The geopolitical shifts associated with the Asian Century bring significant consequences and challenges. We have less to fear than current commentary would suggest because we are in the right place at the right time.
Speaking to business executives in Brisbane, John W. H. Denton discusses the geopolitical implications of the Asian Century.
Click 'text version' to read John's speech.
Thanks for having me here tonight. It's an intimate audience, so I'll speak frankly. I look forward to all your questions and a good discussion after my speech.
I'm speaking to you at an opportune time. The release of the Asian Century White paper on Sunday, which I've been proud to work on, has made clear the opportunity Australian businesses have in their grasp.
Australia was once ironically called by Donald Horne “the lucky country”. I'm not sure we'd have any sense of irony should we write that today.
We've actually had it good. We've had over 2 decades of uninterrupted high-quality growth. We've had the benefit of outstanding terms of trade. And we've reaped the rewards.
Now we have to make the most of another stroke of luck - our geographic position. We are now in the right place at the right time — in the Asian region in the Asian century.
Within only a few years, Asia will not only be the world’s largest producer of goods and services, it will also be the world’s largest consumer of them. It is already the most populous region in the world. In the future, it will also be home to the majority of the world’s middle class.
To put some numbers to this, Asia is currently expected to have around 3 trillion people who are middle class by 2030, 10 times as many as that of every other region in the world except for Europe. And Asia will still have 5 times as many middle class people as Europe.
This middle class is increasing its aspirations along with their wealth. They want a diverse range of goods and services. The nouveau riche of Asia want better quality health, aged care and education services. They want more household goods, banking and financial service as well as high-quality food products.
The potential value of these wants is enormous. The Boston Consulting Group estimates that just China and India's middle class is a '$10 trillion dollar prize'.
But it's not just about us making money from this new middle class - it's about us creating value together. This growing middle class seeks better relationships with us. They'd often like to visit, as the Chinese tourism boom Queensland is currently experiencing shows. And they're looking to come here for more than just a holiday: they'd also like closer educational, cultural and people-to-people links.
I'd like to try and talk to you about these people tonight. They are vital. They bring with them many, often-unanticipated benefits. Today's students, tourists, and friends are tomorrow's political leader, investors and business partners. Being enmeshed in Asia requires us to be enmeshed through people.
I'm going to talk about three things today, and all of them get back to this idea of relationships and unanticipated benefits. I'll firstly look at geopolitical shifts in Asia and their consequences. I'll show that we have less to fear from recent geopolitical shifts in Asia than current commentary might have you believe, mainly because the domestic incentives for decision makers in Asia complement the current situation much better than any new order.
I'll examine the challenges of integration in Asia, particularly for financial services. I'll show that while dramatic shifts are unlikely, steady reform using our current regional institutions promises great benefits for the region. And that infrastructure is the key to Australia making the most of these benefits.
And I'll finish by looking at what it all means for Australia, in this, the Asian Century. I'll argue that winning in the Asian Century requires getting our own domestic settings right. But more importantly, I'll argue that we can win in the Asian Century through the quality of our people, and through the quality of our relationships across the region.
Any discussion of geopolitical shifts in Asia must begin by discussing the shift in global economic weight towards Asia. As Angus Maddison has shown persuasively, this tilt in the world's economic gravity is not new. The re-rise of China and to a lesser extent, India, is in many ways returning the world to where it once was. In the 15th Century!
But even given this historical perspective, the change in our region has been staggering. Between 2000 and 2006, around a million people were lifted out of poverty every week in East Asia alone. Japan, South Korea, Singapore and, more recently, China and India doubled their income per person within a decade. It took the UK over 50 years to double its income per person during the Industrial Revolution.
This increase in income and reduction in poverty is very good for all countries in the region. Life expectancy has risen enormously - in Indonesia, for example, a baby born today is expected to live into their late 60s, compared with only living to 45 should they have been born in 1960. In Vietnam, average life expectancy has risen to 75 years, up from 49 in 1970.
And this shift will be good for us too. Life's good at the centre of the economic world. The great economist John Maynard Keynes once wrote of life in London in the 1910s, when London was the centre of the world's economic gravity, that:
'escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages.'
This is not far from the comments of many successful people all over Asia, who now enjoy lives that their parents only once dreamt of. And should the region continue to grow the same way it has for the last few decades, millions more will enjoy similar idylls.
