Published daily by the Lowy Institute

Time to double down on economic engagement

Time to double down on economic engagement
Published 2 Aug 2016 

The Lowy Institute analysis 'Making the Most of the G20', which argues the G20 should be at the centre of Australia's approach to economic engagement, explores many of the themes that will be aired in this debate.

Australia's enviable economic performance over the last quarter-century has given us something more than boasting rights in international fora. It has delivered comparatively strong improvements in real incomes and asset prices for middle Australia at the same time that the middle class in America and Europe has withstood stagnant real wages, falling asset values and a withering attack on traditional jobs as a result of the 'fourth industrial revolution'.

This improvement in Australians' standard of living was driven by a range of domestic policy decisions taken by successive governments. Moreover, the protection of our economic diversity served us well as everything from the internet to commodity prices endured boom and bust conditions.

As a medium-sized, open economy however, Australia's economic growth prospects will always be most significantly influenced by external developments. Our flexible currency, manageable external debt and robust financial system have helped us to withstand external shocks.

In the future we may not be so lucky in a more volatile economic environment, so working hard to better understand increasingly complex international economic transitions really does matter for a number of reasons. [fold]

The first is that better understanding global trends leads to better informed domestic policy. Many of the reforms that shaped the modern Australian economy were influenced by the success of similar policies in other countries. These include: opening our economy to freer trade and bigger cross border capital flows; moving to a flexible exchange rate regime; pursuing labour and product market reforms to increase competition; and building strong institutions that support the rule of law. 

While much has already been done, there are always new political and structural challenges. 

In my role as Australian Ambassador to the United States of America, I am witnessing first hand the policy debate on free trade. America is divided and too few policy leaders are willing to defend a principle of free trade that has helped make America prosperous (and great) for the last 98 years. 

We continue to face turbulent days ahead because extraordinary policy decisions of recent years have created the need for extraordinary countermeasures in the future.

Traditional monetary policy and fiscal policy stimulus are near capacity. Central bank liquidity levels are at all-time highs. And as governments seek to wind back 'extraordinary measures' through fiscal consolidation or a gradual tightening of interest rates, the pressure for more global regulation (like the new rules for banking in the Third Basel Accord) will ring in some further uncertainty as the impacts of new regulation remain untested and unknown. 

We must not assume that Australia will be immune to these external challenges going forward. Support for free trade and an open economy remains comparatively strong in Australia because they have delivered real benefits to all Australians. But if global growth is weak, then demand for our exports will be as well. And Australia is not immune to deflationary pressures that are increasingly evident in a number of the world's major economies. In this less-than-perfect environment, more Australians will question the necessity of maintaining existing policies in the same way that they may want to upgrade an old mobile phone or trade in the old Holden Commodore.

The second justification for greater global engagement is that we can influence global policy well beyond our traditional playing weight.

With a quarter of a century without a recession and a deep operational understanding of emerging Asian economies, Australia has an increasingly influential voice on the world economic stage. In recent years this has been most obvious in the G20. It has not been lost on global opinion leaders that many of the initiatives that Australia introduced when we hosted the G20 in 2014 remain at the centre of the G20 agenda two years later. The impact of our leadership and the progression of our policies has been embraced by China, the 2016 host of the G20.

The Brisbane G20 set out a collective growth target of an additional two per cent of Global GDP by 2018 through more than 1500 new structural reforms initiated by member nations. Although countries are only halfway there, the need to maintain the plan for growth has become more important. Traditional macroeconomic levers like low interest rates and expansionary fiscal policy have failed to deliver the expected baseline growth; only structural reform can deliver the growth trajectory the world needs. 

In a world with massive liquidity and an aversion to risk, investing in new and upgraded infrastructure remains highly attractive. In June the McKinsey Global Institute highlighted that between now and 2030 the world needs to invest an average of US$3.3 trillion a year in economic infrastructure just to support expected rates of growth. So I am encouraged that the Global Infrastructure Hub, established under Australia's G20 leadership and based in Sydney, continues to play a key role in helping to grow the global pipeline of quality, bankable infrastructure projects.

Another key focus of our host year was cracking down on systemic tax avoidance by large multinational companies. As countries implement the action plans that were agreed, it is important to remember why these plans matter. For free trade and open investment to retain public support, both individuals and smaller businesses need to be confident that large multinational companies will pay the right amount of tax and are not gaining an unfair advantage over their competition by avoiding tax. 

Finally it is reassuring that the G20 continues to monitor and evaluate the changes that have been made to the global financial system. While much has been done to strengthen the financial system following the 2008 crisis, the most recent Communique from G20 finance ministers and central bank governors highlights that, like everything else, there is still much work to be done.

In a global economy, global engagement matters. Australia is very good at it and now is the time to redouble our efforts and help shape the direction of future prosperity.

Photo: Getty Images/Cassie Trotter

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