Australia's Future Engagement in the Asian Century: Joe Hockey Speech

25/10/11

Australia’s Future Engagement in the Asian Century

Hong Kong Foreign Correspondents Club

Tuesday 25 October 2011 12:30PM

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At a recent dinner in Sydney a close friend of mine introduced me to his travel company employees based in Mumbai, Jakarta, Singapore and Shanghai. Each person is charged with the task of convincing locals in those countries to travel to Australia for their holidays.

When I asked the team what they like about Australia they were emphatic that the clean air, open spaces, good weather and polite people made it a great place to visit or, if they could, even a great place to live.

I was struck by a young gentleman at the table – Yash Vora, a 27 year old from Mumbai. Before coming to Australia the previous week Yash had never even been to an airport let alone set foot on a plane.

Clearly this two week visit was a very big experience for him.

Even though he had memorised every nightly hotel rate in Australia as part of his job preparing itineraries for prospective travellers, Yash had never spent a night in a hotel room in Australia or anywhere else for that matter. He knows Cairns from Canberra and for four years he had been selling the “Australian experience” without ever visiting the country.

Yash earns around 9000 Australian dollars a year, about 72,000 Hong Kong Dollars, which is considered a reasonable sum of money for a young man in Mumbai where the minimum wage is set at 110 Indian Rupee a day, the equivalent of $2.15 Australian or 16 Hong Kong Dollars.

So this wage puts Yash amongst the middle class in India.

Even though he is about to enter into an arranged marriage with a woman he has only met four times, Yash comes across as independent, educated and confident. He is a blend of traditionalism and the modern global world in which we all live.

And Yash is the new and evolving Asia - the middle class. He is knowledgeable, worldly and technology savvy. However, most importantly he aspires to have a better quality of life than his parents, an aspiration shared by millions right across Asia.

Much has been written and said recently by my Parliamentary colleagues and numerous commentators about the awesome growth of Asia and its impact on Australia.

Of course for many years our relationships in Asia were heavily influenced by our deep and extensive engagement with Japan. This relationship has now broadened and just as Japan now has China as one of its largest trading partners, we too are adjusting to a new regional dynamic, with China emerging as our largest trading partner and significant bilateral relationships with Hong Kong, Singapore and other major Asian economies.

It took us many years to develop a close bond with Japan but heeding the lessons from this relationship we know that so much depends on the capacity of individuals to step into the shoes of their newfound business and political partners to fully capitalize on the opportunities these new partnerships can bring.

Most contemporary commentary fails to step into the shoes of Yash, or his work colleagues that I met like Vivien Du from Shanghai or Astrid Firmansyah from Jakarta. Yet it is their dreams, their hopes and their aspirations which give us an insight into Australia’s destiny in this region.

The emergence of Asia’s middle class is generally underestimated because in dollar terms it still lags a fair way behind western countries. However it is the sheer numbers and rapid growth that is most revealing. This is Australia’s most significant economic opportunity in the region.

The GDP (Purchasing Power Parity) per capita of China has almost doubled in the last five years from $4748 USD in 2006 to a predicted $8394 USD in 2011.[1]

According to a PriceWaterhouseCoopers Study, by 2050 the Chinese economy will be roughly 57% larger than the US[2] whilst India’s will be 14% larger.[3] Indonesia will go from being 7% of the size of the US economy in 2009 to 16% in 2050, and Vietnam from 2% of the US economy to 10%.[4]

Whilst increases in GDP are not evenly spread across the region, the vast populations in Asia’s major economies mean that the emerging middle class is enormous in terms of the sheer volume of people.

Within twenty years Yash, Astrid and Vivienne will be well established members of a group of some two and a half billion new middle class consumers across Asia seeking a modern first world lifestyle, with all the expectations and demands to match.

They will want good jobs for themselves and their children – so they will demand values based, world class education facilities and diverse language skills.

They will want clean air and water – so they will demand safe, consistent and affordable clean energy production, backed by a stable energy supplier.

They will want mobility – socially and geographically – so they will demand roads and infrastructure able to cope with modern life, and access to mass transport that is able to keep pace with their busy lifestyle including affordable aviation services.

They will want immediate access to information – so they will demand the latest technology combined with connectivity at very rapid speeds.

They will want safe, nutritious and affordable food – so they will demand access to top class agricultural produce and protein with greater diversity and very limited processing.

And they will yearn for status – so they will demand luxury goods and access to premium shopping and entertainment.

And over time the discretionary spending of the Asian consumer will rival and then far exceed the level we have today from traditional western markets in North America and Europe.

All the “wants” of the emerging middle class will become “demands” because democracy is an unstoppable growing force across Asia whether it is through formal structures or social media. The sheer numbers of the middle class will demand a response to their calls and they will get it.

