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Tuesday 22 Aug 2017 | 07:27 | SYDNEY
Tuesday 22 Aug 2017 | 07:27 | SYDNEY

Observations on the defence debate



21 August 2012 12:08

Christopher Joye is a a director and strategic adviser to a number of funds management and financial services companies. He's also a blogger and columnist for the Financial Review.

I come to the defence debate hampered by being a clean-skin, but without the baggage of legacy conditioning and deep-seated preconceptions. I've always had a visceral interest in defence, and did have some nascent ideas. But I have made an effort to remain open-minded since I decided to engage more properly.

One of the things that has struck me is how respectful the debate is. I've spent the last decade locked in pretty fearsome battles in economics land prior to, during, and following the global financial crisis. The economics debate is characterised by scant respect, and frequently becomes highly personalised. In an ironic sort of way, the dialogue distinctly lacks humanity. Perhaps that's no surprise.

A good example of what I have seen is the very courteous rapport between Hugh White and ASPI's Mark Thomson, notwithstanding that they hold contrasting opinions. It helps that both are good blokes.

In this post I wanted to further traverse the themes I cover in more detail in my column for the Financial Review today. I'd emphasise that these remain working thoughts and are subject to change if anyone can convince me I am wrong. They should also be read in combination with the column.

I think the Australian community generally, and some defence specialists, materially underestimate the likelihood of catastrophic conflicts during our lifetimes. We tend to focus on the here and now. And a feature of the human condition is to reflexively assume that what we see around us, the so-called status quo, will propagate itself indefinitely over the horizon. Put differently, change is intrinsically hard to imagine. I've found this to be a problem in economics too.

I argue that we are falsely extrapolating from a very small sample — the period of relative global stability since the end of the Second World War — and using this as the basis for projecting our distribution of future states of nature. I think Hugh White and some others would agree with this. I'd submit we are under-clubbing both the known risks and the unknown uncertainties. I argue that if we took the approach of any prudent private insurer and simulated future contingencies using a boot-strap methodology based on the last 100 or so years of data, we would be investing more on the catastrophe insurance that is defence. This does not have to mean more dollars; it could connote more 'intense' defence. I will return to this issue later.

I firmly reject Mark Thomson's free-riding proposal. I don't think it makes sense. The US is unlikely to accept this moral hazard in the long run, or be able to underwrite it financially. Furthermore, our political leaders have an obligation to cost-effectively minimise existential risks. Free-riding does not satisfy this objective. Indeed, it merely amplifies the risks in the event our great protector decides to renege on its implicit contract to serve as insurer of last resort.

I'd emphasis here that the contract between Australia and the US is implicit, in my opinion. That is to say, it is not binding in all eventualities. Ironically, some local commentators and politicians have argued precisely this point from the opposite perspective: that Australia should not necessarily support a US war with China in all events.

An extension of this point, which I did not get room to make in the column today, is that current generations are potentially appropriating wealth from future generations by forcing them to internalise higher costs in prospective conflicts (that is, they are under-insuring today). You can see this in the spike in historical defence spending when wars arise.

For me the Australian defence dilemma is embodied in Paul Keating lauding Hugh White's new work on America's 'China Choice' (see video above), yet presumably failing to accept Hugh's central domestic policy prescription: that we need to double defence spending to 3-4% of GDP. To be clear, I have not spoken to Paul Keating directly about this, but I did consult enough experts about the question, and I think it is a reasonable supposition.

A second observation is that the current debate is focused on capability options that I think are mostly irrelevant to the risks we face. I am not sure I completely agree with Hugh White on 200 Joint Strike Fighters or 24 conventional subs. I am much more attracted to a cost-effective minimum deterrence capability. What am I talking about here? I will explain another time.

A third insight is that I think some of the experts and politicians with whom I have spoken, and the public more widely, get the rise of China, the US reaction function, and our economic and strategic relations with each, wrong.

I hear many people offer China strategic deference for lifting hundreds of millions out of financial (if not political) poverty. Coupled with Australia's economic integration with China, much like UK and German integration prior to 1914, this infuses an alleged tension into our strategic decision-making process. One gets this sense reading David Uren's latest book.

Should we contemplate distancing ourselves from a heavy-handed US hell-bent on clinging to its historical primacy, which is capable of destabilising the region as much as China? Should we consider Swiss or Swedish-style neutrality? Could we imagine aligning ourselves with the Middle Kingdom?

At this juncture, I don't think these are legitimate options. I argue that China's progress over the last sixty years is as much attributable to US hegemony and the post-Bretton Woods economic stability established and enshrined by US-led Western states as any actions on the part of Chinese leaders.

China's prosperity has been built on subsidised exports to North American and European markets. These subsidies, which have been reluctantly tolerated by the West, include currency manipulation, undervalued labour, and intellectual property theft. China has also stealthily resisted reciprocating free trade by making it difficult for foreign companies to compete in its domestic markets.

I argue that these misunderstandings lead us to misconstrue US intent, and the policy of containment. I believe that US policymakers recognise, as much as Australians do, that the epicentre of global growth in the next 50 years will be found in Asia. Their financial future, as much as ours, will be fueled by exports to Indo-Pacific nations, and demand generated by billions of new middle-income consumers.

I think US policymakers have resolved that in order to protect their own economic and political interests, and ensure that the region is not mortally disrupted by non-democratic actors, they have an obligation to both developed democratic nations, and to their own taxpayers, to maintain their Indo-Pacific leadership. This is the US policy of least regret.

And it is clearly exemplified in Hillary Clinton's recent essay for Foreign Policy, which I think has been to some extent neglected in the domestic debate. She does not conceive of this as an 'Asian Century' but rather as 'America’s Pacific Century'. Now that is fascinating.

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