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Three questions on the Asian Century

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25 January 2012 15:21

Since some of my colleagues have been  setting out their thoughts on the Asian Century White Paper, I thought I might chip in with my two cents. I have three opening questions.

1. Shouldn't we try to go beyond old-school geography?

Granted, we know that there's lots of globaloney out there. Distance isn't really dead, the world’s not flat, and geography certainly isn't history. The real estate agent's mantra – location, location, location – remains an important feature of our world and of Australia's place in it.

Still, restricting ourselves to thinking about the world in old school geographical terms, especially when it comes to the international economy, seems just, well, overly restrictive. Perhaps, instead of starting from artificial geographic designations like 'Asia', we could start by mapping the evolving flows of goods, services, capital and people within which we are enmeshed, and then see where that takes us. At a minimum, in a world of international supply chains where traditional trade statistics capture only a small part of the underlying reality and which is characterised by increasingly complex financial networks, we need to supplement our traditional models with new ways of understanding our environment.

2. Can we find appropriate benchmarks?

It's probably inevitable that any study on our economic relations with a given region is going to generate claims that our ties with one country or another – or even the region as a whole – are underdone, or alternatively, that certain markets or modes of exchange are less developed than we might expect (I'm not immune to this kind of temptation). After which assertion we immediately and naturally skip on to the question, 'what is to be done to alter this deplorable state of affairs?'

Before we get to that, however, it seems worth spending a bit more time on the premise. If we think our economic ties to country X are too small, precisely what is it that they are too small relative to? What's our point of comparison – other than a gut feel, or perhaps the fact that we currently trade or invest more with countries Y and Z? What we need is some kind of benchmark, but how do we find one?

One option would be to take some off-the-shelf estimates from gravity models of trade and finance in order to construct a simple estimate of what we think Australia's trade and financial relationships should look like in equilibrium, and then compare these to the actual outcomes in order to highlight outliers, or alternatively to note where actually, we are probably already trading or investing pretty much as we would expect to be. 

Yes, I'm realistic enough to accept that any such benchmark is going to be pretty rough and ready, and subject to all sorts of limitations. But at least it would provide a start on examining our assertions before we rush to fix a problem that may not exist.*

3. How do we balance diversification and specialisation?

We all know that there are potentially big gains from specialisation. Likewise, we also know that there important gains to be had from diversification. Constructing a good portfolio involves balancing one against the other. So an interesting question is, how far (if at all) should we apply that analogy to Australia's portfolio of economic relationships? 

Suppose, for example, that some compelling version of the benchmarking exercise suggested above indicated that, even though almost 70% of our merchandise exports currently go to East Asia, in equilibrium we should be exporting even more goods to the region. And suppose we believed that a given policy intervention (for the sake of argument, say spending more on Asian language education) could help drive that number towards this target. Should we seek to balance the implied extra benefits that would presumably come from greater specialisation in our trade portfolio against the risks that might be implied by increased concentration? If so, how?

Actually, this raises a further question: in our increasingly integrated world economy, would a greater spread of country trading and investment partners really deliver anything other than illusory diversification anyway? The mapping exercises I proposed above might at least go some way to helping answer that one.

*It's possible someone has done this kind of exercise already and I've missed it. If so, mea culpa, and I'd be grateful to any Interpreter readers who could point me in the right direction.

Photo by Flickr user atomicShed.

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