Thanks to Aaron Payne and Kim McCosker – the Secretaries-General for the conference, as well as the rest of the organising committee.
I’m really pleased to be able to join you today for the opening of the Asia-Pacific Model UN Conference, and as a local it's particularly good to see it held in Brisbane for the third time in 19 years.
It's a tremendous year for this city and big events. Before long – 139 days I’m told – your seats will be taken in this room by leaders of the G20 economies which account for 85 percent of the world’s gross product, eight tenths of trade and two thirds of the population.
In your place, Presidents Obama and Xi; Prime Ministers Modi and Cameron; Chancellor Merkel and others will come together to try and find solutions to the greatest challenges facing our world today.
And as I look around at the future faces of leadership in the Asia-Pacific region, I see some real parallels with the G20. Not just that you come here from different places – from economies at various stages of development; from different political structures and the like.
And not just that they, like you, will come here to try and work out what aspirations they share and how to make them reality.
More than that, what today's decision-makers have most in common with you who are just beginning your leadership journey, is the greatest economic phenomenon of all our lives – the middle-classing of Asia.
You may know the stats: in two decades from 1990, the Asian middle class more than doubled: from 21% of the population in 1990, to 56% of the population. By 2030 the OECD estimates that the Asian middle class will make up two-thirds of the global middle class by 2030.
The result is that we can no longer see Asia’s development solely or even mostly through the prism of export growth. The huge demographic shifts currently underway mean that much of our region’s future growth will be self-created and self-sustaining.
We won't just be the world's biggest production zone but the biggest consumption zone as well. That flow of goods, services, people and knowledge throughout the Asia-Pacific is the undeniable strength of our regional economy in modern times.
The McKinsey Global Institute has done a great job quantifying these benefits in their recent report on Global Flows in a Digital Age. If you have read it you would have been struck by the fact that around the world, flows of goods, services and finance in 2012 reached $26 trillion, or 36 percent of global GDP – one and a half times larger than in 1990.
They found that the flows themselves contribute a great deal to GDP growth, confirming what we as internationalists know intuitively – that trade liberalisation has driven competition, innovation and entrepreneurship. The value of these flows is up to $450 billion to global GDP each year; between 15 to 25 per cent of world economic growth.
It’s not just decades of liberalisation that have brought about this rise in global exchange. Rapid technological advance and digitisation is increasingly transforming and supplementing all global flows.
Coupled with advances in robotics and digital and social media, technology is doing much to remove the physical barriers that restricted trade. The result is that some forms of production and interaction are transformed from labour-intensive to knowledge- and capital-intensive processes.
All of us will feel the spill-on effects, and they will catalyze economic, social and institutional change in our region.
Changes like these compel us to adapt. Just as the developed world has needed to keep up with advancing technology – challenges like increasing inequality and the replacement of labor with capital in some industries – so too will the developing economies of Asia.
What’s more, the incipient middle class of Asia will expect the same benefits of prosperity as the rest of the developed world – the opportunity to accumulate wealth and property, to accumulate human capital, and input into national decision-making.
...
The upside of greater regional integration is incredible; lifting people out of poverty; growing domestic economies; rejuvenating markets devastated by the global crisis.
But continued integration is not assured in the face of three substantial complications I will discuss today. In business-speak it has become fashionable to call these 'disruptions'. I prefer 'complications'. And I think there are three of them: security issues, threats to the durability of growth, and political timidity.
The security concerns in the Asia-Pacific region are the subject of much discussion and research at the moment, and I don’t intend to discuss the subject at length here. You know the issues: China and Japan arguing over disputed islands; new oil rigs in the South China Sea; and the security challenges associated with America's Asia pivot.
There are still big questions about the future order in Asia and the roles of the US, China and Japan which haven't yet been worked out. It’s likely that it will look very different from what we have known because the circumstances have changed so much.
I won't labour an obvious point: that conflict real or potential distracts and diminishes our chances of greater regional economic integration.
I do want to spend some time on the second complication: durability.
Despite the stunning rise of Asia in more recent times, some question whether this growth is durable or sustainable even in the near term.