But I said I was going to talk first tonight about geopolitics, and the impact this shift in economic gravity will have on geopolitics. Only with stable relations among the major powers in Asia and the Pacific—China, India, Indonesia, Japan and the United States— will we all get to enjoy the benefits of a shift in economic gravity.
It’s hard to figure out though what a shift in economic weight will mean for stable relations, and for global geopolitics. Let's look first at what it will not mean.
It will not mean the end of the global trading system as we know it. As the cliché goes, history is written by the winners. Economic agreements are no different. And the expected winners of the next 20 years will all be countries that have benefited strongly from a relatively benign global trading environment.
In this way the last 50 years are instructive: American leadership of the world economic system has been enormously beneficial. It has created standards. It has built up a level of trust, and a degree of connectivity, unprecedented in international economic history. And Asia, particularly its Northern quadrant, has been the prime beneficiary.
This does not mean that we'll all metaphorically hold hands and sing by the campfire, basking in the warm glow of a functioning global economic system. Solid trading partners can still become the bitterest political enemies.
But the current distribution of gains from the global trading system means that there is a strong domestic political incentive to keep the system going. Most Asian nations undertook massive reform programs just to get into the global system. And now they are in it, they play by the rules. China, for example, has only gone outside the WTO system in 2 of its last 26 trade spats.
So today not only do Asian leaders follow the rules of the global trading system, they institute incentives to use the rules for their own gain. And a domestic political incentive is a powerful thing. In fact, it's powerful enough to make me positive about the prospects for the security of Australia's region.
I'll need to be clear here: I'm not positive because I think that we all magically will trade together and then get along. I'm positive because I think that the winners from trade will be more powerful and thus win more of their domestic fights. Compromise won't happen from our better angels, but rather, from our expedient devils. Or to paraphrase Gough Whitlam, the nag named Self-Interest will keep running a good race.
Accepting this argument, what does the continuation of the global trading regime, with an Asian tilt, mean for us? It means many things, some good, some bad. But mainly, it means that Asia has groups of decision makers that clearly believe in the benefits of trading, and trading systems. We need to keep reaching out to these groups. And we, Australia, need to keep creating and bolstering the sorts of trade agreements that will keep making these people winners.
There's another implication from my initial predictions. It's that we don't need to choose between the US and China, nor between China and another major trading partner like Japan or Korea. This is the major worry dominating our public discourse today: the idea that there may be a war between two of Australia's major trading partners, and that we have to choose to pick sides.
We need to be clear: this so-called choice is a false one, and it is one that Australia has no need to engage with.
In fact, even thinking there has to be a choice will be dangerous for Australia. Countries throughout Asia are very clearly thinking that China will in 20 years time cast a very long shadow. So they wish to influence Beijing's thinking now, and they wish to act now in order to ensure that there is a counterweight to China in the region.
This creates a sort of geopolitical arbitrage situation: the more that countries in Asia can get the Australia, and us, a staunch US ally to think that China's rise will hurt us, the more they can play each side off against each other.
A good example of this behaviour at present is Vietnam, which is clearly championing closer defence ties with the US, and is reaching out to us, while still reassuring China that they have a special economic relationship through their Communist Party exchanges.
Australia in this way is not alone in confronting what Hugh White has called its 'China Choice'. We worry regularly about a situation where our major trading partner is not our security partner. Asia, on the other hand, has been facing this situation for the past 20 years. So there's a lot we can learn from their approach. And their approach, as far as we can tell, is based on knowing China well, and, especially, knowing China's intentions.
So let's stop here and examine what Beijing thinks of the current geopolitics of the region. Beijing knows economic weight matters, and that economic weight changes the structure of the world we live in. But in its head, it remains weak and unable to challenge the might of the US globally for the next 50 years at least.
What it instead wants to do is to be able to deny the US access to the area next to the Chinese mainland, and if it's really lucky, to get Taiwan to somehow reunite with mainland China. Of China's top 10 foreign policy priorities, Taiwan still holds slots 1 to 9.
And for all the chatter, foreign policy is largely unimportant in China. China's top foreign policy official is ranked around the 40th most powerful man in the Chinese party system. The Central Committee, which functions as China's real Parliament, has representatives from all parts of the Chinese system. There are 204 full members. But only 1% of these members work on foreign policy.
Beijing's focus is strongly domestic, and internal. We need to remember this: there is no plan to remake the region, or the globe. China wants, on the whole, to be left alone. In Beijing's head, its foreign policy worries are either initiated by pesky neighbours trying to settle old scores, or initiated by a West that fails to recognise China's magnificent achievements.
