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For Peace and Prosperity, Recapture the Spirit of Bretton Woods

Opinion Piece

Date : 12 November 2019

Author: The Hon Josh Frydenberg MP

Publication: The Sydney Morning Herald

Since Federation, the transformation of the Australian economy has been profound. We are now more urbanised. We live longer. We have a more diversified economy and are no longer reliant on the United Kingdom and the “sheep’s back”.

In the early 1900s the life expectancy of an Australian was 56; now it’s 83. Two-thirds of Australians lived outside of the capital cities and now it’s the other way round. Agriculture was 20 per cent of GDP and now it’s less than 3 per cent. And neither China, Japan nor Korea were listed in our top 10 export markets; now they make up the top three.

Just as Australia’s economy has changed, so too has the world’s. From islands of isolation, the continents of Europe, the Americas, Africa and Asia have become plugged in to each other, interconnected by technology and the forces of globalisation like never before.

With a few clicks on a keyboard, you can order your shirts from London or a book from New York. Global supply chains mean the iPhone in your pocket has components from 43 countries, and Boeing in Australia makes wing parts for planes assembled in the United States and sold to the world. As new markets opened up, economies that were largely agricultural have turned into manufacturing hubs, generating rapid export-led growth.

While the world’s population has increased from 1.7 billion to 7.7 billion people today, median incomes have risen dramatically, with more than 50 per cent now classified as middle class. More than 40 million people per year have moved from rural to urban areas and, in the process, more than halved the number of people living in poverty from 1.8 billion in 1950 to about 750 million today – a figure even more remarkable given that over that time the global population has almost tripled.

But just as growing wealth, new technologies and improved access to health and education have lifted global living standards, there are a new set of challenges that, if not addressed, will put at risk the progress we have made. These challenges are as diverse as demographics and debt, environmental sustainability and great power relations. Individually, each challenge is enormous and cannot be solved by any country alone.

With average life expectancy now more than 30 per cent longer than in 1960, it’s estimated we will move from one in 11 people aged over 65 in the world today to one in six by 2050. In countries such as China and Japan, the ageing of the population is particularly pronounced. By some estimates, China’s population will begin to shrink as early as 2027, and by 2050 China will have more women over the age of 84 than there are people in Australia today.

As this ageing demographic shift takes hold, economies will come under pressure as the proportion of the working-age population falls and the demand on health, ageing and pension systems increases. As more people save for retirement, global savings increase. This produces surplus savings that drive down the price of funds and ultimately interest rates, a contributing factor in a low-interest-rate environment that is evident in the world today.

With interest rates low, global debt levels are being managed. However, with global debt levels up 15 per cent in the past three years, to now be at a record high of $US188 trillion ($273 trillion), or 230 per cent of global output, concerns are rising. At these levels, the ability to respond to future shocks is more constrained; the impact of any future shock is more amplified and future generations will be left to deal with the consequences.

With the world’s population estimated to grow by another 2 billion people between now and 2050, the pressures on the environment are increasing. In Asia alone, energy consumption has quadrupled over the past three decades, the demand for raw materials has surged and the impact of human-induced climate change has been real.

History tells us that as economic weight shifts, so does strategic weight. In 1980 China and India accounted for 1/20th of the world’s GDP. Today it’s one-quarter and growing. As China has risen, we have seen greater tensions with the United States, which are now spilling over into the global economy. The reciprocal imposition of tariffs by the United States and China will, according to the IMF, reduce global output by 0.8 per cent, or $US700 billion over the period to 2020. This is harming not just the protagonists but bystanders as well.

In today’s global environment, characterised by changing demographics, elevated debt levels, environmental pressures and great power tensions, it’s critical that we pursue reforms at home that retain our competitiveness, openness and fiscal discipline, and that globally we remain a strong advocate for a transparent and rules-based global economic system that has strong multilateral institutions.

The compact at Bretton Woods that was agreed 75 years ago provides us with a framework based on co-operation and co-ordination that has underpinned our peace and prosperity. We need to recapture that moment and the lessons that got us there. Conflict between nations, aggressive currency devaluations and protectionism were the backdrop for that 1944 meeting in the little town of New Hampshire. There was a recognition that from such conduct all parties paid a price.

As a result, those nations present reached an agreement on a new pathway forward that would see the establishment of the World Trade Organisation, the International Monetary Fund and the World Bank – organisations that have been and continue to be central to the amelioration of tensions between nations.

As then-US secretary of the treasury Henry Morgenthau said of the 44 nations present, including Australia, they had not “found any incompatibility between devotion to our countries and joint action. Indeed, we have found on the contrary that the only genuine safeguard for our national interest lies in international co-operation.”

Today, Australia wants to see the WTO reinvigorated with a more effective dispute-settling mechanism and a broader remit to deal with e-commerce and the opportunities created by the digital economy. So too with the IMF, we would like to see change to the governance structures reflecting the greater role played by emerging economies, particularly in Asia. With these reforms, these important institutions will be even stronger and more relevant to the task before them.

As the world set out on a destructive path to World War II, Sir Robert Menzies espoused in 1939 an important role for Australia on the world stage, saying: “It is true that we are not a numerous people, but we have our vigour, intelligence and resource.”

His statement was as right then as it is now.

Given Australia’s strong strategic, political and economic ties with key partners both near and abroad, we are well placed as a nation to play an active and constructive role. Australia has benefited greatly from the transformation of the global economy, of which we have been a key part. But there are significant challenges ahead. Working together and invoking the spirit of Bretton Woods, we can meet these challenges and secure peace and prosperity for all.

Josh Frydenberg is the federal Treasurer

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