On 23 February 2017, Corrs Partner and CEO John W.H. Denton AO addressed the Melbourne Forum about the economic outlook for business in the Asia Pacific region and beyond.
Below are John’s remarks.
The zeitgeist is ‘uncertainty’.
When I talk about uncertainty, I like to parse it into three:
The unusual feature of where we are today is that generally one or two elements of uncertainty are heightened at a given time, but right now, all three are operating at a heightened level.
For the first time, we are confronting a world order in which the founders and drafters of that world order are talking about walking away from that which they created.
This is ‘the new context’ in which we are operating. Now, I am not going to attempt economic prophecy today. Instead, I will outline three of the forces that I believe will influence the global economy and Australia’s prospects over the next few years. These forces are rapidly evolving.
Finally, I will throw out some thoughts on policy approaches that those of us in business, government or civil society might think about to prepare ourselves to lead and prosper - whatever may come our way.
Force 1: Developed world disillusion with globalisation
Right now a lot of people are analysing what the new US administration means for the world.
I think we need to look at recent developments in the US as a symptom, not a cause. The same goes for Brexit in the UK and even the resurgence of One Nation in Australia.
Arguably, they are all the result of the same phenomenon: a general unease and resentment that arises when citizens feel they are being left behind. This is whipped up and confounded with general disillusionment and cast under the new invective of ‘globalisation’.
And ‘globalisation’ is seen as interchangeable with ‘free trade’. Though a lot of what people are experiencing is actually the result of automation and technology and an algorithmic revolution.
As a result, the historic, 70-year run of global trade liberalisation faces a major backlash, undermining future prospects for further liberalisation – and raising the risk of greater protectionism. The world will be closely watching the US and other traditional supporters of trade for signs of policy reverse. And there are plenty of signs that indicate that further liberalisation of free trade may be limited at best.
One of the striking features of the ‘new context’ has been the surprise of many voters in cities like London, NYC, Washington DC, Melbourne and Sydney at discovering how differently some of their fellow citizens are thinking.
These tend to be people living in towns and smaller cities where traditional jobs began to disappear a generation ago and have never been adequately replaced. Whole communities have experienced their real incomes stagnating or falling since well before the financial crisis.
Over the past thirty years, rich nations have seen the sustained decline of their manufacturing industries. Nearly two billion workers, often from former state-managed national economies, have joined the global marketplace. Many of them are skilled and educated. They’re cheaper than counterparts in richer countries.
In major developed economies, the cost of this historic transition has not been carried by ‘elites’. The burden has fallen upon people and communities outside the major centres in towns like Detroit, in Newcastle upon Tyne, in the outer suburbs of Melbourne and Sydney and the list goes on, for whom manufacturing was for so long the basis of economic and social stability and social mobility.
These people were offered a ‘bargain’ – a ‘citizens bargain’: if they acquiesced in the opening up of the economy and relaxing a number of protections, the benefits untapped would also ‘trickle down’ to them.
But in the end they lost faith in the bargain. They don’t feel the benefits. The ‘citizens bargain’ has failed and needs to be rebuilt.
The problem was only made more visible after the GFC in 2008.
In that time, the developed world has suffered from low growth, increasing debt levels and accelerating technological disruption. Pressure from immigration and displaced people (now +65 million globally) has grown. The established political parties and processes have failed to manage this historic shift.
Here in Australia, reforms we made in the past have helped us cushion ourselves from some of the worst effects felt elsewhere. But are we capable of leading the nation to improved living conditions in this new context?
After all, isn’t that the point of national economic policy?
Australia has stopped making white goods and will soon stop making cars (Ford and Holden are gone, and Toyota will wind up shortly). We no longer contribute significantly in the construction of offshore platforms for the oil and gas industry. Steel-making and heavy engineering continue to decline.
We are transitioning to a services-led economy – through the increased emphasis on education, tourism and professional services, through high-end food, advanced manufacturing and exploitation of mining services knowhow.
