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Is Australia shy of the Asia boom?

Published in Business Spectator (Melbourne), 27 October 2011
http://www.businessspectator.com.au/bs.nsf/Article/Australia-economy-America-Europe-debt-crisis-West–pd20111024-MX33A?opendocument

To describe Australia’s traditional position in the world two classic expressions come to mind, Geoffrey Blainey’s ‘tyranny of distance’ and Donald Horne’s ‘lucky country’. Both sum up Australia’s self-image as an outpost of the West, blessed with natural resources.

Despite their superficial straightforwardness, the terms have often been misunderstood. Blainey referred to the enormous distances within Australia as much as to Australia’s distance from Europe and America. And Horne’s saying was rather mockery than praise, which is obvious when you read the complete quote: “Australia is a lucky country, run by second-rate people who share its luck.”

As Australians watch countries on both sides of the North Atlantic struggling with their economic crises, these two phrases have come to sound different.

Europe fights the collapse of its banking system and fears its own decay into global insignificance. Meanwhile, the United States is plagued by high unemployment and a federal debt burden already equivalent to its annual economic output. Taken together, these developments mark the end of more than five centuries of Western dominance as the decline of the West is coinciding with the rise of the East.

Australia may still be a lucky country (and perhaps it is still run by second-rate people), but the ‘tyranny of distance’ from the old centre of the West has turned into a blessing. Who would still want to be close to the economic disaster zones of the US or the European Union? Australia’s geography is finally working in its favour.

Danny Quah, a professor at the London School of Economics, has calculated the shift in the world’s centre of economic gravity, defined as the average location of economic activities. In 1980, this theoretical point was located in the Atlantic between the Azorean and the Canary Islands. By 2010, it had moved to Israel, and based on Quah’s projections it will shift further east, so that by 2049 it will reach Tibet.

For Australia the changing economic geography of the world means that the distance from the world’s economic centre of gravity (measured from Sydney) was 19,500 kilometres in 1980, it is 14,100 km now and it will shrink to just 9,400 km by the middle of the century. Physically Australia may still be in the same spot, but the economic world is moving closer towards it.

The two factors responsible for this different geographic outlook are demographic change and economic development, both in the old West and in Asia. Europe’s population is projected to remain roughly constant for the coming decades but the continent’s age profile will shift dramatically. Whereas today there are four working-age Europeans for every European pensioner, there will only be two workers per pensioner by 2060. By then, Europe’s median age will be 47.9 years.

There is no way that Europe could ever recover its past economic strength in this demographic winter. At best, it will stagnate. At worst, it will collapse. Europe’s current problems are just a dress rehearsal of what is to happen in the coming decades. And its fiscal and monetary crisis is only foreshadowing a far bigger catastrophe that is looming on the other side of the Atlantic.

In comparison, Asia looks forward to decades of increasing wealth based on favourable demographic conditions (with the notable exception of China) and strong economic growth. The key word is convergence. The rising middle classes of India, China and other South-East Asian countries aspire to be as affluent as the old West – and they are getting there.

According to OECD calculations, a billion North Americans and Europeans together accounted for 54 per cent of the global middle class population in 2009. By 2030, the absolute number of North Atlantic middle-class people will remain constant but their world share will drop to just 21 per cent. In this short period of just 20 years the Asia Pacific will add 2.7 billion consumers to the world’s middle class. In 2030, two out of three middle class people will live in this region – Australia’s region.

The tyranny of distance from the North Atlantic has turned into a blessing, and the idea of geographic isolation could well be replaced by the notion of fortunate proximity to those places that really matter in the 21st century. But it is far from certain that Australia really understands this massive opportunity.

As Robert Gottliebsen observed a couple of weeks ago (There goes the neighbourhood, 13 October), Australia is still behaving as if it were a morally or intellectually superior country in the region. Gottliebsen rightly deplored Australia’s arrogant diplomacy towards Indonesia, Fiji and China. He could have also mentioned the diplomatic blunders towards Malaysia, Vanuatu and East Timor over asylum seekers. He could have written about the rejected merger with the Singapore stock exchange. He could have wondered why, within the chronically understaffed Department of Foreign Affairs and Trade, only 10 per cent of Australia’s diplomats speak an Asian language.

In economic terms, Australia has decoupled from the old West as its performance throughout the so-called ‘Global’ (read: North-Atlantic) Financial Crisis demonstrates. Unlike other Western economies, Australia is close to full employment, public debt is low, the banks appear strong and well regulated, and its population is comparatively young and growing. These factors should set the scene for participating in the rise of the Asia Pacific region.

Yet, mentally, Australia has not made the shift to its new place. On the contrary, with increases in public spending, re-regulation of the labour market and an increasingly paralysed political system, Australia looks hell-bent on repeating many of Europe’s mistakes.

Australia is not moving nearly as fast as it Asian neighbours. To just give one example, while Shanghai has added more than 420 kilometres of underground railway lines since 1995, Sydney has taken the same time to prepare for the introduction of integrated ticketing on its public transport system, which will hopefully start sometime next year. Perhaps this is sufficient to keep pace with a sluggish Europe but in the booming Asia Pacific context this is simply not good enough.

By internationally practising a policy of exceptionalism against its Asian neighbours, and domestically following the path of European-style governments, Australia is missing out on the greatest opportunity available to any of the world’s developed economies.

The tyranny of distance has gone, but when will our luck run out? Australia needs to decide whether it wants to be more like Europe or a real partner of Asia.

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