One of these threats to the durability of growth in Asia and its ability to invest in its people is the pervasiveness of major multinational enterprises shifting profits and associated tax revenue offshore. It affects all economies but hits developing countries in Asia particularly harshly.
If we think about the statistics we heard earlier this year in Australia – that Apple paid something like $193 million in tax in Australia on a $27 billion revenue stream since 2002 – we get a sense of the problem.
As an advanced economy, Australia has the resources to pursue legal action and government investigation into this form of profit shifting. Developing countries don't have the same capacity.
And with the revenue from corporate tax so important for low and middle income countries, the effect of companies going in, producing goods or extracting resources and then sending their profits overseas without paying their share is particularly devastating.
The IMF has estimated in a recent paper on Spillovers in International Corporate Taxation that revenue lost in this way from non-OECD countries is about 12 percent of their total corporate income tax revenue. They make clear that the impact of this on revenue is not a zero sum game – some countries gain, but the aggregate effect is a loss.
Unfortunately, it seems to be that developing countries are shouldering most of that, while a few advanced economies gouge the gains. That’s why the base erosion and profit shifting agenda undertaken by the OECD and the G20 is so important.
Of course, even if tax loopholes were resolved, the durability of future growth is nowhere near assured. The middle income trap that saw South Africa and much of Latin America languish among the middle income range of countries for decades is a looming concern for many Asian nations, and therefore for the region more widely.
It’s one thing for a country to develop out of poverty to a middle-income economy, but it’s something entirely different to move from a middle-income economy to a high-value economy like Australia's.
Asia has relied for many years on its low cost structures to fuel growth and productivity gains. But as the middle class swells, and consumer demand increases, so does the cost-of-living. So must wages. So must costs, and soon their competitive advantage fades.
What this means, of course, is that innovation and R&D become increasingly important factors in productivity gains and GDP growth. What it also means, is that investment in education and research becomes an increasingly crucial determinant of Asia’s prosperity.
Some countries are doing better than others. The opening-up of secondary and tertiary education to the masses in South Korea in the 1980s has been recognised as one of the key factors of their transformation to a high-income economy.
And while hundreds of millions of Asians are the beneficiaries of amazing intergenerational mobility – lifted out of poverty – it is not so simple to say that inequality is an issue the only shows its face in the developed world.
As developing Asia grows it needs to guard against the type of crony capitalism that sees one tiny group of political and/or corporate insiders achieve mega-wealth not accessible to even the most capable. We don't want to see an unequal distribution of opportunities anywhere; not here or abroad; not by accident and especially not by design.
Left unchecked, and without the opening up of education in many Asian nations, this increase in inequality will exacerbate the possibility of falling into the middle income trap.
The IMF recently identified that trap, and rising inequality, as two of five challenges to Asia’s future, along with the quality of institutions and governance, the ageing population, and financial sector development.
Let me add a sixth threat: political timidity.
For as long as trade has existed, there has been timidity. There has been a fear of trade openness. There has been a protectionist instinct.
‘Protectionism’ seems like such an old-fashioned word these days, and it certainly does refer to an idea based on an old-fashioned logic. But the sad reality is that since the Global Financial Crisis, protectionist thinking has re-emerged as a severe threat to regional prosperity.
In November 2008, the G20 adopted a standstill on protectionist trade measures. But by August 2013, the Centre for Economic Policy Research identified 1,527 protectionist trade measures implemented by G20 countries in that interim period, and that’s without counting forms of veiled protectionism, like currency manipulation.
In one sense, it’s easy to understand why protectionism re-emerged during the Global Financial Crisis. It’s easy to understand why policymakers and diplomats, worried by plunging spending, plummeting investment and skyrocketing unemployment, succumbed to sectional interests in their countries to shelter a handful of preferred industries.
It’s not right, but it’s at least easy to understand in one respect. What’s not easy to understand is why these protectionist philosophies are lingering during the recovery. It’s not easy to understand why nations would seek to insulate themselves from the global flows that are creating and supporting growth around the world.
This is the great problem with protectionism. Protection from what? Protection from access to the burgeoning markets of Asia? Protection from access to foreign capital to grow local markets? Protection from the new cultures and new ideas that will enhance our businesses?
