Stakes high in Australia-China trading game. In 10 years China will become a middle-income country.
Stakes high in Australia-China trading game. In 10 years China will become a middle-income country.; Strategic decisions involving China are going to be tough but momentous
Tweet Topic Started: 4 Sep 2013, 09:52 AM (1,120 Views)
This election campaign has been remarkable for the almost total absence of discussion of China. This is odd. Decisions about how to run relations with our main trading and regional partner will be among the most important that leaders in Australia will make in the coming decade.
Whoever wins on September 7 will be dealing with falling growth rates in the near future and an era of greater austerity on the horizon due to the ending of the resources boom. They are going to have to find a way to get more growth from our economic relations with China, rather than just relying on selling resources to them, at a time when their appetite for this is declining.
Against this backdrop they are going to have to decide quickly what they will do about finally signing a free-trade agreement and liberalising inward investment rules to allow Chinese investment here to increase substantially, against the trend of recent rhetoric.
The Australian government itself issued its China Country Strategy paper on August 29. That spelt out the immense importance of the relationship, and the challenges it brings. But the paper got little mainstream coverage. That is a pity.
The paper shows why strategic decisions involving China are going to be tough but momentous ones. They could be truly transformative for Australia. It also shows why smart engagement will give Australia a voice in the immense internal changes China is likely to see in the coming decade.
In the next 10 years China will become a middle-income country, a predominantly urban country, and a service-sector oriented economy. This is truly a crossroads moment, both for China and for us. Real choices that require political risk are involved. Perhaps that is why the politicians have wanted to keep quiet about it.
Much of the 32 pages of the China Country Strategy is concerned with education. Education lies at the heart of our relations with China. We already have 120,000 students from China here, and their involvement in our education system, along with their role in the changes coming in China in the future will be immeasurable. This is acknowledged in the strategy. But it is only half the issue.
The far greater challenge is to teach Australians, from business to government, about how to understand and engage better with their greatest regional partner. The Country Strategy calls this the need to be ''literate'' about Asia, and in particular China. Greater knowledge about our main trading partner will give us a competitive advantage.
Universities are going to be among the most important partners in this challenge to create a new generation of people who make China a focus of their careers and professional lives. It is no longer an exotic choice for a minority. Knowledge of a culture as different and as complex as China's is critical for Australia's future. We cannot neglect it if we want to maintain the levels of wealth and success that we have experienced over the past two decades.
The China Country Strategy is a worthy and important document and should be at the centre of a well-informed public debate. The easy platitudes of a China threat that we hear sometimes are becoming increasingly outdated. In several policy areas, from sustainability to innovation to global governance reform and international finance, we share common concerns and a common environment.
But rhetoric is one thing. When we say we want to be partners in innovation or research, then we have to think long and hard about where and how we do this. Are we looking at medical research partnership to face common health challenges (China will be facing a demographic time bomb in the next decade as its population ages), or energy innovation to do something about our shared addiction to fossil fuels? Is water conservation our priority with a China starved of decent resources, or are we keen to see a free-trade agreement that finally opens up the vast untapped consumer market in China for our companies?
What price are we willing to pay to get this market openness? Heavy Chinese investment in our agribusiness (China bought most of Australia's exported beef last year)? Or even final allowance for Huawei to be involved in our telecommunications infrastructure?
The rise of China is a well understood phenomenon. It began in the seventies with the embrace of capitalism. The reform era, as it is known, brought the Western ideals of private sector dynamism to together with the most abundant and cheap labour in the world. What followed was an explosion of economic growth that persists to this day.
This was not some miracle, however. In fact, China simply followed a script of development written for it by Japan and then Korea decades earlier. Open up to trade and inwards investment, allow labour to be mobilised by foreign capital and unleash the productivity potential of the nation through heavy investment in urbanisation and infrastructure to modernise the economy.
In short, it is not difficult to invoke powerful growth in an under-developed economy. The dynamics are well understood. Many nations have succeeded at various times, including much of South America, Southern Africa and most of Asia. This is widely known as the economic policies of “catch up” growth.
But there is a problem. Although it is relatively easy to get such a transformation underway, once an economy reaches a certain point of success, when labour supply gets tighter and incomes have risen materially, it suddenly gets much harder to generate high rates of growth.
The reason why is not complex either. Rising wages reduce competitiveness and formerly dynamic but labour intensive export industries begin to wane before the economy has made the jump to the more sophisticated value-add activities in exports and services that are the hallmark of developed economies.
As well, if the nation has a natural resource endowment (as many do) then extractive industries can hog capital and favoured political decision making, as well as drive up currencies, again hitting competitiveness. The vested interest problem can apply to other industries too that have benefited from the early phase development and are threatened by renewed creative destruction. All of these weights can combine to retard swift growth in what is known as the “middle income trap”.
Far fewer nations have made the leap from fast early-phase development economics to equally fast post middle-income development. Japan and Korea are outstanding examples but many more have failed or stagnated for long periods.
The secret of those that did make the transition was that when they reached the point at which growth began to slow, they did not rest on their laurels. Reform turned from opening up to capital, mobilising cheap labour and heavy investment in infrastructure to liberalising capital markets so that they may prioritise returns on investment, labour was driven to higher value-add industries through shifting investment to soft infrastructure like education and health and the overall economy was mobilised for innovation and productivity gains. These, in turn, drove income growth and ongoing high growth rates.
As a result, the infrastructure investment that drove much of the high speed growth in the early phase of development begins to fall, though investment rates remain high.
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