So how can Australia both accommodate and benefit from this extraordinary geo-political transition across Asia?

Energy, Resources and Environmental Management

The starting point on the road to development is always energy and resources and the foundation stone for much of Asia’s economic development is already being provided by Australian businesses.

More than 80% of Australia’s resource exports currently go to Asia, with 28% to China alone.[5]

But the demands for development are also being matched by more recent competing demands for cleaner air, better water and better environmental management along the way.

This underscores a role for Australia to be a source of clean, green and affordable energy sources.

With at least 90 years of known coal reserves at current production rates, Australia will continue to be a reliable supplier of traditional energy.[6] With better research and bi-lateral investments, such as our $20 million joint venture clean coal technology program with China, we can find ways to address emerging environmental concerns.[7] We can also offer at least 60 years supply of gas which is an alternative to coal and is arguably even more energy efficient.[8]

In addition to all that, Australia currently holds around 36% of the world’s known reserves of low cost uranium.

China and India currently have a small but important nuclear powered electricity industry (1.8% and 2.9% of installed electricity generation capacity respectively) and plan to increase their nuclear generating capacity. [9] Australia can and will be a reliable supplier.

Australia has agreed to supply China with uranium for its current 14 operating generators, and for the more than 25 under construction.[10]

However Australia currently has an outdated policy of refusing to sell uranium to India because it is not a signatory to the United Nations Nuclear Non-proliferation Treaty. This has forced India to seek alternative uranium sources in France and Argentina. That policy will change with a change of Government in Australia.

It is not just good business to sell uranium to India, but it is our responsibility as good global citizens to play our part not just in reducing carbon emissions but in providing consistent, reliable and affordable energy supplies to our partners in the region.

Twenty years ago Japan was our largest trading partner in goods. Today China is Australia’s largest trading partner.[11]

Last year China took $65bn of Australia’s exported goods, with an additional $3bn to Hong Kong, well ahead of our second largest export recipient, Japan, at $47bn.[12] Hong Kong was our 5^th largest source of foreign investment in Australia. China was also our largest supplier of imported goods, at $41bn. This was well ahead of the next largest source of imports, the USA, at $23bn.[13]

This in part reflects the rapid change in consumer spending in Asia and the growth of Asian manufacturing, particularly in China.

Three years ago consumer spending in developing Asia reached $4.3 trillion – which equated to almost a third of private consumption in the OECD. Within twenty years this is predicted to grow to 43% of global consumption.[14]

In a short time China alone will account for 20% of the world’s luxury goods sold.[15]

Whilst Australia will remain a niche supplier of some consumer goods like cars, household appliances and clothing, our biggest opportunity for relationship growth is in the servicessector.

Last year Asian countries took 44% of Australia’s services exports. China was our largest export partner, taking over ten percent of our $52bn of services exports and passing the United States for the first time. [16]

Services exports to China are predominantly travel, for both business and leisure. In 1991 16,500 Chinese visitors came to Australia. Over the last 12 months that grew to more than 454,000 Chinese visitors, plus a further 164,000 visitors from Hong Kong.[17] This will grow to over 900,000 visitors from China in 2020.[18]

When I was Tourism Minister in 2000 and visited Beijing the Chinese Government asked how many visitors Australia could accommodate. That is a rather intimidating question coming from a country with over 1.3 billion people.

After lengthy discussions the more important question became obvious - how many Chinese visitors can Australia properly cater for. We are not a high volume destination. We cannot cater for 6 million Chinese visitors a year, which is our current total visitor numbers.[19] We want to make sure that we give our visitors a great experience in Australia. So they must be greeted by hosts who speak their language, provide experiences that meet their needs and give them a reason to come back again and again.

Even better, once they get to know Australia they may well be inclined to send their children over for part of their education. They may be willing to purchase medical and other services from us in a safe and professional environment and they will be inclined to drink our wines, eat our produce and consume our energy.

This is our big opportunity.

Education

The Asian culture, quite rightly, puts a very comprehensive education at the heart of success. Asian families see education as the passport to reward and a prosperous life.

Vivien, the travel consultant from Shanghai, reminded me of this when she expressed a desire to send her children to an Australian university.

This year alone there are around 332,000 long term foreign students studying in Australia, with over 200,000 hailing from Asia.[20] These are not the children of elite families – primarily they are from the current upper middle class and the demand curve will broaden out as per capita GDP increases across the region.

Overwhelmingly, Chinese, Indian and Indonesian students are choosing to study on campus, in Australia, rather than the same courses online. Top Australian executives operating in Hong Kong and China tell me that Chinese students receiving tertiary qualifications from Australian universities while living in Australia are highly regarded when they return home because of better language and interpersonal skills.

Their international experience gives them that edge with the large firms operating in the new world of emerging economies.

