SAMEBED,DIFFERENTDREAMS ASIASRISE:AVIEWFROMAUSTRALIA

LondonSchoolofEconomics&PoliticalScience 5October2011 LetmecommencebythankingtheLondonSchoolofEconomicsforinvitingmetospeakhere thisevening.WhileIdidnotattendthisUniversity,Ifeelverymuchathomethisevening thankstomanystimulatinghourslisteningtothepodcastsofthelectureshere. ListeningtoanLSEtalkanddiscussionwhilecyclingaroundthelakebeforeworkinCanberrais asinformativeasitistherapeuticacalmandrationalcontrasttothefuriousdiscordof Australianpoliticsin2011. TonightIwanttogiveanAustralianperspectiveonthebiggesteconomicchangeintheworld todaytheriseofChinaandfollowingit,India.Thisisamassiverealignmentofeconomicand, induecourse,politicalandstrategicpowerataspeedandonascaletheworldhasnotseen before. IwillspeakmostlyaboutChinabecauseofitssizeandeconomicimportanceandalsomake referencetoIndia,risingadecadeorsobehindit. Butletmeobservethereisaverybigworldbeyondthesetwo.TheAsianregionisfilledwith otherrisingemergingeconomies,thelargestofwhichisourcloseneighbourIndonesia,aswell asadvancedeconomiessuchasJapan,SouthKoreaandSingapore.Theirstories,andtheir futures,areasfascinatingandimportantasthoseofthetwogiantswhicharethefocusofthis talk. ByanymeasureChinasgrowthhasbeenextraordinaryfrom1980to2010itseconomygrew 18fold,anannualaverageof10percent.Chinahasbeentheworldssecondlargesteconomy

 since2002inPPPterms,andaccordingtotheIMFsforecastswillovertaketheUnitedStatesin 2016. 1 Othersargueithasalreadydoneso. 2 NolessimpressiveisthechangeinChinasshareoftheglobaltotalforsomekeyindicatorsof progressbetweentheearly1990sandthelate2000s: 3 Population22to20percent Poverty(<$US1.25/day)38to15percent Manufacturingvalueadded5to11percent Steelproduction12to39percent Foreignreserves3to22percent Residentownedpatentfilings1to15percent Telephonelines1to29percent Internetusers0to15percent Carbonemissions11to20percent IndiasreformsstartedafterthoseinChinaanditsreemergenceasaglobaleconomicpower hasbeenmoregradual.Still,from1980to2010IndiasGDPincreasedsixfold,anannual averageof6percent.Sincethemid2000saveragegrowthhasrisento8percent,andthisyear IndiawillpassJapantobethethirdlargesteconomyinPPPterms. 4 IndiahasindustrialisedmoreslowlyandtradeslessthanChina,inpartreflectingthelegacyof licenseRajdistortionssuchasimportrestrictionsandrulesforbiddinglargescalemanufacture ofmanygoodstopreservesmallerproducers. 5 Tradehasexpandedasashareofoutputsince 1991,butgrowthhasalsocomefromdomesticdemandandalargeservicessectorincluding
1AsmeasuredinPurchasingPowerParityorPPPterms.InternationalMonetaryFund(2011)World EconomicOutlookDatabase,Sep2011. http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx 2ForexampleArvindSubramanian,PIIE(2010)IsChinaAlreadyNo1?PetersonInstituteforInternational Economics,Jan2011.http://www.piie.com/realtime/?p=1935 3OECD(2010)PerspectivesonGlobalDevelopment:ShiftingWealth,OECDPublishing,2010,p.47. 4InternationalMonetaryFund(2011)WorldEconomicOutlookDatabase,Sep2011. 5ForadescriptionoftheSSI(smallscaleindustries)programintroducedin1967,whichprevented investmentinlabourintensivelargescalemanufacturingofmorethanathousanditemsbythelate1970s,see AdamCagliarini&MarkBaker,ReserveBankofAustralia(2010)EconomicChangeinIndia,RBABulletin,Sep Qtr,2010.http://www.rba.gov.au/publications/bulletin/2010/sep/pdf/bu09103.pdf.Between1990and 2010theimportanceoftradetoIndiaseconomytripledtradeingoodsandservicestoGDProsefrom16to 43percent.WorldBank(2011)WorldDevelopmentIndicatorsDatabase.http://data.worldbank.org/country 2

 ITrelatedsoftware,servicesandoutsourcing,whichaccountfor6percentofGDPandroughly aquarterofexports. 6 Betweenthem,ChinaandIndiaadded2.5billionconsumerand1.3billionproducerstothe globalmarketwhentheyopenedtheireconomies.Thatopening,andtheirrapidgrowthsince, hasledtohugeshiftsinthedistributionofglobalproduction. In1990WesternEuropeandNorthAmericaproduced49percentofworldGDP,butby2030 theirsharewillalmosthalveto26percentaccordingtoWillemBuiteratCitigroup(whose figuresareinlinewithhalfadozensimilarrecentprojections). 7 EmergingAsia(i.e.exJapan)produced14percentofworldGDPin1990,butwillmorethan tripleitsshareto44percentin2030accordingtoBuiter. 8 Thosearemuchbiggershiftsinthelocationofglobalproductionthanwererecordedafterthe industrialrevolution,andtheyareoccurringovermuchshortertimeframes. 9 Sincetheturnofthecentury,stronggrowthinemergingAsiahasalsobeenmatchedintherest ofthedevelopingworldalthoughDaniRodrikhasrecentlyquestionedthewidespread assumptionthatthiswillcontinue. 10

