Economic diplomacy: Diversification is hard

catch up

25 years after World Bank Senior Vice President and Chief Economist Joseph Stiglitz turned sharply against his employers to set a roadmap for “moving towards a post-Washington consensus” Years have passed.

In response to criticism that the policies of the World Bank and, more importantly, the International Monetary Fund had failed in the Asian financial crisis, Stiglitz set out to criticize two of the major institutions enabling globalization. . Ever since. As he said then:

The policies advanced by the Washington Consensus are imperfect and sometimes misguided. A functioning market requires not only low inflation, but also some fundamental issues ignored by the Washington Consensus: sound financial regulation, competition policies, policies that encourage technology transfer, and transparency.

That’s exactly what John Williamson coined the term “Washington Consensus,” the drastic economic reforms that the US Treasury Department and Washington-based global agencies advocate to solve the Latin American debt crisis. It was only ten years after I summarized the principles.

It was therefore interesting to see Australian Treasury Secretary Jim Chalmers skewer the Washington Consensus as a symbol of the outdated or dysfunctional policies he wants to replace while in power. And the World Bank is already pushing its own reforms. translator For example, Stephen Grenville (here) and Mike Callahan (here).

Chalmers’ point of view was correct a decade or so ago.

but write The MonthlyAs if nothing had changed, Chalmers argues that the Washington Consensus has “become a caricature of ever simpler and unified policy prescriptions to ‘increase rather than reduce’ markets.” This line of thinking assumed that markets would typically self-correct before disaster strikes. “

Chalmers’ view was correct a decade or so ago, and although it includes increasingly uncompromising some of its powerful member states, both institutions still have issues to deal with. But the IMF has since backed capital controls, called for a coordinated global Covid-19 vaccine rollout, argued that climate change spending will eventually pay for itself, and encouraged individual governments to become more self-sufficient. The contented last year spurred action on cryptocurrencies.

In many ways, the IMF provides a well-designed market roadmap that Chalmers hopes to foster. In fact, endorsements of ‘contributing to recovery’ from those who have successfully emerged from the pandemic in 2021 provide the script for Chalmers to rebuild Australia’s budget. And this week, just two days after Mr. Chalmers’ essay, his IMF review of Australia provides further coverage of long-overdue reforms such as curbing capital gains tax cuts and expanding sales taxes. I was.

Meanwhile, the World Bank last month took another step towards a different approach to development assistance based on individual country needs and the need to play a bigger role in broader global challenges such as climate change. I stepped out.

And Chalmers, like many previous opportunistic Treasury secretaries, couldn’t resist using the IMF’s permission to defend the government’s short-term actions. See media release from last November.

Chalmers’ ambitious endorsement of value-based capitalism – supporting public-private partnerships, a welfare budget approach to economic performance, and workforce adaptation to drive the transition to renewable energy in major fossil fuel exporting countries Regulation of new technologies to enable – could actually bring success. Australia is a Petri dish to meet some of the great global challenges.

But he needs to be more attuned to the current state of the world than the tilt of the Washington Consensus seems to suggest.

The Dilemma of Diversification

Trade Minister Don Farrell will finally turn his attention to China’s Wang Wentao next week, but there’s still a video link that highlights the slow-dancing quality of this putative settlement. Boss has already met in person with his Chinese counterpart.

It is therefore striking that Farrell still ritually points out in interviews that China is a larger trading partner than the United States, Japan, South Korea, France and the United Kingdom combined. From depopulation to pandemic management. This seems to imply a compromise that may not be suitable for everyone.

But Farrell’s disciplined tenacity contrasts with the relatively successful diversification rhetoric commonly heard a year ago, with many of the exporters hurt by the blockade of some $20 billion in commodity exports. Farrell’s approach also reflects how concentrated Australia’s commodity exports have been this century, both in terms of products and markets. It is also supported by new research that shows.

Trade economists Ron Wicks, Mike Adams and Nicholas Brown, in a working paper from the Institute for International Trade (IIT), noted that “this reduced concentration of commodity exports is a threat in an increasingly uncertain international economic and security environment. It poses a risk to Australia.”

