Speeches

THE AUSTRALIAN ECONOMY IN ASIA

October 18, 2019

THE AUSTRALIAN ECONOMY IN ASIA
ADDRESS TO THE ARNDT-CORDEN DEPARTMENT OF ECONOMICS

AUSTRALIAN NATIONAL UNIVERSITY
CANBERRA

***CHECK AGAINST DELIVERY***

I acknowledge the Ngunnawal and Ngambri people and I thank Ligang Song and Adam Triggs for that introduction and the invitation to be back here at the old stomping ground at the Australian National University.

ANU CONTRIBUTION

I wanted to start today with the story of another ANU student who came here in the late 1990s from his hometown of Jakarta to do a PhD in economics. He was funded by an AusAID scholarship and was working under the wonderful Hal Hill.

While he was at the ANU, he learned about economic development, the role of institutions, how to engage internationally, how to grow an economy, how to make it more inclusive and what to do when things go wrong and economies and financial systems go into crisis.

The lessons he learned here at the ANU would prove vital to the livelihoods of many people back in Indonesia.

This student was Chatib Basri, known to some of you as ‘Dede’, who went on to be Indonesia’s 28th Finance Minister.

During the Global Financial Crisis, Chatib was an advisor to the then – and current – Finance Minister, Sri Mulyani, before becoming Finance Minister himself just a few years later.

Like others around the world, Chatib watched in shock as the world economy teetered on the edge of collapse.

Credit markets were freezing, stock markets were in freefall, global trade was grinding to a halt and rolling failures across banks and financial institutions—including Bank Century in Indonesia—were eerily similar to the start of the Great Depression.

The threat was that a financial crisis would become an economic crisis, then an employment crisis and then a political crisis.

Chatib did more than watch things unfold. He helped manage the response in his home country.

At the same time, I was advising Australia’s Treasurer, Wayne Swan, and the Rudd Government. I was Chatib’s counterpart here.

As ANU alumni, we were not alone. Indonesia’s then trade minister, Mari Pangestu, their then Vice President, Boediono, and Indonesia’s then foreign minister, Marty Natalegawa, were all in the Indonesian cabinet during the crisis — and all studied here.

In Australia, Prime Minister Rudd was also ANU alumni, and the people he was receiving advice from during that period were too, including my friends Gordon de Brouwer in Prime Minister & Cabinet then – and here today – and David Gruen in the Treasury.

When Wayne and Kevin designed what Joseph Stiglitz described as one of the best designed stimulus packages in the world they got a lot of help from their offices packed with ANU-trained economists.

Monetary policy played a critical role and, as you’d expect, our Reserve Bank was full of ANU people as well, perhaps most notably Warwick McKibbin who was on the Board – and you’ll hear from him today too.

They helped empower the G20 in coordinating country responses to the crisis and, remarkably, every single Australian G20 sherpa was, and still is, from the ANU.

This is less surprising given it was on these grounds that vital regional institutions were born, most notably APEC through the work of Peter Drysdale but others.

Australia also played an important role in the years of global recovery, which were still marked by substantial volatility. This was supported by the work of people like Adam, who was a PM&C adviser working on global economic policy issues for some of this period.

And I don’t need to remind you in this Department just how substantial Andrew Leigh’s contribution is and has been as well.

The point I’m making is this: when big challenges emerge in our economy, and in Asia and the world, ANU alumni try to fix them.

You’ve shown that being a scholar does not mean being a spectator.

What the students are all learning here and researching here will give you the skills you need to solve the challenges we face today and into the future. So I hope you’ve been paying attention!

ECONOMIC CHALLENGES IN OUR REGION

Because there’s no shortage of concerning developments.

Trade and technology wars, Brexit, tensions in Hong Kong and in the Middle East are prominent parts of our economic debate and for good reason.

But we shouldn’t forget some of the biggest economic challenges facing us and our region existed well before some of these political tensions arose.

Even before the trade war, growth had slowed in many Asian economies. Some face the prospect of growing old before they grow rich as the long-run driver of living standards, productivity growth, flat-lines.

Inequality in Asia is among the highest in the world. The richest man in Vietnam now earns more in a single day than the poorest person does in a decade.

Advances in technology and automation, while offering big opportunities, will also mean some difficult transitions in our labour markets –particularly for the millions of low paid workers in our region.

Climate change threatens the very existence of many Asia Pacific nations as many countries, sadly including Australia, fail to come up with credible plans to reduce emissions.

Here at home, we also have big domestic economic challenges.

The slowest economic growth in the decade, wages are historically stagnant, household debt is at record highs, almost two million people are looking for work or more work and living standards and productivity have declined on the Government’s watch.

As the Reserve Bank reminded us earlier this month when they cut interest rates to less than one percent for the first time ever, our challenges are primarily domestic and arising out of weak consumption flowing from a long period of weak incomes growth.

