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Surrounded by Four Billion Asians

Fall 2012 Nez À Nez

Surrounded by Four Billion Asians

Proposition: Australia and New Zealand are not prepared for Asian pre-eminence

Hugh White is Professor of Strategic Studies at the Australian National University, Visiting Fellow at the Lowy Institute, and former Australian deputy secretary of defence (for): The return of Asia to its traditional position at the centre of the world economy is arguably the biggest shift in the global distribution of power – and in the global order at large – in over 200 years. It is certainly the biggest shift in the international environment of Australia and New Zealand since these distinctive settler nations were established by British settlement in the South Pacific over two centuries ago. That process of British settlement was itself a reflection of British strategic and economic power as it approached its apogee. The founding of these two societies was a product of the power that Britain acquired through the Industrial Revolution. It was the increase in per-capita productivity in Britain that produced the wealth that allowed Britain to take, hold, develop and populate these islands at such a distance from the North Sea. Of course, it is no coincidence that this was precisely the time at which Asia’s giants lost their traditional place as the world’s largest economies to the relatively small countries of the North Atlantic.

Perhaps the most remarkable thing about what economic historians call The Great Divergence – the gap that emerged 200 years ago between the developed economies of the West and the rest of the underdeveloped rest of the world – is that it lasted as long as it has. As Britain’s power started to falter a century ago, America emerged as a new Western primary power in the Asia-Pacific region. This has been fundamental to the worldviews of both Australia and New Zealand. As they emerged to become independent nations, both have approached Asia with an assumption of Western global economic pre-eminence, as well as ‘Anglo-Saxon’ maritime strategic primacy in the Western Pacific. Today, as much as at any time since 1788 (when the New South Wales penal colony was established by the British), Australia and New Zealand assume that they can rely on Western power in Asia to keep them safe from their Asian neighbours, and to make Asia a safe place for them to do business.

Now we are seeing the end of this era. The question for Australia and New Zealand is: how do we adapt? The first essential step is to acknowledge and understand the fact that this big change is happening. Australia, at least, has yet to take this step. One might expect us to be very conscious of the implications of Asia’s rise, because it has been so important to the Australian economy. Instead, we have developed a split view of our future. Economically, Australians assume that Asia – and especially China – will keep on growing and buying more and more of our minerals. At the same time, we assume that America will forever remain the dominant power in Asia, and therefore the ultimate guarantor of our security. But these cannot both be true at once. The economic growth that drives China’s demand for Australian resources is also driving a fundamental shift in the relative power of the US and China in Asia. Most Australian politicians have yet to even explain to the Australian public that this is happening – let alone start to explore what we should do about it. Instead, Prime Minister Julia Gillard and Opposition Leader Tony Abbott both assure Australians that the US will continue to play the same role in keeping Asia stable and secure that is has played for the past 70 years. For Australians – and, I suspect, New Zealanders – nurtured on the assumption of perpetual Western primacy, the message is just too unwelcome to be delivered. So, as Asia returns to its traditional global pre-eminence, the West’s outposts on Asia’s periphery are patently unprepared.

David Skilling is founding Director of Landfall Strategy Group in Singapore, and former Chief Executive of the public policy think-tank The New Zealand Institute (against): The rebalancing away from Western economic and political dominance is indeed a tectonic shift. It is worth noting, however, that even with continued Asian growth, this does not lead to Asian pre-eminence anytime soon – that is, the per-capita income league tables will remain dominated by the West for some time, even if global GDP shares move.

But the world order is undoubtedly changing, and countries do need to prepare themselves. This is particularly so because this power transition involves countries with markedly different perspectives and interests. It is quixotic to expect these new powers to simply sign up to be responsible stakeholders in the existing system. Change is inevitable.

At a minimum, this shift in the world order will be an uncomfortable process for Australia and New Zealand – both of which were established as Western outposts, and remain in the Western orbit. To be sure, the process will also be challenging and uncomfortable for many other countries – large and small, inside and outside Asia, Western-aligned and not. As such, I would suggest that a more useful framing of this exchange is to ask whether Australia and New Zealand are ready for a transition to Asian pre-eminence in a relative sense.

