Australia's Strategic Positioning: The Challenge to Leaders

Strengths and Weaknesses

Australia is traditionally regarded as an economically prosperous and politically stable society on a continent sized island in the southern hemisphere.

It has a (say) 60,000 year history of human habitation, and a 200 year history of European settlement. It inherited British legal and government institutions which were the strongest in the world in the 19th century. This provided the basis for establishing a successful agricultural and mineral based economy within the colonial framework of the British empire.

Australia has a diversity of rich natural resources, though it soil and water endowments are limited and mainly confined to south and east coastal belts. While average population densities are low, most Australians live in urban settings on the coast.

Strong egalitarian principles (which were not initially extended to indigenous Australian or non-Europeans) allowed the emergence of stable governments, and attempts at economic diversification based on 'all round protectionism'.

In the face of the perceived long term failure of this strategy and the emergence of stronger competition from previously less developed economics in Asia, reforms in the 1980s and 1990s removed political controls over markets, opened the economy and society to more international influences and created the foundation for stronger (though still small) diversified industries, greater economic resilience in the face of external shocks and a sustained period of growth mainly based in service industries.

The economy remains export oriented - with major emphasis on mineral and agricultural commodities complemented by niche manufactures and services (such as education, law and tourism).

Population increase has occurred through both natural increase and migration (which has often been a means for recruiting needed skills). Educational and health standards have traditional been good - though a relatively lower share of technically skilled workers reflected the resource / service character of the economy. There are however considerable difficulties in the health system ..., while a 'wishy washy' approach to education has become a threat to literacy and students' ability to acquire functional knowledge, while the practical outcome of the underlying postmodern assumptions have seriously damaged many societal institutions.

Moves towards reconciliation between indigenous and mainstream Australia have been proceeding in fits and starts.

Environmental quality is generally high - due to relatively low overall population densities - though agricultural activities have led to problems in many regions and persistent drought causes increased concern.

Low population densities have contributed to difficulties in establishing rapid inter-urban transport infrastructure.

In 2005 matters of significant public concern include: ongoing economic challenges; a loss of egalitarianism; international tensions; the establishment of stronger international relationships in the region; environmental sustainability; population aging; and the provision of public services and infrastructure.

What 'everyone knows' about future reform needs is outlined below

OECD:

Intergenerational Report:

Reserve Bank:

Economic and Social Outlook Conference:

Melbourne Institute:

Productivity Commission: Having been asked by the Commonwealth Treasurer to report on NCP reforms the Commission suggested that NCP has complemented other market liberalization reforms over the past two decades, that were introduced as a result of Australia's long term decline in international economic rankings, and produced significant economic benefits. NCP has produced useful gains (especially in infrastructure), though the process has not been without difficulties. However, in spite of two decades of reform, new challenges exist which require further efforts. A new nationally-coordinated reform agenda incorporating competition policy principles should be undertaken to: (a) complete and reinforce the past NCP agenda by: overcoming various infrastructure problems; completing legislative reviews; and improving the way NCP impacts on various major areas of the economy; and (b) address two major new goals (ie health care and natural resource management) (see also Review of National Competition Policy Reform: A Commentary).

First, NCP was unbalanced in that it focused on competition, but neglected competitiveness (eg the capabilities required to compete successfully - which competition alone does not ensure). This is significant now because Australia encountered a supply constraint (ie a demand / production imbalance).

For the past 15 years Australian business has tended to cope with its competitive challenges by cutting costs - a tactic which seems now much less feasible.

Thus firms must increasingly cope with future challenges by new business development, but this will only be profitable if Australia's relatively under-developed business environment improves dramatically. The reforms that 'everyone' knows about make no mention of this but rather involve an attempt to squeeze out more low-quality output by forcing the weakest segments of the community to contribute more or further changes to public functions (eg infrastructure, taxation). A better solution would involve strengthening the economy's ability to generate more wealth, by qualitative transformation of the economy at the top end,

Second, NCP was implemented as a grand theory without any effective means to monitor its practical consequences. Those practical consequences included contributing to a deterioration in the ability of governments to govern as the result of a complementary 'new public management' theory which assumed that governments' primary contributions should be low taxes and efficient infrastructure.

Unfortunately a serious lack of comprehension by the architects of reform about practical aspects of government and infrastructure contributed to a breakdown in the effectiveness of machinery for planning / management of infrastructure - as considered further below.

