The decade ahead: disruptive, disorderly and dangerous

This Sir James Plimsoll Lecture by Dr Heather Smith was presented at the University of Tasmania on 29 November 2022.

Chancellor, Alison Watkins

Professor Nicholas Farrelly, and other members of the University faculty,

Bryce Wakefield, National Executive Director, Australian Institute of International Affairs,

Kim Boyer, President, Tasmania Branch of the Australian Institute of International Affairs,

Tim Ault, Director, Tasmania State Office, Department of Foreign Affairs and Trade,

Members of the Plimsoll family,

Distinguished guests,

Ladies and gentlemen,

I acknowledge the traditional custodians of the land on which we meet and pay my respect to their Elders past and present. I extend that respect to all Aboriginal and Torres Strait Islander people present with us today.

It is an honour to be here in Hobart at the University of Tasmania to deliver the 2022 Sir James Plimsoll lecture.

It is also humbling to be following in the footsteps of so many truly distinguished speakers.

Previous speakers have been, understandably, inspired by the life and career of Sir James. Yet most, like me, never had the honour of knowing him.

That’s quite a striking thought – an impact that extends well beyond one’s own present!

Sir James truly was an extraordinary Australian.

He was part of an exceptional generation of intellectually gifted post-war public servants who made Australia and the world a better and safer place by virtue of their commitment and service.

Previous speakers have shared their reflections on Sir James’s long career that spanned from the end of WWII to just before the end of the Cold War. That career culminated, of course, in his serving as Governor of Tasmania from 1982 to 1987, a role that he discharged for the people of Tasmania in the same way he represented Australia, with total dedication.

In reading Jeremy Header’s biography, I was intrigued by how Sir James, trained in economics, came to move so easily between the strategic, foreign, economic and political dimensions of policy and to have such a significant and enduring impact on Australia’s place in the world.

Two formative experiences might help explain this.

The first was Sir James’ recruitment by Sir Alfred Davidson into the Economics Department of the Bank of New South Wales with the mission to promote collective thinking about national and international affairs. Unique at the time, it was an invaluable experience for a future diplomat.

This stimulating environment also gave rise to the life-long professional and personal relationships with the great Nugget Coombs, at the Commonwealth Bank, Arthur Tange and Professor Torleiv Hytten, who would later become Vice Chancellor of the University of Tasmania, all of whom Davidson also recruited.

The second was his recruitment in 1942 into the multidisciplinary research team of the Land Headquarters at Victoria Barracks. As part of an extraordinarily talented and eclectic group, Sir James advised on the political and economic conditions of PNG, China, the US, India and the USSR – the latter three countries, all places where he would go on to represent Australia.

In these formative years, one of Sir James’s peers described him as a man of caution, prudence and considerable intellectual perception.

How we build and nurture that capability in future generations should be of interest to all of us seeking a wealthier, safer and more equitable Australia.

Our turbulent world

It seems obvious to say we are living in a period of unprecedented turbulence – a confluence of events that we have not witnessed in the past three-quarters of a century.

It is this lack of historical parallels that makes the decade ahead so fraught – neither our political leaders nor their bureaucratic advisers have experience in facing any of our current challenges, let alone all of them in combination.

As the world grapples with the ongoing impact of the pandemic, Russia’s unwarranted and illegal invasion of Ukraine, high and potentially sustained inflation, a global slowdown and the breakdown of global supply chains, our regional and global order is being remade.

We are now in a world lacking in strategic trust.

There is the real possibility of a splintering into democratic and authoritarian spheres of geopolitical influence.

More than a third of the global economy will contract this year or next as growth in the largest economies, the US, EU and China stall. Growth in global trade is slowing sharply and is projected next year to be around half the average of the last 50 years.[1]

We are living through a resurgence of inflation for the first time in three decades as the supply-side interdependence of the effects of the pandemic, Russia’s invasion of the Ukraine and geopolitics manifest.

The world has never experienced an inflationary surge, and the related policy response, with such historically high public debt levels.

The energy crisis – higher prices and reduced supply – flowing from Russia’s actions is unlikely to be a transitory shock and has triggered a global realignment of energy supplies. Interestingly, it is triggering both greater short-term investment in fossil fuel energy sources and an acceleration in the move to low and zero emission sources of energy.

