Memo generals: China is our inescapable economic destiny

There must be times in Australia’s history when people look at the nation’s economic experts and wonder if they have any idea what they’re doing. Today, the boot’s on the other foot: people who care about our economic future are wondering what game the nation’s defence and foreign affairs experts think they’re playing.

The concern of many business people and others has been most eloquently expressed by Dr John Edwards, former Reserve Bank board member, in a paper for the Lowy Institute. He’s in complete agreement with Scott Morrison’s assertion last year that “even during an era of great-power competition, Australia does not have to choose between the United States and China”.

Edwards says Australia made its choices long ago, and is now locked into them. “It chose its region, including its largest member, China, as the economic community to which it inescapably belongs. It also long ago chose the US as a defence ally to support Australia’s territorial independence and freedom of action.”

There is a good deal of tension between these two choices, but no possibility that either will change, he says. “Like many other enduring foreign policy problems, it cannot be resolved. It must instead be managed.

“However, it can only be managed if the Australian government has a clear and united understanding of Australia’s interests, and competent people to execute policies consistent with that understanding.”

Australia’s trade with East Asia has been growing faster than its gross domestic product and its trade overall for many decades. Our exports to East Asia now account for more than a sixth of our total GDP. Half of these exports go to China, and now amount to 10 times those going to the US.

Australia is meshed with China’s economy not only because China is such a big market for our exports, but also because China is the major trading partner of our other major markets in East Asia: Japan, South Korea, Taiwan and the ASEAN countries.

Today, East Asia and the Pacific form a regional economic community that, in terms of trade and investment between its members, is only a little less integrated than the European Union, and very much more integrated than the North American region.

“Already selling all it can to Japan and Korea, Australia would not find new markets for iron ore and coal to replace even a part of what it now sells to China. Nor could it easily replace exports of wine, meat, dairy products and manufactures to China. The largest share of foreign tourists is from China, as is the largest share of foreign students,” Edwards says.

“Without trade with China, Australia’s living standards would be lower, its economy smaller and its capacity to pay for military defence reduced.” (Generals – armchair and otherwise – please note.)

“It is difficult to imagine plausible circumstances in which an Australian government would voluntarily cut exports to China. Australia cannot and will not decouple from China’s economy any more than Japan, Korea, Taiwan or Southeast Asia can, wish to, or will,” he says.

Australia’s stance towards the US-China competition must therefore be informed by a recognition that what injures China’s prosperity also injures Australia’s prosperity. Economic "decoupling" of China from North America or Europe is not in Australia’s interests.

But “nor will Australia decouple from its security arrangements with America. The US will remain the primary source of advanced military technology for Australia. It will also remain the primary source of security intelligence.

“And no hostile power can entirely discount that possibility that the US would come to Australia’s military assistance if required. The security arrangements Australia has with America are therefore sufficiently valuable that no Australian government would voluntarily depreciate them, let alone relinquish them.”

The tension between these two pillars of Australia’s engagement with the world will continue for decades to come. The centrality of these relationships makes it all the more important for Australia to conduct them carefully and cleverly, always guided by a notion of Australia’s long-term interests, we’re told.

“China’s growing role on the world stage, its authoritarian government, its suppression of internal dissent, its territorial claims and defence build-up in the South China Sea, together with the deterioration of the relationship between the US and China, make this tension increasingly difficult to manage.

“Thus far, the cleverness Australia increasingly needs is not evident in its handling of relations with China . . . Refusing to take sides in the trade and technology competition between China and the US is Australia’s declared policy. It was wisely adopted – but not deftly implemented,” Edwards concludes, with admirable restraint.

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Treasury boss's parting advice is daunting

One of Tony Abbott's first acts on becoming Prime Minister was to sack the secretary to the Treasury, Dr Martin Parkinson. Parkinson's crime was to believe - as did the government he had been serving - that we need to take effective action against climate change.

Abbott also sacked Parkinson's obvious successor at Treasury, Blair Comley, for the same crime. It was a disgraceful, vindictive way to treat loyal and proficient public servants.

But Parko's departure from Treasury was delayed, first so he could help the new government prepare its first budget and then because his experience was sorely needed to help Abbott and Joe Hockey prepare to chair the G20 meeting this month.

But the time for his departure has finally arrived and this week he gave one of the last of many speeches during his distinguished career. It was a tour of the short-term and longer-term challenges and opportunities that lie ahead. He professed to be very optimistic about our prospects, but I found his remarks pretty daunting.