In particular:

as noted above the whole basis of Australia's national competition reform agenda has been unbalanced;
while infrastructure is one of the 'capability' issues that need attention, infrastructure efficiency is by no means the most critical - for reasons outlined below. Moreover most proposals for a 'national approach to infrastructure' seem likely to do more harm than good. What is probably required is to rebuild basic government machinery that has been fragmented by increasingly centralized control (see Infrastructure Constraints on Australia's Economy); and
there have been attempts to cut red tape in the past (eg Savage task force established in Queensland in the 1980s) which have failed to prevent an explosion of regulation. This arose apparently because the focus was on cutting red tape, rather than on revising the (political) process whereby regulation is generated. While some outdated regulations were eliminated, the system was simultaneously swamped by new regulation as interest groups sought to achieve new goals. Proposals (by Business Council of Australia) to require estimates of the cost of regulation would help, but there are more fundamental questions about the limits to which regulation can be effective in guiding socially desirable behaviour.

Introduction + Status 'Consensus' on the Future Global Shifts Domestic Challenges Realistic Strategy	Introduction This document considers Australia's positioning in terms of apparent future challenges. The primary focus is on economic considerations in relation to the emergence of what is seen as a new consensus on ongoing economic reform. However attention is not limited to economic prosperity and other issues are identified. In brief it will be suggested that: Australia's strategic position is more favourable than that of many other nations, and progress is being made in dealing with some emerging challenges that are receiving attention (eg population aging, environmental risks). However there are fundamental risks to the effectiveness of government and to economic prosperity, as well as significant strategic issues that are being neglected. Australia's emergent economic reform agenda is a continuation of past approaches which have produced dubious results. In essence the answer for the future was assumed without closely studying the situation. That agenda seems inappropriate as it pays most attention to improving the quantity of inputs to poorly developed economic systems. Priority should probably be given to strengthening the performance of those systems as a whole. the sustainability of Australia's economic growth depends on assuming that a global credit bubble can keep expanding. If it does not, there will be very significant economic and public financing impacts machinery of government is ineffective - reflected both in an inability to deal effectively with infrastructure and in the superficiality of strategy; the geo-political environment is undergoing change - and Australia's approach to this is again superficial. Asia is not only a difficult market and competitor, but also a challenge in terms of its style of civilization and financial systems. Australia's traditional allies face uncertain positions. despite the progress being made, serious environmental uncertainties remain. In a multitude of ways Australia faces a difficult external environment, and is not coping well. This document concerns the leadership challenge to improve its strategic positioning.
Status	Strengths and Weaknesses Australia is traditionally regarded as an economically prosperous and politically stable society on a continent sized island in the southern hemisphere. It has a (say) 60,000 year history of human habitation, and a 200 year history of European settlement. It inherited British legal and government institutions which were the strongest in the world in the 19th century. This provided the basis for establishing a successful agricultural and mineral based economy within the colonial framework of the British empire. Australia has a diversity of rich natural resources, though it soil and water endowments are limited and mainly confined to south and east coastal belts. While average population densities are low, most Australians live in urban settings on the coast. Strong egalitarian principles (which were not initially extended to indigenous Australian or non-Europeans) allowed the emergence of stable governments, and attempts at economic diversification based on 'all round protectionism'. In the face of the perceived long term failure of this strategy and the emergence of stronger competition from previously less developed economics in Asia, reforms in the 1980s and 1990s removed political controls over markets, opened the economy and society to more international influences and created the foundation for stronger (though still small) diversified industries, greater economic resilience in the face of external shocks and a sustained period of growth mainly based in service industries. The economy remains export oriented - with major emphasis on mineral and agricultural commodities complemented by niche manufactures and services (such as education, law and tourism). Population increase has occurred through both natural increase and migration (which has often been a means for recruiting needed skills). Educational and health standards have traditional been good - though a relatively lower share of technically skilled workers reflected the resource / service character of the economy. There are however considerable difficulties in the health system ..., while a 'wishy washy' approach to education has become a threat to literacy and students' ability to acquire functional knowledge, while the practical outcome of the underlying postmodern assumptions have seriously damaged many societal institutions. Moves towards reconciliation between indigenous and mainstream Australia have been proceeding in fits and starts. Environmental quality is generally high - due to relatively low overall population densities - though agricultural activities have led to problems in many regions and persistent drought causes increased concern. Low population densities have contributed to difficulties in establishing rapid inter-urban transport infrastructure. In 2005 matters of significant public concern include: ongoing economic challenges; a loss of egalitarianism; international tensions; the establishment of stronger international relationships in the region; environmental sustainability; population aging; and the provision of public services and infrastructure.