On this framing, my sense is that Australia and New Zealand are more ready than many other countries. There are three types of arguments that can be advanced in this regard. First, history: The experience of Australia and New Zealand with respect to the decline of the British Empire after WW2, and the British withdrawal to the other side of the Suez, provided a salutary lesson on the impermanent nature of security guarantees. Similarly, the entry of the UK – at the time, New Zealand’s most important market – into the European Community was a searing moment in terms of economic security. These experiences taught Australia and New Zealand that they should not rely excessively on any one party forever. There is today an understanding that maintaining a portfolio of economic and security relationships is important – learning that may be relevant to the current transition.

Second, geography: Australia’s proximity to Southeast Asia (and New Zealand’s, to a slightly lesser extent) has helped to acclimatize us to Asia. Proximity to Asia – together with strong growth in our economic relationships with Asia, and significant Asian immigration – helps us to appreciate the extent and nature of the changes currently underway. In other words, the understanding that a growing part of our future is with our Asian neighbours focusses the mind in a way that is less true for more distant parts of the world. Geography also makes it more likely that we think about Asia as more than just East Asia – that is, that we really reflect on other parts of Asia that will also be important (such as those countries on the Indian Ocean).

Third, there is politics: The domestic politics of Australia and New Zealand perhaps make it easier to accommodate new power realities. New Zealand – and Australia, to a lesser extent – appreciate that we are often (strategic) price-takers and have to adapt to emerging realities. Yes, we contribute to the regional debates – the establishment of Asia-Pacific Economic Cooperation (APEC) and the Trans-Pacific Strategic Economic Partnership Agreement (TPP) are examples of innovation from Australia and New Zealand, respectively. But we do not expect the world to accommodate our interests. By contrast, other leading countries – notably the US – face domestic political difficulties in adapting to a much more dominant Asian role in global economic and political affairs. Australia and New Zealand can approach relationships with Asia without the spectre of declinism.

Bref: Australia and New Zealand seem as well prepared for Asian pre-eminence as any other country. Perhaps that is too low a bar, but it is a start. It may well be, as you suggest, that political leaders in Australia and New Zealand have not fully communicated the implications of these structural changes. But there is an intuitive awareness that things are changing, and that it is not possible for the status quo to hold. Certainly, we need to do much better.

HW: Australia and New Zealand, as you say, have gone through big changes in our international setting before, and managed them pretty well. However, there are a few things this time that are different, and that will make the coming transformations harder to manage.

First, there are no more new ‘Anglo-Saxon’ allies to which we may turn. When Britain’s power ebbed, Australia and New Zealand could and did turn to the US. This was not a simple or painless process, but we did find a country as powerful as Britain – and much like us in history, culture and values – to take Britain’s place as our guardian in Asia. This time, there will be no more great and powerful friends from the North Atlantic world to which we may turn. While I agree that the US will remain an immensely powerful and important country in Asia for many decades yet, it will not be able to play the same kind of role that it has to date, and that Britain did before it, because its power relative to the Asian giants will simply not be as great.

Second, our own power relative to that of our neighbours is declining rapidly. Only 25 years ago, Australia had the second largest economy in Asia after Japan. We were richer than India and China, and our GDP was not far from the combined GDP of all of ASEAN’s countries. Today, the story is very different. In 2010, Indonesia overtook Australia in GDP. This is a profound shift in itself. Australia has always assumed that it would forever remain the richest and strongest country in its immediate neighbourhood. Although much remains uncertain about Indonesia’s trajectory, there is a real chance that 25 years from now, Indonesia’s economy could be in the order of three or four times larger than that of Australia. Of course, per-capita GDP would still be well below Australia’s, but in the calculus of national power, it is national – not individual – wealth that counts.

The case of Indonesia shows how little we are doing – at least in Australia – to respond to the new power realities. Australia’s bilateral relationship with Indonesia remains focussed on third-order, short-term issues like people-smuggling and live cattle exports. We are doing nothing to build the kind of relationship that we will need with Indonesia if and when it becomes a great power in its own right. Indeed, the most high-profile feature of Australia’s bilateral relationship with Indonesia is a large and fast-growing aid programme. With this aid, we seem to be trying harder and harder to perpetuate a vision of our relationship with our giant neighbour in which we are wealthy and strong, and they are poor and weak. To me, this looks like we are in denial about what is really happening, and about our changing place in the neighbourhood.