There is, for Beijing, no masterplan to supplant us. Rather, there’s a plan to compete with us. It admires the West, and yes, it's trying to catch up and surpass us. It should: our standards are world-class, and they get results. And we need to give them a run for their money!
And this, for Australia, is a good thing. We won't need to have a choice between a world where everyone who's a trading partner needs to be a security partner, and vice versa. Rather, we'll be fortuitously placed to stay out of it all. And we should embrace this lack of choice.
Another advantage of not having to make a choice is that it stops us from overestimating the impact we can have on the foreign policy choices of Asian countries. Australia has very little role to play in changing Beijing's internal domestic incentives. Australia has a far bigger role to play in ensuring the region has functioning multilateral bodies that represent values that Australia supports. Transferring these values into a domestic audience in China is the biggest role Australia can hope to play in changing China.
There are a couple of nasty stings in this tail. The first I'll have to raise and then discuss in greater depth later on in my speech, and that's the issue of standards. We benefit from being a good global citizen. We benefit from being known for a commitment to human rights. And we benefit, enormously, from being a model economy and society.
If we are going to keep these standards, or values, we are going to need to be strong. We need to resist the urge to pick short-term winners, because we will become the long-term loser. So we'll not pander to Beijing's subtle prodding about being a 'better friend' to China. Rather, we'll be a ‘steady friend’ to China, and all the nations it and we deal with.
The second sting in this tail is the impact of rising new players on the norms of our international trading system. We are already seeing a geopolitical shift towards more individual economic agreements — rather than agreements aimed at merging an entire region together economically and (to a lesser extent) in security terms, instead we are seeing more individual negotiations.
This gets me to the second part of my speech, the challenges of integration of financial services.
Asia is always going to face difficulties in integrating. As most of you have no doubt grappled with many times, we don't even know which countries to include in 'Asia'.
The region itself often seems similarly confused. We've had our problems in the past with the so-called 'ASEAN way', and with regional cooperation bodies such as APEC. Both of these bodies function largely on consensus, and their goals and targets are mainly voluntary. There is no overarching body telling members what to do.
But while there are critics of this model, it has delivered results. Tariffs between APEC economies have fallen from 15% in 1998 to 6.8% in 2010. Voluntary commitments made in fora such as APEC have helped members bridge their different goals, structures and systems.
However, it has been hard to make a similarly effective agreement for financial sector integration. The funds are clearly there. Despite fluctuations, Asia's massive foreign exchange reserves, high savings rates and private investment flows have made it a major net exporter of capital throughout the world. And the region's asset base will only grow: it's estimated that by 2050 Asia will account for as much as 45% of global financial assets.
But, despite the region’s impressive progress in strengthening its financial systems and building regional connections, Asian financial markets remain relatively underdeveloped and are more closely linked to global markets than to each other.
This focus on linking into global markets remains a major barrier to deeper financial market integration. The share of total savings in China, India and other emerging economies is likely to rise in the coming decades. But current predictions show the majority of these savings from Asian countries heading to foreign markets, such as the United States and Europe, due to the historic stability that these markets have offered compared to the Asian financial market.
Obviously, having a different reserve currency such as the Renminbi for trade and currency swaps would make Asian financial market integration much simpler. But Beijing will remain tentative on RMB internationalisation for many years to come. There are few domestic interests pushing for further liberalisation. And the past few years have seen the 'state advances, private sector retreats' become the dominant economic narrative in China, with few signs that this will change under Xi Jinping's forthcoming leadership. This conservative attitude will view rapid RMB internationalisation as a risk, rather than an opportunity.
So I see greater financial market integration as coming more from far greater direct investment throughout the region, rather than from one country rising up to institute a new regional economic order. Steady reform of regulatory and supervisory frameworks will boost regional confidence in their own capital markets. While this is a slower type of reform, this could lead to far deeper Asian capital markets in the long-term.
The challenge is how to institute these reforms. A goal that I've been pushing hard for is a new regional agenda through APEC for more structural 'behind the border' reforms. Behind the border reforms (domestic reforms in the economies of member states) offer far greater gains than international trade and investment liberalisation agreements because they affect all market participants equally.
I see the APEC, and ASEAN, model of voluntary commitments to reform actually helping us create more behind the border agreements. Behind the border reforms lead to vigorous domestic political battles between winners and losers, and any changes have to come from domestic political processes, and not some regional body telling members what's what.