6ServicesaccountforaboutathirdofIndiasexportsofgoodsandservices.ServicesrelatedtoITand communicationsaccounted,inturn,for72percentofservicesexportsin2010.WorldBank(2011)World DevelopmentIndicatorsDatabase.NASSCOM,industryassociationforIndiasIT/outsourcingsector,estimates GDPcontributionhere:http://www.nasscom.in/Nasscom/templates/NormalPage.aspx?id=56966 7WillemBuiter&EbrahimRahbari,Citigroup(2011)GlobalEconomicsViewGlobalGrowthGenerators, London,February2011.http://www.nber.org/~wbuiter/3G.pdf BuitersmeasureforemergingAsiaisAsiaexJapan:HongKongandSingapore(developedbymostmeasures in1990),plusTaiwan,Korea,therestofASEAN,Pakistan,ChinaandIndia. 8TheAustralianTreasuryrecentlyroughlyestimatedthejointshareofChinaandIndiainPPPadjustedworld GDPat9percentin1990,20percentin2010,andaprojected33percentin2030.MartinParkinson, Secretary,AustralianTreasury(2011)TheImplicationsofGlobalEconomicTransformationsforAustralia, SpeechtoAiG,19Sep2011,p.8.http://www.treasury.gov.au/documents/2160/PDF/AiG_speech.pdf 9After1820ittookBritain50yearstoincreaseitsshareofworldGDPfrom5to9percent.Rapidgrowthin theUnitedStatesbetween1870and1913,whenitbecametheworldsdominanteconomy,lifteditsshare from9to19percentofworldGDP.Maddison(2006)TheWorldEconomyVolume2,HistoricalStatistics, OECDPublishing,2006,p.641 10DaniRodrik,HarvardUniversity(2011)TheFutureofEconomicConvergence,PaperforJacksonHole Symposium,FederalReserveBankofKansasCity,Aug2011,pp.12. http://www.kansascityfed.org/publicat/sympos/2011/2011.Rodrik.paper.pdf 3

 Soremindedofthespeedbutabovealltheextraordinaryscaleofthiseconomictransition,letus firstreflectontheviewfromBeijing. ### Morethanalmostanyothercountry,Chineseleadersdrawstrengthandguidancefromthe lessonsofhistory. 11 DengXiaoPingreachedbacktothetradeandexplorationofAdmiralZhengHeinthe15th centurywhen,in1979,hebegantoopenChinatoforeigntrade.Heremindedthehardliners thatwhenChinahadengagedwiththeworldithadbeenstrong.Wheninthe16thcenturyit closedofftheworld,thisbeganadeclinethatendedwith150yearsofhumiliatinginvasion, colonisationandexploitationbystrongernations. 12 TheworldmaybeamazedbyChinasdramaticrise,buttheChineserecognisethisasverymuch areturntothenaturalorderofthings. InfactthehistoricalnationalaccountsconstructedbythelateAngusMaddisontellusthatfrom antiquityuntilthemiddleofthe19thcentury,severaldecadesintotheindustrialrevolution, ChinaandIndiawerethetwolargestglobaleconomies,accountingforbetween45and50per centoftheworldsoutputovermostofthe18centuries. 13 ThereareafewnationswithasenseofculturalcontinuityandexceptionalismthatrivalChinas, butnonerivalitsscale.Chinaseesitselfasa3000yearculture,foralmostallofhistorythe worldslargestandstrongestcountry. WhileelegantlycladyoungChinesebusinessmenandwomenmayappeartohavelittlein commonwithMaosboilersuitedrevolutionaries,theeconomicsuccessofmodernChina,
11Intheprologueofhis2011bookOnChina,HenryKissingerdescribesMaoZedongbasinghismilitary strategyinthe1962borderwarwithIndiaentirelyontheancientprecedentsandstrategiclessonsofaTang DynastyincursionintoIndia1300yearsearlierandthesackingofDelhibytheMongolrulerTamburlane700 yearsafterthat.Kissingerarguesinnoothercountrywouldamodernleader(withthesupportofhisgenerals) invokestrategiesfromeventsmanycenturiesearlierinamomentouscontemporarydecision.YetChinais singular.Noothercountrycanclaimsolongacontinuouscivilisation,orsuchanintimatelinktoitsancient pastandclassicalprinciplesofstrategyandstatesmanship.HenryKissinger(2011)OnChina,AllenLane, 2011,prologue. 12SeeforexamplethediscussioninNiallFerguson(2011)Civilisation,AllenLane,2011,p.48 13AngusMaddison(2006)TheWorldEconomy:Volume2,HistoricalStatistics,OECDPublishing,2006, p.641 4

