The decline of global stability and rise of ‘homeland economics’

Perhaps, uniquely among both modern history and the world’s developed nations, Australia, the “Lucky Country”, has enjoyed a record-setting, unbroken period of three decades’ worth of economic growth, seemingly without hiccup.

Like many nations during this 30-year period, Australia was buoyed by the voracious demands of the world’s emerging superpower, the People’s Republic of China, thanks to a period of reform initiated by Deng Xiaoping in the late-1970s, becoming known as the period of “Boluan Fanzheng” or “Eliminating chaos and returning to normal”.

As Deng’s China shook off the inherently chaotic aftermath of Mao’s failed Cultural Revolution and Great Leap Forward policy failures, many nations began to peg their economic prosperity and stability to the rising ancient power. Australia, likewise, doubled down, leveraging its vast resource and agricultural wealth to help transform China’s economic fortunes into one of the world’s major economic powers.

Seemingly unassailable in its economic, industrial, political, and strategic ascendency, China’s economic miracle, much like Australia’s, avoided the worst of the Asian Financial Crisis and the Global Financial Crisis of 2008 to become the “factory of the world”, resulting in the hollowing out of many national industrial bases as globalisation took hold across the world.

While the Great Financial Crisis of 2007–09 swept away the wealth, prosperity, and stability of middle-class populations across the developed world, especially in the US, and saw the financial and banking systems of the Western world bailed out by government, Australia enjoyed record economic growth, buoyed by the voracious demands of China in particular.

Fast forward a few years and the world was ravaged by the COVID-19 pandemic and its aftermath, which is now serving to reveal the cracks in our national economy.

In particular, the rise of “just in time” supply chains throughout the 1990s and early-2000s, combined with mounting geopolitical and strategic competition from our primary trading partner, have revealed the inherent vulnerabilities of this approach to economic policy, shedding light on the very real cracks in the economic and security foundations of many nations, especially Australia.

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This combination of international and domestic factors has prompted many nations to begin looking closer to home to resolve concerns about their economic stability, prosperity, and industrial capacity and competitiveness.

However, the rise of this new phenomenon of “homeland economics” isn’t without its challenges or draw backs, argues Callum Williams in a special report for The Economist, titled, Governments across the world are discovering “homeland economics”, in which he presents the challenges facing this “new” approach to an increasingly divided world.

‘Redividing the world’

Much of the consensus since the end of the Cold War is that the world lived through the “Pax Americana” or the American peace, a period of relative benevolence and monopolarity, dominated by the United States as the world’s sole superpower.

However, in recent years, the post-Second World War global order has come under assault, both directly and indirectly, as emerging powers like China and India, backed by established powers, including a resurgent and increasingly belligerent Russia, are all combining to begin building a parallel network of economic, political, and strategic organisations and arrangements to challenge the post-war global order.

At the core of this push is the intent to directly undermine the legitimacy and reputation of the United States and the post-war order as increasingly elitist, unjust, and “Western-centric” at the expense of the Global South.

However for Williams, the rise of this new, multipolar world has been a long-term process as part of a new “redividing” of the world in stark contrast to the optimism and sense of universality which characterised much of the narratives following the collapse of the Soviet Union.

Williams highlights the impact of this new “redividing” on domestic politics and policy making, particularly on the economic front, stating, “a radical alternative really is taking shape. Some call it ‘global resilience’ or ‘economic statecraft’. We call it ‘homeland economics’. The crucial idea is to reduce risks to a country’s economy – those presented by the vagaries of markets, an unpredictable shock such as a pandemic, or the actions of a geopolitical opponent. Supporters say this will produce a world that is safer, fairer and greener”.

This has been a long time coming, with many of the foundations for the new world laid during the Great Financial Crisis and then exacerbated by the mounting competition between the United States and China, the COVID-19 pandemic, and finally, Russia’s invasion of Ukraine which has disrupted global energy flows.

The rise of artificial intelligence is the fourth and final arm of the shocks that have served to radically reshape the global economic, political, and strategic circumstances.

Against this backdrop, Williams details the objectives of homeland economics, stating, “Homeland economics wants to protect the world from similar shocks in the future. It wants to keep the benefits of globalisation, with its emphasis on efficiency and low prices, but avoid the downsides: the uncertainty and unfairness of the previous system. This requires meshing national security and economic policy.”

In an attempt to deliver on this shift in economic thinking, the United States and European Union have sought to implement a range of approaches to build the domestic economic resilience and capacity.

Something Williams explains, stating, “To achieve this requires reaching back into the historical toolkit. Some, following the protectionist policies of the 1930s and President Donald Trump in 2018, are raising tariffs. Others are spending on R&D, hoping to recreate the government-funded research labs of the 1950s that helped win the cold war.

“Drawing on the European experience of the 1950s and 1960s, many governments are hoping to build up national champions in ‘strategic’ industries – not coal and steel, as before, but computer chips, electric vehicles and AI. They are implementing huge subsidies and domestic-content requirements to encourage production at home,” Williams explains.

However, there are some concerns about the capacity of this new approach to deliver.

An imperfect system with serious fall out

Highlighting these concerns, Williams articulates major concerns about both the macro and microeconomic impacts of “homeland economics” as a policy mechanism for building national resilience and reinforcing of the post-Second World War order.

Williams posits, “A lot about homeland economics sounds reasonable. Who could be opposed to making supply chains resilient, helping left-behind regions, rebuilding energy structures and standing up to China?” Going further, Williams adds, “These policies will create many winners, from the bosses of firms receiving payouts, to investors in those firms, to local areas which benefit from a new factory.”

However, despite this, Williams states, “Beneath the apparent reasonableness, there is a deep incoherence. It is based on an overly pessimistic reading of neoliberal globalisation, which in fact held great benefits for most of the world. The benefits of the new approach are at best uncertain. Meanwhile, attempts to break free economically from China are likely to be partial, at best. The benefits of green subsidies for the fight against climate change are also less clear than their proponents admit.”

In explaining this, Williams adds that failure to deliver on these promises will present a series of domestic political challenges in the coming years, with little moving in terms of our dependence on China’s own economic capacity and demand, “By promising things which they cannot deliver, politicians are storing up trouble. In 10 years the West will probably be roughly as reliant on China as it is today, and as unequal and as slow-growing. What then? Do politicians double down on industrial policy, believing its only weakness was that it was applied with insufficient enthusiasm?”

Final thoughts

We have to accept that while the world is increasingly becoming “multipolar”, the Indo-Pacific, in particular, is rapidly becoming the most hotly contested region in the world. Underpinned by the emerging economic, political, and strategic might of powers like China, India, Pakistan, Thailand, Vietnam, and the established and re-emerging capability of both South Korea and Japan, in particular, are serving to create a hotbed of competition on our doorstep.

Recognising this array of challenges and opportunities, both the Australian public and its policymakers need to look beyond the myopic lens that has traditionally dominated our diplomatic, strategic, and economic policy making since Federation.

Ultimately, we need to see Australia begin to play the long game to fully capitalise on the opportunities transforming the Indo-Pacific. The most important question now becomes, when will we see a more detailed analysis and response to the challenges and opportunities facing Australia and when will we see both a narrative and strategy that better helps industry and the Australian public understand the challenges faced and opportunities we have presented before us?

As events continue to unfold throughout the region and China continues to throw its economic, political, and strategic weight around, can Australia afford to remain a secondary power, or does it need to embrace a larger, more independent role in an era of increasing great power competition?