Playing for position in looming golden era

THIS state is experiencing rapid development as a first-tier resources exporter to the world.

It is possible that what we are witnessing is the creation of an Australian ‘California’, with the centre of economic gravity in this country shifting westwards.

Certainly if the rate of growth experienced by Western Australia during the past 10 years continues for another couple of decades, it will have a transforming effect on our economy.

The achievement of such strong economic growth will depend, of course, upon countries to our north and north-west continuing to grow – and to grow at even stronger rates than ours; but that does appear to be eminently possible, and the implications for us are very significant.

It was with that in mind that this university took the initiative of establishing the ‘In The Zone’ conference series. It is, in our view, an important contribution towards aligning our thinking with the increasingly prominent Asian and Indian Ocean regions and seeking to optimise our relevance and influence within the zone’s political landscape.

There are few nations in the Commonwealth not in a similar position, relying on developing nations – China and India in particular – to sustain reasonable overall global growth in the face of a very poor outlook in the developed economies of Europe and the US.

It is hard not to be very concerned about the situation facing developed economies whose governments have run up large amounts of public debt, particularly in Europe. In some cases those debt levels are unsustainable and it is inevitable some sort of restructuring will need to take place. 

Hopefully this can be achieved without detrimental contagion effects on larger economies; but one way or another, it seems likely that Europe as a whole will experience relatively low growth for some years.

Many commentators tend to feel that the outlook for America is more positive – that, as our prime minister was quoted as saying this morning, America is adaptable and resilient, that the means of restoring its sovereign debt to a healthier level are more straightforward – but it remains to be seen whether there is the political will and the political capacity to actually do that.

I am inclined to think that we should prepare ourselves for a period of subdued growth in Europe and the US for some years while deleveraging takes place. The question for all of us is what effect that is likely to have on the developing world – in particular countries in this zone.

It would be naive, I believe, to think that their economic growth would be unaffected in the face of weak export markets. Economies like China’s will need to turn inwards, to focus on consumption, if they are to maintain growth rates near those achieved during the past decades – and this is not an easy thing to do; so I think there is some risk that the extraordinarily high terms of trade that many of us benefit from may be under threat.

Take the long view

But this is, in my view, a short – and at worst, medium-term – issue. If we stand back and think about what is happening in north and north-east Asia and put it into a historical context, there is reason to be optimistic about the longer-term outlook.

The recent trend of high growth in these economies represents a process whereby China and India are simply regaining the central importance they have had for much of their history. Their low growth over the past 100 years may well be the aberration, rather than their recent rapid rise to greater prominence.

As an illustration of that, for the 300 years prior to 1830, China accounted for around 30 per cent of total world gross domestic product and India around 20 per cent – that’s half of the world economy in total.

By 1950 their combined share of world GDP had fallen to just 9 per cent as a result of:

• industrialisation in Europe and rapid economic development in north America; and

• the impact of colonisation, civil wars and rebellions on economic and social conditions in those countries.

After just a few decades of strong growth, China and India now account for 25 per cent of the world economy, which is quite remarkable considering they are still at an early stage of development in terms of GDP per capita.

The OECD predicted in 2009, over the next 20 years, China would grow at 6.6 per cent per annum and India at 7.6 per cent; as we all know, both nations continue to grow at a faster rate than that today.

Now here’s an exciting thought. At a growth rate of 7 per cent per annum an economy doubles in size every 10 years. If you assume a constant level of resource intensity (which is a reasonable assumption given their current level of development), China and India will require more resources in the next decade than they have used in their entire history to date. That’s the power of compounding.

The implications of this for resource-exporting economies, of which there are many in the Commonwealth, are pretty obvious. Our challenge is to make sure that we position ourselves to take advantage of this golden era by creating and maintaining efficient economies ourselves and through effective investment strategies.

Education needed

With regard to the requirement for effective investment strategies two things come to mind; namely, adequate infrastructure provision, which I do not propose to discuss here, and education, which I do.

Education represents Australia’s third largest export industry, earning around $18 billion annually. In 1982 the Australian government introduced new laws allowing our universities to admit full-fee-paying foreign students. In that year there were 2,000 international students enrolled in Australia. 

Today there are over 600,000, from 190 different countries. 

Australia leads the world in respect of international tertiary enrolments with fully 20 per cent of our students coming from other countries. This compares with the OECD average of 7 per cent and the US, for example, with 3 per cent. On a global scale we punch well above our weight in this area, with 20 per cent of all students studying outside their own country located in Australia.

I believe this strong international student orientation will give Australian universities and this country a competitive advantage, and not just because of the export income and goodwill benefits I described earlier.

The presence of large numbers of international students in Australia enhances our ability to collaborate offshore through the research they conduct here, through research they will undertake on return to their home country, and through closer business collaborations. The potential scale of this is quite exciting. 

• This is an extract from University of Western Australia chancellor Michael Chaney’s address to the In The Zone Dinner at the Commonwealth Business Forum on Monday October 24.