A new economic history of Australia

It drew little comment, but the centrepiece of Julia Gillard's white paper on the Asian century was her target of raising Australia's standard of living - income per person - from the 13th highest in the world into the top 10 by 2025. Considering the three richest economies on the list are the tiddlers of Qatar, Luxembourg and Singapore, it's clear we're already very rich.

Perhaps the reason this grand objective excited so little interest is that, for us Australians, there's nothing new about being in the materialist winners' circle. As Ian McLean, an economic historian at the University of Adelaide, reminds us in a new book, Why Australia Prospered, we joined that company from about 1820, and between 1860 and 1890 we were the richest country of all.

Few countries have been so successful for so long, he says. Some have achieved comparable levels of income only since World War II (think Japan or Italy). Many Asian countries are making good progress in catching up to these levels, though they still have some distance to travel (even South Korea).

McLean reminds us one country has experienced long-term relative decline after having achieved membership of the rich nations' club in the early 20th century: Argentina. And even New Zealand, which tagged along near us for most of the journey, has been falling further behind since the 1970s.

So, in the first major economic history of Australia for 40 years, McLean sets out to explain why we became rich so soon and how we've managed to stay that way for the most part of 200 years.

The story we have in the back of our minds explains it in a phrase: we're the Lucky Country. The Europeans who settled in this vast land had the good fortune to arrive at a place well suited to farming and teaming with valuable minerals. For more than 200 years we've been living off that great luck.

There's no doubt Australia's longstanding prosperity owes a lot to the exploitation of its bountiful "natural endowment". We became a major world producer and exporter of wool as early as the 1820s, and it stayed our principal export earner until the 1950s, save for the 1850s and 1860s when it was supplanted by gold.

McLean says the gold rush was "no flash in the pan". Gold continued to be important to our prosperity for several decades. And we remain a significant world producer to this day.

At the start of the wool boom in 1820, Australia's European population was just 30,000. By the time gold was discovered in 1851, it was up to 430,000. Thanks to the gold rush, in just 10 years it had reached 1.2 million. Most of those people stayed, and by the start of the serious depression of the 1890s it was 3.2 million.

The story of our lucky natural endowment continued with the discovery of many mineral deposits in the 1960s, right up to the Asia-driven resources boom of the past decade. Still today, primary products account for two-thirds of our export income.

But McLean disputes the notion our unending prosperity can be explained simply in terms of our lucky strikes. For one thing, their study of many countries has led modern economists to the conclusion that possession of some valuable resource deposit is almost always a curse rather than a blessing.

It tends to lead to squabbling over who gets the proceeds, corruption, complacency, underdevelopment and stagnation. By contrast, resource-bereft countries such as Singapore or Taiwan seem to have succeeded precisely because they knew they had nothing going for them beside their own efforts.

Clearly, Australia is an exception to the "resource curse" rule. But then we have our erstwhile southern hemisphere twin, Argentina, as a reminder you do have to play your cards right.

Our long prosperity defies another conventional wisdom: colonies get exploited by their colonising power. McLean finds no evidence of significant exploitation by the British. On the contrary.

Unlike some Asian colonies, our economy had to be built from scratch. Who built the foundations and paid for them? The British taxpayer. We benefited from our convict origins. The Brits were expecting it to cost them, and the 160,000 convicts they sent us were selected for their suitability for hard work.

A big part of the reason we got rich so quickly was that such a high proportion of the population was in the workforce. Then there was the advantage of being part of the British Empire trading bloc and the privileged access it gave us to Britain's market.

Self-government came early and bloodlessly in the 1850s.

But McLean gives much of the credit to the quality of our economic and political "institutions" - legal system, property rights, control of corruption, political arrangements and social norms - most of them inherited from the Brits.

The test of our institutions is their flexibility, their ability to adapt in response to changing circumstances and needs. As evidence of flexibility McLean cites the ending of transportation of convicts, a solution to the monopolisation of grazing land by squatters and the pull-back from using indentured islander labour on sugar plantations.

Much more recently you can point to all the economic reforms we undertook in the 1980s and '90s to open our economy to a globalising world. And to our skilful response to the global financial crisis - just the latest of many economic shocks the world has thrown at us.

Australians don't have tickets on themselves as great managers of our economic fortunes, but a look at the record - and at the performance of comparable countries - says we've had a lot more going for us than just luck.

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What business needs to learn about politics

The way big business sees it, economic reform has ground to a halt because the politicians on both sides have lost the political will to make the tough decisions. But I think big business must share the blame for the stalemate we've reached.