Starting with the rest of the world, Parkinson observed that, even this far on, the big, developed economies' recovery from the global financial crisis was slow and uneven. Forecasts for global growth next year had been downgraded again, to 3.75 per cent, following a pattern that had become familiar over the past few years, he said.

"We now have a situation where 200 million people around the world are looking for work. As the International Monetary Fund's Christine Lagarde noted, if the unemployed formed their own country, it would be the fifth-largest in the world."

The financial crisis led to rapid accumulation of public debt, and governments in many countries had neither the political support nor market tolerance to use deficit spending to stimulate their economies, he said.

In normal times, countries might use monetary policy to offset fiscal tightening, supporting demand by cutting interest rates and boosting economic activity by having their exchange rates fall. But many countries already had their interest rates at zero.

So their efforts to cut spending and raise taxes while their economies are still so weak - known as a policy of austerity - ran the risk of weakening demand further and making the budget deficit bigger.

Many countries had resorted to "quantitative easing" - metaphorically, printing money - to offset the budgetary tightening. Trouble was, we are yet to see the massive increase in funding this has generated translate into growth-inducing investment, he said. It was leading to too much financial risk-taking (buying high-priced shares and bonds) but not much economic risk-taking (increasing production capacity).

This was why our move to get each of the G20 members to agree to take measures that would cause their growth over the next five years to end up 2 per cent higher than otherwise, particularly by increased investment in infrastructure, made so much sense.

In the short-term construction phase, it adds to aggregate demand. If it's done well, it adds to the economy's supply capacity and boosts productivity for the long term. And if you price access to the infrastructure properly, it might even help the budget in the medium term.

Turning to our economy, the short-term outlook was dominated by our transition from resources investment-led growth and risks associated with continued weakness in the global economy and the potential for renewed financial instability, he said.

But our transition to broader sources of growth was occurring more slowly than we might have expected. In particular, the dollar hadn't fallen as much as expected, considering how far commodity prices had fallen, so the boost to the non-mining economy hadn't been as great as hoped.

The limited fall in the dollar was explained by the big countries' quantitative easing, which was pushing their currencies down relative to ours.

Our consumers were also cautious in their spending and businesses seemed unwilling to invest until they saw consumer spending picking up. It was looking likely the economy would have grown below trend for seven of the eight years to 2015-16.

The long-delayed return to healthy growth created a risk that cyclical (temporary) unemployment turns into structural (lasting) unemployment. However, working the other way was our moderate growth in wages, which was a sign that the labour market was adjusting flexibly, even though it was also likely to be limiting consumer spending.

Turning to our longer-term challenges and opportunities, our big opportunity arose from the shift in the centre of global economic growth to Asia. By 2050, four of the five largest economies in the world would be in our region: China, India, Japan and Indonesia.

In this decade, the number of Asian middle-class consumers would equal the number in Europe and North America. These people would increase their demand for a wide range of goods and services that we could help supply.

But if we were to grasp these opportunities, we would need to work for them, and work hard, Parkinson said. There were no grounds for complacency.

We must use the opportunity provided by all the present reviews - of the tax system, the workplace relations system, the financial markets, competition policy and the functioning of our federation - to make decisions that improve our productivity growth and position ourselves to reap the most from our prospects.

Our other big problem was achieving a more sustainable fiscal position - getting the budget back to surplus. Australia had a "structural" budget problem - that is, one that wouldn't disappear once the economy had returned to normal growth - requiring a sustained and measured response, involving people giving up benefits.

It was important we start the process of repairing the budget now, he said. We had recorded 23 years of consecutive growth and the budget projections were based on an assumption that this would continue for another decade.

Such an outcome - 33 years of uninterrupted growth - would be without precedent. Get it? We're unlikely to be that lucky.

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Why India's development is so strange

Every Aussie who takes an interest in such matters knows how a country goes from being undeveloped to developed. We 've been watching our neighbours do the trick for years. It' s called export-oriented growth and it 's all about building a big manufacturing sector.

You encourage under-employed rural workers to move to the city and take jobs in factories. Because your one big economic advantage is an abundant supply of cheap labour, you start by concentrating on making low-cost, simple, labour-intensive items such as textiles, clothing and footwear.

Since the locals don' t have much capacity to buy this stuff, you focus on exporting it. Foreigners lap it up because to them it' s so cheap.

