Australia is the envy of the world

Australian Financial Review |

By Barry Dunstan

Parag Khanna is on Esquire magazine’s list of the most influential people of the 21st century and has the breadth of knowledge and self-confidence to call his latest book How to Run the World.

In Australia for investment symposiums for Perennial Investment Partners, Khanna spends?his time charting the major changes in the world as the West struggles and the emerging world rises – and he envies Australia and the other resources-rich Western country, Canada.

“You are the two luckiest countries in the whole wide world,” he says. “If?you want to give me your passport, I’ll take it.”

His message for local smart investors is simple: count your blessings. A carbon tax is a smart idea, he says. We can be an education superpower. We should embrace sensible infrastructure spending.

While he hears concerns from hedge fund managers about what would happen to Australia’s boom and the currency if China falters, he has confidence in China’s economic management.

Khanna, who has degrees from Georgetown University and a PhD from the London School of Economics, directs global governance at the New America Foundation. He also worked as senior geopolitical adviser to the US?Special Operations Command and as a foreign policy adviser for Barack Obama’s election campaign.

He isn’t a desk-bound academic and is constantly travelling – like the best asset managers, he says – to see things for himself. He is dismissive of?a lot of investment research on emerging markets.

Lists of investable emerging countries – including places such as?Egypt, Nigeria and Iran – and predictions about 2040 are silly. “This is what happens when people spend too much time sitting at their desks.”

Meanwhile, unsettled local smart investors should take heart and ignore the naysayers. Khanna says Australia is in a very good position, along with Canada. Now, he says, Canada is discovering China in the way that Australia has done and, like us, is worried about things such as China’s human rights. “That’s a tricky?balance,” he says.

We may just need to get used to the really long-term views which China takes. “You’re never going to have a stunning success with China,” he says. “It’s going to be our lifetime, and the next 20 lifetimes, of protracted negotiations.”

It helps to know China and not overstep or do too much grandstanding. “I actually think Australian diplomacy is quite deft. You read them well.”

Even if Australians may not realise how well placed we are, Khanna says it is important that we have smart policies. He thinks we have done quite well in several areas – like the much-maligned carbon tax.

He says carbon taxes have a track record of spurring innovation and alternative energy. “So it’s important to do it, for economic as well as environmental reasons. It can have a very positive effect on innovation. You’ll obviously have a lot of complaining and grumbling, but [a carbon tax] has secondary benefits people aren’t thinking about.”

On handling the resources boom, Khanna says we should use its benefits wisely. “While you have the boom, spend it well. There is an infrastructure deficit in this country and there are identifiable projects that will create jobs.”

Countries with very small populations like Australia have a lot?of flexibility in economic management, he says. In a boom, it’s a time to say: “What do our people need? What do we need to do to avoid a resources boom and a strong currency hollowing out the economy’s base?”

Khanna says it’s perfectly sensible, say, to insist on Qantas servicing being done here, not overseas. “That’s legitimate [to say] ‘let’s invest in our infrastructure’. You can’t trade that away. It’s OK to do that. It’s important to do that.”

We have several other strong points, such as education, where he calls Australia a superpower. “It was a?very wise investment, going back 10 years, strengthening the tertiary education system and attracting all Asians to English language programs .?.?. it’s a growing share of GDP [and] incredibly smart policy.”

And he would like to see Australia resolve the phobia about budget deficits when it comes to spending money on economically justified investments. This is one of the key drivers of economic growth in emerging, indeed all, economies. He says countries should always spend money on roads – even the “bridges to nowhere” of the 1950s and 1960s.

“That’s one of the great silly, ill-informed myths of emerging market analysis. There is no such thing as a bridge to nowhere in an emerging market. It could be the most corrupt infrastructure project in the world – Latin America is littered with them – but they use all those bridges today. Trust me.”

Now there’s similar talk about bridges to nowhere in China and Dubai. “Nonsense,” Khanna says, “I?wouldn’t undo a single road, highway or building built in Dubai, China or Brazil. They’ll use all of them.”

He says there hasn’t been enough preparation in developed countries for the rise of emerging nations and the rapid outsourcing of jobs and services – except in Germany and Japan, which he describes as the most advanced modern countries, with developed infrastructure and the lowest inequality. “No Japanese person would want to be an American, given its poor infrastructure, high inequality and?no welfare state.”

Other countries have been very?slow to adapt to the rapid changes. Says Khanna: “American administrations have been talking about worker retraining for more than 10 years.

“There’s not one single tangible retraining program in America – can’t afford it, wouldn’t know how to do it, don’t even know what to train people to do.”

In coming years, Khanna says the world will see all sorts of control of capital and trade. “There’s a clever and not-so-clever way to do this.”

He cites Brazil, which has imposed a 2 per cent expatriation tax to avoid hot money inflows.

Everyone said they would get punished. “But demand for emerging markets is so high that everyone is willing to pay that tax to stay in the country. That proves you can do capital controls sensibly.”

Now Europeans are going to do it through softer strategies and a mix of incentives and regulations. “America wants to do it, too,” he says, to do something about the trillions of dollars on corporate balance sheets and because it can’t bridge the spending gap and it needs private investment.

And emerging markets are going to?start spending and taking equity stakes in other emerging markets. That cross-border trade between emerging markets is what is driving growth today. “That’s why Australia is?a great place to be,” Khanna says.

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