AGM — Sydney Tuesday 28 May 2013
Speech given by Maurice L Newman AC
Chairman, Melon Pastoral Pty Ltd
It is customary when speaking to audiences from another country, to say how much you like their home and the people. In my case I can say with complete sincerity that I have a deep affection for Taiwan and its people.
Indeed, I have long been a friend of Taiwan. It was my privilege to chair the ATBC for five years. I was also honoured to receive the Taiwan Government’s Economic Medal, First Class.
Over the years I have also been privileged to know many of Taiwan’s leading citizens, some of whom I am proud to call my friends.
As a card carrying Australian, who has long foreseen the growth potential and opportunities for us in Asia, I have often lamented what I have seen as a too tentative engagement by our governments and businesses.
This is surprising.
Australians are generally a self-confident, outgoing people who know Asia better than most non-Asians. We do business there. Asian faces are quite unremarkable on our streets. We do booming trade with our Asian neighbours and, generally speaking, our government-to-government relations are in good shape. Yet, there is a reserve. While this quickly dissolves over a good Chinese meal and a few drinks, when you get down to it, out-dated perceptions do linger in a way that they shouldn’t with good friends. That is changing. We now know each another well enough to ensure on both sides that we invest greater trust in the relationship. This should transcend trade and include deeper engagement at a cultural level. This is what is known as soft power and it is the most effective way of building people-to-people engagement.
There is not much point in spending time searching for reasons. It may be because of the speed with which the Asian miracle and Taiwan’s growth and wealth accumulation have caught us on the hop.
Perhaps it is because Asian social priorities are based on Confucian principles of self-reliance which put more emphasis on family and individual accountability, than the post-war redistributive economic model pursued by Australian governments. This has fostered an environment more encouraging to saving and entrepreneurship than Australia. This doesn’t make Taiwan better or worse than Australia, it simply means that we have different social objectives and priorities which our economic policies support. But in the real world of economics, Taiwan’s way delivers superior commercial strength which makes some Australians wary that they will become victims of Taiwan, Mainland China and others who will take control of our assets and businesses and repatriate our wealth in perpetuity. And, in a sense this is true. But it is the unintended consequences of Australia’s collective objectives rather than evil Asian intent.
So the sorts of policies which have propelled Taiwan and Asia more generally, require a different mind-set to the one we are comfortable with. Australia’s preference for spending, taxing, borrowing, consumer protection, red tape, labour market rigidities and growing welfare dependence, comes at a cost including limits on domestic scale.
Rather than lament the fact, if Australians don’t like it, they will have to mount a sustained and conscious shift in policy settings which will not be politically easy to achieve. There is no easy way. Selling off our assets to overseas buyers because Australians don’t value them has the initial attraction that we can spend the proceeds. But in the long term it is a pathway to a branch economy. Even the strongest political will to fend off this dilution in ownership will not overcome underlying market forces. It may for a while preserve control, but of depleting assets.
Of course, there is a middle way which would see Australian enterprises joining in partnership with Asian firms. This would allow the pooling of expertise and financial resources to better compete with the rest of the world. This doesn’t mean losing control but a sharing of direction.
Lost in much of the nationalistic and emotional clamour, is that mergers create scale economies and revenue leverage which are most unlikely to be a zero sum game. The common purpose of mergers is to create opportunities to grow in a way which may be difficult for individual businesses to achieve separately.
It is now accepted that Asia will become the economic centre of the world. Taiwan will be an important contributor. As little as ten years ago those words would have invited argument. It is a sign of the times that such an assertion goes almost uncontested today. But perhaps less appreciated is that with the rise of Asia economically will inevitably come cultural, financial and political influence. This will challenge our traditional beliefs and assail our comfort zones.
Australia’s place in this new order is not assured. It will demand more than a white paper. Australia is not an Asian insider as historically its alliances have been predominantly with the West. Its image in Asia has been as a supplier of raw materials and farm products. This perception belies Australia’s proven capacity for innovation and its technical excellence. Indeed, Australia has led the world in a number of knowledge based industries and it has a proud record of producing Nobel Laureates in science and medicine quite disproportionate to its population. It also has a growing and affluent market for things “Very Well Made in Taiwan”.
Potentially Australia is also a significant source of investment flows to the Region. As Australian superannuation money looks for balance to avoid excess weighting at home, international assets will be targeted. To date, Asia has not been the favoured destination, but this will change.
Taiwan, too, has invested in Australia. At the portfolio, as well as the business level. Following the GFC, Taiwan’s foreign investment in securities was curtailed, but there is evidence of a growing appetite for risk. Australia is one of only eight countries now rated “triple A” by all rating agencies.
It offers safety combined with relatively attractive yields. Sovereign debt and mortgage backed securities should appeal to major Taiwanese institutional investors and the Central Bank. And, MARQ Financial Services, a partnership between Oliver Wyman, Perpetual Trustee and Morgij Analytics, is speaking to Taiwanese investors about a unique product which will revolutionalise the mortgage backed securities market.