As the plan works and the country 's income rises, you plough a fair bit back into raising the education level of your workers, which allows you to move to making more elaborate goods and to paying higher wages. You 're on the way to being a developed country.

Over the decades we' ve seen a succession of countries climb this ladder: Japan, Hong Kong, South Korea, Taiwan, China and now even Vietnam and Bangladesh at the bottom. It s like pass-the-parcel: as each country' s labour gets too expensive to be used to produce low-value thongs and T-shirts, some poorer country takes over and starts the climb to prosperity.

That 's the way it s always done. Except for one country: India. Its economy started growing strongly in the 1990s and now it' s the world 's third-biggest (provided you measure it correctly, allowing for differences in purchasing power).

India has got this far without building a big, export-oriented manufacturing sector. It 's done something that' s probably unique: skipped the manufacturing stage and gone straight to the rich-country stage, in which most growth in jobs and production comes from services.

The Indians have done it by being so good with software and other information and communications technology and the things that hang off it, such as call centres. It' s a big export earner.

It' s an impressive effort, and there' s no reason a developing country shouldn' t have a big tech sector. But, even so, the experts are saying India would be a lot better off if it had a bigger, more vibrant manufacturing sector, employing a lot more people who, by Indian standards, would be on good wages.

This is a key theme in the Organisation for Economic Co-operation and Development 's report on the Indian economy, issued this week.

The report offers suggestions on what could be done to encourage the growth of manufacturing, which go a fair way towards explaining why manufacturing never really got going the way it did in other emerging market economies .

First, some basic facts. India has a population of 1250 million and before long it will overtake China 's. About 29 per cent of the population is younger than 15.

Manufacturing accounts for only 13 per cent of India' s gross domestic product, which is low compared with the other BRIICS emerging economies: Brazil, Russia, Indonesia and China, but not South Africa.

Indian manufacturing probably accounts for a slightly smaller share of its total employment. Huh? It 's normally the other way round. You 'd expect it to be quite labour intensive. But "despite abundant, low-skilled and relatively cheap labour, Indian manufacturing is surprisingly capital and skill intensive," the report says.

Almost two-thirds of manufacturing employment is in companies with fewer than 10 employees. That compares with Brazil' s 9 per cent. This tells us the sector' s many small firms mean it isn' t exploiting its potential economies of scale.

And, indeed, its manufacturing productivity is low, with productivity 1.6 times higher in China and and 2.9 times in Brazil.

India' s employment in manufacturing hasn' t grown much over the years, with the sector hardest hit by the economy' s recent slowdown. What new jobs have been created have been " informal" , with workers not covered by social security arrangements.

Manufacturing' s share of India' s merchandise or goods exports (that is, ignoring the big and rapidly growing exports of IT services) fell from 77 per cent to 65 per cent over the decade to 2013.

My guess is an important reason for the sector 's unusual configuration and weak growth is excessive regulation. India has been and still is a highly, and badly, regulated economy. The socialists ' obsession with manufacturing means I wouldn' t be surprised if the newer technology sector has taken over the running because, being outside the Left' s traditional preoccupations, it wasn' t so heavily regulated.

Some regulation has been removed but, particularly as they apply to manufacturing, India 's labour and tax laws, which are tougher on bigger than smaller firms, have inhibited and distorted the industry 's development.

As the report puts it, manufacturing "firms have little incentive to employ and grow, since by staying small they can avoid taxes and complex labour regulations".

A second part of the explanation the report points to is what it calls "structural bottlenecks" . As with all developing countries, the whole Indian economy suffers under inadequate economic and social infrastructure.

But manufacturing is particularly reliant on good transport links - more so than the tech sector - and India 's transport infrastructure is still bad.

Every business needs a reliable electricity supply, but manufacturing probably needs it more than most. A business survey has found that 48 per cent of manufacturing firms experience power cuts for more than five hours a week. About 60 per cent of firms feel that erratic power supply affects their competitiveness and they would be willing to pay more for a more reliable supply.

As usual with developing economies, the list of things that need reform is long. The challenge for governments is to give priority to the ones that would do most to help, even though everything is interconnected.

In the case of Indian manufacturing, however, the OECD' s top recommendation is to introduce simpler and more flexible labour law, which doesn' t discriminate by the size of the enterprise.

