It’s the economy, stupid! Building economic resilience, competitiveness and relationships key to our future

Few nations have benefited from the post-Second World War economic, political, and strategic order as much as Australia has, particularly in the three decades following the end of the Cold War.

Meanwhile, for successive generations of Australians, the economic success and growth of the national economy have been the gifts that keep on giving.

Skyrocketing resources and agricultural prices, backed by our “services” economy and the robust, voracious appetite for Australian real estate saw explosion in the individual or per capita wealth of Australians, or at least that is what was thought and what we were told.

During this nearly half-century period, Australia, like many Western nations, effectively waived goodbye to their economic and industrial complexity, depth and diversity, in a wave of unbridled economic liberalisation that gave rise to the era of free trade and hyperglobalisation.

Not even the Asian Financial Crisis of the mid-1990s or the Global Financial Crisis of 2008, which laid the United States and Europe low, could slow the inevitable march of growth that had come to characterise the Australian economy.

However, none could escape the economic turmoil that was wrought by the COVID-19 pandemic and the unrestricted quantitative easing unleashed by governments around the world, Australia included.

Now our chickens have well and truly come home to roost as the world continues to devolve into great power competition characterised by economic, political, and strategic tensions and the corresponding emergence of multiple centres of gravity, both close to home and more broadly across the globe.

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Australia finds itself at the epicentre of the 21st century’s new great game, as the Indo-Pacific has rapidly become the next major battleground for the world’s established and emerging great powers, many with their own designs and ambitions for the region that conflict with Australia’s own national interests and security.

Referring back to the age-old saying of “It’s the economy, stupid!", it becomes clearer that Australia’s economy has begun to show signs of fatigue at best and necrosis at worst, with devastating impacts for the average Australia and more broadly on the nation’s stability, prosperity, and security.

Highlighting the importance of the economy to Australia’s long-term national security and position in the new world order is Greg Earl, who was the deputy editor, opinion editor, national affairs editor and Asia Pacific editor of The Australian Financial Review, writing for Lowy Institute in a piece titled Economic diplomacy: Ringfencing the Lucky Country.

Don’t jump the shark on globalisation

As the world heads towards the inevitable rise of multipolarity and individual competing centres of economic, strategic, and political gravity, many (including me) have been quick to highlight the seeming collapse of the post-Cold War era of globalisation.

This phenomenon has been, in large part, driven by the rise of economic policies like “homeland economics” born out of the rapid collapse of global supply chains during the COVID-19 pandemic and the acceleration of multipolarity.

However, for Earl, it is important that we don’t “jump the shark” in terms of predicting the complete end of globalisation and the interconnected networks of the global economy, where he stated, referring to issued raised by former United States Treasury and Trade official Brad Setser, “It is good context to assess Australia’s approach to globalisation, considering how three quite different local institutional players have provided interesting insights in the past week into how the country is managing the issues raised by Setser.

“The federal government’s Treasury boss has strikingly embraced the most iconic phrase in the Biden administration’s turn inwards, just as Australia’s equivalent of a sovereign wealth fund is retreating home in the face of geopolitical turmoil, and all while the alternative government has turned to the economic paternalism of the 1950s to justify its big idea for the next election," Earl said.

Against this backdrop, in the Australian context, we have seen the transformation – although some would strongly argue devolution – of the national economy from a diverse, manufacturing-focused, “industrialised” economy into a mining, resources, services and agriculture-dominated economy, with an ever-declining level of complexity.

In response, Prime Minister Anthony Albanese has officially launched his push to reform and reinvigorate Australia’s economy and industrial base through the introduction of the Future Made in Australia Act, seeking to reverse the well-documented industrial and economic decline of the nation.

Yet for Earl and Australia’s own Treasury secretary, Steven Kennedy, that while there is a global shift occurring, our own shift towards an Australian version of “homeland economics”, as has been hinted at by the Prime Minister’s signature Future Made in Australia, tempts “jumping the shark” and leaving Australia potentially isolated from the markets we need to continue our economic recovery.

Kennedy said during a speech at the United States Studies Centre, “These parts of the economy cannot be left to the private sector alone and there is a clear role for government in regulating their operation and ownership. This is often described as the ‘small yard, high fence’ strategy, where a strong set of protections are put around a small number of critical economic activities.”