'Consensus' on the Future	Australia's 'Consensus' about the Future In April 2005 a prominent national economic commentator suggested [1] that: Australia is at a crossroads having gained from past economic reforms and needing to start on a new reform program; federal-state tensions could prevent high growth; everyone knows what Australia's next round of reforms should be and why they are needed, because they were set out by the OECD, by the federal Treasury in its Intergenerational Report, by the Reserve Bank governor, by various business groups at Economic and Social Outlook conferences, by the Melbourne Institute and the Productivity Commission; the only problem is to work out how to implement them - and to do this the methods used for National Competition Policy (NCP) would be most effective What 'everyone knows' about future reform needs is outlined below OECD: Intergenerational Report: Reserve Bank: Economic and Social Outlook Conference: Melbourne Institute: Productivity Commission: Having been asked by the Commonwealth Treasurer to report on NCP reforms the Commission suggested that NCP has complemented other market liberalization reforms over the past two decades, that were introduced as a result of Australia's long term decline in international economic rankings, and produced significant economic benefits. NCP has produced useful gains (especially in infrastructure), though the process has not been without difficulties. However, in spite of two decades of reform, new challenges exist which require further efforts. A new nationally-coordinated reform agenda incorporating competition policy principles should be undertaken to: (a) complete and reinforce the past NCP agenda by: overcoming various infrastructure problems; completing legislative reviews; and improving the way NCP impacts on various major areas of the economy; and (b) address two major new goals (ie health care and natural resource management) (see also Review of National Competition Policy Reform: A Commentary). The reforms that 'everyone' knows about seem to involve a feverish effort to complete the National Competition Policy (NCP) agenda and to apply similar methods to a raft of new issues (eg population aging). However there have been serious problems in that NCP was not adequate in building competitiveness and had unintended side effects (including a breakdown in machinery for dealing with infrastructure). First, NCP was unbalanced in that it focused on competition, but neglected competitiveness (eg the capabilities required to compete successfully - which competition alone does not ensure). This is significant now because Australia encountered a supply constraint (ie a demand / production imbalance). For the past 15 years Australian business has tended to cope with its competitive challenges by cutting costs - a tactic which seems now much less feasible. Thus firms must increasingly cope with future challenges by new business development, but this will only be profitable if Australia's relatively under-developed business environment improves dramatically. The reforms that 'everyone' knows about make no mention of this but rather involve an attempt to squeeze out more low-quality output by forcing the weakest segments of the community to contribute more or further changes to public functions (eg infrastructure, taxation). A better solution would involve strengthening the economy's ability to generate more wealth, by qualitative transformation of the economy at the top end, Second, NCP was implemented as a grand theory without any effective means to monitor its practical consequences. Those practical consequences included contributing to a deterioration in the ability of governments to govern as the result of a complementary 'new public management' theory which assumed that governments' primary contributions should be low taxes and efficient infrastructure. Unfortunately a serious lack of comprehension by the architects of reform about practical aspects of government and infrastructure contributed to a breakdown in the effectiveness of machinery for planning / management of infrastructure - as considered further below. These difficulties require not only a fundamental re-consideration of past reform agendas, but also of the means whereby they have been implemented. In spite of this a meeting of the Council of Australian Governments on (date) reportedly produced broad agreement by political leaders about the need for renewal of the national competition reform agenda involving (a) cutting business regulation / red tape (b) promoting transport, infrastructure and energy efficiency and (c) a national approach to infrastructure [1] . While these are only some of the options that have been considered in relation to ensuring Australia future welfare, they provide a good illustration of the inadequacy of the efforts that are being made. In particular: as noted above the whole basis of Australia's national competition reform agenda has been unbalanced; while infrastructure is one of the 'capability' issues that need attention, infrastructure efficiency is by no means the most critical - for reasons outlined below. Moreover most proposals for a 'national approach to infrastructure' seem likely to do more harm than good. What is probably required is to rebuild basic government machinery that has been fragmented by increasingly centralized control (see Infrastructure Constraints on Australia's Economy); and there have been attempts to cut red tape in the past (eg Savage task force established in Queensland in the 1980s) which have failed to prevent an explosion of regulation. This arose apparently because the