 whethermanifestedingleamingnewcities,fasttrainsandfreeways,orintanksandstealth fighterjets,isthefulfillmentofMaosproudboastin1949fromthetopofTienAnMen. Zhongguorenminzanqilaile. TheChinesepeoplehavestoodup. Andsotheyhaveandwearenowalltakingnotice. Butinthemidstofthispridearegreatrisksandchallenges. TheCommunistPartyofChinapresentsasamodernpoliticalparty.Indeedtheyhavesent officialdelegationstoourLiberalPartyconferencesinAustraliasomethingwhichwould,I suspect,makeSirRobertMenziesandthecoldwarriorsofhisdayturnintheirgraves. ButChinaisnodemocracyandthedominanceofthePartydependsonasocialcontractyou thepeopleletusrunthecountry,andwethePartywilldeliverrisinglivingstandards. Pragmatically,astheGovernorofLiaoningonceobservedtome,Justbecausethemajorityof thepeoplewanttodosomething,doesntmeanitsright. NotwithstandingtheirNYSElistingsthestandardbearersfortheChineseeconomyathomeand abroad,thebigstateownedenterprisesorSOEs,areledbymenandwomenappointedbythe CentralOrganisationDepartmentoftheCommunistParty. 14 Whileinfallibilityisnotavirtueclaimedbydemocracies,oranyotherpoliticalsystem,itoffersa mosteffectivewayoflettingoffsteamthrowingtherascalsout(eveniftheyarereplacedby morerascals)isbetterdonewithballotsthanbullets. AndsointegraltoeveryaspectofgovernmentpolicyinChina,whetherviewedfrom ZhongnanhaiorfromatruckstopinXinjiang,isaconcerntopreservepoliticalstability.Tensof millionsofChinesediedinpoliticaldisordersonlyafewgenerationsago:theRevolutionitself, theGreatLeapForwardandresulting19581963famine,andtheCulturalRevolution.Chinese dontneedtoimaginetheconsequencesofcivildisorderanyoneover40haslivedthroughit andisluckytohavedoneso.

14SeeforexampleRichardMcGregor(2010)TheParty:TheSecretWorldofChinasCommunistRulers, AllenLane,2010,pp.8183. 5

 Chinesealsorecognizetheblackestperiodoftheirhistoryresultedfromweaknessthatwas exploitedbystrongernations.LeaveasidethebrutalinvasionandoccupationofChinabythe Japaneseinthe1930s,justreflectontheOpiumWarswhichbeganin1839. InitssearchforsomethingotherthansilvertoexchangeforChineseteaandothergoodsthe BritishEastIndiaCompanyhitonthegreatideaofsellingopiumtoChina.WhentheChinese governmentofthedaycrackeddownondrugtraffickinganddestroyedtheopium,theBritish responsewastosendinthegunboatstoinsistChineseportsremainopentofreetradeinBritish drugsandthedrugtraffickersbecompensatedfortheirlossesbythenowutterlyhumiliated governmentofChina. ItisasiftheMedellinCartelsentgunboatsupthePotomactoshelltheCapitoluntilthe AmericansdisbandedtheDrugEnforcementAgency. Chinasleadersarealsokeenlyawareoftheneedtoensuregainsfromgrowtharemoreevenly spreadacrosssociety.Chinahasgonefrombeinganegalitariansociety,inthesensethatalmost everyonewaspoor,toonewherealargeandprosperousmiddleclassandhighlydeveloped industrysharesanationwithalotofpoorpeople.Thisischangingrapidlybetween2005and 2010alone153millionChinesewereliftedoutofpovertybutenormousdisparitiesremain. 15 Atthesametimethemiddleclassarestartingtowonderifthesystemisstillworkingintheir favour.Industrialdisputesarebecomingmorecommon.Andbeyondthatmiddleclassliesa classofsuperwealthywhoaregenerallyperceivedtohaveobtainedtheirwealthbyillicit means.WorkbyWangXiaoluindicatesonly50percentoftheincomeofthetoptenthofincome earnersisreported;therestisgreyincome. 16 Withnotmuchofawelfarenet,Chinesearebigsaversandhouseholdconsumptionis extraordinarilylowat35percentofGDP,downfrom49percentin1984. 17 AsMichaelPettisnotes,thiscuriousstateofaffairsisaccompaniedbythreeadditionalimplicit taxesonChinesehouseholds: 18
15LaurenceChandy&GeoffreyGertz,Brookings(2011)PovertyinNumbers:TheChangingStateofGlobal Povertyfrom2005to2015,BrookingsInstitution,Jan2011,p.5. http://www.brookings.edu/papers/2011/01_global_poverty_chandy.aspx 16WangXiaolu&CreditSuisse(2010)AnalysingChineseGreyIncome,CSEquityResearch,6Aug2010. 17Citigroup(2010)GlobalEconomicsView:ProspectsforHouseholdConsumptionGrowthinChina,Apr 2010.http://www.nber.org/~wbuiter/chinaconsumption.pdf 6

