Recent Charts on the Australian Economy

Combining the two ways to measure the size of economies might give us a better indication of economic weight. Australia the 16th largest economy (12th with USD measures, although this will fall with the exchange rate over time; 18th using PPP measures). 

Is the current account deficit about to worsen? Will it return as an issue for public policy - as it was in the 1980s and early 1990s - over the next few years. 

Commodity prices continue to decline 

The precipitous fall in iron ore prices ... 

Australia's largest export ... 

Employment outcomes fairly solid in Australia 

But predominantly pushed by public dominated sectors

Investment down ... 

Offshore funding growing again ... 

Middleweight to Heavyweight? The Growing Importance of Asia in the World Economy

Asia's rise has been Australia's economic gain. The rise of Japan, followed by South Korea and Taiwan, Singapore, Malaysia, Thailand and other non-communist countries of Southeast Asia had provided significant export markets for Australian commodities, though not a sustained structural increase in their value. Then along came China, changing everything. Not only did rapid Chinese demand increase the prices Australia received for its exports, but also Chinese manufacturing production helped to decrease the price of Australian imports. Manufactured goods made (or assembled) in China became significantly cheaper. Chinese competitive pressures also helped to keep in check the prices manufacturers throughout the world could charge for their goods.

Currently there are several narratives about Australia’s economic future. The first is an acceptance of Australia’s role as a resource exporter built on the back of long-term Asian demand and a high exchange rate. Alongside this story is one about a growing Asian middle class, which will be increasingly receptive to utilising Australian services. This view means that there will be an alternative market for Australian exports after the Asian giants become less resource intensive economies as they progress up the income ladder.

All of these positive narratives are based on a projection that Asia's remarkable rise over the past half century will continue over the next half. The possibility that Asia may not continue its rapid economic rise is largely dismissed as a narrative, although the likelihood that Asia will become conflict-ridden is common in international relations, foreign policy and security studies.

To understand where Asia might be headed we need to fathom how far it has come since the end of World War II.

This post shows that if current GDP trends were to continue, even at a moderated pace, Asia will become the world's most important economic region and China the world's largest economy. Emerging market and developing economies have overtaken the advanced economies on a purchasing power parity basis. The major component of this GDP convergence has been the rise of developing Asia, particularly China. Asian GDP (both developed and developing) is now approaching the GDP of the European Union and the United States combined.

Economically, a continuation of present trends would provide amazing opportunities for Australia, although politically it might heighten concerns amongst Australians about the implications of Western and American relative decline.

The Great (Re)convergence

The rise of developing Asia has been a major component of the so-called rise of the rest, which has led to the reversal of the great divergence between the advanced and developing economies that began with the industrial revolution. The great convergence is profoundly reshaping the world economy. Given that the world economy on the eve of the industrial revolution was dominated by Asia - particularly China and India we should perhaps consider the current period as the great reconvergence.

Gregory Clark in A Farewell to Alms outlines the Malthusian world (from the Stone Age to 1800), which he argues exhibited “a counterintuitive logic” where:

anything that raised the death rate schedule –war, disorder, disease, poor sanitary practices, or abandoning breast feeding – increased material living standards. Anything that reduced the death rate schedule – advances in medical technology, better personal hygiene, improved public sanitation, public provision for harvest failures, peace and order – reduced material living standards. 

In other words, vice equalled virtue and virtue equalled vice. Even gradual improvements in technology increased population and therefore did not lead to lasting increases in living standards. Hobbes, Clark contends, was wrong; man was better off in his natural state. 

The Industrial Revolution, whose most remarkable feature is the “all-pervading rise in incomes per person”, changed all that and led to a remarkable divergence between rich and poor countries. The gap between the living standards of the rich and poor countries grew from 3-4:1 before 1800 to 40-50:1 in the late twentieth century.

World Economic History

Source: Clark

The commercial revolution from the late fifteenth century shows that global economic weight is not necessarily an indication of global power. Asia's dominance of the world economy until the early nineteenth century could not stop it from being overrun by European colonial powers from the sixteenth century. Economic dominance was overcome by military superiority. 

Gross economic weight is clearly not everything, but there can be no doubt that economic relativities are changing, which provides the possibility that the West's period of dominance is coming to an end. 