focus was on cutting red tape, rather than on revising the (political) process whereby regulation is generated. While some outdated regulations were eliminated, the system was simultaneously swamped by new regulation as interest groups sought to achieve new goals. Proposals (by Business Council of Australia) to require estimates of the cost of regulation would help, but there are more fundamental questions about the limits to which regulation can be effective in guiding socially desirable behaviour. The federal budget received considerable attention for what it said about future reform. Its major themes involved some reductions in tax rates. It was widely criticized as only a small part of what is needed to build a foundation for continued prosperity. In particular: In other words Australia's adopted reform agendas are lightweight. Political leaders agreed to 'do something' because many were being criticized. But what is being proposed needs to be reconsidered. Numerous other suggestions have been made for reform, including: tax reform (especially reducing top marginal tax rates), which is the RBA's top priority [1] increased competitive pressure in a number of specific areas - as well as labour market changes - which are the OECD's suggested priority [1]; renewed emphasis on the development of human capital (eg by increased education spending) [1]; training of under-employed human resources, and increased incentives to move from welfare to work [1]; increased budget surplus, and shift in spending priorities from election bribes to skills / infrastructure investment [1]; suppressing demand, because supply constraints can not be overcome quickly. Increased immigration is not a solution because it would lift both demand and supply [1]; tax simplification and emphasis on common law employment contracts [1]; increased incentive through tax system and something like ALP's 'youth guarantee' proposal [1]; linking reform of welfare and industrial relations systems; improved education quality; a coherent health system to reduce costs; and better federal / state cooperation [1]; increased emphasis on innovation. Suggested IR changes would simply encourage the practice of seeking competitiveness by cutting costs, and would thus discourage innovation [1]; reforms related to infrastructure, industrial relations, corporate regulation and tax, which would be the Business Council of Australia's highest priority [1, 2]; renewed emphasis on: productivity by changes affecting industrial relations, skills training, workforce partipation and infrastructure investment; as well as on state / commonwealth cooperation in reforming health, education, ecological and transport systems [1]; reduced negative gearing of property investment, to re-direct resources to other areas [1]; large increase in public infrastructure investment [1]; saving (rather than spending) the tax revenues gained from expected commodity boom to prevent adverse effects (eg currency appreciation) that could reduce competitiveness [1] industrial relations reform; reducing dependency ratio and high taxes on savings; rethinking green programs [1]; graduating more scientists and engineers who can develop high value products [1]; education and training for all Australians, rather than reliance on a commodity boom or fiddling with fiscal / monetary policy [1] reducing remaining subsidies and tariffs; defining property rights for water and forestry; market reform for transport and professions; tax reform (especially in relation to high marginal tax rates on social security, narrow tax base, complex tax system); better urban development process; and intergovernmental collaboration [1] the issue is complicated by aging population, rising health cost and intergenerational equity. Favoured options include: reduced high effective tax rates that are obstacle to working (eg by tax credit for those who take up work); supporting women in duel work / children aspirations to raise fertility; investing in education and R&D; further competition reforms (eg opening professions to competition; peak pricing of power to control demand; congestion charges on roads; trade liberalization); avoiding federal / state duplication and cost-shifting in health; and exploiting opportunities linked to growth in Asia [1]. gains from present prosperity need to be invested for future to overcome infrastructure / skills / aging population constraints. Demand must be reduced because of capacity constraints. There is a need for reform of: tax scales (to not emphasize property investment); industrial relations; health and education; get people off dole; enable (eg by privatization) more infrastructure investment [1] there is a need to boost savings, and not to expect that capacity constraints that have been developing for a long time can be overcome by suppressing unions [1]. However virtually all of these involve options for public policies which are only (say) 30% of the environment from which business and the community must draw support and none even begin to address the more difficult external challenges that seem to exist.
Global Shifts Environmental Geopolitical Economic Energy	Some Global Shifts The external environment is changing rapidly bringing both opportunities and threats. However a number of the most critical factors do not seem to be being considered in Australia's 'trust to luck' reform agendas. The following merely touches superficially on a few of many significant issues. Natural Environment The natural environment is under increasing pressure as a consequence of the growth of human populations and economic activities. The agrarian revolution (from around 14,000 years ago) provided more food than could be gained by hunter gatherers, while the industrial revolution (from around 200 years ago) mobilized new sources of mechanical energy to aid human efforts. Improvements in sanitation and medical science reduced human death rates, while high birth rates swelled many populations. Concerns now arise about: the effect of toxic pollutants on ecological systems and ultimately on human health; deficiencies in soil