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Climatic adjustment limits our farmers' Asia boom

The first thing to realise about the rise of Asia is that our farmers are about to join our miners in the winners' circle. The second is that climate change and other environmental problems may greatly limit our farmers' ability to exploit this opportunity. The third is that what we see as a looming bonanza, the rest of the world sees as a global disaster.

According to the government's white paper on the Asian century (which, be warned, shares economists' heroic assumption that there are no physical limits to consumption of the world's natural resources), continuing population growth and rising living standards in Asia will cause global food production to grow 35 per cent by 2025, and 70 per cent by 2050.

Rising affluence is expected to change the nature of Asia's food consumption, with greater demand for higher quality produce and protein-rich foods such as meat and dairy products. This will also increase the requirement for animal feed, such as grains. There'll also be demand for a wider range of processed foods and convenience foods, and for beverages, including wine.

But environmental and other problems will prevent the Asians from producing much of the extra food they'll be demanding. Unlike in the past, Asia is likely to become a major importer of food. And, of course, any delay in increasing food production to meet the increasing demand will raise the prices being charged.

You little beauty. "Australia's diverse climate systems and quality of agricultural practices position us well to service strong demand for high-quality food in Asia," the white paper says. After all, Australia is one of the world's top four exporters of wheat, beef, dairy products, sheep, meat and wool.

"As a result, agriculture's share of the Australian economy is expected to rise over the decade to 2025," we're told, something that hasn't happened for many, many decades.

So, a new age of growth and prosperity for Aussie farmers? Don't be too sure. The environmental constraints the white paper expects to bedevil Asian farmers will also limit our farmers' ability to cash in on Asia's growing affluence.

Also published last week was a determinedly positive but franker assessment of our agricultural prospects, Farming Smarter, Not Harder, from the Centre for Policy Development.

It says "winners of the food boom will be countries with less fossil fuel-intensive agriculture, more reliable production and access to healthy land and soils". That's not a good description of us.

The first question is climate change - the problem so many Australians have been persuaded isn't one. Although other countries - including China - are doing more to combat climate change than the punters have been led to believe, we don't yet know how successful global efforts to limit its extent will be.

What we do know is we're already seeing the adverse effects - hurricane Sandy, for instance - and can expect to see a lot more, even if global co-operation is ultimately successful in drawing a line. At present we're focused on efforts to prevent further change; before long we'll need to focus on how we adapt to the change that's unavoidable.

This non-government report says climate change is projected to hit agricultural production harder in the developing world than the developed world - "with the exception of Australia".

"Rainfall is forecast to increase in the tropics and higher latitudes, and decrease in the semi-arid to arid mid-latitudes, as well as the interior of large continents," the report says. "Droughts and floods are expected to become more severe and frequent. More intense rainfall is expected with longer dry periods between extremely wet seasons. The intensity of tropical cyclones is expected to increase."

So, without action to reduce or manage climate risks, Australia's rural production could decline by 13 per cent to 19 per cent by 2050, it says.

And it's not just climate change. "One of the biggest challenges for Australian agriculture is that our soils are low in nutrients and are particularly vulnerable to degradation ... every year we continue to lose soil faster than it can be replaced."

The productivity of broadacre farming used to grow by 2.2 per cent a year; since the early 1990s it's averaged just 0.4 per cent. Australian farmers use a lot of fertilisers and fuel, the cost of which is also likely to rise strongly. And that's not to mention problems with water.

Meanwhile, those who worry about how the world's poor will feed themselves - or about the political instability we know sharp rises in food prices can cause - don't share our hand-rubbing glee at the prospect of Asia's greatly increased demand for food.

Almost as bad as high food prices are highly volatile prices. The three world price spikes in the past five years each coincided with droughts and floods in major food supply regions. Extreme weather events are likely to become even more frequent. (The growing diversion of grain to produce biofuels is another contributor to higher food prices.)

After the food price spike in 2008, 80 million people were pushed into hunger. But the growing concern with "food security" is often a euphemism for resort to beggar-thy-neighbour policies: countries that could export their food surplus to other, more needy countries decide to hang on to it, just in case.

The Asians' attempts to continue their (perfectly understandable) pursuit of Western standards of living are likely to be a lot more problem-strewn than the authors of the white paper are willing to acknowledge.

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Asia white paper assumes away environment

The most glaring weakness in the Prime Minister' s white paper on the Asian century is its failure to factor in the high likelihood that mounting environmental problems will stop Asia continuing to grow so rapidly as well as limit our ability to take advantage of what growth there is.