Third, I fear that – again, at least in Australia – our political leadership today is not as strong as it was when we faced big changes in the past. Back in the late 19th century, as British power began to ebb, a remarkable group of Australian statesmen led by Alfred Deakin identified the issues, debated the options, and took radical and effective action. They did all of this by reaching out to the Australian public and leading the development of opinion. The same quality of leadership appeared from people like Percy Spender after WW2, as we came to terms with decolonization in Asia. Today, Australia’s political leaders are, almost without exception, unwilling or unable to show that kind of leadership. Rather than trying to shape events, they seem content to wait in order to respond to them.

DS: It is certainly the case that the transformational rebalancing toward Asia will be more consequential for Australia and New Zealand than was the case with the previous power transition that took place within the Anglo-Saxon family. This change is made more uncomfortable by the declining economic importance of the Antipodes. Australia and New Zealand are no longer the rich kids on the block, and our voice may seem quieter as a result.

Much more needs to be done to position us for this very different, and less comfortable, world. We need to understand the disruptively changing strategic environment and its implications for our national interests. And we need to define a response. The status quo is not enough.

That said, the current global strategic rebalancing is not a binary shift. Although Asia – or more precisely, some parts of Asia – have been growing at astounding rates, we should not over-interpret this. The language used to frame this debate – Asian pre-eminence – seems premature. By virtue of its large population, China will likely become the world’s largest economy, in nominal terms, in the next couple of decades. But Asia is more than China. Countries like India have struggled to meet their potential, and many Asian countries are struggling to sustain the growth rates that will propel them out of the middle income trap. Population growth will help some – although not China or Japan – but the growth rates observed over the past decades will probably not be sustained. This will surely affect the ability of Asian countries to project power and influence.

Rather than Asian pre-eminence, there will be multiple global nodes of economic and political power. HSBC estimates that just four of the largest 15 economies in 2050 by GDP will be Asian, with the remainder coming from Europe and the Americas. And it is the current group of advanced economies that will dominate the per-capita income rankings.

The rise of Asian powers will give a very different feel to the Asian/Western Pacific region. China, Indonesia and others will be increasingly influential – and perhaps dominant – in the region. This is our immediate neighbourhood, and Australia and New Zealand need to respond. Still, we should not over-respond. Important high-income markets and nodes of innovation will still be found in the traditional locations of North America and Europe – as well as in Asia and other emerging markets.

This suggests that an approach of balancing and diversification may be appropriate – an approach in which Australia and New Zealand deliberately position themselves for the new regional realities, while continuing to invest in existing economic and political relations. Rotating our focus toward Asia only to a point may be the best course.

This is not intended to be a cop-out. Hard choices and trade-offs need to be made, and the new world will be confronting and challenging – in security, political and economic terms. But Australia and New Zealand’s history, geography, politics and economic structures may position us well to engage intensively with Asia as well as with markets in North America and Europe. The skill is to be comfortable with new approaches and powers, and to remain engaged with traditional markets and partners.

Indeed, our hybrid Asian and European status may be well-suited to the emerging environment. New Zealand has a free trade agreement with China, and has been rapidly expanding its Asian relationships. Australia has profited from voracious demand from China for hard commodities. And yet we retain strong relationships with North America and Europe.

This balanced exposure to Asia and other global powers is envied by other parts of the world. The challenge for policy-makers in Australia and New Zealand will be flexibility, balance and clear-headedness about the pursuit of our respective national interests. Given the similarities of the exposures of Australia and New Zealand, this might even involve us doing more in the region together.

HW: There will indeed be many more centres of power in the world than just China, or even Asia. China may well become, for a few decades, the world’s largest economy and strongest state, but it will not ‘rule the world.’ It will face several other very strong states – or quasi-states – that will limit the way in which it can use its power, and indeed provide important opportunities for Australia and New Zealand to ‘hedge our bets.’ In this sense, Europe, America and South America all come to mind. New Zealand actually has a better record here than Australia in looking beyond Asia. For many reasons – geographic, economic and demographic, as well as temperamental – New Zealand has always been less fixated on Asia than Australia, and more inclined to give weight to opportunities further afield, such as in Europe.

Of course, New Zealand’s economy has been less dominated than Australia’s by massive resource trade with Northeast Asia. As long as that trade remains the only apparent foundation for Australia’s future prosperity – and no one seems to know of any alternatives – then Australia has little choice but to continue to place its economic bets where they lie today. If India starts to build infrastructure and develop manufacturing on the scale of China today – clearly possible, though not a certainty – then it may start to rival China as a market for Australian mineral exports. Having said this, it is hard to imagine any non-Asian market for minerals emerging that would be large enough to displace Australia’s overwhelming economic alignment with Asia. New Zealand, on the other hand, probably has more options to diversify its trade to markets like Europe.

