable goods produced in the region require inputs from other countries; often the same goods move across borders many times, and at thin margins, before reaching a final consumer. This business and trading model fundamentally depends on these countries having a stable policy environment and being open with each other.
Great uncertainty now exists over long supply lines — and the export-led growth model in East Asia that underpinned the economic development of many of Australia’s key trading partners. Only nine years ago, China was experiencing double-digit growth in GDP, this year it hit 6.2 per cent and it will continue to fall over time as the Chinese economy matures. The point is NOT that China’s growth rate has slowed, but that the growth model which lifted the Asian Tigers and then China is no longer a viable development path for other countries. That export led-growth model promised prosperity if countries opened themselves up to the world, importing not only the best technologies but everything that markets require to work.
Australia and our region has much to lose from a concerted attempt to de-couple the US and Chinese economies – possibly even more than the damage that would be done to both of those countries.
There are two necessary conditions for avoiding what Paulson has called a ‘long winter’ – necessary, but possibly not sufficient.
First, China needs to continue the reforms it started in the 1970s, paying particular attention to those areas where the United States has legitimate concerns. Ironically, and despite the rhetoric and mistaken beliefs of some of the more vitriolic China critics, this will make China stronger, not weaker. Redirecting resources from China’s unproductive state-owned enterprises will relieve a burden on their thriving private sector. Allowing more market forces into the finance sector will stop the suppression of Chinese savers and provide new channels for their capital overseas. Now, more than ever, continued reform of the Chinese economy provides the best path for sustainable prosperity in our region.
Second, we need to improve, rather than discard, international trade rules. The G20 has acknowledged the need for WTO reform. As the Prime Minister said recently, here at Bloomberg and Asialink ‘the rules based-order is in need of urgent repair’. This should be a priority for all countries, like ours, that understand the fundamental importance of a trading system that supports ‘right, not might’. Bilateral deals that simply divert trade impose unnecessary costs, reduce global growth, and add more uncertainty into the international trading environment, effectively emulating the kinds of state-backed economic direction liberal market economies should be condemning. The answer to unacceptable trade practices is more effective rules, not no rules.
These two pre-conditions can reduce trade tensions, but they cannot avoid the geo-political competition in our region — a competition that will define the region over the coming generation. Even if the United States and China drop all recently imposed tariffs, confidence in the economic rules-based order has already been damaged. This collapse of confidence in the international system undermines the long-term confidence that underpins foreign direct investment. Indeed, we are already seeing companies moving production and changing suppliers and customers in response to the tension between the two great powers. My view is that this degree of sovereign imposed risks on markets will continue for many years, perhaps decades, without some new and sustainable accommodation between China and the United States.
While great power competition poses a significant challenge for our region, rapid technological change poses another, but quite a different challenge, especially for low-income workers. Export-led growth has been the main path to development for emerging economies in the region, and manufacturing has been the backbone of that growth model. However, new technology may be reducing the development benefits from manufacturing industries. Countries are reaching ‘peak’ industrialisation at levels lower than they were in the past. For example, the manufacturing share of employment is already declining in many developing economies. Regional unskilled workers used to transition from agriculture to manufacturing, but now this gateway is increasingly being taken up by advanced machines.
A key global trend worth keeping an eye on is how fast manufacturing is improving productivity relative to services. Nowadays you simply do not need as much capital to deliver the same output in manufacturing as in the past. Presumably, this is one reason why global interest rates are so low — investment is historically low because businesses can now get more out of their capital than ever before.
This means more and more economies in our region will become like Australia more quickly — with services being an increasing share of their economies. While it is difficult to impose tariffs on services, the shift to a service economy risks an easy slip into protectionism. ‘Behind the border barriers’ are often easier to disguise and have fewer international rules to limit them than tariffs.
Technology may even be one reason why western countries are finding it difficult to lift inflation. Many of us have seen a flattening of the Philips Curve and a shift to a lower level of unemployment consistent with stable inflation, at least in part due to technology making the supply side of the economy more responsive. Just take one example – there are now many more contingent workers sitting outside the labour market who can easily be brought in when an app goes off on their phone letting them know about work that is available.
Many businesses in our region are seizing the opportunities from new technology. Well-known examples include Gojek in Indonesia and Alipay in China. In fact, emerging economies are leapfrogging from cash to mobile payments, without wading through cheques and credit cards as we have. In China, scanning a QR code for payments is the norm — you would stand out using cash or credit cards.