quality and in the availability of fresh water; the potential for climate change and for a large scale loss of biodiversity. In some regions (eg parts of former Soviet Union, sub-Saharan Africa, and perhaps parts of Australia) environmental deterioration has limited human populations and activities. In Australia environmental concerns now routinely receive attention (and everyone now claims to aim for 'sustainability'). Recycling is routine (though limited) and life-cycle management for some potential wastes is understood by industry. Water and land management are receiving serious attention. Concerns about climatic change are leading to potentially productive debates about the best practical way to reduce greenhouse emissions. The effect of toxins in the environment seems on the point of being seriously addressed. However globally the overall effort seems inadequate to ensure real sustainability - though there are contrary arguments (see Skeptical Environmentalist). Whatever the outcome, the effects will necessarily impact on Australia. In any event, the only way 'out' of humanity's environmental bind is 'up' (ie towards better technologies) because reversion to traditional technologies (eg the world of the hunter gatherer or agricultural revolution) will not prove sustainable for more than a fraction of current human populations). Part of moving 'up' is recognition that, in addition to human influence, the environment is driven by influences that humanity can never control or even understand. Geopolitical Instability The global political and economic order seems to be at risk (see The Second Failure of Globalization? and Competing Civilizations). Following the end of the Cold War and improvements in transport and communication, economic activities have been increasingly organized globally. However there has been no corresponding system of effective global governance - presumably due to a lack of agreement about the principles on which it could be based. The United States (which had achieved a dominant economic, military and cultural position at the end of the Cold War) has promoted a global order based on liberal democratic capitalism. However many societies have not prospered in this environment and in some cases the whole system of government has collapsed - arguably due to (a) lack of effective institutions (b) universally-unexamined limitations in democratic capitalist models which lead to poor economic leadership in many marginal regions (c) the equally-unexamined limitations implicit in cultural assumptions and (d) the dependency / corruption stimulated by conventional attempts to provide aid; the UN system established under US leadership to promote global peace and prosperity on the basis of Western cultural assumptions after WWII has been ineffective (arguably because of its inability to guarantee security and its susceptibility to irresponsible / incompetent influences); global economic institutions (ie World Bank, IMF, WTO) reflect US liberal market assumptions, and have been criticized for their inability to deal with financial crisis as well as environmental and social difficulties. A substantial minority of those who have struggled politically and economically are in predominantly Muslim societies (especially in the Middle East), and Islamist extremists have reacted to their situation with an agenda for (a) revolution in Muslim societies to impose strict religious government (b) terrorist attacks against outsiders whom they see as oppressors and (c) gaining internal influence in liberal Western societies. Because of the increased availability of weapons of mass destruction, most governments have opposed terrorism. However there has been no agreement (or even any obvious serious discussion) amongst world leaders about how to deal with the political and economic failures that seem to be the core of the problem - presumably because of unexamined preferences for radically different styles of political economy. For example: influential countries in Europe have traditionally preferred various forms of social market economy within a framework of Roman Law. This gives priority to the society as a whole (and its cultural traditions) over individuals and differs markedly to the emphasis given to individuals which is implicit in British Law and the institutions in Anglo-American societies. increasingly economically significant societies have emerged in East Asia (initially led by Japan and now dominated by China) based on practices which are radically different to those of Western societies (eg in terms of nature of knowledge and power; government by man rather than by law; and emphasis on community rather than individuals). The US tried (almost unilaterally) to deal with the core of the threat posed by Islamist extremists by encouraging more democratic governance in the Middle East and military action apparently hoping to transform Iraq into a regional model. Despite some gains, the situation remains unstable, and global disunity has increased. Australia has provided active, but limited, cooperation with the US in its attempt to deal with this situation. But there has been no serious public discussion of the complex underlying issues [1] which has made it difficult to judge that action. The overall effect has been: accusations of illegal action; some elevation of Australia's international status; and souring of relationships with some countries who have disagreed with US tactics in the war against terror. Moreover the US, with whom Australia has a long established alliance, has eroded its internationally credibility and influence (though it remains dominant) because of: simplistic militarily attempts to solve complex problems; ineffectual efforts to deal with multilateral machinery; and lack of any meaningful response to its current account and fiscal imbalances and to global economic challenges generally. Furthermore the growing strength of nations in East Asia is giving rise to proposals for regional associations (perhaps led by China or Japan) that could be incompatible with Australia's traditions in ways which have received