Growth in Asia since the 1960s has been nothing short of remarkable. Economic success, however, was far from universal. Until the late 1980s, authoritarian capitalist states and authoritarian communist states divided Asia. Countries under US tutelage embraced an authoritarian form of capitalism with a strong developmental ethos. The success of capitalist economic development provided a stark contrast to the failures of the socialist centrally planned development model. 

China attempted to collectivise and control economic development from the centre, Vietnam struggled with war and its aftermath, and India fostered autarkic import substitution policies that led to stunted growth. Even before the end of the Cold War, the Communist and insular states realised that shifts in economic direction were vital if they were going to replicate the high growth rates of capitalist Asia. China began its long march to capitalist dynamism in 1978 and Vietnam switched economic direction in the mid-1980s. 

By the early 1990s, Japan appeared to be set to overtake the US economy, but unfortunately the 1990s were a decade of stagnation after the excessive property and stock market boom of the late 1980s. In the late 1990s, the region suffered a severe financial crisis which threatened to derail Asia’s rise, but by the early 2000s it was clear that the crisis was only a temporary set back on Asia’s phenomenal economic rise. 

From the mid-1990s, China became the major economic story in the region because of its sustained high growth rates. China's continuing growth during the economic crisis that began in 2007 cemented Asia's place as the centre of world economic dynamism. Growing regional production networks initially developed by Japan in the 1980s, followed by South Korea, Taiwan, Singapore and Hong Kong and now centred on the Chinese economy have reinforced Asian dynamism. Despite assertions about decoupling, final goods demand from outside the region still matters for Asian growth. 

In recent years, many analysts have argued that India will join China as a major Asian success story. Developing Asia has been joined by other emerging economies to transform the world economy since the 1980s. The countries of Eastern Europe, Brazil and South Africa have led to the great reconvergence. 

Emerging market and developing economies now account for over 50 per cent of the world economy on a PPP basis, surpassing the total weight of the developed economies. This is a remarkable change from 1990 when the emerging market and developing countries accounted for a little over 30 per cent. Since 1990 emerging and developing economies have been on an ever-upward trajectory, with the global crisis beginning in 2007 thus far affecting mainly the United States and Europe.

All Graphs

Gross Domestic Product (Purchasing-Power-Parity)
Share of World Total
Percent

Source: IMF World Economic Outlook (see here for definitions of country groups)

The bulk of the increase in the emerging and developing country share has been accounted for by developing Asian economies, particularly China. 

The Asian economies combined - both developed and developing - are approaching the economic weight of the European Union and United States combined. Given projected relative growth rates Asia should overtake the EU and US in the near future. The EU and the US combined has declined from 55.8 per cent of the total in 1980 to 37.4 per cent in 2013.  

The rising economic weight of Asia has mainly been a result of rapid growth in China, although India and the ASEAN 5 have also contributed. China's increased weight has been at the expense of Japan. (Developed Asia includes Japan, South Korea, Singapore, Taiwan and Hong Kong)

Comparing the top 5 plus the EU we can clearly see the significant changes to relative weights since the early 1990s. These trends have been strengthened since the global crisis. The advanced capitalist countries have lost ground to China and India.

The Future

Ideas about an Asian ascendancy are not new. US President, Theodore Roosevelt, writing in 1903 argued that: “The Atlantic era is now at the height of its development and must soon exhaust the resources at its command. The Pacific era, destined to be the greatest of all, is just at its dawn.” (Yahuda) War and the dilemmas of decolonisation made Roosevelt’s prediction premature, but the post-war world has seen Asia rise to the world’s most dynamic economic region. The general assumption today is that the Asian ascendancy will continue, even if the breakneck speed of growth moderates in coming years. 

In 1994, Paul Krugman compared the growth of the newly industrialising countries of Asia to Soviet growth in the 1950s and 1960s, a period when it appeared that the Soviets were on the brink of challenging the United States economically as well as militarily. He argued that ‘perspiration not inspiration’ had been the major factor. He saw Japan, however, as different: 

Japan, unlike the East Asian “tigers”, seems to have grown both through high rates of input growth and through high rates of efficiency growth. Today’s fast-growth economies are nowhere near converging on US efficiency levels, but Japan is staging an unmistakable technological catch-up. 