And after years characterised by declining income inequality between countries and widening inequality within countries, we are now in a scenario of a widening of income inequality both within and between countries.

This is sobering, with real consequences for social cohesiveness.

Even demographic trends, which are usually baked into the long-run growth trajectory of a nation decades before, have been startlingly altered in ways that could have economic and geopolitical implications. In the United States, the combination of the pandemic and the opioid crisis has seen US life expectancy fall below that of China and several other developing countries.

This truly is unprecedented!

At the same time, China’s sustained lockdown and slowing economy has raised again the worry of the 2000s – will China grow old before it grows rich?

In my own view this is a given. The deteriorating geopolitical environment, much of it of China’s own making, along with the tendency to increasingly subjugate economic decisions to political control will slow China’s potential growth.

This will lead to less productive domestic investment, less foreign investment, and the stymying of innovation. The consequences of which will be a China mired in the ‘middle-income’ trap as we move into the 2030s.

Some have described our world as being in a polycrisis, one that affects everyone.

As Adam Tooze notes, ‘no one is outside the current conjecture. There are different vantage points, with different perspectives, but no single point and no single theory that encompasses our reality’.[2]

This reinforces my earlier point that our political leaders, and their policy advisers, are in uncharted waters.

As the pandemic demonstrated all too starkly, there seems little prospect of global coordination on issues of the global commons at a time when these shared challenges are increasing in their complexity and consequence.

Well before the pandemic struck there were clear signs that the existing architecture of the international system had run its course.

The diffusion of power from the developed to the developing world made it hard to reach multilateral consensus on shared challenges. Witness, for example, the continuing failure to effectively address climate change.

In the wake of the Global Financial Crisis, the failure in both developed and developing economies to appreciate the benefits of strong institutions, open trade, the role of responsible monetary and fiscal policies, and the importance of structural reform coincided with the global rise of populist, anti-establishment politics.

This was driven in part by the abandonment in many countries of sensible redistributive policies that would allow all to share in the benefits of growth. Instead, rising inequality within countries led to disillusionment with the fundamental drivers of prosperity.

The American public, in particular, began to believe the globalised international system no longer served their interests.[3] While there has long-been a streak of isolationism in the American body politic, in recent decades this has been nurtured by the sense of lost opportunity and the absence of pathways to a better life for the broader community, factors that were all manifest in the decision to elect Donald Trump as president.

With the West focussed elsewhere, China’s leadership was spurred on by what it assessed as the structural decline of the West and, in particular, Pax Americana. Beijing’s Belt and Road Initiative in 2013 symbolised the beginning of a new Chinese international assertiveness.

Looking back, the period from 2013 to 2017 turns out to have been a pivotal period, as Xi Jinping set out his roadmap for China to become the preeminent Asian regional power and the global peer of the US by the mid-2030s, and as Washington officially labelled China a ‘strategic competitor’.

When President Trump came to power in 2017, the US National Intelligence Council Global Trends report, prepared at the start of each incoming US Administration, looked out to 2035 and called out that the world was confronting a paradox.

The industrial and information age was shaping a world both more dangerous and yet richer with opportunities. The unipolar moment had passed and the commitment to the post-1945 rules-based order was being eroded. It foresaw an emboldened China and Russia. And that the deep shifts in the global landscape portended a dark and difficult future. [4]

Five years on, and after 75 years of global economic integration, the hope that interdependence would lead to peace and prosperity has again been turned on its head, as it was in the 1930s.

Worse, the economic policies and increasing connectedness that have lifted hundreds of millions out of poverty and delivered an inter-generational doubling of living standards, have now been weaponised.

As Dani Rodrik recently put it, it seems the great powers are ‘now handing the keys to the global economy to their national-security establishments, jeopardising both global peace and prosperity’.[5]

Drivers of destabilisation

The world is experiencing a paradigm shift. But while we know what we are leaving behind we have no idea of what we move toward.

What we do know is that, over this decade, Australia will be pushed and pulled by four interrelated forces.

  • Deglobalisation and the ongoing distributive backlash
  • Geostrategic competition and the struggle against authoritarianism
  • The fourth industrial revolution and techno-nationalism
  • Global decarbonisation and energy transformation
  • Let me briefly expand on these forces.