Business leaders have lost confidence in the Gillard government and, having concluded its days are numbered, are uncharacteristically willing to attack it in public. In private, though, most would doubt an Abbott government would be any more willing to grasp the nettle.

Consider the GST. Despite all the good sense Nick Greiner was talking last week about the need to fix it, both sides refuse even to discuss the topic. It was specifically excluded in the terms of reference for Ken Henry's "root and branch" review of the tax system (which didn't stop him proposing a similar tax with a different name).

It's not hard to see what the problem is. Each side is afraid that, if it showed the slightest interest in considering the topic, the other side will use this as a pretext to launch a scare campaign.

Or, consider the mining tax. Although it's not true the tax raised no revenue in its first quarter, it is true it raised less than expected, mainly because of the fall in commodity prices.

But prices have recovered from their lows in the first two months of the quarter. As well, the nature of the quarterly instalment process means collections are likely to pick up in later quarters.

Even so, it is true that the compromise tax Julia Gillard negotiated with the big three mining companies was both badly designed and too generous to the miners.

Why did she give in to them? Because the opposition had sided with the miners in opposing the original tax and, in their efforts to destroy the Rudd government, the big miners would have given the opposition huge funding in the 2010 election campaign.

One reason the miners were so opposed to the original tax was that the government caught them off guard with a strange tax they didn't understand. This would not have happened had Labor released the Henry report for discussion well before it made up its mind about which recommendations to accept, reject or modify.

So, why didn't it? Because it was so afraid the opposition would run a scare campaign claiming that Labor intended to implement all of Henry's most controversial proposals.

Next, consider company tax. For reasons I can't fathom, big business has its heart set on a cut in the company tax rate. Labor promised a cut of 2 percentage points, but the deal with the miners obliged it to reduce the cut to 1 point.

Then the combined opposition to this from the opposition and the Greens allowed Labor to renege completely. Although all previous cuts to the rate have been funded by the removal of concessions, big business can't agree on which concessions it's prepared to give up.

This has allowed Labor to shelve the idea. And I wouldn't hold my breath waiting for an Abbott government to find the revenue needed to fund a cut.

Finally, consider all the reform the Hawke-Keating government undertook during the 1980s and early '90s: deregulating the financial system, floating the dollar, phasing out import protection, deregulating more industries than you can remember and decentralising wage-fixing.

What do these reforms have in common? They went virtually unchallenged by the Liberal opposition of the day, under the dominant influence of John Howard and John Hewson.

Are you starting to see a pattern? All the reforms that aren't getting up (or, in the case of the mining tax, got badly botched) have become party-political footballs. And almost all the reforms we did get were bipartisan policy - with the GST and the carbon tax as the notable exceptions (although in both these cases the lack of bipartisanship led to inferior policy).

The point is, it's not so much unhappy voters governments fear, it's their political opponents seeking to take advantage of the voters' unhappiness.

What many business people don't understand about politics is the power of oppositions to influence what governments do and don't do. It's rare for governments to make controversial reforms when they know their opponents are waiting to pounce.

The bipartisan support for micro-economic reform lasted throughout the Hawke-Keating government's 13 years, but broke down after Paul Keating's defeat in 1996. Since then, both sides have gone for short-term political advantage at the expense of the nation's longer-term interests.

So, the first lesson big business needs to learn is that it's not enough to pressure the government of the day to show "political will". You must also pressure the opposition to resist the temptation to score cheap political points.

That's particularly the case when it's the opportunism of a Liberal opposition that is discouraging a Labor government from doing what it knows it should.

The second lesson is that big business won't get far until it abandons its code of honour among thieves. That is, when one industry goes into battle with the government to resist a new impost or get itself a special concession, all the other industries keep mum, even though they know the first industry is merely on the make.

Big business looked the other way as the three big miners connived with the opposition to destroy the Rudd government. Its reward was to have its precious cut in company tax snatched away.

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States are correcting earlier mismanagement

In most states around Australia, recent years have seen long-standing Labor governments tossed out and replaced by Coalition governments. In all cases, the new governments have immediately embarked on campaigns to cut government spending. Why?

Is it American-style anti-government ideology? Is it uniform Labor mismanagement across the nation? Could it be some changed feature of the national economy, or just the state governments' irrational pre-occupation with preserving or restoring their triple-A credit ratings?

Turns out to be a bit of most of those.

The Commonwealth Grants Commission, which is responsible for deciding how the proceeds of the goods and services tax are divided between the states, has published an information paper on the changes in state budgets over the 10 years to 2010-11 (which you can find on its website).