Krugman argued that while Japan was experiencing an unmistakable ‘growth slowdown’, he underestimated the extent to which Japan would stagnate over the rest of the 1990s and early 2000s. If Japan had continued to grow at the rates achieved over the period, 1963–73, he predicted it would have overtaken ‘the United States in real per capita income by 1985, and total Japanese output would have exceeded that of the United States by 1998!’. Krugman also noted the differences of the Chinese growth story to that of the Asian tigers. Significantly, he pointed out that, ‘its population is so huge that it will become a major economic power if it achieves even a fraction of Western productivity levels’. By the early 1990s, it was clear that China’s shift in direction was leading to rapid and sustained economic growth. 

The Japanese story should at least alert us to the dangers of the belief that the recent past and the present provide clear guides to the future. While the Asian challenge to Western dominance will probably be the issue of the twenty-first century, we should be wary of substituting a possible future for the present. Asia still has a long way to go and many hurdles to negotiate before its global economic influence matches its growing economic weight. 

The contemporary structure of the world 'political' economy has been shaped by the advanced economies, particularly the United States. This liberal economic order has 'allowed' the rise of developing countries, who are now demanding a larger say in global economic institutions such as the World Trade Organisation. 

But domestic political developments could be just as important. Over the next generation, how the advanced countries deal with challenges to their economic supremacy and counter the negative domestic consequences of globalisation will shape the future trajectory of the world political economy. 

Protectionist responses to relative decline and growing inequality in developed economies would be damaging in an integrated and thus interdependent world economy.Global and regional production structures would exacerbate the impact of protectionist responses, although their existence could also make any shifts toward protectionism more costly and therefore less likely. Whatever the case, the ability of the developed world to influence structure remains paramount. An ironic, if unlikely, turn away from globalisation in the advanced economies would negatively affect export-oriented economies disproportionately.  

Asia's ability to avoid conflict.will also be paramount for a continuation of current trends. Asia’s current situation is unprecedented. Three major powers – China, Japan and India, together with the United States – will shape the future of the region. Australia has alliances with two of the powers, is an important contributor to China's economic rise and has much to offer India as well. Australia stands to benefit greatly from continued economic expansion in Asia and to lose enormously if economic crisis, political instability or environmental catastrophe override economic development. 

Australia has a role to play in helping to establish the regional institutions and diplomatic environment for peaceful relationships. Bilateral relationships will also be very important. But much of the action will take place regardless of our wishes. Australia needs to prepare for the possibility of conflict and economic downturn, while working and hoping for the best. If peaceful development continues, Australia will be fortunate to be geographically adjacent to the world’s most dynamic economic region. Australia’s prosperity is now dependent on continuing Asian economic growth. What happens in Europe and North America still matters for Australia, but nothing matters to us more than Asia. 

Notes

IMF definitions 

Advanced economies
Composed of 35 countries: Australia, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Iceland, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malta, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Slovak Republic, Slovenia, Spain, Sweden, Switzerland, Taiwan Province of China, United Kingdom, and United States.

Major advanced economies (G7)
Composed of 7 countries: Canada, France, Germany, Italy, Japan, United Kingdom, and United States.

Other advanced economies (Advanced economies excluding G7 and euro area)
Composed of 14 countries: Australia, Czech Republic, Denmark, Hong Kong SAR, Iceland, Israel, Korea, New Zealand, Norway, San Marino, Singapore, Sweden, Switzerland, and Taiwan Province of China.

European Union
Composed of 27 countries: Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden, Romania, and United Kingdom.