To some commentators a new world is emerging, in which economic convergence is over and deglobalisation and protectionism, under the guise of strategic resilience, threaten to deliver lower living standards for all.

To others, such as Ian Bremmer, globalisation itself is not fraying, but is adrift due to the absence of leadership – we are in a global ‘political recession’. And while the world will be less coordinated and efficient, a new settling point will emerge because interconnectedness is still in most countries’ interest given how bad are the alternatives.[6]

Either way, a different model of globalisation will unfold. One that involves a re-balancing towards labour over capital, the dominance of the digital global economy, albeit bifurcated and without the global architecture that helped both facilitate and govern the flows of trade and capital in the 20th century.

Inevitably, there will be a reweighting towards economic security and resilience over efficiency and markets as governments become more interventionist, subjugating the drivers of economic growth to political direction.

If I’m correct, the next decade will be a period of transformation of global supply chains.

With global value chains accounting for half of all trade, and autocracies, on some measures, accounting for around one-third of global GDP[7], more diversification in supply chains and deconcentrating of world markets looks inevitable.

If done with restraint, it could change the global economy for the better in terms of the balance between openness, fairness and resilience. Done badly it will lead to sustained higher prices and slower, more uneven growth, and lower living standards than otherwise would be the case.[8]

The biggest unknown for Australia is whether, in this multipolar world, the US and China can co-exist as both strategic rivals and partners for cooperation on critical issues of the global commons.

Unfortunately, the sense is one of growing fatalism that such a balance may be unachievable.

The US and China appear to have now entered the grey zone in the contest for global primacy. We are neither at war, nor at peace.

China had already made its intentions clear. But now the US is unambiguously on a pathway of containment of China. The previous diplomatic language – that the US would not interfere in China’s development – has been overturned as the US now openly seeks to stymie China’s economic and military rise.

This is most visible in the ramping up in technological confrontation as the US moves to constrain access to foundational technologies, such a as microchips.

This is a profound shift. The result will likely be a doubling down by China of its quest for self-sufficiency in a range of technologies, the prospect of tit-for-tat retaliation, and the further undermining of the prospects for any cooperation on mutual global challenges.

For Australia, harnessing the benefits of technology while protecting our national security in this era of major power rivalry will be particularly challenging.

As a net importer of both capital and technology we are dependent on the global technological supply chain. As we navigate the consequences of US-China competition, we will need to be constantly weighing up the trade-offs we have to make between national security, societal licence and the economic benefits of open innovation.

When it comes to protecting technology, building a high fence around a small garden, or using a scalpel rather than a sledgehammer, sounds rhetorically easy. It isn’t. Our government and business are struggling with this balance.

And it will become harder if those tensions spillover into other arena’s traditionally characterised by greater cooperation. For a jurisdiction whose exports are heavily influenced by regional developments, this should be an issue for all Tasmanians. Similarly, the Australian Antarctic Division could increasingly see its role in the Antarctic more and more shaped by geopolitical tensions.

Over the last decade much of our policy deliberations on technology has been seen through the lens of national security.

But policy decisions taken in isolation of our economic interests are likely to be self-limiting for a country like Australia given our historic inability to build industries of global scale, the small size of our domestic market and our dependence on global research linkages.

Building resilience into some of our critical supply chains, as the pandemic has shown, makes sense, as does working with trusted suppliers where input markets are grossly distorted, such as in energy and critical minerals. Such changes take on even more importance in the face of economic coercion.

But going beyond this only make us less secure, will carry a penalty in terms of productivity and growth, and see us in danger of replicating some of the market-distorting policies that Australia’s economic reforms of the 1980s had to unwind.

In the end Australia cannot escape the fact that its prosperity has been built on well-functioning, transparent global markets. This is unlikely to change.

Although we have so far weathered China’s economic coercion, it is unrealistic to think we or much of our region can decouple completely from China and the complex interdependence of its trade, investment and financial linkages.

While much of what I have just said constitute challenges to our future prosperity and security, the story is not all one of gloom.

The decarbonisation of the global economy, driven by investors and consumers, is a source of massive opportunity for Australia. We truly have the potential to be a renewable energy superpower and to build new, globally competitive, industries on the back of our energy, mineral and agricultural abundance.