To be fair, most of the environmental problems that could trip up Asia s economies and ours do rate a mention in the bowels of the 300-page document.

But it doesn t join the dots. Asia s environmental problems are dismissed merely as among the various challenges to be overcome bumps along the road. As for our own environmental problems, the government s existing policies have them well in hand.

And it would be unfair to single out the Gillard government as unwilling to face up to the seriousness of our problems with the natural environment and start integrating them into its forecasts and projections.

That s just as true of almost all economists and business people. While most economists (and some business people) are prepared to acknowledge particular environmental problems climate change, water, soil, fish stocks, biodiversity they re not prepared to see them as symptoms of a much bigger problem: we may be reaching the physical limits to continued growth in natural resource use.

So, just like the white paper, they continue to put worries about environmental problems in a box marked environment , which they keep separate from the box marked economy , where they do their forecasts and longer-term projections of economic growth.

It s an uncontroversial statement that the global economy the production, consumption and other economic activities of humans exists within, and depends on, the natural environment, the global ecosystem.

And it s obvious to anyone with eyes that certain economic activities are doing damage to the ecosystem, which is already rebounding on the economy in the form of costs and disruption (hurricane Sandy, for instance). It s not hard to believe these costs and disruptions are likely to multiply unless we start organising the economy very differently.

It thus makes all the sense in the world for economists to integrate the environment and the economy when thinking about what the future holds. So why don t they? Because they never have, and find the idea pretty frightening.

Economists standard way of thinking about the economy effectively assumes away the environment. That s because their conventional model which has changed little in the past 100 years is built around the prices charged in markets, whereas most environmental assets clean air, clean water, good soil, reasonably reliable weather can t be bought and sold in markets.

Thus most of the costs and benefits generated by the ecosystem are external to the model and so liable to be overlooked. Schemes such as the carbon tax are attempts to put a price on greenhouse gas emissions and so get them into the price mechanism (and the model).

So you can bolt bits of the environment onto the model, but you have to do it case-by-case, which is hardly satisfactory. As Professor Herman Daly has said, if the survival of your society is external to your model, you probably need a new model .

The funny thing is, if you re still not sure why so many scientists doubt it will be physically possible for Asia to grow as big as economists project, the clues are all there in the white paper. To put things in context, at present the developed world accounts for just 15 per cent of the world s population, but 51 per cent of gross world product.

The 19 per cent of the world s population living in China has a standard of living equivalent to 20 per cent of America s. The white paper expects that to reach 40 per cent in just 13 years.

For India and Indonesia, accounting for a further 21 per cent of the world s population, their standard of living could also double, from 10 per cent to almost 20 per cent. And, of course, living standards in other parts of Asia are also supposed to be rising rapidly, meaning more than half the world s population is applying to join the profligate rich club.

Have you any idea what that would mean in additional use of the world s energy and other natural resources?

The white paper advises that, in the 19 years to 2009, Asia s energy consumption more than doubled and its share of world energy consumption jumped from 25 per cent to 38 per cent. China is now the world s biggest energy consumer.

Having gone from consuming less than half as much energy as the US in 2000, China now consumes slightly more. It accounts for almost half the world s coal consumption. It s the world s largest consumer of steel, aluminium and copper, accounting for about 40 per cent of global consumption for each. It s predicted to be 90 per cent dependent on imported oil by 2050.

In 2009, fossil fuels accounted for about 82 per cent of Asia s energy mix. Asia accounts for about 40 per cent of global greenhouse gas emissions up from 31 per cent in 2001. China recently overtook the US as the world s largest emitter.

The white paper happily assumes effective global action to limit climate change will be forthcoming, so makes no allowance for it in its projections.

It s not the done thing for economists to imagine we could ever run out of natural resources. Prices may rise a bit, but this will merely call forth the solution to the problem, whereupon prices will fall back. And every textbook leaves you thinking this process happens seamlessly.

So, no need to worry. Our faith in unending growth remains unshaken.

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How Asia is catching up with the rich West

Asia's transformation into the world's most dynamic economic region has been a defining development of our time. The pace and scale of its rise have been nothing short of staggering.

That's the story according to Julia Gillard's white paper on the Asian century, and it's right.

"Over the past 20 years, one third of the world's population has re-engaged with the global economy and more are set to do so," the paper says. "Living standards for billions of people in Asia have improved at a rate not previously experienced in human history."

Just between 2000 and 2006, about a million people were lifted out of poverty every week in East Asia alone, we're told.

