– including its triple inheritance: a strong national ‘balance sheet’ courtesy of 16 years of uninterrupted growth and sound economic management by its conservative coalition predecessors; a rich national resource endowment and access to high growth East Asian markets; and a tightly regulated banking sector, including the ‘Four Pillars’ policy, which reduced competition and minimized the sector’s exposure to the complex derivatives market linked to the US housing bubble.

Australia enters 2010 with confidence. Seasonally adjusted job advertisements rose 5.2 per cent in November and are up 12.3 per cent from their July low; consumer spending is at a 2 year high; business confidence is at a 7 year high; and business investment is recovering, witness the A$43 billion investment in the WA Gorgon Gas Project — the largest resources project in Australia’s history. With the economy picking up steam,  in October, Australia’s Reserve Bank (RBA) became the first OECD Central Bank to raise interest rates – to 3.25 per cent.

The recovery is in part fueled by a A$22 billion cash hand-out to households plus A$22 billion of infrastructure expenditure. However the economy still has excess capacity. The RBA commodity price index fell 44.9 per cent over 2009. Export revenues declined and the current account deficit increased from A$13.1billion in second quarter to A$16.2 in the third quarter.

To sustain the recovery Rudd recognizes the need to make the domestic economy more productive while simultaneously tightening linkages with Australia’s major export markets in the high growth East Asian region. Through the COAG (Council of Australian Governments) reform process he has proposed reforming the tax, public service and regulatory and competition systems . The government has also attempted, but so far failed, to introduce a Carbon Pollution Reduction Scheme (CPRS) in a bid for Australia to become a world leader in the global struggle to stop climate change.

The proposed reforms are ambitious, and politically challenging. While the first casualty of the Climate debate has been Opposition Leader, Malcolm Turnbull, ousted by his own party for being too accommodating with the government, Rudd also faces challenges. The rejection of the Climate Bill by the Senate raises the potential for a double dissolution of Parliament and an election battle against new Opposition leader, Tony Abbott, on the increasingly politicised climate issue.

Internationally Rudd, as Australia’s first Mandarin speaking prime minister, has asked ‘How do we best prepare for the Asia-Pacific Century?’ His answer is that Australia should become the most ‘Asia-literate country in the collective West, citing studies showing that over three-quarters of Australians speak English only – making Australia the third most monolingual developed nation in the world. Rudd argues that in an Asia Pacific century Australia’s monolingual character amounts to a ‘skills’ shortage.

Today relations with both the US and much of the Asian region are at an all-time high. Australia’s role in the formation of both PECC (1980) and APEC (1989) have made it an important player in Asian regional cooperation. Internationally, Australia has also been lauded for its role in the emergence of the G20 as the premier global body and its ongoing role in the Cairns Group, which pushes for agricultural trade liberalization. Yet, Australia needs to be careful not to ‘over-reach’ in its relations with its – heterogeneous – Asian neighbours.

With its track record of economic performance, its transparent and effective institutions, and its resource wealth Australia has a great deal to offer to its high growth East Asian neighbours. Yet, as the Rio Tinto/Stern Hu affair demonstrated dramatically, Australia’s relations with the region amount to a community of shared interests, not a community of shared values. Australia’s diplomacy with the region — including current attempts to influence the shape of a new regional institutional ‘architecture’ — are best handled with discretion. The community of shared values we dream of will only emerge as a result of sustaining the success of a community of shared interests.

This is part of the special feature: 2009 in review and the year ahead.

Ian Buchanan is Chair of the ANU Crawford School’s Advisory Council, Chair of AusPECC, and a Senior Executive Adviser to – and former regional Chairman of – Booz & Company.