no attention. Moreover Australia has entered into discussions with China regarding a free trade agreement again without apparently considering the radically different character of the regional order which China's traditions would probably cause it to lead (see China as the Future of the World). This has led (for example) to great difficulty in dealing with application for political asylum by a Chinese diplomat - because China is a potential regional hegemon which defies the conventions of liberal democracies [1]. Australia's immediate region contains a perceived 'arc of instability' involving large and small nations which have experienced economic and political turmoil in recent years. Australia has been actively engaged in cooperative endeavours to stabilize those situations. However, despite this, the situation in Papua New Guinea (Australia's closest neighbour) continues to be near critical. Australia seems to lack effective mechanisms to deal with all these issues. An experienced diplomat suggested (in the context of a even a conventional view of Australia's environment) that there is a need for a more sophisticated approach to foreign, security and trade policy based on continuous review, careful intelligence, sensitive diplomacy and a willingness to change course [1]. Economic Imbalances The global economy has been experiencing strong growth and increasingly large segments of humanity have prospered under various forms of market economy. However (as noted above) not all have done so. Disagreement between the haves and the have-nots, combined with global political disunity, has contributed to great difficulties in further liberalization of trade under the Doha round of multilateral trade negotiations. In the event that changes are not achieved prospects for strong future economic growth (and for improving the position of less developed economies) will be significantly reduced. Moreover financial imbalances have emerged because of the incompatible character of Western and East Asian financial systems which put strong global growth at risk (see Structural Incompatibility Puts Global Growth at Risk). The methods used for rapid economic advancement in East Asia have often involved: export-driven growth; economic leadership by social elites with limited concern for financial outcomes; and accumulating losses in banking institutions which can be protected from the need to gain an international credit rating only by maintaining current account surpluses / large foreign reserves. These methods impose a deflationary demand deficit (ie an excess of production over consumption) on the global economy - which has macro-economic effects that Keynes identified as a significant factor in the great depression of the 1930s. The US has compensated for this for many years (with a credit financed excess of consumption over production) - but cannot continue to do so indefinitely because of the resulting high current account deficits and foreign debts. There is increasing speculation about the risk of a crisis of confidence in the $US as the world's reserve currency, and apparent risks of renewed protectionism or competitive devaluation (both of which were also features of the 1930s' depression). Alternately it may be that the unwinding of financial imbalances will see a renewed bout of financial dislocation in Asia (this time probably centered on China) because the bad balance sheets of many Asian institutions place their societies at greatest risk in the event of a crash in financial markets. China, with the help of its diaspora, has achieved remarkable economic gains since its economic reforms in ..... It has educated its workforce; encouraged foreign investment to build on their skills and low wages; become virtually the world's manufacturer; diversified from export driven growth by an emphasis on housing and infrastructure construction; and endeavoured to establish effective higher level functions. It's very strong growth and improving organizational abilities have created demands which have driven economic growth in other regional economies. However the durability of China's growth must be suspect because of (a) mounting environmental constraints (b) domestic discontent and (c) its continued dependence on (probably unsustainable) strong external demands to protect its insolvent financial institutions (see China as a Bubble?) A reaction is emerging to the Washington consensus view about 'free' markets. Alternative paradigms are being explored in Australia's region The idea of an Asian Monetary Fund was proposed in 1997-98 financial crisis but resisted as an alternative to IMF by US. It was resurrected at recent ADB meeting. It could have a big effect on how developing nations go about raising living standards. The idea was raised of an Asia-only bailout fund with fewer conditions attached than IMF required. The US was concerned that a Japan sponsored AMF would shut US out of efforts to end Asia's crisis. New currency swap arrangements (called Chiang Mai) have the potential to become an AMF. It involves a $39.5 billion system to shield currencies from speculative attacks involving China, Japan, South Korea and 10 Southeast Asian nations. Full IMF delinkage is not possible as such countries do not have the bureaucratic infrastructure to conduct necessary economic surveillance - though creating a secretariat is being considered. Asia might set up an equivalent of the OECD to boost economic integration. The IMF has learned from the Asian financial crisis - and now tends to be less preachy, or controlled by US Treasury. Reform of the IMF is needed, including taking more account of Asian voices. Asia wants its own fund because it does not believe US assurances that markets solve problems. Washington Consensus policies (like shrinking governments to ineffectiveness, deregulating and privatizing industries immediately and putting shareholder value over social considerations) created problems in Latin America. An AMF would be part of an alternative - as would an Asian Bond Fund (to jump-start debt markets). These steps will reduce reliance on $US - and