Technologies deliver benefits – some of them transform our societies. But they also raise important policy issues. Large firms like Facebook, Google, and Amazon, face intense scrutiny from the public, legislators, and regulators. These large online platforms are posing new economic problems for us, such as:
- Should the rules governing trade in data be the same across countries?
- Is there a trade-off between personal data protection and investing in big data and AI businesses?
- Does the sheer scale of large networks provide inappropriate competitive advantages?
- How should we think about competition for two-sided platforms that charge other businesses, but provide free services to consumers?
- How do governments respond to platforms that are larger and more influential than many states?
- How do we best tax and regulate platforms which are often based in other countries?
Hopefully we will address some of these questions today. Like great power competition, they will be around for a long time.
The vantage point of history
Much of the post-war order that we are now seeing contested was created by the United States out of a desire to never again see tragedies like the Great Depression and Second World War. Perhaps because this experiment was so successful, some have forgotten the reasons for existence of the order in the first place. If there is one lesson from history above all it is that things can easily spiral downwards, curtains can close, and the world can become a not very nice place, indeed. I agree with the historians Brands and Edel in their recent book – that we may need a keen sense of the potential for tragedy in order to motivate us to avoid it.
The post-war period was unique in constraining the exercise of power by countries in our region, largely because of US military supremacy that allowed us to focus on a prosperity agenda and indulge a pre‑occupation with building rules that could collectively make us rich. Intensifying great power rivalry — or at least a rivalry unconstrained by rules — now poses a risk to that prosperity.
But it is a region that has weathered significant storms in the past, such as the Asian Financial Crisis and the recent Great Recession. Those crises, and particularly the latter, shook global support for the western liberal order, playing no small part in slowing the regional ardour for liberal market institutions and even political reforms. Both crises also helped foster demands for regional specific institutions – some aborted, such as the Asian Monetary Fund, some now in place, such as the Chiang Mai Initiative. We should expect, and even welcome, this kind of institutional smorgasboard if it means countries in our region stepping forward to ensure collective leadership and collective resilience.
Turning to the future, Australia is well placed to help manage the challenges and exploit the opportunities that will emerge.
Our region is likely to remain fast growing and dynamic, even if global growth is subdued. The Indo-Pacific continues to supply around ¾ of annual world GDP growth and is well over half of global GDP. Our friends, Indonesia and India, are two of fastest growing economies globally, and they are both in our region. Others, like Vietnam have huge prospects, while Japan will remain a large, wealthy economy and China will continue to grow and deliver obvious improvements in living standards for its people. The economic success of China is surely the single greatest thing to have happened globally over the last 3 decades and is to be welcomed, not resented.
Australia is already in its 28th year of uninterrupted economic growth - the longest ever recorded amongst developed countries. Australia operates with secure, open, non-discriminatory rules underpinning our markets. By being open and non-discriminatory, businesses are more willing to invest and trade with Australia. Investors know that their capital is safe in Australia and businesses know that they would not encounter arbitrary and inconsistent rule enforcement. We are a safe place to send kids to study, as much as we are to invest for the future. Perhaps even more important than what we do is how we do it – as I’ve said before, a key success over the last 3 decades has been our national policy discussions on how best to go forward. No country can guarantee the rules will never change – what foreigners are betting on when they invest is effectively a country’s national character.
Finally, we also demonstrate our willingness to work closely with partners in our region to reinforce market-based systems. Our trade deals expand trade opportunities, rather than diverting them, and reinforce the rules, rather than abrogating them. We have entered into free trade agreements with 11 countries or groups of countries, including the Trans-Pacific Partnership and a free trade agreement with ASEAN and are working with others to deliver the Regional Comprehensive Economic Partnership RCEP this year. As the global rules come under pressure, such agreements are even more important to us. Australia may have less influence than the large economies, but we know an open economy works for the good of all, Australians and our partners.
To conclude, the region faces significant challenges. Competition between the great powers — the United States and China — is intensifying. At the same time technology is also transforming the regional dynamics — creating immense benefits and raising significant questions. Despite this challenging outlook, I am optimistic about future growth in the region, and the role Australia will play shaping global rules.