Clouds of precarity brewing over Australia

John West
Australia faces an uncertain economic future if it does not successfully reduce its dependence on China, and resources
Executive director of the Asian Century Institute

Australia can feel proud of its excellent record through the COVID-19 crisis. It has one of the world’s lowest number of cases and deaths. And after two quarters in the red, the Australian economy likely returned to growth in the third quarter of 2020, although a full recovery is still a long time away.

But before and during COVID-19, Australia’s world has been changing. Its future is looking increasingly precarious, and the Liberal (right-wing) government does not seem to have a serious strategy for the country. 

All’s not well down under

As its neighbourhood becomes increasingly fragile in the context of the China-US rivalry, Australia is a country in relative decline, although its GDP per capita of $55,000 is among the highest in the world.  China’s total GDP is already ten times that of Australia’s, India’s is double, while Indonesia is catching up fast. And looking ahead, many fast-growing Asian countries with large populations will overtake Australia. For example, PWC projects that Australia’s total GDP could fall from 19th in the world today to 28th by 2050. China, India, Indonesia, Japan, Pakistan, South Korea, the Philippines, Vietnam, Bangladesh, Malaysia and Thailand could all have bigger economies than Australia.

While it is true GDP per capita is a better indicator of economic sophistication and standard of living, total GDP can be a better indicator of ‘power’. A large economy can wield power by virtue of its market size, as China regularly does, notably by restricting market access to countries like Australia.  Moreover, a large economy can finance large military spending. Australian neighbours like China, India, Japan and Korea all have a higher military spend than Australia, even though their GDP per capita is much lower.

After relying first on the UK and then on the US to guarantee its security, Australia finds itself increasingly alone in a world in which the US retreated from global leadership, and was more erratic under Donald Trump’s leadership. While a Biden presidency may be more polite, it is far from certain how committed today’s polarised America will be to protecting and defending Australia. This leads many analysts to recommend a dramatic increase in Australia’s defence spending – from 2% of GDP to 3% or more. Increases are also recommended in its diplomacy budget, which has been withering on the vine.

Australia’s China problem

As the Australian government has been siding with the US in its great power struggle with China, including its unaided call for an independent international enquiry into the origins of COVID-19, Australia is being subject to a growing list of sanctions on its exports to China, which is the destination for about half of its exports.

Beyond Australia’s China problem, its future as an exporter of natural resources—which account for more than 70% of Australia’s merchandise exports—looks more precarious than in the past. From the 19th to the mid-20th century, the UK was Australia’s most important export destination, and wool and gold were leading exports. Over the past 70 years, Australia has been able to surf the wave of Asia’s flying geese of developing nations, starting with Japan. It was followed by forays into Hong Kong, Korea, Singapore and Taiwan, and more recently, China.

Australian organisations are characterised by cultural biases and stereotyping, Western leadership models and a poor understanding of the value of cultural diversity. These factors inhibit Australia’s ambition to be more intimately integrated with the Asian economy.

However, China currently is seeking to diversify away from Australia. As China’s economy develops further and becomes more service-oriented, its infrastructure will become more complete, and it will require less iron ore than it did earlier. And unlike in the past, there is no obvious country to take over as lead resource export destination. India will never become another China.

Another threat to Australia’s dependence on natural resource exports are the recent commitments by China, Japan and Korea to make their countries carbon neutral. This will adversely affect the future of Australia’s exports of coal and natural gas. Additionally, Joe Biden’s presidency will likely push Australia to take climate change more seriously. 

And while education has become Australia’s fourth largest export, Chinese students account for one-third of all foreign students, and it is not clear for how long Australia will remain an attractive destination for them. China already has about the same number of universities as Australia in the top hundred World University Rankings, with two Chinese universities ranking higher than Australia’s best.

Complacency – Australia’s enemy      

In short, Australia’s future is looking rather precarious. Its number one priority must be working on the most important source of national strength and security – a stronger economy. This will require a transformation from a natural resource-based export economy to a human resource-based one. It will need to transition from an extractive export economy to a creative one. It will also require many other things, notably tackling endemic corruption, as identified by the recent royal commissions

Many in the Australian elite are willing to pay lip service to these issues. But after three decades of solid economic growth, prior to COVID-19, many Australians have been lulled into a state of complacency. If things are steady today, why worry about tomorrow? “She’ll be right, mate,” seems to be the prevailing sentiment.