 First,anundervaluedexchangeratebenefitsexportersattheexpenseofconsumers. Secondwhilelaborproductivityhastripledsince2000,realwageshaveonlydoubled. Andthird,negativerealinterestratesfordepositorsleadtoanannualtransferof5to7per centofGDPfromhouseholdstothegovernmentownedbankswhichinturnlendmostofit togovernmentownedcorporations,toomuchofwhichisforillconsideredinfrastructure projectsorpropertyspeculation. Putanotherway,Chinaseconomicgrowthisbeingdirectedawayfromhouseholdsandinto investment,muchofitfundedbysubsidisedpolicylending,withtheinevitableconsequenceof moreandmorebadloansheldbyChinesebanks. Theleadershipiswellawareofthisandtheneedtoliftconsumptionisafocusofthecurrent fiveyearplanbutmanagingsuchachange,anddampeningrealestatespeculationisfarfrom straightforwardastherecentperformanceoftheChinesestockmarketindicates. Payingdepositorsapositiverealinterestratewouldbeastart,buthowwouldstateowned beneficiariesofthesubsidisedpolicylendingmanageiftheyhadtopaycommercialinterest rates?AnotherapproachmaybetodistributesharesintheSOEs,butthatwouldruntheriskof diminishingthepowerofthepartyelitesthatmanagethem. ThepoliticalrealityisthatChinasclosedcapitalaccountenablesthePartytomaintainaniron griponthebankingsystemsoitcandirectcapitalwithintheeconomy.Whilethisphenomenon isbynomeansunheardofintheEastAsiandevelopmentmodel,itdoesseemtohaverunits course.Chinanowhasamassiveindustrialcomplexandthereisnoclearcasetofurther subsidizeproducers,particularlytheSOEs,manyofwhicharehardlymodelsofefficiencyand whichalreadyseemtoproducemoresteel,aluminiumandotherintermediateproductsthan thecountryrequires. Toopenupthecapitalaccountandletthecurrencyfloatmorefreelyistoletthemarketdecide ontheallocationofcapital.ThatissomethingwithwhichthePartyisdecidedlyuncomfortable, butverypopularinChinawhereprivatebusinessesareincreasinglyunhappyaboutbeing squeezedoutofaccesstocapitalbySOEs.

18MichaelPettis(2011)TheContentiousdebateoverChinasEconomicTransition,CarnegiePolicyOutlook, 25Mar2011.http://www.carnegie.ru/publications/?fa=43238 7

 Deniedaccesstothesoftpolicylendingfromthestateownedbanks,privatefirmsalltoooften mustborrowat20or30percentsotheSOEscancontinuetobuildinfrastructureandreal estatedevelopmentswithoutregardtoitseconomicutility. Finally,considertheenvironment.Overmillenniafloodsandfamineshaveseenoffmanyan Emperortangibleevidencethathehadlostthemandateofheaven.Chinafacessomeofthe mostsevereenvironmentalchallengesintheworld.Somearedirectconsequenceofglobal warming;astheHimalayanglaciersmeltmorewaterbecomesavailablewhenitisnotwanted, inwinter,andlesswhenitis,insummer. Atthesametime,industrialpollutionoftheairandwaterissoseverethatitsapoliticalissue whatgoodisittohaveatelevisionoracarifyoucannotbreathetheairordrinkthewater? AndChinasabilitytofeeditselfisthreatenedbydiminishingwateravailability.Agricultureon thenorthernplainislargelyirrigatedusinggroundwaterwhichhasbeenunsustainably extractedtoapointwherewellsarerunningdry.Watercanbedesalinatedorpumpedfromthe southforcities,butthatistooexpensiveforfarming. Soresourcesecurity(energy,mineralsandfooditself)isagrowingpreoccupationofBeijing. TheChineserushtoacquireaccesstonaturalresources,includinginAustralia,istherefore entirelyunderstandable.RapidlygrowingdemandforresourcesinChinaandelsewherein emergingAsiaislargelywhyin2010aquarterofallAustraliasexportswenttoChina(anda thirdtoChinaandIndiacombined). 19 Andthefinancialcrisiswhichbeganin2007,easedafter2009andnowthreatenstoreturn offersgreatopportunitiesforacashedupChinatoacquireasmanypremiumresourceassets aroundtheworldasitcan,soitemergeswithaglobalportfolioofsufficientscaleanddiversity tosecurelongtermlowcostaccesstothemineralsandenergyitneeds. ItwouldbequitereasonableforAustraliatodenyChineseenterprisestherighttoacquire AustralianresourcesuntilsuchtimeasAustralianfirmshadreciprocalrightsinChina.Butitis inourinteresttowelcomeChinesecapitalthatdevelopsourresources,whilestilltakinga discriminatingapproachtobidsforstrategicresourceassetsbyChinesestateowned enterprises.
19In2010AustraliasmerchandiseexportstoChinawere$A58billion(including$A35billionfromironore and$A5billionfromcoal)or25percentoftotalexports.ExportstoIndiawere$A16billion(including$A7 billionfromcoaland$A5billionfromgold)or7percentofthetotal.ABS5368,2010 8

 IndignationinsomequartersinChinawhenChinalcostakeoverofRioTintolistedinSydney aswellasLondonandwith45percentofitsassetsinAustraliaappearedlikelytobeblocked wasquiteunreasonable;ChinashouldrespecttherightoftheAustralianpeopletostandupfor ournationalsovereigntytoo. 20 ### SohavingdiscussedthedreamsontheChinesesideofthebed,letmenow,throughAustralian eyes,lookatthedreamsontheotherside. ChinarepresentsachallengetotheUnitedStateswhichisutterlyunique. Americans,imbuedwithadeepsenseoftheirownexceptionalism,haveassumedthattheywill alwaysbethestrongest,richestandcleverestnationonearth.Theirbirthrighthasbeento providethebenchmarkinlivingstandards,infrastructure,educationandtechnology. TomFriedmanslatestbookThatUsedtoBeUsiseloquenttestimonytothegrowingsenseof inadequacyAmericansfeelastheycomparetheircountrytoChina.Itstitlewasinspiredby PresidentObamainNovember2010:ItmakesnosenseforChinatohavebetterrailsystems thanus,andSingaporehavingbetterairportsthanus.AndwejustlearnedthatChinanowhas thefastestsupercomputeronEarththatusedtobeus. 21 ItsnotjustPresidentObamahavingaSputnikmomentAmericanseverywherefeelthecoreof theireconomyisbeinghollowedout.Theirpessimismhasabasis:42,000factoriesclosedin theUnitedStatesbetween2001and2010and5.5millionmanufacturingjobs(aboutathirdof thetotal)disappeared. 22China,incontrast,nowmakesmorecarsthantheUSandJapan combined,aswellasthelionsshareofmanyotherfamiliaritems. NowthissenseofbeingoutclassedbyChinaisnotlimitedtoAmericans.Nobodywhohas visitedShanghaicouldnotbeimpressedbytheirsubwaywith434kilometresoftrackit
20RioTintoInvestorChartbook(2011)p.5. http://riotinto.com/documents/investors_databook/Chartbook.pdf 21TomFriedman&MichaelMandelbaum(2011)ThatUsedToBeUs,Farrar,Straus&Giroux,2011. 22AndrewLiveris(2011)MakeitinAmerica:TheCaseforReinventingtheEconomy,Wiley,2011.ButIHS GlobalInsightdatashowingChinapassedtheUSin2010tobecomethelargestmanufacturerbyvalueof output(with$US1.99trillionora20percentglobalshare)pointedtoaproductivitygapof8XbetweentheUS andChina:Inotherwords,theUSmanufacturingsectorisproducingroughlythesameamountofoutputin 2010with11.5millionworkersasopposedtoitsChinesecounterpartwitharound100millionworkers. 9