Japan, South Korea, Singapore and, more recently, China and India doubled their income per person within a decade. Some went on to repeat this achievement two or three times.

By contrast, it took Britain more than 50 years to double its income per person during the Industrial Revolution of the late 18th and early 19th centuries.

Why so long? Because the Industrial Revolution was driven by the invention of new technology and it took a while for new inventions to come along and for their use to spread through the economy.

These days, the economy sitting at this "technological frontier" is the US. In principle, the fastest pace at which America's income per person - its material standard of living - can grow is determined by the pace of what today we call "innovation". And that's not fast - say, 2 per cent a year.

So with the rise of Asia we're seeing a phenomenon economists call "catch-up and convergence". Because all the improved machines and better ways of doing things have already been invented and are sitting on the shelf, so to speak, it's not hard for all the countries well back from the technological frontier to catch up with the leader by employing the new productivity-boosting technology. As they do, their standard of living converges on the leading economy's.

This is what happened in the West in the first 30 years or so after World War II. The economies of Europe (and Japan) grew very strongly and closed most of the gap between their living standards and America's.

Now that process of catch-up - and the global spread of the latest technology - has shifted from the developed countries to the developing countries. Japan was the first, followed by South Korea, Hong Kong, Singapore and Taiwan, with China getting going in the 1980s and India in the 1990s. More will follow.

Of course, transforming your economy from developing to developed can't be as simple as taking new technology off the shelf, otherwise all the poor countries of the world would be growing as fast as Asia is.

So how have the Asians done it? What have they got right that the others haven't?

The various countries' success hasn't followed a simple recipe, the paper says, but some common patterns have emerged in recent decades.

Many economists explain Asia's rise mainly in terms of its switch from the post-war policy of "import replacement" (seeking to grow by protecting your industries from competition with imports) to export-led growth.

If, as part of this, you allow foreign multinational corporations to set up factories in your country, they bring in the capital need to pay for building those factories, as well as access to the latest foreign technology and the knowledge of how to use it, which ends up being transferred to local technicians and managers and spreading to local firms.

But that's not how the white paper tells it. "Nearly all the high-performing Asian economies deliberately set out to support prosperity by investing in people, building capital and undertaking institutional change, including expanding the role of markets," it says.

Asia's young people enjoyed marked improvements in their access to education and its quality as governments invested in their youthful populations and dramatically transformed their education and training systems.

"With the benefits of a good education and employment-creating reforms, large numbers of young people have become productively employed as they reached prime working age."

Open global trading systems (created by the successive rounds of multilateral reductions in protection under the predecessor to the World Trade Organisation, to whose trade-promoting rules China signed up in 2001) and the construction of vital infrastructure to reduce transport costs have been drivers of integration between Asia and the rich economies, but also between the Asian economies themselves.

Intricate regional production networks have emerged, along with increased flows of "intermediate goods" (components) between countries in the region. Specialisation within the region, and the consequent economies of scale, have given the region a powerful advantage, particularly in manufactures.

Here's a point that ought to be obvious to older Australians - since they've been able to observe it over their lifetimes - but too few people understand: Asia's most successful economies have continually evolved.

"As incomes have risen in population-dense economies such as Hong Kong, Japan, South Korea and Taiwan, and as their labour-intensive activities have become less competitive, Asia's high performers have refocused their production on new areas of consumer demand - developing domestic markets and specialising in high-skill activities."

What oldies should have noticed is the way, over the years, the production of simple, labour-intensive goods - such as clothing, footwear and toys - has migrated from one country to another.

Why? Because, contrary to the propaganda of the unions and the Left, Asian workers get their cut from being exploited by wicked "transnational corporations".

As countries' economies grow, workers' real wages rise.

As well, a fair bit of the prosperity is ploughed back into raising the education level of the workforce.

Eventually, the workers' labour gets too expensive to continue using them to produce simple labour-intensive goods, so production of such goods shifts to the next, undeveloped Asian country.

In the first country, production shifts to using the more-skilled workforce to make more sophisticated manufactures. As well, more of the country's production shifts from export to being bought by the now-more-prosperous locals.

The white paper predicts, as this evolutionary process continues, within 13 years - 2025 - China will be the world's biggest economy, India will be third, Japan forth and Indonesia 10th. China will account for a quarter of gross world product and Asia for almost half.

