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Does the White Paper underestimate the pace of economic change?

We may again fail to grasp how quickly changes in relative economic weight translate into changes in the balance of power.

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29 November 20173 min read

Does the White Paper underestimate the pace of economic change?

Does the White Paper underestimate the pace of economic change?

The major themes tackled in the Foreign Policy White Paper - particularly China’s ability to challenge the US-led international order but also the rising importance of India and Southeast Asian nations - are underpinned by the shift in global economic weight towards Asia.

As the White Paper notes, these trends are set to continue. Today, China’s economy is 15% larger than the US in purchasing power parity terms, the relevant basis of comparison for most purposes. By 2022, the IMF reckons it will be 50% larger. By 2030, the White Paper’s figures suggest China’s economy will be 80% larger. To put that in perspective, that’s roughly how much bigger the US economy was than China’s back in 2006.

In thinking about China’s challenge to the US-led international order, and the White Paper’s desire to see that order preserved, this relative economic trajectory must be kept front of mind. China’s ability to reshape things took many by surprise just a few years ago and was then put into even more stark relief with the arrival of a nativist Donald Trump. China looks confident and ascendant, and Trump’s America recalcitrant.

But the economics that created this situation did not occur overnight. As we look to the future there is a risk of again failing to fully grasp how quickly changes in relative economic weight might translate into changes in the balance of power, particularly if compounded by other difficult to predict factors. One has to wonder whether the White Paper takes this sufficiently into account, or whether a decade from now it will seem obvious that China’s ability to reshape things was far greater than appreciated today.

The White Paper stakes a lot on the expectation that other Asian countries, notably India and Indonesia, will rise at the same time as China. The argument then goes that this gives Australia an opportunity to hedge and counter-balance a more assertive China, as well as creating economic openings. The White Paper eyes strong growth in these economies driven by their favourable demographics and the emergence of millions of middle-class consumers.

Yet as the White Paper itself acknowledges (though only in passing), these countries will need deep and difficult structural reforms if they are to capitalise on this growth potential while rising automation threatens to undermine that same potential. So as much as they present an opportunity for Australia, these countries could also pose a risk.

Demographics mean countries such as India, Indonesia, and Philippines face the urgent task of creating enough good quality jobs to absorb millions of new workers every year without relegating them to the informal sector where they will not only be far less productive but risk becoming disenfranchised and a potential source of instability. Similarly, a rapidly expanding middle class can help drive growth but will also be accompanied by high expectations for better quality jobs, public services, social security, and cleaner government. Avoiding a crisis of expectations will be a critical challenge.

Will governments and politics in these countries be up to the task? So far, it’s not clear that they are. If these economies eventually falter or become a cause of domestic discontent, they will struggle to help shape the region and instead may become more amenable to Chinese influence and the economic largesse that comes with it.

Finally, it would be remiss not to discuss Trump and the rise in populism of which he is a part. The White Paper does a good job of calling Trump out on his protectionism and undermining of the global trading system, without using his name of course. It reiterates Australia’s strong commitment to economic openness and the value of the World Trade Organization and its dispute resolution mechanism, which Trump is seeking to undermine. The ‘generational’ goal of knitting together a regional trade and investment agreement that includes both the US and China is the right kind of ambition.

But in placing so much emphasis on the US-led order, the White Paper in essence assumes that we can look through Trump and his America First nativism as an aberration with little permanency. Hopefully so. But the structural factors that are driving populism in the US and around the world, including widening inequality, technological disruption, and the role of social media in particular, show no signs of abating.

Photo by Flickr user RedBird XZY.

Roland Rajah

About the author

Roland Rajah

Roland Rajah is Lead Economist and Director of the Indo-Pacific Development Centre at the Lowy Institute, focusing on economic development challenges across Southeast Asia, the Pacific Islands, and South Asia. His research spans macroeconomics, aid and development finance, geoeconomics, and regional integration.

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