None of this is to say that Kennedy or Earl are discounting the rise of “homeland economics” in the Australian context, rather we need to be measured in the policy levers we pull. To this end, Earl stated, “Kennedy’s speech is interesting because it implicitly concedes that the 2012 Asian Century White Paper driven by former Treasury secretary Ken Henry under the Gillard government was too optimistically economic determinist about, for example, the benefits from the rise of China. Having now helped birth the Albanese government’s tighter foreign investment rules and its pro-domestic manufacturing Future Made in Australia policy, Kennedy is resetting the economics of the new national resilience or, perhaps, deglobalisation agenda.”

Bringing us to similar comments made by Director-General of the Office of National Intelligence Andrew Shearer at the same event, who said, “We can’t have prosperity in this country without security, but we can’t have security without prosperity, and so we have to demonstrate by what we do and what we say to business leaders that we understand that Australia needs a strong, open, dynamic, flexible economy with productivity growth, and that is absolutely essential to pay for the resilience and the defence and other capabilities we’re going to need to navigate this period.”

Importantly, Earl stressed an important question, seemingly posed by Kennedy, “But when Kennedy still strongly argues that the reintegration of the likes of China and India into the global economy ‘has benefited Australians greatly’, he begs a question. Should a country so dependent on integration with Asia – China diversification or not – be adopting the lexicon of American protectionism to characterise its own approach to resilience?”

Importantly, we’re not alone

While Australia (true to form) has been and continues to be slow to respond, we are far from alone in responding to the challenges posed by the threat of revisionist world powers.

In the face of continued Russian aggression and the increasing likelihood of a Russian victory in Ukraine, pyrrhic though it might be, Europe is beginning to recognise and accept that it will need to do more to guarantee its own economic, political, and strategic security.

This has resulted in European leaders once again embracing the old Latin saying, sic vis pacem para bellum or “If you want peace, prepare for war”, in order to protect the continent and its regional and global interests from the threat of this cabal of revisionist powers.

Highlighting this, European Council President Charles Michel stated in an opinion piece published across Europe’s major news outlets, “If we do not get the EU’s response right and do not give Ukraine enough support to stop Russia, we are next. We must therefore be defence-ready and shift to a ’war economy’ mode.

“It’s time to take responsibility for our security. We can no longer count on others or be at the mercy of election cycles in the US or elsewhere.”

Michel added, “If we want peace, we must prepare for war.”

Across the Atlantic, successive US administrations, beginning with Trump and furthered by the Biden administration, have sought to reverse the trend of hyperglobalisation that saw much of the West’s industrial base and economic complexity hollowed out during the 1990s and early-2000s, empowering potential adversaries, namely China.

This has given rise or perhaps re-emergence of “homeland economics” and an emphasis on national sovereignty and resilience across the economy, particularly in light of mounting geopolitical tensions and the spotlight shone by the COVID-19 pandemic and impact on global supply chains dependent upon China and other developing nations.

Callum Williams, in a special report for The Economist, titled Governments across the world are discovering ‘homeland economics’, stated, “The crucial idea [of homeland economics] 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 ... 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,” Williams said.

This shift has seen the introduction of a range of regulatory and legislative initiatives, like the Biden administration’s “CHIPS Act”, designed to establish the United States as a secondary supply base for the global semiconductor and microprocessor market in the event of a Chinese invasion or blockade of Taiwan.

Under the Trump administration, the creation of “Opportunity Zones” attracted “US$75 billion (AU$114.97 billion) in funds and driven US$52 billion (AU$79.9 billion) of new investment in economically distressed communities, creating at least 500,000 new jobs”, helping to begin rebuilding formerly mighty “Rust Belt” industrial heartlands like Detroit and Cleveland.

Each of these initiatives are representative of a broader dynamic beginning to transform the economies of the Western world, yet Australia, for all the bluster around programs like the National Reconstruction Fund, which is designed to “diversify and transform Australia’s industry and economy”, appears to be missing in action.

Bringing us back to the comments made by Treasury secretary Kennedy, as quoted by Earl, saying, “As Kennedy warns in the broader context of changing the fences around foreign investment: ‘There should be a high bar for what government puts inside the yard and each decision should be carefully weighed, with both benefits and costs considered’.”