Pearls and Irritations

We spend our days looking at short-term economic indicators, such as the Reserve Bank’s decision on the cash rate or whether Australia has entered a recession. This means we don’t pay enough attention to the longer-term trend: that Australia’s economy is inevitably in relative decline compared to its Asian neighbours.

To maintain its influence, Australia will have to invest in other elements of national power, most obviously in its under-resourced diplomatic capacity. 

An inevitable relative decline

Short of a massive change in migration policy, it is inevitable that Australia will be passed by the fast-growing, populous countries around it.

By 2030, Indonesia’s economy is projected to be three times or more Australia’s size in pure GDP measures with Thailand, Malaysia, Vietnam and the Philippines either outpacing or closing on Australia’s GDP. Australia used to have an economy bigger than all 10 of the Southeast Asian economies; now Indonesia’s alone is 74% the size of Australia’s.

This isn’t a problem in itself. Growth in the region has been very good for Australia. Australia will still be one of the wealthiest countries in the world as measured by income per person. We don’t have to fear the prediction attributed to Singapore’s President Lee Kuan Yew that Australia will become the “poor white trash” of Asia.

The issue we should take seriously is what a relatively smaller economy means for the power and impact that Australia has in its region and international affairs. In the words of Prime Minister Julia Gillard: “History teaches us that as economic weight shifts, so does strategic weight.”

Its strong economy has helped Australia be counted as a middle-power in international affairs with some level of influence in the top forums for global governance. An example is the Group of 20 (G20) where Australia has a seat at the table precisely due to its status of one of the “systemically important” economies, gaining access and influence through its membership.

Australia is a middle-power for now, but for how long? Projections are clear that it won’t continue to be a top-20 economy.

Other measures of power

The good news is that the size of a country’s economy is just one of many factors that contribute to its total power. There are many methods of quantifying state power, usually through a matrix of economic, military, political and cultural data points.

A useful tool is the Lowy Institute’s Asia Power Index. Originally released in 2018, the Index ranks 25 Asian powers based on a weighted matrix of 126 indicators across eight categories: economic resources, military capability, resilience, future resources, diplomatic influence, economic relationships, defence networks and cultural influence.

Today, Australia ranks seven of 25. By 2030, it is likely to rank 13 or lower, mainly due to reduction in economic weight. Where Australia is currently rated as more powerful than any one of the Southeast Asian countries, by 2030 more than half of them will be of similar or greater power. Australia will outspend most of them militarily but that won’t outweigh other factors.

A useful way to think about power is through its proxy – prestige – as usefully outlined by Singapore academic Yuen Foong Khong. He suggests that prestige – the perception by one country of another country’s power – is itself a valuable form of power that lends itself to influence in international affairs.

With Australia’s relative decline in economic power, we will see a comparable decline in prestige and thus reduced ability to have Australia’s interests taken into consideration.

Investing in diplomacy

So what can Australia do? The easiest, cheapest way to reverse this decline is to invest in Australia’s diplomatic capacity. In Australian Foreign Affairs this week, we present the case for reversing the long-term under-investment on diplomacy, aid and trade to rebuild Australia’s capacity.

Australia’s total spending on diplomacy, aid and trade has declined significantly from almost 9% in 1949 to a low of 1.3% today. At such a level, Australia is well below other middle-powers such as Canada and the Netherlands: two countries that have much easier diplomatic patches.

We argue that an immediate boost in funding to at least 1.5% of the federal budget is needed for Australia successfully to navigate the challenges that lie ahead.

The level of geopolitical complexity Australia faces today is equal if not greater to that of the early Cold War period, yet its diplomatic capacity has been cut to the bone. Leaders from both sides of politics have plainly acknowledged the scale of international challenges without providing the resources necessary to navigate them.

As Australia proceeds into an uncertain future, it will remain a highly-developed country with strong cultural appeal and a well-educated population. It can and likely will adroitly market products and services to Asia’s booming middle-classes. But this alone is not enough.

Diplomacy helps Australia retain an influence edge. It helps form relationships with future global leaders, advocates Australia’s interests in international forums and promotes trade with tangible results for Australia’s economy and jobs.

With the right investment, Australia can retain power and prestige – but not if it continues to think that diplomacy is something that somehow does itself.

Melissa Conley Tyler is Director of Diplomacy at Asialink at the University of Melbourne. Mitchell Vandewerdt-Holman is a Master of International Relations student at the University of Melbourne currently interning at Asialink.

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