Unfortunately, there have been many Australian direct investments in Asia which have failed. Moreover, aside from portfolio investment, Asian companies tend to be more unattainable than their Australian equivalents. This is partly due to local restrictions regarding foreign ownership. Asia, like most countries, prefers foreigners to start up ventures than to make acquisitions.
Of course, Australia’s abundant land area and rich endowment of natural resources do provide a regional and global comparative advantage. With this has come world class mining expertise and technology. The companies which operate in this space are also alive to opportunities around the world. They have brought this experience and cutting edge techniques to Thailand, Vietnam, Indonesia, Mongolia and Mainland China. This has been successful and competes directly with Australia’s own domestic operations.
To some extent, overlooked in Australia in all the talk of minerals, is agriculture. With the world’s arable land decreasing and its population growing and, as more people enjoy higher incomes with appetites for a richer and more varied diet, demand for better quality food will increase with prices to match. What is more, given the empty treasuries in Europe, Britain and the US, the capacity to support common agricultural policies and other farm subsidies is rapidly coming to an end. For efficient farmers like those in Australia, this should present significant opportunities, yet, Australians have been slow to recognise it. Not so those in Asia and the Middle East. They are snapping up Australian farming land at a rapid rate.
It should be remembered that Australian agriculture has gone through a tough period. This is what has made the sale of land to foreign investors an attractive proposition for Australian land holders. Droughts, the high Australian dollar and indifferent market prices have had a negative effect on farmers’ incomes.
Australians take food security for granted and have yet to understand the new international concerns around it. Mainland China particularly understands this and has in recent times met strong resistance from Australians who are concerned at the way their land is being bought up by foreign interests. Land ownership is always an emotional issue everywhere beyond its commercial possibilities. It will become an increasingly sensitive political problem for governments and no doubt a way through this will be the negotiation of long-term leaseholds.
Like farming, manufacturing in Australia has also been hit hard by the Australian dollar as well as relatively high taxes, labour market rigidities, excessive red and green tape and the rising costs of energy. Accordingly, manufacturing industry is in decline and at a pace which is causing serious adjustment pain, particular for those employed in the industry. These days declining manufacturing industries are fairly common place in Western economies and it will take time for knowledge based manufacturing together with service industries to absorb the growing number of retrenched workers. While mining is a great wealth generator, it does not employ many people. Perhaps there are opportunities here for collaboration with Taiwan’s technology and expertise. “Very well made in Taiwan” is more than just a marketing slogan.
As prosperous as Australia has been, it now faces an array of issues, some of them conflicting. Having negotiated the Global Financial Crisis in good shape, thanks largely to having no net government debt when the crisis hit, that situation has given way to around $165 billion or more than 11 per cent of GDP. That said, Australia’s gross debt is heading towards 20 per cent of GDP, and, while both these amounts are not in themselves cause for alarm, (they pale into insignificance when compared to most countries), the budget deficits recorded over the past five years do need to be reined in. With a Federal election slated for 14 September, and with the opposition Coalition expected to win, a more market oriented and business friendly government is likely to emerge.
Tony Abbott, the current Opposition Leader and, probable next Prime Minister, will continue with the Asian focus. This all spells Australia’s continued integration into the Asian paradigm.
Whatever the present confidence in the future of Asia and, Australia’s participation in it, progress is never uninterrupted. For five years now since the GFC, the world has been on life support. The occasional signs of improvement have been short lived. Half of the world, despite trillions of dollars of fiscal and monetary stimulus, is in recession. Even the much vaunted US recovery only has a “one” in front of it and there have been signs that this is headed to zero or below. Mainland China is also facing an economic slowdown, huge local government debt defaults and a banking system which is in need of recapitalising. It is obvious that in a slowing world, the PRC’s heavy reliance on trade will translate into less growth at home.
Japan is intent on weakening the Yen and it is inevitable that other countries will also seek competitive currencies.Moreover, according to last week’s Wall Street Journal, Asia is going on a debt binge with debt to GDP in Asian emerging economies, at 155 per cent, higher than just before the 1997 Asian financial crisis. It is why prudent economic management in Australia and Taiwan is so important to us at this time. This will continue until the policy excesses of recent decades have been purged and global balance restored. The fitter we are going into any further slowdown or global rebalancing, the more likely we are to emerge with our position enhanced.
Australia and Taiwan are two countries similar in population size who have much complementarity. There may be many eligible partners in the world but not all of them may want to dance with us. Some may be too rich, some may be too poor, while still others may be too big or too small. The cultural background may not always fit. When partners come along who are compatible we should think very carefully before we let them go. Another may be difficult to find. So Australians should explore mutual opportunities with Taiwan and how partnerships may add up to more than the individual parts.
It will take leadership and goodwill all round, but as two relatively small but prosperous countries in a part of the world dominated by giants, it would seem to make sense for both of us to give it a go.