 carriesmorethan6millionpassengersaday.Andyetthefirstlineopenedonlyin1995.Asa residentofSydneyandpassionatebelieverinmasstransit,itgrievesmetotellyouthatoverthe sameperiodinmycity,despiteincreasinglyacutecongestion,only13kilometresofnewtrack hasbeenconstructed. ButadvancedeconomiescannotblameAsiaforourownchoices.Ifbridgesandroadsand subwaysinourdevelopedcountryarenotingoodrepair,thatisourproblem.Ifouryoung peopleareleavingschoolunabletoreadandwrite,thenthereisanotherproblemforus.Too oftenweaskourselvesthewrongquestion(whyarewedecliningrelativetoChina?)whenwe shouldbeaskingwhyarewenotasgoodaswecanbe? Putanotherway,weshouldbelessworriedaboutrelativedeclineandmoreconcernedto addressabsolutedecline.Thefaultisindeedinourselves. Itisbecomingalltooclearthatinthedevelopedworldtherisingtideofconvergenceand globalisationwillnotliftallboats,andcertainlynotatthesamerate. MichaelSpencehaspointedoutglobalisationwasuntilrecentlyseenashavingabenignimpact onthedistributionofincomeinadvancedeconomies,butthisischanging:Asthedeveloping countriesbecamelargerandricher,theireconomicstructureschangedinresponsetotheforces ofcomparativeadvantage:theymovedupthevalueaddedchain.Now,developingcountries increasinglyproducethekindofhighvalueaddedcomponentsthat30yearsagowerethe exclusivepurviewofadvancedeconomies.Thisclimbisapermanent,irreversiblechange. 23 Spenceshowsthatbetween1990and2008,97percentofthe27millionjobsaddedinAmerica wereinthenontradedsector(40percentofthemingovernmentandhealthcare).Hiswork showsthatinthebarelygrowingtradedsectorsoftheUSeconomy,increasingopportunitiesat thetopofthevaluechainforhighlypaidhighlyskilledworkersareoffsetbymuchlarger decreasesinroutinejobs,asthesefunctionsarerelocatingtoemergingmarkets. 24 WhileUSfirmsinsectorssuchasfinanceortechnologygeneratemorevalueaddedthanever, mostisfromcomplextaskssuchasmanagement,designandengineering.
23MichaelSpence(2011)GlobalizationandUnemployment,ForeignAffairs,Jul/Aug2011. http://www.foreignaffairs.com/articles/67874/michaelspence/globalizationandunemployment 24MichaelSpence&SandileHlatshwayo(2011)TheEvolvingStructureoftheAmericanEconomy&the EmploymentChallenge,CouncilonForeignRelations,Mar2011.http://www.cfr.org/industrial policy/evolvingstructureamericaneconomyemploymentchallenge/p24366 1

 Notonlyisthissupportedbythedata,itringstrue.JustreadthelabelofyourAppleproductof choice:DesignedbyAppleinCalifornia,assembledinChina.Appleisworth$US350billion despitenotmakinganythingitselfassemblyofitsproductsissufficientlycommodifiedasa processtobeentrustedtoacontractor.Itallmakeseconomicsensebutwherearethejobs? Meanwhileimprovedcommunicationsandtechnologyareopeninguppreviouslynontraded sectorsinadvancedeconomiestocompetition:notjustcallcentresorlowlevelsoftware development,butsemiprofessionalandprofessionalservicessuchasfinancialanalysis, accounting,subediting,technologyconsulting,graphicdesignandvideospecialeffects. 25 Anythingwhereaservicecanbetransferredtocustomersasastreamofbitsisfairgame. Inuredtolosinglowskilllowwagejobstothedevelopingworld,nowtheadvancedcountries arelosinghighskillhighwagejobstoworkersjustassmart,justaseducated,butpreparedto workforlowerwages. ThebroadtrendidentifiedbySpenceisevidentinAustraliatoo:employmentinnontraded sectorshasgrownfasterthanintradedindustries.ButinAustraliabothexpandedbetween 1990and2011,withminingemployment(thankstoChinesedemand)triplingoverthepast decadeandmorethanoffsettingjoblossesinmanufacturing. 26 Sowhatistobedone? Thekey,ifobvious,insightisthataconvergedglobaleconomyismuchlargerandmuchmore competitivebutwithmanymoreopportunities.Withintwodecadestherewillbemoremiddle classconsumersinAsiathanthereareintherestoftheworld.

