Overhaul: How Australia can adapt to a changing world economy

Confronted by US-China conflict, decaying global rules, disruptive new technologies and increasing inequality, Australia needs to rethink its place in the world.

Overhaul presents a new way of thinking about Australia’s future, demanding a renewed agenda for Australian politics and statecraft.

Despite three US recessions, a global financial crisis, slowing growth in China, the Euro crisis, bloody conflicts, and frequent prophecies of worse to come, the world economy and Australia prospered in the first quarter of the 21st century.

Overhaul examines the impact of three disruptive forces challenging prosperity in the new quarter century: the rise of China; the decay of the post-Second World War rules of global economic exchange, and the arrival of artificial intelligence. All are directly relevant to Australia’s future in the world economy.

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CHAPTER ONE

The first quarter century, and the next

Bracketed between the tech-wreck recession in the United States in 2000 and a new Middle East war in 2026, the first quarter century of the new millennium was seldom free of calamity. It crammed in the al-Qaeda attacks in New York and Washington, the Iraq War, war in Afghanistan, the 2008 financial crisis and the recessions that followed, the global Covid pandemic, and the invasion of Ukraine, as well as conflicts in Sudan, Yemen, Myanmar, Syria, and Gaza. Fatalities were formidable. Military casualties in the Ukraine war alone were estimated at over two million between 2022 and 2026. More than seven million people died from Covid during the pandemic.

The economic setbacks were severe. Losses in world economic output in 2009 and again in 2020 were by far the biggest recorded by the World Bank in 65 years of data. Even rich and peaceful countries staggered. In Western Europe, the 2008 financial crisis continued on as the Euro crisis to 2012. European Union output did not recover to 2007 levels until the end of 2014. The United Kingdom went through eight prime ministers (with another to come in 2026) and Brexit. Australia had seven prime ministers in the quarter century, one of them twice. The United States amazed both its friends and enemies with the first Trump administration and the beginning of the even quirkier second one.

Yet despite three US recessions, two global growth downturns, slowing growth in China, the Euro crisis, a global pandemic, all those bloody conflicts, and frequent prophecies of worse to come, the world economy performed remarkably well in the first quarter of the 21st century. Global output doubled and average per capita incomes rose by at least 50%. While short of the miracle growth of the years following the end of the Second World War, world growth was only a little slower than that of the quarter century from 1975.

Since the world economy was so much bigger, it provided on average twice the volume of goods and services each year as it had 25 years earlier. Growth was also more inclusive, with much of the gain in developing economies. India’s output grew fourfold and China’s sixfold over the period. In contrast, Japan, Germany, and France grew by less than a third, while the United Kingdom’s gross domestic product (GDP) increased by more than 40% and Canada’s by 57%. US output increased by a decent two-thirds. Its exports more than doubled in real terms, notwithstanding its complaints of sharp practices by trading partners. Pointing to a much wider distribution of gains, per capita incomes increased 13-fold in China, sixfold in Indonesia and India, and more than doubled in sub-Saharan Africa.

The Australian economy, too, had a good quarter century. Output nearly doubled and real per capita incomes increased by more than one-third. This was not as good as the preceding quarter century, which in turn was not quite as good as the quarter century before that. Even so, it was better than Australians might have expected given the turbulence. It was also better than the performance of many other developed economies including the United States, the United Kingdom, Canada, and the Euro area.

Driving GDP growth over the quarter century were the same forces operating since the end of the Second World War, and for that matter since the industrial revolution began in the United Kingdom more than 250 years ago: technological advances, globalisation of trade, an increasing stock of human and physical capital, and population increase.

While economic globalisation was widely said to be retreating in the last quarter century, the numbers suggest otherwise. Measured as global exports to global GDP, economic globalisation peaked in 2008 with exports at a little less than one-third of world GDP, well up from less than one-quarter in 2000. After declining in the second decade of the 21st century, exports rebounded as a share of world GDP and have remained a little less than one-third since. Trade in intermediate goods (excluding oil), a measure of the vitality of cross-border supply chains, remained at half of all goods exports. The capacity of the global container fleet expanded fourfold and the bulk carrier fleet fivefold over the quarter century, both signs of sturdy trade.

Other indicators of globalisation continued to gain. Around 2% of the global population had access to the internet in 2000. By 2025, the share was two-thirds, and rapidly rising. Personal computers became available in the 1980s, but global personal interconnectedness took off with the entry of smartphones in 2007. Less than one-tenth of the global population owned a mobile phone – smart or not – at the beginning of the new century. By 2025, the share had reached two-thirds and was continuing to increase.

Social media and smartphones cemented personal interconnectedness globally. Launched as an online student forum at Harvard University in 2004, by the end of 2025 Facebook had more than three billion active users, well over a third of the global population. Four-fifths of users lived outside the United States. In 2000, long-distance phone calls were still expensive enough for users to keep their conversations short. By 2025, calls were essentially free – though by then emails, social media, and messaging apps, also essentially free to users, were the preferred means of communication.

