At the 2007 APEC Meeting in Sydney, the Russian President arrived late. At the 2014 G20 Summit in Brisbane, he left early. By doing this he managed to attract more attention than he or Russia deserved. If that wasn’t enough, the gathering of Russian warships off the Queensland coast was designed to create an aura of power which in reality simply does not exist.
As the table below shows, President Putin must make an impact in any way he can because Russia’s significance as a world economic power is certainly on the wane. Next year, the GDP of India will surpass that of Russia. Indeed in the next decade, Australia will “shirt front” past Russia and it may be sooner if the world’s economic sanctions continue to bite.
Figure 1. The GDP of G20 countries
Sources. IMF; World Economic Outlook, Oct 2014; www.theconversation.com
The above table shows that Australia is moving up the economic ladder. Our current growth rate may be below historic averages, but it is far superior to that of many of our G20 partners. On current growth projections, Australia will be tapping on the G8 door in a decade’s time and Russia may well be asked to leave the party.
The G20 is a significant group of countries representing the biggest part of the world economy. The group represents the biggest percentage of world trade and their activities create the biggest proportion of carbon emissions. The G20 summit is an important gathering. However, the potential for the G20 to resolve economic problems continues to be short circuited by political antics and posturing. Last year, the Syrian conflict allowed the US President to avoid a “show-down” on multi-national tax avoidance. This year an emissions agreement with China took the G20 agenda away from a focus on economic growth and the much needed regulation of financial institutions.
Figure 2. The G20 countries
Sources. G20 Study Centre; The Lowy Institute; The Global Carbon Atlas; www.theconversation.com
On reviewing the G20 output statements, it appears that very little of significance was achieved. There was no meeting of minds on the capital structures of large banking organisations. There was no discussion regarding the horrendous blow-out in government debt or the intransigence of fiscal deficits throughout the world. There was not even an acknowledgement that quantitative easing actually exists and that it is causing hideous effects on the relative value of currencies. As for the calamitous levels of unemployment across Europe or the rapidly ageing Japanese economy and its unsustainable debt levels, they were ignored as the ugly relatives that were never to be referred to.
You may gather that our view is that the G20 was a disappointing talkfest where the really big issues were brushed aside once again. Whilst Australia hosted the event, we should not be intoxicated by our role. Indeed from this point on, and with a free trade agreement (FTA) having being negotiated with China, we need to partially disengage ourselves from the world’s debt mess and focus upon our own destiny.
Whilst the China FTA may be overstated in its benefits, it does allow Australia to openly engage with the fastest growing economy in the world. It is an economy with 1.3 billion people generating massive trade growth and foreign reserves. It is these foreign reserves that are being recycled into economies across the world to underwrite indebted countries and to maintain growth.
The FTA with China is therefore both an exciting proposition and a concerning development. Australia is moving closer to the growth engine of the world – but at what cost?
Figure 3. Gross Public Debt (% of GDP)
Sources. G20 Study Centre; The Lowy Institute; www.theconversation.com; www.tradingeconomics.com
The FTA with China
The following chart helps explain why Australia will benefit from its FTA with China, and more so than both the FTA with the United States (that was signed about nine years ago) and the recent agreement with Japan. We will align ourselves with growth and that is surely the only thing that will sustain our economy in a world that is ageing and stagnating. Similarly the FTA with South Korea and the mooted agreement with India are significant because they are both high growth economies. However, of concern is China’s desire to have open investment access to assets in Australia. No one should doubt that China’s centralised government, with its massive foreign reserves, will utilise those reserves to attain economic control wherever it is offered.
Figure 4. Average GDP Growth (2008 – 2013)
China will seek unfettered deployment of its capital in the Australian economy. It is therefore important to acknowledge that China’s economy is 7 times the size of ours and that their foreign reserves of about $4.5 trillion dwarf the foreign reserves of Australia at $54 billion. More significantly their foreign reserves are over 2.3 times the size of our superannuation assets ($1.9 trillion). Thus our concern is that whilst open access for capital via an FTA to the others’ economy sounds good, it increases the risk that Australia’s strategic assets become owned by our biggest trading partner without a commercial offset arrangement. The ability of Australian capital to access opportunities in China is hampered both by our lack of size and the lack of a coordinated strategic intent.
Thus Australia should mobilise its human and capital resources in a strategic process that meets the challenges and opportunities presented by the China FTA. Indeed a national economic summit of Australia’s business leaders, political leaders and capital managers would seem essential. Such a summit, similar to that held by Bob Hawke’s Government in 1984, appears crucial to maximise the opportunity with China.
To conclude on a lighter note, it is interesting to review the current credit ratings of major economies around the world. A cursory review of the following table suggests that the potential for default is not regarded as a hindrance for maintaining a high credit rating. Indeed maybe all that is required is an entry ticket to the G20 party!
Figure 5. S&P’s Credit Rating (2014)
Sources. Standard & Poor’s; www.tradingeconomics.com; www.theconversation.com