Out of the trap
It is a subtle change of language, but the Asian Development Bank has just made one of the biggest question marks over the Asian century a little less scary.
The latest Asian Development Outlook has dropped the long-established idea that a middle-income trap can keep countries such as Indonesia and Thailand in a long-term state of economic stasis, unable to rise up the development chain the way newly industrialised countries (NIEs) like South Korea and Taiwan have done.
Instead, in this year’s analytical chapter in the annual Outlook, the bank has chosen to look at how these countries need to overcome a middle income 'challenge' by improving the way they manage innovation, human capital and infrastructure.
It is only a one-word change but this is a striking shift in the language conventionally used to describe how many of Asia’s middle income countries from China down struggle with the governance reforms and structural economic changes needed to move toward more high-technology and knowledge-based economies, ideally based on more domestic consumption.
Large, once-promising economies in other parts of the world such South Africa and Brazil, which have failed to break away from resource-export dependence, low-end manufacturing and cheap labour-based production, demonstrate the challenge facing these fast-growing Asian countries.
ADB officials are understood to have made the language change to play down the sense of inevitability conveyed by the word 'trap'. They also think it is hard to argue that developing Asia is failing to make progress when it is projected to grow around 5.7% a year over the next two years – again the fastest in the world. And the rate is even higher at 6.2% if the four NIEs - Korea, Taiwan, Singapore and Hong Kong - that have already made the evolution are excluded.
Nevertheless, this is an interesting change from the bank's big threshold 2013 study, Asia 2050, that graphically illustrated the Middle Income Trap (note the capitalisation back then) with a chart comparing South Korea's growth take-off with the poor performance of Brazil and South Africa.
The warning to other Asian middle income countries was clear: 'They are caught in the Middle Income Trap - unable to compete with low-income, low-wage economies in manufactured exports and with advanced economies in high-skill innovations.'
This year's Outlook underlines the argument that developing Asia is making progress by generating about 60% of world growth, with high growth in India and South East Asia offsetting a balanced slowdown in China.
Nomenclature aside, the chapter on the middle income challenge in the latest Outlook reiterates the conventional theory that better productivity from advanced infrastructure and higher education is the key to higher income status, rather than simply accumulating more physical and human capital.
'Many norms that served the region well at low income, such as macroeconomic stability and high investment, still serve it well at middle income,' it says. 'At the same time, the pattern of growth will have to evolve if Asia is to sustain rapid growth and eventually reach high income. In particular, education, innovation, and infrastructure all have vital roles to play.'
If Prime Minister Malcolm Turnbull is tempted to fall back on the old saw of cricket, Commonwealth and curry on his trip to India next week he should pay attention to what happened when British chancellor Philip Hammond turned up this week looking for some post-Brexit solace in the former colony.
India let a bilateral investment treaty expire just days before Hammond arrived in yet another demonstration of how confident it feels about setting the terms of international economic engagement. Hammond went home empty-handed.
That confidence will only be bolstered by the last ADB Economic Outlook, which says India will be the fastest growing economy in the region (apart from Bhutan and Myanmar) as it recovers much faster than expected from demonetisation of high value banknotes. It is also the world's fastest growing large economy.
India has let other investment treaties lapse but this snafu during Hammond's visit has underlined how the Commonwealth will not provide an easy safety net from Brexit.
It's also worth noting that India has given its 'Make in India' manufacturing strategy and fiscal consolidation higher priority than the much-vaunted promise of an Australian trade deal in 12 months, made during Tony Abbott’s prime ministership in late 2014. These days the two countries are simply doing a 'stocktake' on trade relations.
Nevertheless, the ADB forecasts underline the importance of this trip when the whole relationship with China faces challenges and Australia needs to devote more attention to the post-resource trade aspects of its economic relations in the region.
A prime ministerial visit alongside Education Minister Simon Birmingham is a good way to make this point, and perhaps take a small step along the way to an audacious idea being propounded by the senior Indian businessman and Australia-India Council chairman Ashok Jacob. He says Australia’s next BHP Billiton (or global scale company) should emerge from the education and training sector, with India a key partner.
The appointment of former spy chief and China ambassador David Irvine as the new head of the Foreign Investment Review Board (FIRB) underlines a much more activist approach to managing the flow of Chinese capital into Australia after the relatively flat-footed approaches that have often occurred since the boom in this investment began in 2008.
It represents a subtle compromise between those arguing for the removal of FIRB from the Treasury portfolio to a more independent position in the bureaucracy to better assess national security issues and those arguing for clearer rules about just what foreign (read Chinese) investment is acceptable since Australia is so dependent on foreign capital (which means more from China for a long time to come).
Chinese complaints about Australian foreign investment rules always seem more like negotiating tactics than heartfelt concerns, given both the considerable numbers that are approved and the less than transparent environment back in Beijing. But managing investment by Chinese state owned enterprises (SOEs) is a challenge that isn't going away given the role they will continue to play in China, whatever happens with the economic rebalancing process.
Ever since then Treasurer Wayne Swan tightened or just clarified the rules (depending on where you sit) back in 2009, it has been clear that some way of distinguishing between market-oriented SOEs and politically motivated strategic investors is needed.
The Treasury's latest proposed approach is to allow SOEs from China and elsewhere to buy assets valued at up to $100 million without having to notify the Treasurer. It's estimated this will exempt about 300 foreign investments from the more expensive and complicated approval processes introduced a bit over a year ago.
This is a long way short of the $1.1 billion threshold for private foreign company investments that now exists in several of Australia’s trade agreements. But, combined with the more transparent procedures being developed on critical infrastructure after the AusGrid sale imbroglio last year, it should go a long way to calming complaints from Chinese SOEs.
Money or the guns
The nervousness about the state of Australia’s security relationship with the US in the Trump era is fueling a significant refocus on the importance of the bilateral economic relationship.
Former minister and US ambassador Kim Beazley stepped up the rhetorical level of the debate this week in Sydney, declaring that Australia has never had the sort of hard-headed approach to international economic policy making that was applied in defence white papers. (As an interesting aside, he nominated former Labor Treasurer Ralph Willis, former Liberal Opposition leader John Hewson and Labor trade minister Craig Emerson as the three most economically literate politicians of recent times.)
Beazley was speaking at the Sydney launch of the Perth USAsia Centre study of the economic relationship that uses US data to calculate the size of sales in the US by Australian-controlled businesses. These sales are valued at about four times Australian exports to the US.
Now the US Studies Centre at Sydney University is embarking on a larger project with the American Chamber of Commerce in Australia examining the impact of US investment in Australia. Coming after this major Partnership for Change study of future economic links with China, published last year, the basis for a better informed debate about balancing security and economic partnerships may be emerging.