That, however, will require a clear-eyed, long term strategic vision for our economy, based on a bipartisanship that is presently lacking.

Australia’s new strategic reality

The three pillars that have underwritten our security and prosperity for decades – our alliance with the United States, the multilateral system and our economic integration with the Indo-Pacific – are now being reshaped and redefined.

It will be challenging for Australia to make our way in this new world.

It will test our statecraft as we calibrate in ways we have never had to do before.

The multidimensional challenges we face require a toolkit that similarly is multi-faceted as we both mitigate risk and position ourselves for advantage.

We will need to conceive of national power in a more subtle and nuanced manner – one that involves our military power projection, economic vitality and flexibility, and our social cohesion, not one of these alone.

Forged through battle and underpinned by our shared values and deep strategic and economic ties, Australia’s alliance with the United States will remain the central pillar of our security and prosperity.

Some question whether the US’s value proposition to the rest of the world is now fading. Yet, for all its domestic tensions, the US is for the foreseeable future, the only country with a world view and the capability to project power globally.

Notwithstanding the slight thawing in our relationship, it would be a perilous path for Australia to bet on any change in China’s aggressive behaviour anytime soon as Xi Jinping continues China’s quest of ‘national rejuvenation’, even as his Marxist-Leninist model with its inherent weaknesses may look self-defeating to us.

This period, while the struggle is underway and before the outcome is clear, is the time for Australia to consider the complex choices we face. We need to think about the principles that should guide our approach to a multilateralism that works for the mid-21st century, balancing our dependence on open and transparent markets with the building of a more resilient regional and global order.[9]

In our region, will need to persuade and project influence through a networked grid of alliances, partnerships and institutions to both reinforce a regional order that has been stable, peaceful and prosperous and deter an emerging order inimical to the factors that have underpinned the Indo-Pacific’s success.

Reliance on trusted partnerships – sometimes based on common values such as AUKUS, sometimes on common interests, like the Quad – will be an important part of this networked approach. But the wariness with which AUKUS is viewed by some in our region means we need a multipronged approach to engaging within the Indo-Pacific.

Working collectively and bilaterally with regional partners such as Japan, the Republic of Korea, India, Southeast Asia and the Pacific Island states will require a sustained effort.

The concerted focus by the Albanese government to build deeper and more robust relationships with ASEAN and the Pacific is to be applauded. Both regions will be arenas of strategic competition, and we need to recognise that economic development, rather than strategic hedging, will remain the prime objective for many countries.

To that end, we must recognise that what we do at home to strengthen our economy will be just as important to our security and prosperity as how we engage with the world.

In the absence of new drivers of growth, the rate of increase in Australia’s quality of life will fall, our ability to project power will diminish and the relative attractiveness of our political and economic model will decline.

Raising our productivity performance through supply side reforms should be just as urgent an undertaking as is our defence planning.

The Treasury now assumes that a decade from now our productivity growth is unlikely to exceed the long-run average of 1.2 per cent per year – and that it will require significant economic reforms to achieve even this.[10]

Treasury has been making this point for many years, but neither the political class nor the community appear inclined to act until it is too late. The fact that our living standards haven’t fallen precipitately has been due to big shifts in commodity prices and our terms of trade.

Relying on repeated bouts of luck hardly comprises sensible policy.

The reforms needed to lift productivity have been well documented and debated.

What hasn’t been debated, but needs to be, are the trade-offs that we as a nation need to make as we build resilience at home and abroad, and the importance of a sustained focus on deterrence as we rachet up spending on our defence capability.

Like other aging democracies, unless we lift economic growth we will be unable to make these trade-offs without difficult decision to raise taxes or reduce spending.

It’s unlikely that many of us will see another budget surplus in our lifetime as health, ageing and social welfare and increasing defence spending consume an increasing share of the nation’s resources.

Post the pandemic we also now have a smaller, older population than we had previously anticipated, with a higher dependency ratio and much larger stock of debt.

The net result of all these factors is a heightened vulnerability to what looks like a prolonged period of geopolitical uncertainty.

The conversations we must have

Our position will remain perilous without sustained, forward thinking political leadership.