So while I'm delighted by the current talk of making the Australian dollar the 3rd currency to be able to undertake direct swaps, I think it's important that we don't take our eyes off the prize. Steady, voluntary reform appears our best option to create sustainable, deep integration of Asian financial markets.
And businesses such as Suncorp have a critical role in this. You can do a lot to help others become part of the region. You can assist enterprises connect with potential customers and partners. You can make investment easier in both directions. And you can build the relationships that allow the countries themselves to reform.
I'd like to talk about total regional economic integration, and not just that of financial markets. Long-term mutual benefit is based on being outward looking, rather than being defensive. Singapore remains the benchmark. Singapore’s geographic location, world-class infrastructure and the ease of doing business there have made it an important commercial hub. For example, around 70 per cent of all intra-ASEAN trade is now with, or through, Singapore. And Singapore's financial markets have prospered.
I raise this because the Asian Century has been built on an often under-discussed phenomenon, and one that Singapore has pushed very hard for: supply chain integration. The amount of supply chain integration that has occurred is unprecedented in history.
Open global trading systems and the construction of vital infrastructure to reduce transport costs have been drivers of integration. Intricate regional production networks have emerged, along with increased flows of intermediate goods between regional partners. Specialisation and scale have given the region a powerful advantage, particularly in manufacturing.
Long cross-border 'value chains' have been central to economic clout switching back to the region. These Asian networks began during Japan's economic rise. As it developed, its production costs rose and the yen appreciated, so Japanese companies began specialising in higher skill goods and services. And they moved their labour-intensive operations to South Korea, Hong Kong, Taiwan and Singapore. When production costs rose in these countries, operations moved to ASEAN countries and China, and the cycle continues today.
But as the OECD noted recently, we've had relatively low participation in these value chains, to our cost. I think this will change. I think this will change because the secret to intricate regional production networks is connectivity, and mobility of capital and intermediate goods. And Australia, including our financial institutions, has a role to play in making Asia more connected through our expertise with infrastructure.
While the region now has very few internal trade barriers, there are major physical barriers to integration, and major barriers to free capital flows through the region. I've discussed the capital flows already. But what I haven't discussed is the physical barriers. These, bluntly, are considerable, and they can only be fixed by building better infrastructure.
Building better infrastructure will require a lot of money, fast. The ADB recently estimated that the 32 ADB developing member countries are expected to need almost US$8.2 trillion (in 2008 US$) to meet their infrastructure needs to 2020. Most of this investment (around 68 per cent) is needed for new investments in infrastructure. But ADB countries have committed to only US$330bn worth of projects, leaving a gap of around US$8 trillion.
And that's just for domestic infrastructure. Recent reports have also identified around US$1 trillion in trans-regional infrastructure projects.
A lot but not all of the money for these projects will need to be raised through public-private partnerships. The shortfalls are just too great for Governments alone.
And to secure more public-private partnerships, we'll also need to deal extensively with state actors. Infrastructure investment throughout the region varies heavily (for example, China spends $116 per person, while India spends about $17 per person). But what doesn't vary is that the state usually leads on infrastructure spending throughout the region.
So we'll need to convince these state actors that they should undertake good behind the border reforms to make infrastructure projects more likely to succeed. We need better regulatory frameworks for project finance and better risk management protocols. And we'll need to increase the region's ability to use public-private partnerships to finance infrastructure projects where appropriate.
We need to do this now. The shortfalls in these states’ ability to fund infrastructure can help us argue that better infrastructure is a priority. It will help Asia enjoy even more benefits from global supply chains and production networks. It will help business logistics. And as domestic infrastructure spending is politically popular and has few winners or losers, it could offer decision makers some relatively cheap political wins.
To return to the point I made on geopolitics, making more integrated markets will come from domestic incentives. Behind the border reforms, like foreign policy reforms, are made through internal battles. Sustainable change will have to come from domestic political processes, and not some regional body telling members what's what.
I've worked intensively on this through my role on the APEC Business Advisory Council. One of the goals we've put forward on this council is the establishment of an Asia-Pacific Financial Forum. Australia is holding an international symposium next year on this issue, bringing together private sector leaders, regulators and actors from across the system. This will be an excellent opportunity to keep pushing the case to Asian decision makers as to why reform can be so beneficial for them and their countries.
And I think this shows the large role companies like Suncorp can play in the Asian Century. Convincing societies, states and leaders of the importance of change is a job for everyone. But it's a job that will be led by the financial services sector enabling investment in new projects and infrastructure. This infrastructure boom offers Australia incredible opportunities across all sectors of our economy - and these opportunities will need to be financed by businesses like you.