Financial markets became more global, too. Between 2000 and 2025, the number of Bloomberg terminals (used to monitor, analyse, and trade in financial markets) more than doubled to 350,000, with users across the world and Bloomberg support offices in 160 countries. In 2000, the cross-border financial transactions network known as SWIFT processed 2.4 million messages a day. By 2025, the daily volume was 50 million.

Technological invention and diffusion went hand in hand with trade and investment. Research and development (R&D) spending trebled in real terms in the first 25 years of the new century. Rapid, cheap global communications enabled yet more technical innovation. It was everywhere evident. It transformed health care, government service delivery, factories, and offices. An example: in 2014, there were around 1.4 million industrial robots deployed worldwide, and by 2025 there were an estimated 4.6 million, with annual installations expected to top 600,000.

The World Intellectual Property Organization recorded around one million patent applications worldwide in the mid-1990s. By 2024, the annual number had risen to 3.7 million, a new record for a single year. Product invention and innovation moved well beyond Western Europe and America. Two-thirds of patent applications were resident filings, suggesting invention within the country concerned. Most of the increase was attributable to resident filings in China, followed by India and South Korea. China’s patents authority received close to two million applications in 2024; the United States, the second highest, a little over half a million.

For Australia, globalisation was a winner. Exports rose from one-fifth to one-quarter of a larger GDP. Over the 25 years, Australian import prices on average increased by one-third while Australian export prices trebled. In health care, finance, and communications, Australian businesses deployed and sometimes created leading technologies. By 2025, the S&P/ASX All Technology Index, a narrow category mostly covering software services companies, was worth AU$170 billion – ten times the value just a decade earlier. (In technology origination, however, Australia did not do so well. In 2024, it recorded just 2,542 resident patent applications, not much more than half of the number in Canada.)

These considerable economic gains over the quarter century unfolded in a political and public climate of increasing anxiety and pessimism, regional wars, economic crises, gloomy predictions, and regretful invocations of a kinder and more prosperous past. Yet for most people, life had never been better than it was at the end of the first quarter century of the new millennium, at least to the extent that economic prosperity could measure it.

The global economy in 2050: a base case

It is certainly true that compared to the first couple of decades after the Second World War, growth rates have slowed. Economies have matured in Western Europe, the United States, Japan, South Korea, Southeast Asia, and China. And there are headwinds. Workforces will continue to decline in some big economies such as China, Japan, Germany, and South Korea. With better health, populations will live longer, and a higher proportion will be old. Economic globalisation remains a strong force but may have peaked. In some areas, trade barriers and industrial subsidies are rising, while populism, xenophobia, and US-China antagonism all pose political risks.

Even so, the basic mechanisms of global growth remain in place: the wider inclusiveness of the global economy, increasing population, technological invention and diffusion, rising education and training levels, improving health, cross-border trade and investment, growing household demand, rising capital stocks, and the efficiency of national and global finance in allocating capital to the most profitable uses.

Given the persistence of these elements, a simple base case for the new quarter century is that the global economy will continue to expand in much the same manner but at a somewhat slower rate. Whether it is a little slower or faster does not matter very much. The important thing is that the expansion continues as it has for the last quarter century and the quarter century before that. In this base case, global output will have once again doubled or nearly doubled by 2050. Living standards will increase by around half again of today’s levels. Poorer countries will again have done better than richer countries. Cross-border trade and investment, and technology advances and diffusion, will remain the main drivers of global economic expansion. This seems a reasonable base case. After all, economic growth over time has been usual since the industrial revolution.

A 25-year timeframe diminishes the pertinence of today’s events compared to underlying economic forces. Today’s wars – in the Gulf and Ukraine – will one way or another be long over, replaced by new disputes. Today’s leaders – Xi, Trump, Putin – will long have left office, replaced by new leaders. The 25-year perspective encourages consideration of what might make a persistent difference to the base case of continued expansion.

A projection is not a prediction. It is a way of thinking about how the future may look, given what we know today and our experience hitherto. A projection of the shape of the global economy in 2050 illuminates the issues we need to think about, plan for, and so far as possible influence towards an outcome consistent with Australia’s national interest.

Yet this base case of a continued rise in global output and living standards, an expectation affirmed by more than three-quarters of a century of expansion in a wide variety of sometimes unpromising circumstances, is now queried by three forces at play in the world economy.

All three have altered, or will alter, the world economy in new ways. All three present long-term issues of uncertain direction, magnitude, and consequence. All three arose in conjunction with the success of the global economy over the last quarter century. All require an overhaul of Australian economic statecraft to guide the nation through big changes in how the world works.