We will need to be more clear-eyed about our national interests than currently. In its simplest form the national interest should be about ensuring security, prosperity and social cohesion of the nation and its people, today and into the future.

But different sections of Australian society place different weights and priorities in terms of security, prosperity and social cohesion. And there is no shared understanding of the costs we are prepared to pay to achieve each.

In my view it is time for Australia to adopt a national interest strategy, or at the very least a national statement that brings together an integrated and balanced understanding of the national interest incorporating our security, economic and societal interests.

Such a strategy would help bring clearer policy frameworks to decision-making by better connecting the principles that guide our domestic economic interests – markets, institutions, social wellbeing – with the principles that underpin our national security – our interests, values, identity and history.

It would also better connect our arms of government that engage in periodic long-rang planning.

Indeed, how we organise our national decision-making structures and processes may be just as important as the postures we adopt.

Our new reality also demands a more inclusive national conversation on Australia’s strategic circumstances.

The era when strategic policy was pursued behind closed doors has passed. The threats we face, and the difficult choices our elected leaders will have to make on our behalf, call for more, not less public discussion because of the profound inter-generational implications.

The signs are encouraging, with the new government’s recent levelling with the Australian people on our economic challenges.[11] But that needs to be matched by a similar openness about our strategic circumstances. Only by drawing these two together can the public truly understand the choices in front of us.

One hundred years ago, Elihu Root, former US Secretary of War and Secretary of State, in reflecting on the lessons of the Great War in the very first issue of the journal Foreign Affairs in 1922 spoke to the pressing demand for open diplomacy and popular education in international affairs.

‘Democracies determined to control their own destinies object to being led, without their knowledge, into situations where they have no choice’. [12]

As a gifted communicator, Sir James, while serving under then Foreign Minister Sir Paul Hasluck recognised the importance of communicating with the public on strategic and foreign policy.

This annual lecture series is an important part of engaging with Australians on the difficult choices Australia faces, not only in the decades ahead but, even more importantly, those we face in the near term.

The role that the Australian Institute of International Affairs plays in this public discussion has never been more important. As President-elect I hope to see the AIIA’s role and contribution to the national discourse enhanced.

Finally for the students here tonight, the decade ahead will be a decisive one in shaping your life. We will need leaders – including you – of great character, courage, wisdom, and judgement.

You could do no better than look to James Plimsoll as a role model.

Thank you.

[1] IMF, World Economic Outlook, October 2022.

[2] Adam Tooze, June 27, 2022. https://adamtooze.substack.com/p/chartbook-131-calibrating-the-polycrisis?utm_source=email&publication_id=192845&post_id=61181502

[3] Heather Smith and Allan Gyngell, ‘Virus demands a call for a new world order’, Australian Financial Review, 23 April 2020 p.36-37.

[4] National Intelligence Council, Global Trends: Paradox of Progress, January 2017, p. ix-x. www.dni.gov/nic/globaltrends

[5] Dani Rodrick, Don’t Let Geopolitics Kill the World Economy, November 10, 2022. https://www.project-syndicate.org/commentary/us-china-high-tech-trade-restrictions-by-dani-rodrik-2022-11?barrier=accesspaylog

[6] Ian Bremmer, Globalization Isn’t Dead, Foreign Affairs, October 25, 2022. https://www.foreignaffairs.com/world/globalization-isnt-dead

[7] The Economist, ‘Globalisation and autocracy are locked together. For how much longer? March 19, 2022. https://www.economist.com/finance-and-economics/2022/03/19/globalisation-and-autocracy-are-locked-together-for-how-much-longer

[8] The Economist, ‘The tricky restructuring of global supply chains’, June 16, 2022. https://www.economist.com/leaders/2022/06/16/the-tricky-restructuring-of-global-supply-chains

[9] Heather Smith and Allan Gyngell, op.cit, p.36-37.

[10] https://budget.gov.au/2022-23-october/content/bp1/download/bp1_bs-3.pdf

[11] https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/speeches/budget-speech-2022-23

[12] Elihu Root, ‘A Requisite for the Success of Popular Diplomacy’, Foreign Affairs, Vol.1 No.1 September 1922. https://www.foreignaffairs.com/articles/united-states/1922-09-15/requisite-success-popular-diplomacy

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