25AsSpenceandHlatshwayowrite:Twentyfiveyearsago,businessservicessuchasinformation technology(IT)maintenanceandsupportwerenottradedinternationally;nowInternetconnectivityand innovativesoftwarepermitsmanyoftheseservicestobeperformedremotelyatlowercost,ofteninanother country.Spence&Hlatshwayo(2011)p.9. 26SpencesfiguresfortheUScanbereproducedforAustralia.Tradablevalueaddedinindustriesis assumedtoberoughlysimilartoSpencesUSestimates:100percentinagricultureandinmining,90percent inmanufacturing,67percentinfinanceandinprofessional,businessandtechnicalservices,33percentin information,and10percentinretail,intransportandineducation.Onthisbasisestimatedtradedsector employmentinAustraliawas2.0millionin1984,2.3millionin1990and2.6millionin2011.Nontraded sectoremploymentwas4.4millionin1984,5.6millionin1990and8.8millionin2011.Totalemployment increased45percentfrom1990to2011(15percentintradedsectorsand58percentinnontradedsectors). ABS6291,AugQtr,2011. 1

 Thefirmsandcountriesthatwillsucceedinthisbravenewworldwillbethemostefficient,the mostinnovative,thehighestquality.Forhighwagecountriesthatseektoremainso,thepursuit ofexcellencewasnevermoreimportant. Ourschoolsanduniversitiesshouldbeturningouttheworldstopstudentsnotsettlingfor middleofthepack,whichiswhereonemeasure,theOECDsPISAstudyofcomparative performanceinsecondaryschooling,suggestsmanyadvancedcountriesfindthemselves. 27 Whilegovernmentsshouldbewareofpickingindividualcompaniesaswinners,creating environmentswhichencourageresearch&development,innovationandaboveallthe developmentandcommercialisationofnewtechnologiesisabsolutelycritical. 28 TheGermanshaveshownthesuccessofastrategyfocusedonadvancedtechnologyand manufacturingtheirsloganGermanylandofideasfairlysumsitup. AndweshouldnotimaginethatChina,IndiaandtherestofemergingAsiaarenotdoingthe samething.JustasJapanandthenKoreatargetedelectronicsasanationalindustrialpriority,so nowisChinaseekingtotaketheleadingreentechnology.WhilepoliticiansintheWestargue aboutwhetherornotclimatechangeisreal,inChina,theworldslargestemitter,billionsare beinginvestedinwind,solarandelectricvehicles. Likesomanydifficultpoliticalissuessuchasclimatechangeandlongtermfiscalsolvency preparingforamorecompetitiveworldinwhichChinaandIndiaaretwoofthethreelargest economiesrequireslongtermthinkingandleadershipleadershiptopersuadevotersthat ratherthanspendtodayweshouldinvestforamoreprosperoustomorrow. Justasresearch,educationandindeedinfrastructurearelongterminvestments,sotooisthere aneedinmycountrytorecogniseourtermsoftradewindfallwillnotlastforever.Thereisa viewthatitwill,especiallyinCanberra,andthatisdangerouscomplacency.
27IntheOECDs4thPISAsurveyin2009,covering65countries/economies,fourEastAsianeconomieswere amongagroupofsixtopperformers.ShanghaiChina(testedforthefirsttime)ledonmostmeasures,while Korea,Finland,HongKongChina,SingaporeandCanadawerealsointheleadinggroup.OnreadingAustralia ranked9th,theUS17th,Germany20thandBritain25th.Australiaranked10thonscienceand15thon mathematicsandwasstatisticallysignificantlyabovetheOECDaverageonallmeasures,butshoweda declinefromearliersurveysonsomemathematicsandreadingliteracyscores.OECD(2011)PISA2009 Results:ExecutiveSummary,p.8,onlinehere. 28OnemeasureofsuccessispublicandprivateexpenditureonR&D,akeyinputintoinnovation.R&Dto GDPishighestinIsrael(over4percentin2009)andhigherinKoreaandJapanthantheUS.Australianisnear theOECDaverageof2.3percent.OECD(2011)Science,Technology&IndustryScorecard,onlinehere. 1