A former Australian Prime Minister, Paul Keating, used to say that we need to seek “security in Asia, not security from Asia”. In the same way, I believe we need an economy secured by Asian economic change, not an economy secure from Asian economic change.
There will be opponents to this model, of course, but we need only remind ourselves of what the protectionists said about Keating’s reform agenda of the 1980s and how wrong they were in light of 23 years of unbroken growth in Australia, to be sure that we are on the right path.
Our task is to stake out the best part of global value chains that will characterise the globalised workforces of the future.
Just as we are feeling the benefits of the last few decades of trade liberalisation, we cannot let protectionist dinosaurs stand in the way of future progress. It is one thing to stand up for national interest - as we all do, and all should. It is another to adopt a reflexively negative and defensive posture against change.
...
That brings me to the three Ps I want to finish on today. Because to achieve beneficial economic progress of the type I’ve described, we need to win a policy argument; a political argument; and an argument over the centrality of genuine partnerships.
In policy – and I speak from an Australian perspective here – we need to grow the economy in a more inclusive way, fostering intergenerational mobility as the key wellspring of dynamism and creativity and verve. We need to work out where the jobs of the future will come from and hook our vast and sprawling suburbs up to these opportunities.
We need to orient scarce public funds to where they're needed most: shutting down corporate tax loopholes and profit shifting and redirecting revenue towards investment in human capital and the tools of success.
We need to maximise the benefits of a more multicultural society; accommodate a bigger population; and recognise that our efforts to integrate with Asia would be well-served by new constitutional arrangements for an Australian republic.
As always, whether here in Australia or anywhere in the region, policy success depends on getting the politics right too. We need to move on from a hyper-partisan, winners-and-losers approach which lets loud voices from small corners derail national and international benefits of trade, investment and integration across borders.
I'm not saying countries should cop trade deals which are not in their interests; far from it. In Australia we have concerns about some aspects of current negotiations, including in banking and other areas. And peak industry groups in all our countries have a job to do to stand up for their members. But at the national political level I do think we need to reject that instinctive opposition and defensiveness I identified earlier on.
It is governments' role to evaluate trade outcomes on their potential benefits to the domestic and regional economies as a whole. To recognise that it may not be possible for every sector in every country to benefit from every trade deal. We can all in the long-run benefit from greater trade liberalisation; not from any deal but from good deals.
Convincing people of this message requires a concerted international effort. It requires partnerships, the third P, via the UN that you are modelling this week, or via the G20, or the WTO or ASEAN.
Instead of preferable multilateral gains we are seeing progress on several plurilateral and regional free trade agreements; the alphabet soup of TPP, TAFTA and RCEP, the last of which is arguably most relevant to our region.
The Shadow Minister for Trade, Penny Wong, puts this best when she says that regional and bilateral FTAs should be stepping stones, not barriers, to multilateral progress. The beginning, not the end.
In this vein, the goal of the RCEP negotiations must be more than just extending the ASEAN Free Trade framework to the wider Asia-Pacific region. More than trade but all aspects of economic security.
Australia’s seat on the UN Security Council means we have an important leadership role to play. And as host of the G20, we have a great opportunity to demonstrate this leadership to the rest of the world, in trade, but also in climate, energy security, and all kinds of other areas.
The issues in our region are cause enough for us to consider an Asia-Pacific caucus of the G20. This would see us meet as six Asian nations before each forum, to coordinate strategy where that is realistic. In a forum so influential in developing world economic priorities, this would help our region develop a more cohesive agenda for the years ahead.
…
This brings me to your role, which is already more substantial than you may recognise. Your job this week isn’t just to collect 600 or 700 business cards or another 600 or 700 Facebook friends. Your job this week is to foster a habit of international cooperation from a young age.
Because before you know it, you will go from analysing and discussing these big issues I've discussed today todeciding them.
Before you know it, you will go from observers of the Hard Choices Hillary Clinton identifies in her book - a book I'm finding far more interesting than the reviewers did, by the way - to those who will help make the decisions at home and abroad.
Combined, your decisions will determine the future of the most important regional economy in the world. And in that spirit, I wish you well for your deliberations this week, and beyond, and I thank you again for inviting me to open the proceedings.