Emerging market and developing economies
Composed of 153 countries: Afghanistan, Albania, Algeria, Angola, Antigua and Barbuda, Argentina, Armenia, Azerbaijan, The Bahamas, Bahrain, Bangladesh, Barbados, Belarus, Belize, Benin, Bhutan, Bolivia, Bosnia and Herzegovina, Botswana, Brazil, Brunei Darussalam, Bulgaria, Burkina Faso, Burundi, Cambodia, Cameroon, Cape Verde, Central African Republic, Chad, Chile, China, Colombia, Comoros, Democratic Republic of the Congo, Republic of Congo, Costa Rica, Côte d'Ivoire, Croatia, Djibouti, Dominica, Dominican Republic, Ecuador, Egypt, El Salvador, Equatorial Guinea, Eritrea, Ethiopia, Fiji, Gabon, The Gambia, Georgia, Ghana, Grenada, Guatemala, Guinea, Guinea-Bissau, Guyana, Haiti, Honduras, Hungary, India, Indonesia, Iran, Iraq, Jamaica, Jordan, Kazakhstan, Kenya, Kiribati, Kosovo, Kuwait, Kyrgyz Republic, Lao P.D.R., Latvia, Lebanon, Lesotho, Liberia, Libya, Lithuania, FYR Macedonia, Madagascar, Malawi, Malaysia, Maldives, Mali, Marshall Islands, Mauritania, Mauritius, Mexico, Micronesia, Moldova, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Nicaragua, Niger, Nigeria, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Qatar, Romania, Russia, Rwanda, Samoa, São Tomé and Príncipe, Saudi Arabia, Senegal, Serbia, Seychelles, Sierra Leone, Solomon Islands, South Africa, South Sudan, Sri Lanka, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Sudan, Suriname, Swaziland, Syria, Tajikistan, Tanzania, Thailand, Timor-Leste, Togo, Tonga, Trinidad and Tobago, Tunisia, Turkey, Turkmenistan, Tuvalu, Uganda, Ukraine, United Arab Emirates, Uruguay, Uzbekistan, Vanuatu, Venezuela, Vietnam, Yemen, Zambia, and Zimbabwe.

Developing Asia
Composed of 28 countries: Bangladesh, Bhutan, Brunei Darussalam, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao P.D.R., Malaysia, Maldives, Marshall Islands, Micronesia, Mongolia, Myanmar, Nepal, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Tonga, Tuvalu, Vanuatu, and Vietnam.

ASEAN-5
Composed of 5 countries: Indonesia, Malaysia, Philippines, Thailand, and Vietnam.

My definition of Total Asia includes Developing Asia plus Japan, Korea, Taiwan, Hong Kong and Singapore. 

The US-China Economic Relationship in Pictures

This from the US-China Business Council ... Well worth a read to break down a few myths about US-China relations.

Firstly, US exports to China have grown  at a far greater rate than US exports to the rest of the world.

 The next biggest growth market is Brazil, which has grown at 180% compared to 542%.

Not surprisingly Canada is a far more important export market for the US, followed by Mexico. See geography does still matter, despite the guff written about the "end of geography" in the 1980s. 

To prove its point about the continuing domination of the US economy, the authors use the USD exchange rate measure of economic weight. As I argue in How Big, How Rich and How Developed? The State of Play in the World Economy:

How we measure economies matters. To get a clearer picture of the world economy we need to look not only at size, but wealth, development and distribution. But even when measuring the size and wealth of economies, the method of measurement we choose will have a big impact on the outcome. ...

There are two ways to measure the size of economies. Firstly, we can convert the value of a country's gross domestic product (GDP) into US dollars and compare it to the GDP of other countries whose currencies have been converted into US Dollars also.  ... When exchange rates do vary considerably over time, such as the dollar–yen exchange rate after the 1970s, this method may cause distorted measures of size. ...

Such discrepancies have led to the increased use of an alternative method of measuring the size of economies based on the concept of purchasing power parity (PPP). Statisticians measure purchasing power within individual economies and then make comparisons on that basis. PPP measures GDP adjusted to reflect different costs of living and production within different economies. As most travellers know, goods and services and production costs are considerably lower in some countries than they are in others.

One should be very cautious about this projection, which seems to animate Australian policy-makers as well. It could turn out to be true, but before 2020 China is likely to suffer a big slowdown in growth, which might make these "middle class" growth projections come unstuck.

This is the one that would surprise most people. Although value-added measured via purchasing power parity would show a significantly different result I would think. Other analysts argue that the Chinese manufacturing sector surpassed the US manufacturing sector in terms of value-added late last decade. Remember too that value-added is just one way to measure the size of the sector (although it is perhaps the most important measure). China does a good deal of assembling still, but as wages increase these assembling operations will increasingly shift to elsewhere in Asia and perhaps Latin America.