thus increase risks of dumping US Treasuries [1] These trends are significant for Australia. Australia's sustained period of economic growth (which has raised incomes and boosted public financing) has been based on an experiment in driving global growth by the creation of credit. It may fail because of the resulting financial imbalances. Moreover expectations of an (at least short term) resource boom in Australia depend on continued strong growth in Asia (especially China) which seems anything but secure. However in the event that East Asian growth is strong Australia will continue to face severe low-wage competitive challenges to its traditional medium technology industries as technological standards advance (especially in China and India). Energy While there is widespread recognition in Australia of the uncertain future of fossil fuels (which are important both a major export and as an input to electricity production / resource processing), there has been no obvious planning for the possibility of a new oil crisis. There seems to be a real prospect of a global 'oil peak' soon (if this has not already occurred). Given rapidly increasing oil demand associated with growth in Asia, the result must be: strongly increasing oil prices; inflationary pressures; and a shift towards conservation and substitutes (eg LPG; electric vehicles; fuel cells). Though market forces will stimulate adjustment, the transition is likely to be disruptive and to require careful consideration.
Domestic Challenges Governance Infrastructure Economy	Domestic Challenges Governance Australia's system of government is under increasing stress for reasons outlined in Australia's Governance Crisis. For example: democratic institutions have been losing effectiveness and support (eg because increasing complex issues; and a reduced ability to redistribute income in a globalised economy); administrative support to elected governments has weakened because of inconsistent efforts to make it both politically responsive, and business-like; federal - state financial imbalances have led to increasingly dysfunctional intergovernmental relationships; the 'Crown' (whose apolitical constitutional role is vital giving power to elected governments) has been politicized; the moral foundations needed for a legal system that assumes individual liberty have eroded, leading to pressure for state supervision of interpersonal relationships which would undermine liberty and its economic / political advantages. As a result Australia seems to be moving ever closer to the status of a true 'banana republic'. For example: government in the state of Queensland (which has experienced repeated administrative failures and scandals) was described by an observer from Zimbabwe as like that in a typical African republic (personal communication); the federal government appears to retreated from attempts to diversify Australia's resource dependent economy into higher productivity activities - despite the adverse economic and political consequence associated with a 'resource curse'; the federal government adopted a process of centralized / politicized strategic planning in around 2000 similar to that which had previously led various state administrations to administrative failures and to be seen as arrogant and unresponsive (see Decay of Australian Public Administration). This syndrome appears to be reflected in practice in: a coercive (and at times poorly informed) approach to federal-state relationships; the emergence of other dysfunctions - which led one observer to suggest that the federal government does not seem to have coherent policy. It seems to be in bedlam rather than in control [1]. Infrastructure Infrastructure deficiencies are seen as a constraint on Australia's economy (see Infrastructure Constraints on Australia's Economy). The solutions which are being advocated (eg spending more money; a national role in infrastructure coordination; a large scale private sector involvement) appear unlikely to improve the situation because: the basic machinery for planning / managing infrastructure has become hopelessly fragmented partly as a result of 'reforms' intended to promote efficiency in undertaking individual projects; there are severe limits on the extent to which private involvement as principals in providing goods and services which are subject to real market failures can be constructive; construction capacity constraints limit infrastructure spending; What seems to be envisaged would accelerate the decay of public administration in Australia. The problem can be illustrated by proposals which have been developed to overcome bottlenecks in export ports. Business and the federal government have been upset (and proposed numerous unworkable alternatives) because a regulator failed in achieving an impossible task which it had been expected to undertake because of theoretical defects which had been overlooked in developing NCP principles (ie it was required (in effect) to determine a fixed price that could achieve the same effect as the varying prices in a competitive market). Economic Strategy Economic strategy - can't forecast economic boom bust - issues is what will do most to improve resilience and strength irrespective of external circumstances. Certainly worth considering elimination of 'churning' but this is not all. Australia has long had a tendency to seek economic dependency as a resource supplier to major economies (eg UK, Japan). In developing such a relationship in East Asia (eg now with China) there are issues involved which have nothing to do with economics that need serious consideration, such as the potential for political cooption. In the 1980s a Queensland Government seemed to rely to some extent on economic patronage on dubious Japanese factions. The federal government seems to view resource exports (if they were only not limited by infrastructure bottlenecks) as the key to reducing Australia's current account deficit [1, 2]. This is of concern because: commodity exports have some adverse economic impacts, such as: unstable demand - noting the short life of Australia's last