We must however take an even more aggressive approach to our development as an education hub for Asia and the Pacific. It is the obvious basis for successful enduring engagement with our region.

For example I am particularly pleased with the emerging growth of campuses across northern Australia in Darwin, Townsville, Cairns and Broome.

Institutions like the University of Notre Dame are taking advantage of state government incentives to expand campuses in towns like Broome. Others like James Cook University, which has 5,600 international students, are not only growing domestically in Cairns and Townsville but they have over 2,500 at their campuses in Singapore and Beijing.[21]

Our Government has a role to play in facilitating greater growth in this area. For a city like Cairns education exports are a major future source of job and investment growth. Vitally, international students keep the international planes flying and parents and friends visiting during tourism downturns.

Our education relationship with Asia must extend beyond Asian students attending Australian schools and universities.

Unfortunately Australia has only 1,680 students studying in the entire Asian region.[22] This is not good enough. Australian schools and universities must start developing much stronger facilitation links in the region.

Australian students should also seek opportunities to study in Asia. Many campuses across Asia resist the opportunity to accept foreign students. This must change. Bi–lateral agreements between educational institutions would be of long term benefit to the region. Moreover government facilitation of these relationships should be an educational priority. The chance to experience different culture, language and political environments should be seen as a major asset by global employers.

Australia’s engagement with Asia must start in primary school. Our education system does not sell the merits of learning, and becoming fluent in an Asian language. Only 300 students in Australia of non-Chinese-heritage study Mandarin in year 12.[23] While many students start off learning languages in primary school there is not enough incentive to continue these subjects when the studies become optional.

Australian business leaders have expressed alarm at our deficiency in this area.[24] So now is the time for comprehensive curriculum action.

Opportunities for our health system

Health care is another area where Australia could more closely engage with Asia.

Our cradle to grave universal health care system is the envy of many nations and we have some of the best doctors, the best hospitals, and the best administrators.

Australia is renowned for innovation in medical research. In particular IVF research, the cervical cancer vaccine, and the cochlear implant are all examples of Australia’s prowess in developing world leading health care products and innovations.

We have no shortage of talent to develop medicines, vaccines and medical equipment. However, we are not so good at commercialising these innovations. Commercialisation that does occur often has limited capital.

Whilst Australian doctors are already practicing across the region their work is often limited to International Hospitals out of reach to all but a few locals.

As living standards improve across Asia, better quality healthcare will be demanded by the growing middle class. They will want better equipment, better hospitals, and better preventative health strategies.

We should not be afraid of selling Australia as a location for highly specialized medical procedures from dental care to complex surgery. We also have very sophisticated allied health services available. Medical tourism is a rapidly growing multi-billion dollar industry and just as education has proven a massive growth sector to Australia’s domestic advantage so too will medical services grow.

Like so many other service areas, Australians must get their heads around the concept of medical procedures as an export opportunity.

Financial Services.

Australia’s financial services industry also offers opportunities.

Money is a mobile and fungible commodity and Australia has much to offer from simple bank accounts to complex financial products.

Importantly we have particular expertise in funds management.

The reliance on the nature and propensity of Asian consumers to save, rather than spend, means there are significant funds available to be invested. Mark Johnson in his report Australia as a Financial Centre in 2009 commented:

Most Asian economies have very high savings ratios. Many lack a wide range of opportunities for investment of these savings. As private wealth increases and with it aspirations for social security in the form of pensions, insurance and healthcare, many countries in the region will need to develop both a broader and more diverse investor base — not just banks but also pension funds, mutual funds and insurance companies — and a wider range of financial instruments in which to invest.[25]

Australian banks already operate in Asia with innovative banking products. And a good example of this is ANZ’s involvement in Cambodia with the Royal Bank.[26]

About half a million Cambodians have bank accounts. However ANZ had identified that while people may not have bank accounts, a growing number have access to mobile phones. So now a customer with an ANZ account can send money by sending a text message. When enough credit has been built up, their family members can then pick up the cash at over 500 Cash X-Press outlets around the country. By default, it allows anyone with a mobile phone to have a de facto bank account without the paperwork.

There are roughly 200,000 Cambodians now using this ANZ WING system.

Apart from innovative developments at a transactional level, Australia can also offer high end financial services.

The number of High Net Worth Individuals in Indonesia, that is individuals with more than $1m in investable assets excluding property, will almost triple by 2015 to nearly 100,000. These wealthy Indonesians will hold close to $500 billion worth of wealth. This is the fastest rise in Asia.[27]

This is a tremendous opportunity for Australian business to develop and provide a high standard range of products and services for a demanding market.

Potentially the marketing of Islamic banking and finance products has the capacity to increase the access to capital of all Australians.