What are some of the main issues involved for the transformation to a human resource-based, creative economy?

Towards a human resource-based, creative economy

A human resource-based economy necessarily requires a population with an excellent education. And yet, the performance of Australian students in the OECD Programme for International Student Assessment (PISA), which measures capabilities in math, literacy and science for 15-year old students, has been declining over the past two decades. This is despite the overall performance remaining relatively good. 

China was represented in PISA 2018 by Beijing, Shanghai, Jiangsu and Zhejiang, and was the highest performer across all domains, followed by Singapore. Compared to Chinese students, Australian students performed at a level roughly one-and-a-half school years lower in reading literacy, around three-and-a-half school years lower in mathematical literacy, and around three years lower in scientific literacy.

Even more troubling is that according to a more recent study by the Mitchell Institute of Victoria University, about one-fifth to one-third of young Australians are not acquiring lifelong learning skills and are not mastering the knowledge and skills needed to become creative and confident individuals who are active and informed. And it is young people from poorer families, those living in rural and remote areas, and Indigenous Australians who are struggling and missing outmost. Social background is too often a key predictor of educational and future success, and performance gaps are unusually wide in Australia. 

Australia’s Technical and Vocational Education and Training (TVET) system has also been found wanting. This comes at a time when there are calls for efforts to revitalise the manufacturing sector, which now accounts for less than 6% of total GDP and employment. Indeed, COVID-19 has highlighted the decline in Australia’s manufacturing and dependence on global supply chains, focused on China, for the supply of medical equipment and other supplies. Australia’s TVET has suffered from ill-considered reform efforts over the years, and needs to be re-engineered for the fourth industrial revolution underway.

Australia’s future is looking rather precarious. Its number one priority must be working on the most important source of national strength and security – a stronger economy. This will require a transformation from a natural resource-based export economy to a human resource-based one.

Beyond education and training, economic productivity depends critically on all members of the workforce being given the opportunity to contribute in the workplace.  Many Australians continue to believe in the longstanding myth that Australia is the land of the ‘fair-go’. But a recent study by the Diversity Council Australia shows that this is not the case. Lower class workers suffer from discrimination in the workplace which adversely affects their productive contribution.

As Australia progressively embraces the prospective Asian Century, the relatively open immigration system has resulted in some 9.3% of Australia’s workforce being Asian-born. While people from Asian backgrounds are well represented in entry-level and mid-level jobs in Australian businesses, they are significantly under-represented in leadership roles, representing an enormous waste of talent. In other words, Asian Australians are suffering from a ‘bamboo ceiling’. Australian organisations are characterised by cultural biases and stereotyping, Western leadership models and a poor understanding of the value of cultural diversity. These factors inhibit Australia’s ambition to be more intimately integrated with the Asian economy.

Australia on a knife-edge

Since European settlement in Australia 230 years ago, its export economy has been based on natural resources – from wool and gold, to iron ore, coal and natural gas. While the UK was the main destination for Australia’s exports, over the past 70 years, exports have been reoriented to Asia, especially China.

But for many reasons—and not least a deteriorating relationship with China—Australia can no longer rely on being an export economy, dependent on natural resources. If Australia is to maintain its prosperity, it will need to transform to a human resource-based, creative one. This will require high levels of human capital, and most importantly offering full opportunity for Australia’s human resources to the economy. But, as illustrated, Australia has a long way to go to make this happen. For now, it is on a knife-edge.

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Executive director of the Asian Century Institute

John West is author of the recent book, “Asian Century … on a Knife-edge,” and executive director of the Asian Century Institute. He is also adjunct professor at Tokyo’s Sophia University and contributing editor at FDI-Intelligence, a Financial Times magazine. These positions follow a long career in international economics and relations, with major stints at the Australian Treasury where he was director of balance of payments, OECD (head of public affairs and director OECD Forum) and Asian Development Bank Institute (senior consultant for capacity building and training).

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