Given the still very large US manufacturing sector it is not surprising that US companies' manufacturing assets are located mainly in the US itself.

 

Chinese foreign direct investment (non-bond investment) in the US has grown rapidly in recent years, but to put the level of Chinese FDI in the US into context, it is roughly the same as Chinese FDI in Australia.

As The Heritage Foundation reports: "The leading recipients of Chinese non-bond investment since 2005 have been Australia and the U.S. Other major recipients are Canada, Brazil, Britain, and Indonesia. In 2012 alone, Canada topped the list, thanks to the Chinese CNOOC's $15.1 billion acquisition of Nexen, the largest outbound investment to date. The U.S. was second: After a weak 2011, Chinese investment here shattered the old annual record with over $14 billion spent (including a $4.2 billion acquisition late in the year). North America drew a full 40 percent of Chinese non-bond investment in 2012."




Perhaps the most controversial and widely misunderstood aspect of the US-China economic relationship is the issue of Chinese purchases of US Treasury securities, with many commentators arguing that it represents a Chinese advantage over the US.  As Hillary Clinton said: "How do you deal toughly with your banker?"  Fortunately for the US, this 'problem' is overblown. Indeed, reduced Chinese purchases of US Treasury securities would be good, rather than bad, for the US. As the graphic makes clear most Treasuries are held by Americans anyway. For an explanation of China's Reserves see here and here. 

Twelfth or Eighteenth? Measuring Australia's Economic Weight

No one could accuse Australia's politicians and economic bureaucrats of being shy or inscrutable when it comes to analysing the Australian economy. Treasury and the Reserve Bank provide regular commentary on the current state and future prospects of the Australian economy and make a wealth of statistical information freely available.

Some commentators argue that Treasury and the Reserve Bank of Australia are too optimistic about Australia's economic prospects, but having read most of the commentary that has been produced in recent years by economic policy-makers I think that there is a certain amount of hedging going on. The RBA Governor says that "Australia's glass is at least half full".

At the most basic level, policy-makers are optimistic because they believe that current shift of economic weight to China and emerging economies generally will continue indefinitely into the future. In other words, the belief is that future performance will be consistent with past performance.

Members of the Gillard government, as you would expect, are also regular contributors to economic debate hoping that advertising the success of the Australian economy will reverse the government's poor showing in opinion polls.

Treasurer Wayne Swan recently noted that Australia was now the world's twelfth largest economy and that during Labor's period of office it had moved up 3 places, whilst during the Howard government's tenure it lost 3 places.

In the past five years Australia’s economy has surpassed the economies of South Korea, Mexico and now Spain. Our economy has grown around 11 per cent since the end of 2007 while the US has grown only around 1¾ per cent and many European countries are still substantially smaller due to the massive recessions they have suffered. Inhabiting a place among the top dozen largest economies on the planet is particularly impressive when you consider that we have only the 51st biggest population.

This is a truly impressive performance, but one of the reasons we've improved our ranking is because of the appreciation of the Australian dollar against the US dollar. In 2007, the Australian dollar averaged 83.89 US cents compared to an average of 103.43 cents in 2012 up to the 12th October.

If economies are measured on a USD exchange basis, then if a country's currency appreciates against the USD then the economy 'increases' in size as well. 

If the Australian dollar were to fall substantially over coming years, other things being equal, the 'size' of our economy would also decrease.

This US dollar exchange measurement, therefore, is clearly only a partial way to measure the real size of economies, let alone wealth or development.

Swan bases his projections on the IMF's World Economic Outlook Database, the latest of which has just been released. The figures for 2012 are estimates, obviously, and the IMF provides further estimates out to 2017.

An alternative way of measuring the size of economies is by purchasing power parity (PPP). According to Vogel:

A purchasing power parity (PPP) is a price index very similar in content and estimation to the consumer price index, or CPI. Whereas the CPI shows price changes over time, a PPP provides a measure of price level differences across countries. A PPP could also be thought of as an alternative currency exchange rate, but based on actual prices.

