Australia is knocking at the door of opportunity

Author: Ken Henry, National Australia Bank

In 2012, Australia’s Asian Century White Paper outlined fundamental policy and attitudinal changes that would be required if Australia was to make the most of the opportunities presented by the Asian century. Yet it has had no impact on policy in Australia.

That could be because it presented a fundamental challenge to the populist narrative of ‘Australian mercantilism’ that had been used to explain all economic reforms in Australia since the early 1980s. It is now time to move on from this populist narrative and embrace the core propositions of the Asian century paper.

The narrative of Australian mercantilism and its focus on ‘international competitiveness’ and the real exchange rate proved powerful in motivating a broad set of reforms in the 1980s and 1990s. But at the same time, the world was changing for Australia in a way that would ultimately render the narrative misguided and dangerous.

In 1978 the Chinese government embarked on an ambitious growth program based on economic liberalisation and internationalisation. In just the past 20 years, China and India have almost trebled their share of the global economy and increased their absolute economic size six times over. More than 40 per cent of global economic activity now occurs in Asia. Today there are about 500 million people in Asia’s ‘middle class’. By 2030, that’s expected to rise to more than 3 billion.

In the late 20th century, China’s internationalisation rarely rated a mention in Australian policy circles. Australia failed to anticipate the acceleration in its terms of trade from 2003, driven by rapid increases in the world prices of its minerals and energy exports. The resulting significant real appreciation of the Australian dollar damaged the country’s international competitiveness, and Australian manufacturers, tourism operators and exporters of education services suffered. But the narrative of Australian mercantilism couldn’t explain what was going on.

If the term ‘international competitiveness’ is to prove useful for Australia’s place in the Asian Century, then it will have to be framed in terms of Australia’s national endowments and capabilities — a framing compatible with neoclassical theories of comparative advantage. A narrative with this framing should be capable of explaining how exploiting these endowments can help achieve a vision of a future Australia in the Asian Century as a prosperous and secure nation, with sustainably rising living standards and quality of life, that is integrated into this diverse region and open to the world.

Australia remains in relatively good shape. Unlike most of the rest of the developed world, government balance sheets are strong. The financial system is sound. Australia’s economic policy frameworks and governance institutions, developed over several decades, insulated the Australian economy from the external shocks associated with the Asian financial crisis of the late 1990s. These frameworks and institutions represent ‘created endowments’ — a legacy from an earlier generation of Australians.

Australia’s natural endowments, too, have a strong measure of complementarity with the world’s fastest growing economies. Australia has large environmental assets, abundant mineral and energy reserves and the capacity to produce greater volumes of high protein foods. And in this Asian Century, Australia has locational advantage.

Australia’s human capital endowments are also significant. It has a highly skilled, diverse and creative population that has demonstrated capability in innovation, design and complex problem solving. People-to-people ties with the region are growing deeper, as migrants, students and visitors from Asia bring new perspectives, energy and skills. Australians also increasingly live, study and work in the region.

But it would be a mistake to think that Australia has done all it needs to do. Indeed, the challenge for government, business and the community is immense. A new mindset is required. Success in this century means a willingness to adapt continually.

Prosperity will come from Australia building on its strengths, reinforcing the domestic foundations of society and a productive, open, flexible and resilient economy. This involves investing across the five pillars of productivity — skills and education, innovation, infrastructure, tax reform and regulatory reform.

Australia must do more to build the capabilities that will help it succeed by investing in its people’s education and skills. Highly innovative, competitive Australian firms and institutions should develop collaborative relationships with others in the region. Australian governments need to be involved in initiatives that make the region more open and integrated, encouraging trade, investment and partnerships.

With its country’s future irrevocably tied to sustainable security in the region, Australian governments should continue to support a greater role for Asian countries in a rules-based regional and global order. And the deep and broad relationships that already exist across the region should be strengthened at every level. These links are social and cultural as much as they are political and economic. Engagement to date has been episodic; Australia needs to adopt a more strategic approach to bilateral relationships.

The 21st-century recipe for long-term business success comes from working collaboratively with partners in Asia, not just competing against them. In some cases, Australian businesses will be able to access large Asian markets through export, including as part of regional supply chains. In other cases they may establish enterprises, including business partnerships, in Asian countries. Australian businesses will need the capabilities to do both.

‘Collaboration’ and ‘engagement’ are part of the language of this century, just as ‘international competitiveness’ was the language of the last quarter of the last century. The central point here is that gains from trade arise not from mimicry but from harmonious points of difference that allow for complementarity. Australia’s include: exceptional standards of corporate governance and workplace safety; an insistence on quality, including with respect to food standards and animal welfare; and an intolerance of corruption.

For Australian businesses and individuals that develop the capability to engage in this way, there is a vast landscape of new opportunity, especially in supplying goods and services to an increasingly prosperous Asia and in ventures to help address the challenges confronting several large regional neighbours in respect of water security, energy security, food security, green growthurban design, health care and aged care.

But only a small proportion of Australia’s population has these capabilities at the present time. What is needed is Australians with the knowledge and skills to develop strong relationships in the region; with the capacities to understand and operate in cultures, languages and mindsets other than their own. Australia needs comprehensive partnerships involving government, business, community organisations and citizens generally, through commerce, institutions, travel, arts, culture and sport, as well as education, ideas and knowledge exchange.

The focus on capabilities informs a more sophisticated understanding of international competitiveness and a more relevant economic reform narrative than that of Australian mercantilism — one which comprehends the role played by national endowments, both natural and created, in driving national performance.

Ken Henry is a non-executive director and Chairman Elect of the National Australia Bank. He served as Secretary to the Australian Treasury from 2001 to 2011. In 2012 he led the development of the White Paper on Australia in the Asian Century.

An extended version of this article was published in the most recent edition of the East Asia Forum Quarterly‘Asia’s Intergenerational Challenges’.