Despite these loud alarm bells we have a federal Government with no plan to address the weakness in our economy, either through smart domestic policies or more comprehensive strategic international engagement.

This inaction is leaves us dangerously and unnecessarily exposed to global shocks.

COLLAPSE OF COOPERATION

Tackling the longstanding challenges in our region was already hard, and recent global political instability has made it harder.

Not only because trade wars and other tensions are having a real economic impact on many countries – which I’ll come to shortly.

But because these tensions are undermining the spirit of global cooperation.

Weakening global cooperation is now one of the greatest economic risks we face as a country and as a region.

It’s what makes the future so unpredictable, the economic cost of political tensions so uncertain and the consequences so dangerous.

It makes all our existing problems bigger and harder to solve.

Whether it’s weak growth, rising emissions, technological transitions – global challenges require global effort.

One of the secrets to Australia’s success over the years and especially during the Global Financial Crisis has been willingness to engage with the world on our terms. Seeking common ground for the common good.

That’s why it was so disturbing to see our Prime Minister turn his back on global cooperation in a recent speech at the Lowy Institute.

As ANU professor Allan Gyngell highlighted in his rebuke the following day, Morrison’s speech was a fact free frenzy, full of glaring inconsistences.

Morrison argued against making a binary choice between great powers, while using rhetoric to suggest Australia is wholly-owned subsidiary of the US.

He railed against global institutions for their coercive power despite their powers being seriously eroded in recent years.

In doing so he made us part of the problem not part of the solution.

At best, Morrison’s speech was bizarre and incoherent.

At worst, it was dangerous, dealing Australia out of global conversations that are critical to advancing our national interest.

My colleague Penny Wong, the Shadow Minister for Foreign Affairs, made some important remarks about this earlier in the week, at the Australian Institute of International Affairs.

As Penny rightly points out, Australia has a choice when it comes approaching the increasingly competitive dynamic between the US and China.

We can be an active player or a spectator.

But if we don’t engage constructively we let others determine the rules and agenda on our behalf.

It’s easy for the PM to disparage and diminish international cooperation, much harder to shape it so it works in our interests.

Morrison’s reckless remarks were consistent with his broader mishandling of our relationship with China, including his declaration about China’s place in the World Trading Organisation.

Yes the world’s trading rules do need updating. They fail to deal with issues around subsidies, state-owned enterprises, cross-border data flows, technology, intellectual property, services and many other issues currently inflaming tensions.

But making this declaration about China, while in the US, following a Trump rally, was not a smart way forward.

The Government should be working with our partners in the region on a plan for world trade reform that’s in all our interests not left to the loudest voice in the room.

Labor is not only concerned about the direction the Prime Minister is taking us, we don’t like his motivations.

He knows our prosperity depends on global cooperation, but still rejects it.

He knows the importance of making progress through rules-based, multilateral organisations, but still tries to undermine them.

He chases big headlines, not good outcomes.

When many countries in our region are playing the long game, he is focused on the six o’clock news.

Every day he orchestrates a new distraction from his Government’s failures on economy, and on climate change.

And he’s selling Australia short.

I understand many people feel that globalisation hasn’t lived up to its promises. Australians feel their lives are getting harder – in many ways they are.

But instead of making globalism work for the people his government represents, Morrison has chosen to exploit and prolong their fears and anxieties for his short term political gain.

THE COST OF LOOKING INWARD

The cost of a collapse in cooperation and integration will fall unevenly across the world, but heavily on our region.

It challenges the very pillars of Asia’s economic development: trade, investment, finance, immigration and regional cooperation.

Asia’s prosperity and economic security are also more connected than any other part of the world.

The days in which countries export final goods to one another are rapidly coming to an end. More than 70 per cent of world trade is now through global production networks—where goods and services are assembled across multiple countries, facilitated by free trade, advances in technology and cheaper transport costs.

Supply chains are now hyper-globalised. You’re all familiar with the example of the iPhone in your pocket which now relies on suppliers from forty-three countries across six continents.

Supply chains like these have boosted growth, reduced the cost of living and, according to the OECD, raised productivity growth by up to 0.6 per cent each year.

For Australia, these supply-chains have boosted demand for our resources, our agriculture exports, our services and our goods.

They have made the world more integrated and, in doing so, have made conflict more expensive.

But Asia’s regional integration is under threat.

Tariffs, the trade war, conflict over currency and technology, the Japan–Korea trade dispute all weaken and reshape these supply chains.

The consequences have been swift and are getting worse.

World trade growth has nearly halved since 2017 and foreign direct investment fell by 27 per cent last year.

The total cost of shifting supply chains just to deal with the US tariffs already imposed on China are estimated to be substantial. Total costs for US firms would rise 11 per cent for the clothing industry and 21 per cent for the manufacturing industry as a whole.