However, I think we can see that the traditional political class is struggling to define policies that meet the needs of economic growth in this services led environment while ensuring greater fairness across the system and meeting the demands of an ageing Australia.
If that rebalancing doesn’t occur, we’d better get used to One Nation.
Force 2: Rapid progress in the developed world and effect on the world order
The second force I want to address today is related to the first: the rapid and sustained economic progress of the ‘developing’ world.
Between 1990 and 2013, the share of the global economy made up by developing nations rose from 32% to 49%. More than half of US exports now go to developing countries, and for Japan the figure is 65%. Both are up considerably over twenty years.
Take out China and these nations now make up one third of the global economy. This expansion hasn’t been through bilateral agreements but through regional and multilateral deals which promoted initially supply chains but now global value chains.
After the GFC, growth in rich nations contracted, requiring massive central bank intervention to restore stability. In developing countries, however, growth continued at an average of around 3%. There are undoubtedly challenges now in the patterns of trade and investment flows but there is no future scenario that does not point to the importance of these new developing and emerging markets.
Perhaps even more importantly, according to data from the World Bank and other sources, the number of people living in extreme poverty (less than $2 per day) has been dropping in absolute numbers since the early 1990s. Between 1993 and 2011, within just eighteen years, the number more than halved, from 1.3 billion to 600 million.
Given that the global population is growing rapidly, the percentage of people living in extreme poverty has been cut even more dramatically.
This staggering achievement was only made possible by joining the global economy. Some argue the direct economic costs of President Trump pulling the plug on the Trans-Pacific Partnership (TPP) are relatively small. But strategically, it is an inflection point, further corroding the global trading order. The power of the TPP was in enabling further work on value chain integration and the growth that might ensue.
We now see a threat to global trading rules and the primacy and relevance of the WTO.
Will China and Japan work to preserve this order – one so intrinsic to their future prosperity? Perhaps by working more collaboratively with their neighbours. Can Australia help play a role?
Over the last thirty years, eighty-one other developing countries have achieved real reductions in the number of poor people despite increases in population – nations across Africa, South Asia, Central and East Asia, South and Central America, and the former Soviet Union.
Not long ago, developed country companies were investing in the developing world to exploit cheap, low-skilled factory labour in order to export finished goods back to the richer economies. It’s a model that is gradually changing.
Major developed country companies are now investing in many developing countries to join in their steady growth and market goods to local consumers. The risks associated with establishing business in a developing nation is falling fast. Governments in these countries are more stable, their currencies less likely to experience rapid inflation and their workforces becoming better educated.
Australia has a great opportunity to be part of the transition, but not so much in traditional manufacturing. Australia has the potential to be a services superpower for Asia.
But isn’t it time we started to understand better how we drive a services economy and create the environment for us to prosper in Asia?
One clear opportunity is for Australia to double-down on our engagement with Asian economies and help lead an Asian push-back against protectionism and isolationist policies.
Australia, together with the likes of China and Japan and other Indo-Asian economies, must work collaboratively with those forces in America that can shape future policy, despite the short-term threats posed by the incumbent administration. Australia’s future relies upon connections, openness and outward-looking trade policies across the world and especially in our region.
This was always a fundamental of Australian foreign policy. Is it now?
Force 3: Disruptive technologies
The third force I want to mention today is technology. We all know the creative and destructive force of the digitised modern world. The most obvious impact has been from the spread of information technology and the algorithmic revolution.
One particular feature of the digital world is that it needs so much less capital, which means there is great potential for disruptive start-ups to challenge legacy business models.
Compare the established main street American retail giant Walmart with the online retail giant Amazon.
One competes with stores and car parks and the other competes with online ordering and fast home delivery. At the beginning of last year, their total market value was roughly the same: about $250 billion. But Walmart needed $154 billion of capital to create that market value. Amazon achieved the same result using only $35 billion of capital. Many of the most profitable modern companies are asset-light in terms of physical capital.