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White paper shows way to Asian century

When governments make grand policy unveilings, as Julia Gillard has with her white paper on the Asian century, it’s terribly tempting for people in jobs like mine to sit back and criticise. After all, unlike you and me governments tend to be less than perfect.

If you’re disposed to criticise, there’s never a shortage of material - particularly if you’re prepared to offer mutually inconsistent criticisms, or shift your angle of attack from one week to the next.

Sometimes the media are so eager to fan controversy they hardly pause to summarise the content of a 300-page document before launching into their own and other people’s criticisms. And no matter how weighty the subject matter, you can bet it’ll be done and dusted within a week.

I prefer to be a little more considered, even more co-operative with our elected leaders (and nor do I regard a diet of unrelieved negativity as a smart way to sell news). So, though I have some major criticisms of my own, I’ll leave them for another day.

Throughout the life of the Rudd-Gillard government people have criticised its failure to articulate an ‘overarching narrative’ - an encompassing story of what Labor stands for and what it’s on about. A vision of the future; something that gives meaning and direction to our national life.

Well, it may have taken five years, but here’s Gillard’s best shot. It’s not, as some have imagined, the report of another committee headed by Dr Ken Henry; it’s a white paper, a firm statement of government policy intention.

So what do the critics say? It’s just more talk. Where are the new decisions? When will we be getting them? What about my pet project?

You may say this is a narrative with an arch that stretches from the economic to the commercial via the financial (and I may agree), but that makes it an accurate depiction of the breadth of this government’s priorities.

Some say suspiciously that the white paper includes a mention of just about every project Labor is working on: the carbon price, the national broadband network, education reform etc. Sure. That’s what overarching narratives do.

It’s a vision of increasing our material prosperity by ensuring we fully exploit the opportunities presented by our proximity to Asia, which is transforming itself from poor to rich within the short space of our lifetimes.

Within that limited purview, it’s on the right track. It’s hard to imagine our equally materialist opposition disagreeing - though you can be sure it will find plenty to criticise.

The white paper says that, to succeed in this objective, Australians need to act in five key areas. First, we need to build on our own economic strengths. In particular, we’ll need ‘ongoing reform and investment’ across ‘the five pillars of productivity - skills and education, innovation, infrastructure, tax reform and regulatory reform’.

Second, we must do more to develop the necessary capabilities. ‘Our greatest responsibility is to invest in our people through skills and education to drive Australia’s productivity performance and ensure that all Australians can participate and contribute.’

Third, we need businesses that are highly innovative and competitive. ‘Australian firms need new business models and new mindsets to operate and connect with Asian markets.’

Fourth, we need stable defence security within the region. And finally, we need to strengthen our relationships across the region at every level. ‘These links are social and cultural as much as they are political and economic.’

It’s easy to say there’s nothing new in the white paper. We already knew about the rise of Asia. And prime ministers have been banging on about our need to get closer to Asia since Malcolm Fraser.

It’s all true. But it misses the point. The experts may be full bottle, but public doesn’t know as much about Asia as it should; this is an attempt to lift our ‘Asia literacy’ as well as getting more study of Asia and its languages into curriculums.

And governments bang on about a lot of things; this is a decision to give our relations with Asia top priority. This is a long-term project and it didn’t start yesterday. It doesn’t hurt to have a grand renewal of our commitment. It maybe old to us oldies, but to our kids it’s new and sparkling.

The white paper seeks to dispel a lot of misperceptions among Australians. For one thing, it’s not just about China. It’s also about India, South Korea and developing Asia in general - and hugely populous Indonesia in particular.

For another, it’s not just about mining. Though the mining boom has further to run, it’s also about selling a lot more food and fibre to Asia at much higher prices, and supplying Asia’s burgeoning middle class with education, tourism, sophisticated niche manufactures and many services.

But deepening our economic (and, inevitably, social and cultural) relations with Asia is two-way street. Exporting more to Asia will mean importing more from it (giving the lie to criticism this is about exploiting the poor people to our north)
And increasing our business investment in Asia will mean accepting more Asian investment in our businesses.

And, as we’ve already seen with the mining boom, maximising our benefit from the rise of Asia will inevitably mean accepting change and upheaval in our economy. The more we try to preserve the world as it was, the more we pass up the opportunities Asia presents.

The other bad news is that full benefit from Asia isn’t something this government or any other can deliver us on a plate. It needs to be a national effort, with most of the heavy lifting done by business, schools, universities, unions and individuals.

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