A precarious world economy: Australia still 'lucky' but not immune

September 1, 2011

This is an edited version of an address to the CEDA Seminar on ‘Inventing the Future’ held at the Parmelia Hilton, Perth, on August 29 by Professor Richard Higgott, renowned political economist and Vice Chancellor of Murdoch University.

International views of the current state of the world economy vary; from poor (at best) to potentially catastrophic (at worst). Australian expectations of its impact on us, and Western Australia in particular, protected by the resource boom also vary—from ‘we are immune’ (at best) to ‘she’ll be right’ (at worst). There is a seeming disconnect between global analytical pessimism and national and local complacency. Why so when most of the signals tell us we are not witnessing a smooth transition in the economic management of the global economy.

Indeed, the transition from the post world war II bi-polar trans-Atlantic dominance of the Cold War era, through a short lived moment of American uni-polar authority, to a multi-polar world in which economic authority and management is shared between the old centre of economic power and the new centres of economic gravity in the zone to the north of Perth is anything but smooth.

When it comes to the management of the global economy the world, in the words of the iconoclastic Singaporean commentator Kishore Mahbubani, is a boat cast adrift. He likens countries to cabins on the boat. We try to keep them tidy but the boat lurches ahead without either captain or crew, and all at a time when the demand for systemic, coordinated global leadership has never been greater.

Both America and Europe are in economic crisis and absent good political leadership. China and India, despite their recent dramatic growth remain primarily politically internally preoccupied. Globally, the international economic system has never looked more fragile. If ever there were a moment for collective global reflection and leadership, this is it.  But this is lacking. Nothing illustrates this better than the collective response to the global financial crisis (GFC).

The G20, which holds its next meeting in Cannes in November, seems to have lost direction after its first flushes of success in stemming the last financial crisis.  G20 leaders, and increasingly the financial community that were largely responsible for creating the GFC, have retreated to their old ways since 2009. US hegemonic leadership of the global economy in the post cold war era is clearly short lived. Given the way US politics works President Obama will focus almost exclusively on his re-election from now through 2012. European leaders show no sign of filling the institutional vacuum. Nor are the new players, the BRICs as a collective, or China as the strongest of them, to be expected to depart from an essentially reactive approach to global economic management.

If we look at the structure of world order through the lenses of the historian we can identify the greatest shift in the balance of power since the rise of the European empires. Power is progressively diffused from the west and the north to the east and the south. New (and new-old) great powers compete with the USA and Europe. The re-emergence of Russia and the rise of China and India especially are dramatically changing our understandings of global power (both economic and political). All this creates deep insecurity in the established powers and how they adjust to and operate in the contemporary global order.

Economic leadership requires the receding powers to reconfigure global structures rather than cling on to their exorbitant privilege acquired in the 20th century. But they don’t. Rather the US and Europe muddle through their internal institutional economic crises exhibiting what Mahbubani calls the ‘Great Western incompetence’. As they do, the world’s wealth holders wonder how and where to use and store their assets. In the answer to that question lies the future of the global economy in general and indeed the future of Western Australia too.

The transition from an international economy dominated by the North Atlantic to a global economy increasingly influenced by Asia will not be linear. And given the lack of vision and leadership on both sides of the Atlantic, and a lack of evolving leadership, as opposed to growing contempt and dismay from Asia, what that system may look like remains a mystery.

Jean Pierre Lehmann, from the Swiss business school IMD, likens our current inability to govern ourselves economically through the G20 to the famous play by the early 20th century surrealist Italian author Luigi Pirandello. In the play there are six actors on stage with no author and hence no script. They exchange improvised words, but never find a plot and the play ends pretty much as it began. This genre of play was known in Europe at the time as the “Theatre of the Absurd.”

For Lehmann the G20 summits are reminiscent of Pirandello’s play but in the case of the G20 it is 20 states (plus hangers-on) who strut the stage, with little or no action, in search of a script in what is a clear recipe for bad decision making. The difference is that Pirandello was writing fiction, while we are witnessing reality. If the actors continue to roam the stage with no purpose, to extend our theatrical metaphor, the play may end up as both tragedy and farce.

So why, in light of this serious global inertia (an inertia which the global politicians would of course deny) are we in WA so complacent? Is it irrelevant to us? I think not.

Australia in general and WA in particular have been insulated from the worst excesses of the earlier GFC, saved by China’s seemingly insatiable appetite for our resources. Mining royalties and some, albeit limited, ‘trickle down’ are certainly keeping the economy afloat and Australia’s debt to GDP ratio (at 22%) is amongst the healthiest of all OECD nations.

But, and they are big buts, all is not well. As recent political debate tells us, manufacturing is under siege, the service industry is over-extended and under-developed and innovation is low. Significantly, household debt as a ratio of disposable income in Australia is among the world's highest. Indeed, for someone such as myself, returning to Perth after two decades in Europe, the situation is more reminiscent of the other major Western crisis-hit OECD countries than might superficially, and too comfortably for us, seem to be the case.

Lucky we in WA are. Immune we are not. The policy implications of this for party political survival, across the national political spectrum, seem to be to: keep the mining boom ticking over, the financial markets happy, and borrowing costs down thus ensuring the supply of cheap credit—and keep our fingers crossed that China does not go off the boil.

This commentary is not a critique of the resource sector. The sector is a blessing not a curse. This issue is what we do to leverage and complement it at this moment of unique opportunity in our history. Perth is as much part of the global economy as is Athens. It may not have the problems of Athens but nor is it immune from downturns and policy failures elsewhere over which it has little control. The rub here is real life politics.

And politics is both global and local. What we cannot significantly influence at the global level—and our influence is more limited than successive Australian foreign ministers would have us believe—we must mitigate at the local level. The need to offset Australia’s uneven development is clearly the priority (rhetorically at least) for our elected leaders in both the near term and the longer term. But how to do this without running foul of powerful lobbies and short term political pressures is of course the question that always faces them. Attacking this question requires courage and skill. Let us hope neither are in as short supply locally as they currently seem to be globally.

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