Even if a measure of economic bet-hedging is possible, in the sphere of politics and strategy, Australia and New Zealand will find it hard to evade their Asian destiny – if only because the strategic and political influence of non-Asian powers in our region seems set on a long-term decline. Perhaps one of the strangest consequences of the economic Great Convergence of our age is the way in which the world, as it becomes more and more integrated economically, is becoming more and more regionalized strategically and politically. Whereas for centuries North Atlantic powers have been able to project decisive strategic power anywhere in the world, we are now entering an era in which no country will be able to project strategically decisive power into other regions. The US ability to project power into Asia will wane, but China will equally remain unable to project power into the Western Hemisphere or the North Atlantic. In Asia, therefore, we will see an increasingly self-contained strategic system, dominated by regional great powers like China and India, in which other players will have little influence. For Australia and New Zealand, that means friends from afar will be of little utility.

All of this will signify a very different international order from the one to which we are accustomed. Over the past century, and especially in the decades since the end of the Cold War, we have come to expect an increasingly globalized, Western, liberal world order in which Australia and New Zealand would feel very much at home. But as power shifts to Asia, that will change. We will still see – we hope – a world order, but it will be less globalized, probably less liberal, and certainly less Western than we have been expecting. And the scope to hedge our bets will be that much narrower.

DS: Yes, it is a new game. For Australia and New Zealand to respond appropriately to these changes, we need to avoid both complacency – a sense that we can continue to behave roughly as we have to the present day – and also fatalism – a sense that small and middle powers can do nothing more than observe. Australia and New Zealand need to act with both strategic intent and seriousness of purpose in order to position ourselves as best we can. As you have observed, previous disruptive changes have been met with determined leadership from Down Under. We need to do the same again.

The regional and international environment is becoming more challenging, and also less forgiving, with reduced margin for policy error. Hedging bets is neither easy nor risk-free. And in the longer-term, perhaps it is not sustainable. But it is a place to start, as it recognizes that the world is changing.

There are powerful structural dynamics driving the global rebalancing, but there is also unusually high uncertainty about global economic and political developments. It is exceedingly difficult to know what the world will look like in two decades. The world is always uncertain, of course, and policy-makers cannot wait until uncertainty resolves itself before acting. Policy-makers can adopt a structured response to this uncertainty – to start, by deeply investing in better understanding the emerging world, considering possible futures, and actively communicating challenges and opportunities to our publics.

More specifically, in the new, more complicated environment that you correctly describe, there is a case for keeping options open for as long as we can. A balanced portfolio of economic and political relationships helps to keep our options open – something that is particularly valuable in uncertain times.

I accept the argument that the political and security challenges are more acute than the economic challenges. It may indeed be that difficult decisions with respect to security and political relationships will need to be made. There may also be tension between pursuing our economic and security interests. One response to this is to develop a balanced set of economic interests, such that the costs of future political or security choices are manageable.

You note that a stronger regional flavour to security arrangements is likely – that is, friends from afar are indeed afar. Still, the relatively peripheral nature of Australasian geography in the region may provide a partial buffer. We see similar regional tendencies in the economic space, with strong intra-regional trade and investment growth. But our export structure, demographic profile and history make it more feasible for Australia and New Zealand to diversify economically across regions than is the case for other countries.

This balancing is demanding work: we need to be valued, trusted and respected by many players. However, around the region – and beyond – many countries are trying to respond to these challenges in just this way. They are developing both old and new relationships, balancing economic and security interests, and thinking hard about the emerging new world. Australia and New Zealand may be in the vanguard of this process – by virtue of geography and history – but starting this thinking early may be helpful. There is evidently considerable work to do – much of it highly challenging. However, given the unique features of the current transition, as well as our respective histories, we should have some confidence in our ability to respond.


Hugh White is Professor of Strategic Studies at the Australian National University, Visiting Fellow at the Lowy Institute, and former Australian deputy secretary of defence. His new book is The China Choice: Why America Should Share Power.

David Skilling is founding Director of Landfall Strategy Group in Singapore, and former Chief Executive of the public policy think-tank The New Zealand Institute.

(Illustration: Louis Fishauf)

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