But the biggest concern is the unknown unknowns. We simply don’t know the full cost of unravelling this integration. That’s why global investment uncertainty is so high and threatens a serious global downturn.

Global supply chains have become so integrated that many international firms don’t even know who their suppliers are, let alone the suppliers to their suppliers.

While Australia is less integrated in these supply chains than we should be, we are a significant trading nation and the largest supplier by far of strategic raw materials to all of Northeast Asia.

A fifth of our economy comes from exports.

In the past year alone, export volumes represented around 45 per cent of Australia’s GDP growth.

Looking inward will only further damage Australia’s already troubling economic growth performance and our region’s prosperity.

OPPORTUNITIES OF LOOKING OUTWARD

The circumstances demand more global engagement not less.

It might seem unusual to talk up the opportunities of Asia for Australia at a time of heightened tensions, but it’s important we do.

Looking inward not only has real economic costs, it means we miss huge economic benefits.

Our economy is built on gains from trade. Trade reforms over the past 30 years have meant real household incomes were $8,500 higher in 2016, according to one study.

Australia still has a major advantage when it comes to global trade: our location in the most dynamic region in the world.

Though it is taking a hit, Asia is still doing more than twice as well as the rest of the world.

This comes off the back of a long and transformational growth record.

China and India’s share of world GDP have grown two and a half fold over the last 20 years. ASEAN economies have quadrupled their nominal output value over two decades. The region will shortly account for 45 per cent of the world economy.

We are well placed to benefit from this growth and development, assuming we chose to foster and protect it.

Asia already represents two-thirds of Australia’s two-way trade in goods and services. 12 of Australia’s top 15 trading partners are in Asia.

The combined stock of FDI in Australia from Japan, China, Singapore and Hong Kong is now about the same size as that from the United States but is growing much faster.

The opportunities for us are immense.

Our relationship with Indonesia is just one of our relationships in the region that has huge potential for growth.

Indonesia is the world’s third largest democracy and is an economic powerhouse.

Based on current trends it is set to move from the world’s 16th largest economy now to the ninth largest in 2030, and fourth largest in 2050.

Despite its proximity to us and its impressive growth record, Indonesia represents just two per cent of Australia’s trade.

We should be doing better, and investing more in this important relationship, particularly now.

Because with global and regional growth slowing, Australia and Asia need more trade and more access to markets, not less.

Of course, in doing this, we need stick to our own values and principles.

The fair go needs fair markets.

When it comes to trade agreements, Labor has always favoured a multilateral approach, while the Liberals have gone down the path of poorer quality bilateral deals.

Proposed trade deals with Indonesia, Hong Kong and Peru will offer benefits but there are legitimate arguments on both sides about their impact.

We make these calls on balance.

We support these deals because we recognise that more and bigger markets can mean more and better jobs, as long as we get the details right and that’s why we are pushing for improvements.

Labor will fight to ensure that the implementation of the Indonesia, Hong Kong and Peru trade agreements protects and creates Australian jobs.

I think it’s also important to highlight that many past failures to secure broad-based gains from trade boil down to domestic policy failures. This is the root cause of the US-China trade war.

The United States has gained massively from its engagement in the international economy over the years and continues to do so. But the average US worker hasn’t necessarily felt enough of the benefits.

The better path forward, and the Labor way, is to combine open and fair markets with effective social and economic policies to ensure that parts of our community don’t get left behind.

We want trade to work for working people, not at their expense.

CONCLUSION

Let me finish where I started.

It’s been 15 years since I hit the ‘submit’ button for my PhD here at the ANU and a lot has changed since then.

For one thing, the Kambri precinct is certainly a lot nicer than anything I had back when I was a PhD student scratching around for beer money.

But one thing that hasn’t changed is the critical role that the ANU plays in taking Australia forward.

As I said ANU is a place for scholars, not spectators.

And more than ever we need you and ANU alumni to help us tackle some of our biggest challenges, particularly in our region.

Challenges like reforming the WTO and the rules that govern our trading system.

Challenges like tackling climate change.

Not least because it threatens the very existence of many of our island neighbours, and many of our own communities – including from more frequent and extreme natural disasters.

But also because Australia won’t be taken seriously in the region until we have a credible climate policy.

Challenges in the age of the digital economy and accelerating technological change.

And advancing cooperation in forums like APEC, ASEAN and also the G20 to build our defences against a future economic downturn.

This is the ANU way.

It is the intellectual legacy of this School and College for which Australia should be proud, and the region is indebted.

This place and its people help us shape the future.

To shape technological change, deal with climate change, and lead.

And to recognise we can’t have an upward-climbing economy without forward-looking and outward-facing policies.

I wish you all the best with the rest of your time at the ANU and hope you enjoy what looks to be a great day.

Thank you.

ENDS

WE'LL PUT PEOPLE FIRST