 In2005ashiploadofironorepaidfor2200flatscreentelevisionsbutby2010thatsame shiploadbought22,000flatscreentelevisions. 29 Whilehopingthegoodtimesneverend,akey focusforussurelymustbeareturntolargefiscalsurplusesandestablishmentofanew sovereignsavingsfund(orreneweddepositsintoourexistingone)sothat,liketheNorwegians withtheiroilandgasrevenues,whenthecurrentboomendswehavesomethingmonetaryto showforit. 30 AsworryingastheshiftofmanufacturingandeconomicoutputtoAsia,intheeyesofmanyin theWest,arethetransfersofpolitical,institutionalandmilitaryinfluencethatwillsurely follow. InternationalinstitutionsarechangingtoreflectthenewordertheG20isoneexample. 31 TheresalsobeenaboostinemergingeconomyinfluenceattheInternationalMonetaryFund, whereChinawillsoonhavethethirdlargestquota;withinafewdecadestheIMFsheadoffice maybeinBeijingratherthanWashington. 32 Shiftsineconomicweightandmilitarypotentialarealegitimatecauseforanxiety,asthe worldsgrimhistoryfrom1914tothemid20thcenturyremindsus.Acenturyagotherising economieswereGermany(lockedinacostlynavalarmsracewithBritain)andJapan,tobe joinedinthe1920sbytheSovietUnion. ThegunsofAugust1914turnedouttosignalthestartofmorethanthreedecadesofmilitary andeconomiccatastrophe.
29SeeGlennStevens,Governor,ReserveBankofAustralia(2010)TheChallengeofProsperitypublishedin RBABulletin,DecQtr,2010.SinceGovernorStevensgavehisspeechon29Nov2010,theUSdollarpriceof ironorehasincreasedafurther25percent,sotheshiploadwouldnowfetchcloseto28,000TVs. http://www.rba.gov.au/publications/bulletin/2010/dec/pdf/bu12109.pdf 30IgavealongerspeechonthisissueinJune:http://www.malcolmturnbull.com.au/uncategorized/4487/ 31TheG20draws6ofits19membernationsfromtheAsiaPacific(Japan,China,India,Korea,Indonesiaand Australia)againstonlyJapanintheG8.GiventheAsiaPacificaccountsforoverathirdofworldGDPin2011, thisseemsmorerepresentative. 32IfChinabecomesandremainsthelargesteconomyitmaybecometheIMFslargestfunderandquota holder.FormerIMFchiefeconomistSimonJohnsonpointsoutthiswillmoveIMFHQfromWashingtonto Beijing:ArticleXIIIoftheIMFArticlesofAgreementstipulates:TheprincipalofficeoftheFundshallbe locatedintheterritoryofthememberhavingthelargestquota,andagenciesorbranchofficesmaybe establishedintheterritoriesofothermembers. IMFArticlesofAgreement:http://www.imf.org/external/pubs/ft/aa/index.htm#a13s1 IMFCurrentquotas:http://www.imf.org/external/np/sec/pr/2011/pdfs/quota_tbl.pdf 1

 PreviousthreatstomorethanacenturyofUSeconomicprimacywerenotcredible:theUSSRof thelate1950sandtheJapanofthelate1980s,thetwoallegedchallengers,hadeconomiesonly 40percentaslarge. 33 Sothestakesarehigh,andthistimethechallengerisreal. YetmostAmericansappearutterlyflummoxedbytheswiftnessofChinasrise,whichwas simplynotontheirhorizonuntilveryrecently.Aslateasthe2004USpresidentialrace,for instance,Chinaseconomicrisebarelyratedasubstantiveremarkfromeithercandidateinthree hoursofdebateoverAmericasfuturewatchedbyacombinedaudienceof160million. 34 EconomicanxietyhasbeenfeltbeforeinAmericaandEuropeovertheriseofJapanfor example.ButthistimethereisalsostrategicanxietyintheWest,particularlytheUS,over China,reflectingaconcernthattheMiddleKingdomhasaverydifferentunderstandingofthe wayinwhichworldaffairsshouldbeorderedthantheWest. Whileeveralert,weshouldnotbealarmedsaysHenryKissinger,whoarguesChina'swell developedandhistoricsenseofitscentralplacewillmakeitalessoutwardlyassertiveleading powerthantheUS.HecontrastsmissionaryUSexceptionalismbasedonanobligationto spreaditsvaluestoeverypartoftheworldwithChinasdisinterestinclaimingitsinstitutions arerelevantoutsideChina. 35 AndindeeditisimportanttonotethatChinasgrowthinpower,botheconomicandmilitary, hasnotbeenmatchedbyanyexpansionisttendenciesbeyondreunitingTaiwan.Indeedvery largeterritoriesintheNorthEastofChinatakenbyRussiaunderduressfollowingtheunequal treatiesofAigun(1858)andBeijing(1860)havenotbeenleftunresolvedasapossiblecasus belliinyearstocome,butinsteadhavebeenlegitimisedinnewtreatiessignedonlyafewyears ago.
33MarkThirlwell,LowyInstitute(2010)DifferentPathstoEconomicPrimacy,21Dec2010. http://www.lowyinstitute.org/Publication.asp?pid=1481 34Transcriptsforthethree2004USPresidentialDebatesbetweenGeorgeW.BushandJohnKerryreveal14 mentionsofChina.TeninvolvedsecurityissuesinNorthKorea;onereferredtoaproposedtaxbreakfor importingceilingfansmadeinChina;onereferredtoChinaandIndiajointlyeducatingmorescientiststhanthe US;onewasaKerryattackonBushfornottakingonChinaovercurrencymanipulation;andoneinvolveda debateanchorsestimateofhourlycostsinChinaforsoftwaredevelopers. Transcripts:http://www.debates.org/index.php?page=2004debates 35HenryKissinger(2011)OnChina,AllenLane,2011. 1