It found that, taking all the states and territories together, they ran small overall budget deficits (known as the "net borrowing position") in the first two years of the noughties. Then, for the next five years, from 2002-03 to 2006-07, they ran quite large overall budget surpluses ("net lending position"), meaning they could run down their level of government debt.

Great. But then, for the final four years, they switched back into ever-growing overall budget deficits, rising from $4.3 billion in 2007-08 to a mammoth and unsustainable $15.3 billion in 2010-11.

Can you think of some momentous event about that time that might help explain such a marked deterioration in the states' finances? How about the global financial crisis, which began in August 2007 and reached its climax in September 2008 with the collapse of Lehman Brothers investment bank?

But there was another factor, which got going a bit earlier: the states' rapidly increased spending on capital works. How much does this explain?

Before we go any further, note that these figures relate only to the states' "general government" sector. That is, they don't include the activities or the borrowing of government-owned businesses, such as water boards or electricity authorities.

Also, note that state budgets are heavily influenced by the receipt and spending of grants from the federal government. These receipts are the proceeds of the GST, plus "special purpose payments" - which include federal grants for spending on capital works. Much of the Rudd government's fiscal stimulus went on capital works spending by the states.

Total grants from the federal government account for about half the total revenue received by the states. Until 2007-08, the GST accounted for about 60 per cent of all federal money received; since then its share has fallen to half, a sign it's no longer the "growth tax" it was.

So far, however, this decline in the relative importance of GST money has been offset by increased special purpose payments - though whether this will remain true is different matter.

So next the Grants Commission's information paper strips out all federal payments (and the spending of them) so we can see what's been happening to the states' "own-account" revenue-raising and spending.

It turns out the states' own-account "expenses" - that is, their spending for recurrent purposes - have grown quite strongly relative to the growth in their economies, from 7.3 per cent of gross state product in 2005-06 to 8.1 per cent in 2010-11.

At the same time, however, the states' own-account revenue - composed of mainly of state taxes and receipts from public transport fares and public housing rents - has fallen relative to gross state product, from a peak of 7.8 per cent in 2006-07 to 7.4 per cent in 2010-11.

This explains the marked deterioration in the states' own-account "operating balance" from a surplus of $4 billion in 2006-07 to a deficit peaking at $12.1 billion in 2009-10, before falling to $9.7 billion in 2010-11.

All this suggests there was a degree of mismanagement by the mainly Labor governments in power at the time. While their own-account revenue raising was failing to keep pace with their economies, they were allowing their own-account expenses to grow very much faster than their economies.

I don't have a problem with a growing public sector, but I do have a problem with politicians allowing their day-to-day spending to grow rapidly without being willing to increase taxes to cover it. Particularly at the state level, that's not being "progressive", it's being irresponsible.

To be fair, much of the weakness on the revenue side of their budgets wouldn't have been the state premiers' fault. In particular, conveyancing duty - which accounts for 12 per cent of the states' own-account revenue - made a negative contribution to revenue growth after 2005-06.

This was due to the global financial crisis's effect on the housing market. At the same time the state governments were allowing their own-account operating budgets to deteriorate, they were also stepping up their own-account spending on capital works. This increased from a mere $32 million in 2004-05 to $5.6 billion in 2010-11. (If these figures seem low, it just shows how much of state capital works spending is financed by the feds - in the final year, about two-thirds.)

But if you look at it from the last overall budget surplus of $1.2 billion in 2006-07 to the overall deficit of $15.3 billion in 2010-11, the increase in own-account capital spending accounts for just $2.8 billion of the $16.5 billion deterioration.

So the popular impression that the states are in bother with the credit rating agencies simply because of their need to overcome the widely assumed (but rarely demonstrated) infrastructure backlog seems far from true.

The main problem is borrowing to finance recurrent operations - which, unless states are in the depths of recession, can't be defended.

I don't have much time for Standard & Poor's, Moody's and the other rating agencies. Their dereliction of duty contributed greatly to the global financial crisis, for which they've got away with far too little public censure.

Sometimes I suspect they run an especially hard line on government borrowers to distract attention from the way they disgraced themselves with their paying-customer private sector borrowers in the years before the crisis. They're walking proof that an independent opinion on your financial affairs is not something you can buy.

But in this case they're in the clear.

The main reason for all the belt-tightening by state governments is old-fashioned mismanagement.