commodity boom; the forecast ending of the current boom in a couple of years because of emergence of new production capacity elsewhere [1]; and the precarious position of China - the driver of the current commodity boom; usually denying producers of undifferentiated products the market power to gain a high rate of return; boosting exchange rates during periodic booms, and so damaging the competitiveness of other industries ('The Dutch disease'); it was considerations such as these which led Australia to pursue economic reform / liberalization in the 1980s and 1990s in order to reduce the 'lucky' country's dependence on resource exports. The real problem is that those reform / liberalization efforts were not well enough thought out (see Defects in Economic Tactics, Strategy and Outcomes); an orientation to commodity exports by business and political leaders can have highly undesirable consequences in terms of undermining the quality of economic leadership that a community receives. The 'curse' of natural resources is well demonstrated by Queensland's history and by the experience of many resource-rich third-world nations. have a look at federal budget - solving capacity constraints is not a matter of more money but of capabilities; problem with tax bias towards property is the lack of alternatives not the fact that property is treated the same as any other business - and this reflects relatively under developed economy. Business lobby's are acting in self (not community) interest - because of lack of competent PS SP - eref strategy Article and email - no doubt economic apathy - but as major responsibility for economic development is taken by states (including responsibility for skills and infrastructure) the problem can be just blamed on feds. Problem is that leadership has been 'political' rather than practical. Governments have become less and less capable - only good at winning elections. Federal government is now likely to repeat the politically driven damage to Australia's system of government which was done by state political leaders in the 1980s and 1990s by demolishing the federal system (because of frustration with state's failings) Article over a decade ago argued the need for attention to capabilities required to be competitive. Without this (which requires far more than economic inputs) can't succeed. As well as not developing capabilities, political establishment has positively undermined effectiveness of government (see Queensland's Worst Government) which amongst other things as contributed to infrastructure constraints. The consequences of politicisation of leadership (when quite a different need existed) is illustrated by Decay of A Public Admin - which forecast 'arrogance' label on present federal government trough isolating itself from reality and from persons who did not share its assumptions (as befell various states). Fixing public policies will do no good on its own - see comments to productivity commission. Need also practical leadership (eg in development of public sector and economic systems). Without the latter, smart inputs can achieve little. MORE - production constraint is not one of physical output (which requires an increase in quantity of inputs - whether skills or infrastructure) but rather a failure of value creation without simply increasing inputs. Solution must be qualitative change - especially upgrading economy's ability to gain increases in productivity from use of knowledge. Problem in doing this is inappropriate leadership. Business has been concerned with cost cutting as it means for increasing productivity - not with using knowledge (the major driver of economic growth in a developed economy) to increase productivity. Having reached the limits to which this can be achieved - it is now asking for governments to cuts costs in ways that are socially stressful (and damaging to effectiveness of government) because of a lack of competent and committed economic leadership - see The Economic Futility of Backing Australia's Ability 2. HEADING - Flogging a Dead Horse - need strategy based on upgrading quality of economic activity - not quantity. add reference to production limit to discussion of productivity; to comments on NCP; to comments on infrastructure constraints capacity constraints - bear in mind global macro-economic exposure
Realistic Strategy	Towards More Realistic Strategy In order to better position Australia for its future challenges it seems necessary primarily to: ensure more realistic assessment of current challenges by encouraging a diversity of governmental and independent institutions to obtain relevant information, analyze it (in close collaboration with practitioners), produce indicative proposals for both enterprising initiatives and public policies, and make the results available both publicly and to targeted stakeholders; ensure more realistic support to elected governments by restoring the Westminster concept of professional accountability in making public service appointments; decentralization of the process of developing strategic responses in order to (a) engage people where they live and work - in community, business and government (b) and gain access to relevant practical information. Current methods (involving attempts at increasingly centralized analysis and decision making) are precisely the reverse of what is needed to generate realistic proposals and practical action. In particular it is critical to retain the engagement of regional communities - through arrangements established under local and state governments. Need to develop plans which would prosper in a variety of global economic and political scenarios (eg economic prosperity, modest growth or setbacks due to various possible global risks). There are institutions producing increasing quality of ideas. Ensuring prosperity in neighbour hood -a dn stability as a goal. For prosperity challenges to be overcome include: energy; environment; renewal of government

[unfinished WORKING DRAFT of] Australia's Strategic Positioning: The Challenge to Leaders (2005)
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