 ThecentralroleoftradeinChinasprosperityalsoarguesforitsrisetoremainpeaceful.Chinas tradewas55percentofitsGDPin2010thesameasforBritaininthe1870s,andfivetimes largerthantheroleoftradeintheUSeconomyofthe1950sand1960swhenUSeconomic dominancewasgreatest.Chinahasmoretolosethanmostfromanyconflictthatdisrupts globaleconomicflows. 36 ThebestandmostrealisticstrategicoutcomeforEastAsiamustbeoneinwhichthepowersare inbalancewitheachsideeffectivelyabletodenythedominationoftheother. Withitsenergyandresourcesecuritydependingonlongglobalsealanes,itishardlysurprising thatChinawouldseektoenhanceitsnavalcapacity.SuggestionsthatChinasrecentlaunchof oneaircraftcarrierandplanstobuildanotheraresignsofanewbelligerencearewideofthe mark. 37 Thisisnotimeforanotherlongtelegramorsuggestionsofcontainment. 38 China,unlikethe SovietUnion,doesnotseektoexportitsideologyorsystemofgovernmenttoothercountries. ItmakesnosenseforAmerica,oritsallies,tobaselongtermstrategicpolicyonthecontentious propositionthatweareonaninevitablecollisioncoursewithamilitarilyaggressiveChina. Inthatregard,Idisagreewiththeunderlyingpremiseofthe2009AustralianWhitePaperthat weshouldbaseourdefenceplanningandprocurementonthecontingencyofanavalwarwith ChinaintheSouthChinaSea.Prejudiceisnotasubstituteforcoollyrationalanalysis.

36TheratioofexportsandimportsofgoodsandservicestoGDPmeasureseconomicopennessand integration.AtthepeakofBritainseconomicdominancein1870thisfigurewas54percent.Britishtradeto GDPreached63percentin1913,butfelltohalfthatlevelbythe1930s.IntheUS,tradetoGDPwas8per centin1950and11percentin1970.InChinatradetoGDPwas45percentin2000and55percentin2010. FromWorldBank(2011)WorldDevelopmentIndicatorsDatabase;StephenBroadberry(2001)Openness& BritainsProductivityPerformance18701990.UniversityofWarwick,Feb2001,p.24. 37EnergysecurityandtradeareChinasparamountmaritimeconcerns.Maintainingahugemerchant marinefleet,andensuringitsfreedomofaccessandsecurity,willbeanongoingchallenge.Satisfying exponentiallyrisingenergydemandsinparallelwithotherburgeoningeconomiessuchasIndiaandBrazilwill beanother.BrigGen.JohnFrewen,AustralianArmy(2010)HarmoniousOcean:ChineseAircraftCarriersand theAustraliaUSAlliance,JFQ59,4thQtr,2010.http://www.ndu.edu/press/harmoniousocean.html 38TheUSdiplomatGeorgeKennanservedasdeputyheadoftheUSmissioninMoscow19441946.On22 Feb1946KennanrespondedtoUSTreasuryquestionsabouttheerraticbehaviouroftheSovietUnionwitha longtelegramof5,500wordswherehedescribedtheSovietworldviewasinsecureandneuroticand proposedthestrategyofcontainmentwhichtheWesternnationssubsequentlyadopted. 1

 Thisisnocounselforcomplacencybutourstrategicresponseshouldbetohedgeagainst adverseandunlikelyfuturecontingenciesasopposedtoseekingtocontain(futilelyinall likelihood)arisingpower. Ofcoursecoolheadsarerequiredonallsides.Chinaneedstobemoretransparentaboutits goalsintheregionandonthebasisofthatbuildconfidencewithitsneighbourssothat misunderstandingscanbeavoided. WeinAustraliahavetoadoptacleareyedappraisalofthestrategicbalanceinEastAsia. Americaisourclosestally,itsinstitutionsanddemocracyasclosetous,asindeed,theyareto thoseoftheUnitedKingdom.WhenthemantleofworldsgreatestpowershiftedfromBritainto Americaitshifted,inourperspective,fromonefamilymembertoanother. However,asChinarisestobecometheworldslargesteconomyandintimeamilitaryrival,if notanequal,oftheUnitedStateswearepresentedwithanationwhoseinstitutionsandculture areverydifferenttoours.YetChinais,asIhavenoted,ourlargesttradingpartnerandinlarge measureresponsibleforourcurrentandprospectiveprosperity. 39 Wehaveeveryreason,andindeedeveryprospect,ofremainingcloseandbecomingcloser friendsofboththesegiants.Butindoingso,andasAustraliabecomesaccustomedtoamulti polarworld,wehavemuchtodotodrawclosertotheothercountriesinourregion,including India,aswedeepenourrelationsandtrustwithourneighbours. Thesearetransformingtimes,theLowyInstitutesMichaelWesleyreflectedonAsiainthe 1970s:BeyondtheseAsiantigersstilllaythevast,sullenAsianlandmass,therealmof subcontinentalcivilisationsandancientempires.Herelaynationswithpopulationsnumbering inthehundredsofmillionsasurfeitofhumanitylivinginabjectpoverty,theirvastunder classescloggingthearteriesofsluggisheconomies,multiplyingataratethatswampedthe capacityofanaemicgrowthtoprovidejobsorwelfare. 40 Howfarfromthatwearenow.NotjusttheChinesepeople,butpeoplerightacrossEastand SouthAsia,haveonceagainstoodup.Andso,indeed,shouldwe.
39AustraliaisChinasseventhlargesttradingpartnerandsixthlargestsourceofimports.Inadditionto Australia,ChinaisalsothelargesttradingpartnerforJapan,Korea,Taiwan,Thailand,India,Iran,Brazil,Chile, Peru,SouthAfrica,EthiopiaandAngola,amongothers,andthelargestsourceofUSimports. 40MichaelWesley,LowyInstitute(2011)ThereGoestheNeighbourhood:AustraliaandtheRiseofAsia, NewSouth,2011. 1