It's not all hard yakka though - an infrastructure boom will also offer you terrific investment opportunities in Asia. This, to me, appears the most obvious quick win of the Asian Century for financial institutions. A recent study by the Boston Consulting Group showed that out of the estimated $US60tn invested annually worldwide, only 0.6% is invested in infrastructure as an asset class. It's a big prize if you can get it right.
The final topic I've been asked to speak on is what role Australia has in this, the Asian Century. Obviously, I've touched on some elements of this above. But I'd like to highlight a few more areas where there's more that we can, and will, do as a nation.
Right now, we're doing well from the Asian Century. We've got one of the strongest economies in the world. Unemployment is low. Inflation is contained. The terms of trade are high. While commodity prices appear to have passed their record peak, considerable minerals and energy investment is still to come and large-scale production and exports are yet to flow.
Our public finances are among the strongest in the world. Government debt is low. Our financial institutions are sound and we have the highest possible sovereign credit rating. And we have a multicultural, highly skilled and creative population that has demonstrated capabilities in innovation and complex problem solving.
We've also got a strong commitment to keeping regional trade booming. We've been a big winner from trade. The Centre for International Economics suggested that trade liberalisation since 1988 may have added 2.5 per cent to Australia’s GDP in the long run, representing an increase in real income of around $3,000 to $4,000 a year for the average working family. More than one in five Australian jobs today are trade-related.
We've got a strong commitment to developing financial market ties with Asia. At present, like the other countries in Asia, we're much more financially integrated with other parts of the globe rather than other parts of the region. But we're committed to encouraging far greater investment from Asia. And I think far more investment will come - investment from Asia in general is much lower than it should be given the relative size of the economies.
We need to be clear: we must welcome economic investment. Economic investment is good for us. It creates jobs. It boosts our tax base. And it lets us engage and interact with Asia.
But getting more out of the Asian Century is not just about us receiving more investment. There are many other things we need to address: we need to have much greater flow of goods, services, capital, ideas and people. We need to have stronger trade links. We need to encourage and be a part of more comprehensive regional agreements. And we need to look at Asia as a working partner, and understand them as partners. This means knowing their legal institutions, political leaders, commercial practices, cultures and governance standards better across the board.
Doing this requires us to rely more on our people. We've got a highly skilled, hard-working and creative population. We've got world leading research institutions in education, health, environmental management, science and design. We can add enormous value to cross-border value chains and regional production networks. And we've got the intellectual property frameworks and traditions to allow us to make the most of all this talent.
But it isn't just about our people: it's also about theirs. Asia will become an increasingly significant source of new ideas, technologies and leading-edge science for Australia. And our population — more than a quarter of whom were born overseas — and our large diaspora can help to build social, business, and, cultural networks that help us work together with Asia to make the most of their new ideas.
These networks are vital. They bring with them many, often-unanticipated benefits. Today's students, tourists, and friends are tomorrow's investors and business partners. Being enmeshed in Asia requires us to be enmeshed through people.
Businesses can enjoy similar benefits. More sophisticated relationships between our firms and Asia will encourage us to share knowledge, and to specialise in the things we do best.
All these things I've discussed can be seen in the five key areas listed in the Asian Century White Paper. The first is building on our strengths, and reinforcing the things we already do well. We've got to keep our own house in order, as this is what makes us attractive to Asia.
The second is developing the capabilities of our people, and making sure that they understand the region. We need these capabilities and this understanding in order to build stronger relationships and partnerships across the region.
The third is ensuring that the business sector develops strong relationships with others in the region as well. We'll need new business models and new mindsets to best operate in Asian markets, and in order to seize the opportunities created in our region.
The fourth is keeping our region stable. We will work to build trust and cooperation in the region, and to secure a greater role for Asian countries in a rules-based regional and global order. We'll do this through maintaining a strong alliance with the US, and through encouraging China to fully participate in regional developments.
The final goal is to strengthen Australia's relationships across the region at every level. I spoke before about the unanticipated benefits of people-to-people contact across the region. A wide range of groups — from businesses, to unions, to community groups, to even sports teams — can enjoy stronger relationships through Asia. It will be these relationships that form the base for future improvements in Australia's relations with Asia.
Getting these areas right is not going to be easy. But it's achievable, and Australia has a good base to build on.
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