Australia’s fundamental export dependence on China is well known, but the IIT paper puts it in a clearer context by looking at changes over the past two decades.

While they advocate diversification, the paper argues that Australia’s exports to the high-growth industrial nations of South Korea and Southeast Asia (respectively ahead of China’s development and lagging behind) have fallen due to China’s export boom. and their call for a series of domestic productivity-boosting economic reforms to promote export diversification It tends to coincide with Chalmers’ critique of new economics.

Australia’s basic export dependence on China is well known, but the IIT paper puts it in a clearer context by looking at changes over the past two decades and contrasting it with trade over the past half-century. I’m putting China’s share of Australian merchandise exports has risen from 5% to 40% in two decades, while Australia’s share of Chinese imports (or export intensity) has doubled from 1.5% to more than 3%. It’s been the same in the meantime, but it’s been declining in the US, South Korea, and Southeast Asia.

Similarly, product intensity increased from 10% of coal, which was the largest export in 2001, to 30% of iron ore in 2020. The next concentration of nine exports went from 32% to 40%.

Rather ironically, a former State Department and foreign trade economist observed that “unlike half a century into 2000, when increased diversification of Australia’s exports led to new opportunities across East Asia, since the early 21st century, Various indicators point to an increase in the concentration of exports.” – Mainly due to the rise of China.

Meanwhile, as education and tourism providers gear up for China’s reopening, the paper contains some interesting but tentative double-edged points about services as an avenue of diversification. I’m here. At face value, exports of services are concentrated like iron ore to China, and in the almost two decades to 2019 the share of education and tourism in services increased from 48% to 62%. pointing out. This is mainly due to Chinese students.

However, the paper suggests that the balance of payments data do not adequately account for the services provided offshore by subsidiaries of Australian companies. This is suggested by his 2018-19 special investigation of little-reported offshore affiliates featured here. translator.

But can a better accounting for Australia’s health, financial, building and other services exports really offset China’s reliance on commodity trade and its flood of Chinese and now Indian students? is another matter.

strikeout

The new year begins with a reminder that despite many governments and companies embracing offshore diversification, key geographic options are well defined and limited.

As such, events in or around Australia’s three Chinas and selected destinations in India, Vietnam and Indonesia may be sufficiently attractive that a modest Chinese settlement may still be attractive to some businesses. is emphasized. This is what Nicholas Moore, the government’s special envoy for Southeast Asia, seems to have pondered in a recent interview, saying of diversification, “The question is, if China reopens to Australian exporters in these different regions, what will happen next?” It’s about what happens in the future.” Also, the Australian businessman is now reportedly returning to China.

A sharp drop in share prices following allegations of fraud at India’s Adani Group, one of India’s most connected businessmen and once Asia’s richest man, has turned his friend and Prime Minister Narendra Modi into power. Adani’s Queensland coal mine is India’s most high-profile Australian investment and was one of Prime Minister Anthony Albanese’s visits to India this year. In part, there must have been some connection.

In Vietnam, where Australia has long established an Enhanced Economic Engagement Strategy (EEES), Communist Party General Secretary Nguyen Phu Trong’s Xi Jinping-like crackdown on corruption now holds the office of the country’s president and two deputy prime ministers. robbed. All were related to the external economic liberalization inherent in the EEES. Whatever happens to economic reform, at least Vietnam’s bureaucratic decision-making seems likely to be paralyzed by corruption and factionalism.

Meanwhile, in Indonesia, the Albanian government and Australian Business Council are re-emphasizing the need for a ‘team Australia’ approach and the need for more patient investment, with the Australian Sun between billionaires Andrew Forrest and Mike Cannon. Cable’s renewable energy partnership could be flagship. Brooks has fallen. The project promised a consortium investment approach with partners from Australia, Singapore and Indonesia in new industries.

While India, Vietnam and Indonesia remain economically and demographically attractive for Australian businesses, these very different developments in the coming weeks are likely due to the shift away from China’s geographic and product concentration risks. It shows that there are still challenges.