However there remain regulatory obstacles, such as the issue of double taxation. The UK’s Financial Regulator, the FSA, has summarized their approach to Islamic Banking as ‘no obstacles, but no special favours’.[28]

In Australia we should not treat Islamic Banking differently or preferentially, but we should be mindful of making Australia an attractive market for all types of financial services, provided they are in line with Australia’s high national standards and stable banking system.

Regulation

One of the areas where Australia has delivered world class performance is in the area of regulatory supervision.

To many Australians this may seem a little odd, after all, regulation is often viewed as an impediment to private sector activity and economic growth rather than as a positive attribute.

However, it is important to recognise the role that a strong and well structured regulatory environment can play in ensuring that the excesses of private sector behaviour are avoided and that optimum social outcomes are achieved. Hong Kong performs well in this area but business people tell me that the red tape burden in China and India can be problematic.

One of the contributors to Australia’s robust economic performance during the global troubles of the past four years was the resilience of Australia’s financial system and the strong performance of Australia’s banks. This is widely recognised, most recently by the IMF in its latest review of Australia.

This resilience is not accidental. It reflects Australia’s strong prudential framework, which largely reflects the financial reforms of the previous Coalition government in which I was a Minister.

The 2008 G30 report The Structure of Financial Supervision: Approaches and Challenges in a Global Marketplace commented that Australia’s twin peak financial regulatory structure ‘may also be the optimal means of ensuring that issues of transparency, market integrity, and consumer protection receive sufficient priority.’ [29]

This targeted regulatory structure worked very well and ensured financial institutions were adequately capitalised, had adequate liquidity, and did not build up excessive exposures. The quality of the professional regulators was also of key importance.

Australia also has a strong record of reform in the regulation of financial services, with a progressive unification and simplification of the regulation of financial products and of financial service providers. This has allowed strong growth in the provision of financial services and products to non professional investors such as households and small business.

These regulatory reforms and sound regulatory structure have facilitated rather than impeded the growth of Australia’s financial sector. Financial services now comprise 10% of Australia’s gross domestic product. It might surprise you that that is a larger contribution to GDP than mining, manufacturing or agriculture.

Of course other areas of regulation and the broader role of our legal system represent further opportunities for trade. In fact here in Hong Kong I keep running into Australian lawyers and judges. Clearly within the right regulatory system we have much to gain through legal services exports.

Whilst some sectors of the Australian economy from agriculture to tourism have already engaged with Asia I believe we can do more to prepare regional Australia for the challenges that lie ahead.

The Australian arc of emerging prosperity reaches across northern Australia from north Queensland, through the rugged Northern Territory to the Pilbara in Western Australia.

We have an opportunity to send a message of engagement with our broader region by creating specialist regions.

The North-West should be the centre of our sphere of opportunity in the Indian Ocean. Our opportunity is to use the mineral and energy wealth of the North West to provide a clean, sustainable energy source for Asia through the export of Natural Gas, and to resource the industrialization of rapidly developing economies through the export of iron ore and other metals.

Darwin should be the centre of our sphere of mutual obligation with Asia. We share common goals in fighting global terrorism, halting people smuggling and providing economic and social stability.

Far North Queensland should be the hub for fulfilling our sphere of responsibility in the Pacific Rim. We should work with our Pacific neighbours to ensure they have the skills and capacity to underpin a robust economic future, and an emphasis on poverty reduction.

Over time these specialist regions should be part of a more integrated plan for regional engagement. Health, education and tourism services, together with resource and energy supply, represent hub opportunities for growth in northern Australia.

If the Australian government needs to provide taxation or funding incentives for this northern development then this should be properly considered.

The Australian Government has commissioned a White Paper on our regional engagement. The northern hub approach is worthy of further examination.

Conclusion

The key to our relationship with our region is that Australia must be a consistent, reliable and stable business partner. We should be the blue-chip stock of our time-zone. We will never be the biggest, but we strive to be the best and most trustworthy. We must be a predictable friend and trading partner.

Unfortunately this has been compromised by our current government. The recent ban on live cattle exports to Indonesia, the failed immigration detention centre in East Timor and the failed Malaysia people swap are classic examples.

The good news is I want to change that by changing the government!

Nevertheless today I haven’t even touched on the growing opportunities to capitalize on Asian middle class demand in agricultural production, media services, gaming, housing and architecture, the arts and sport.

There is so much to do as those 2.5 billion middle class Asians emerge over the next twenty years.

The Asian resurgence is underway. This is an opportunity for Australia, rather than a threat.

The fact that Yash and Astrid and Vivienne have all gone from relative poverty to middle class in less than a generation, shows that we live in a rapidly changing world – and the pace of this change will not slow. Australia must not be hesitant in its engagement.

Opportunity for the diverse people of Asia is not just a dream – but a reality. Our responsibility is to help as many people as possible realize that reality and to ensure we can be part of the success story of Asia over the century ahead.