A PPP index provides a way to convert national accounts to a common currency - called Geary-Khamis or international dollars - based on purchasing power. GDP is adjusted to reflect different costs of living and production within different economies. As most travellers and international investors know, goods and services and production costs are considerably lower in some countries than they are in others. The most widely known index is The Economist's Big Mac Index and there is an iPod Index as well. Both are gross oversimplifications of PPP.  

If we consider the top 20 countries on PPP and USD terms we get vastly different results.

The IMF calculates the GDP share of the total for every economy on a PPP basis, but the USD figures have to be constructed. For both tables I have ranked countries on the basis of their 2012 'results'.

China is half the size of the United States on a USD basis compared to a little over three-quarters on a PPP basis. Measured by PPP, China is estimated to overtake the United States by 2017, but on a USD exchange basis it would still remain substantially smaller (21.3 per cent of the total for the US and 14.3 per cent of the total for China in 2017).

The IMF only makes estimates out to 2017, but the general impression is that China is inevitably destined to overtake and then leave the United States in its wake.

According to the latest PPP estimates for 2012, India has passed Japan as the world's third largest economy, although in terms of the USD measurement its economy remains less than half the size of the Japanese economy and only 10th overall only 2 places above Australia (2.7 per cent compared to 2.2 per cent of the total).

In 2017 (PPP), India is projected to leave Japan behind, although it will still only be a third of the economic weight of China. Australia falls slightly to 1.1 per cent of the total.

In 2017(USD), India will be 6th, just behind Brazil. Australia will move to 13th one place behind Indonesia.

Since 1990, Japan has fallen rapidly down the league table of economies as more than 20 years of slow growth and recession have taken their toll. The World Bank online databases only go back to 1999 and projections were only made at this time for one additional year, but we can be reasonably sure that projections based on past performance would have had Japan challenging the United States for supremacy in the 1990s based on 1980s performance.

Paul Krugman, writing in 1994, noted that: “at the growth rate of 1963-73, Japan would overtake the United States in real per capita income by 1985, and total Japanese output would exceed that of the United States by 1998!”.

While China and Japan have profoundly different political economies, assertions about inevitability and irreversibility seem to have a horrible habit of coming unstuck.

Australia is twelfth, as Swan suggests, in terms of the USD measurement, but 18th on PPP terms, just behind Iran. With the recent collapse of the Iranian currency, it is unlikely that Iran will score so well on a USD basis in coming measures.

Recently, Secretary to the Treasury Martin Parkinson argued that Australia now has a smaller economy than Indonesia's, but this is only true if measured via PPP. In terms of USD it still has a smaller economy than Australia's (2.2 per cent of the total compared to Indonesia's 1.3.

Based on current projections Indonesia will have a slighter larger economy than Australia's in terms of US dollar exchange in 2017. Of course this might well change if the Australian dollar falls relative to the US dollar in coming years, as it probably will. This relativity will depend as well on what the Indonesia rupiah does against the US dollar in the next few years.

Over time, of course, PPP indexes must also be recalculated and these undertaken by the International Comparison Program of the World Bank. As economies develop, the costs of living and production increase, making even PPP comparisons problematic at best and inaccurate at worst.

It suits Wayne Swan to use the USD exchange measurement - twelfth sounds much better than eighteenth - and it suits Parkinson to use PPP to make his points that emerging economies are now a much more important part of the global economy, and that Indonesia might leave us behind if we don't improve our productivity and tax system.

What this all means is that measures of economic weight should be taken as indicative rather than absolute and that future projections should carry the same warning as investment products that "past performance is no guarantee of future results".

Economic 'progress' is another thing entirely and we need to consider measures such as GDP per capita, human development and environmental sustainability to get a more accurate picture of the state of play.

For GDP per capita, the distinction between the two methodologies is significant with Australia ranking 6th on a USD exchange basis and 15th on a PPP basis in 2011.

On the Human Development Index, which includes a range of including life expectancy, literacy, education and GDP per capita, Australia ranks second behind Norway. In the 2011 HDI rankings, China came 101st, Indonesia 124th and India 134th.

Improvements in productivity - the efficiency of labour and capital - and an egalitarian distribution of the fruits of that productivity are what matters for the long-term. Getting our policy-makers and the wider population to realise that the two are not contradictory is the short-term challenge.