Technology and algorithms are allowing the creation of networks bringing producers and consumers together in new and very efficient ways:
Airbnb and Uber base their entire business model on other people’s idle resources
Power producers and users have found ways to modify peak demand periods and reduce consumption, resulting in less demand for capital expansion.
And the list goes on.
The big banks will not be immune either. Peer-to-peer lending will be a big disruptive challenge. Entirely net-based companies are now bringing together borrowers with small lenders at such low costs that both sides of the deal are doing better than when they used banks as intermediaries.
Last year in the United States, ‘the economic report of the president to congress’ concluded that as many as 62% of US jobs were likely to be automated in the medium term. The probability was higher the lower the skill level required; workers earning less than $20 per hour have an 83% chance of losing their jobs to automation. More complex white-collar work will also be challenged, however, as machines become more adept at responding to human language instructions.
So let’s pause here.
This disruption is a challenge to the status quo and the living standards we want. We can’t block it. Some may try and slow it down but that is ultimately quixotic. What is our policy response?
I see three main elements to this:
Large cities will always be the best incubators of economic growth, because the more people you have in one place, the easier it is for their knowledge to spread to each other. But we can narrow the natural disadvantage of smaller cities and towns by improving the infrastructure that connects them to each other.
This implies making fast broadband universal, but it also points to the need for better transport, like high-speed rail, because virtual and physical communication are complements, not substitutes.
I claim no expertise in how we should be educating and building skills for our children and citizens for the technological state of the world which is evolving.
But I am fairly certain we’re currently getting it wrong.
Most schools still resemble factories for turning children into expensive and not very good computers. Do we seriously think we have created an environment where citizens know how to build skills for the future world? Are we really building the right skills in vet for the future?
Another improvement would be to help citizens develop the human skills that machines seem furthest away from mastering, such as creativity in problem solving.
3. Devolved power
Every region is different in terms of what jobs it could create, and the kind of education it needs, which brings me to the final priority: giving local levels of government more power. If education policy is being set by a bureaucrat in a distant city, it can’t reasonably be expected to equip students with the appropriate skills for the local economy.
The same is true of other policy areas. One clear lesson of last year’s electoral shocks is how many people felt a lack of agency. They see decisions that shape their lives being taken by people who aren’t like them, in places that feel far away, whether in central banks, multinational boardrooms or booming capital cities, and seem disconnected from their hinterlands. During the recent political campaigns the slogan that resonated most was the promise to ‘take back control’.
If part of what’s undermining democracy is people feeling disconnected from power, part of the answer must be looking for ways to return power closer to people.
All of this is easier said than done.
It would require a very serious redirection of resources to create opportunities in the regions or towns that have been left behind — high quality education and infrastructure do not come cheap.
In addition, the initiative needs to come from the public sector, because public capital is the only kind of capital people in left-behind regions can access.
Some may see this as unrealistic given current fiscal challenges, but the problem is less about resources than political will. Get serious about reforming the tax system and the money for investment could be found.
These are just three of the great forces at work in the world today.
I could also mention climate change; the pressures and potentials of global demographics, profound medical advances and health risks; the rise in geo-political tensions.
The post-World War II international order that enabled today’s political, economic, and security structures and institutions is in question as the developing world crystallisation as critical actors and power diffuses globally, shuffling seats at the “table” of international decision making.
Today, these developing powers seek to adjust the rules of the game and international context in ways favourable to this.
This dynamic complicates reform of international institutions such as the UN Security Council or the Bretton-Woods institutions, and brings into question whether civil, political, and human rights – hallmarks of liberal values and US leadership since 1945 – will continue to be norms that were thought to be settled will be increasingly threatened if current trends hold, and consensus to build new norms may be elusive — particularly as Russia, China, and other actors such as ISIL seek to shape regions and international norms in their favour.
The near-term likelihood of international competition leading to greater global disorder and uncertainty will remain elevated as long as a la carte internationalism persists.
As dominant states limit cooperation to a subset of global issues while aggressively asserting their interests in regional matters, international norms and institutions are likely to erode, and the international system to fragment toward contested regional spheres of influence.