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Climatic adjustment limits our farmers' Asia boom

The first thing to realise about the rise of Asia is that our farmers are about to join our miners in the winners' circle. The second is that climate change and other environmental problems may greatly limit our farmers' ability to exploit this opportunity. The third is that what we see as a looming bonanza, the rest of the world sees as a global disaster.

According to the government's white paper on the Asian century (which, be warned, shares economists' heroic assumption that there are no physical limits to consumption of the world's natural resources), continuing population growth and rising living standards in Asia will cause global food production to grow 35 per cent by 2025, and 70 per cent by 2050.

Rising affluence is expected to change the nature of Asia's food consumption, with greater demand for higher quality produce and protein-rich foods such as meat and dairy products. This will also increase the requirement for animal feed, such as grains. There'll also be demand for a wider range of processed foods and convenience foods, and for beverages, including wine.

But environmental and other problems will prevent the Asians from producing much of the extra food they'll be demanding. Unlike in the past, Asia is likely to become a major importer of food. And, of course, any delay in increasing food production to meet the increasing demand will raise the prices being charged.

You little beauty. "Australia's diverse climate systems and quality of agricultural practices position us well to service strong demand for high-quality food in Asia," the white paper says. After all, Australia is one of the world's top four exporters of wheat, beef, dairy products, sheep, meat and wool.

"As a result, agriculture's share of the Australian economy is expected to rise over the decade to 2025," we're told, something that hasn't happened for many, many decades.

So, a new age of growth and prosperity for Aussie farmers? Don't be too sure. The environmental constraints the white paper expects to bedevil Asian farmers will also limit our farmers' ability to cash in on Asia's growing affluence.

Also published last week was a determinedly positive but franker assessment of our agricultural prospects, Farming Smarter, Not Harder, from the Centre for Policy Development.

It says "winners of the food boom will be countries with less fossil fuel-intensive agriculture, more reliable production and access to healthy land and soils". That's not a good description of us.

The first question is climate change - the problem so many Australians have been persuaded isn't one. Although other countries - including China - are doing more to combat climate change than the punters have been led to believe, we don't yet know how successful global efforts to limit its extent will be.

What we do know is we're already seeing the adverse effects - hurricane Sandy, for instance - and can expect to see a lot more, even if global co-operation is ultimately successful in drawing a line. At present we're focused on efforts to prevent further change; before long we'll need to focus on how we adapt to the change that's unavoidable.

This non-government report says climate change is projected to hit agricultural production harder in the developing world than the developed world - "with the exception of Australia".

"Rainfall is forecast to increase in the tropics and higher latitudes, and decrease in the semi-arid to arid mid-latitudes, as well as the interior of large continents," the report says. "Droughts and floods are expected to become more severe and frequent. More intense rainfall is expected with longer dry periods between extremely wet seasons. The intensity of tropical cyclones is expected to increase."

So, without action to reduce or manage climate risks, Australia's rural production could decline by 13 per cent to 19 per cent by 2050, it says.

And it's not just climate change. "One of the biggest challenges for Australian agriculture is that our soils are low in nutrients and are particularly vulnerable to degradation ... every year we continue to lose soil faster than it can be replaced."

The productivity of broadacre farming used to grow by 2.2 per cent a year; since the early 1990s it's averaged just 0.4 per cent. Australian farmers use a lot of fertilisers and fuel, the cost of which is also likely to rise strongly. And that's not to mention problems with water.

Meanwhile, those who worry about how the world's poor will feed themselves - or about the political instability we know sharp rises in food prices can cause - don't share our hand-rubbing glee at the prospect of Asia's greatly increased demand for food.

Almost as bad as high food prices are highly volatile prices. The three world price spikes in the past five years each coincided with droughts and floods in major food supply regions. Extreme weather events are likely to become even more frequent. (The growing diversion of grain to produce biofuels is another contributor to higher food prices.)

After the food price spike in 2008, 80 million people were pushed into hunger. But the growing concern with "food security" is often a euphemism for resort to beggar-thy-neighbour policies: countries that could export their food surplus to other, more needy countries decide to hang on to it, just in case.

The Asians' attempts to continue their (perfectly understandable) pursuit of Western standards of living are likely to be a lot more problem-strewn than the authors of the white paper are willing to acknowledge.

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Asia white paper assumes away environment

The most glaring weakness in the Prime Minister' s white paper on the Asian century is its failure to factor in the high likelihood that mounting environmental problems will stop Asia continuing to grow so rapidly as well as limit our ability to take advantage of what growth there is.

To be fair, most of the environmental problems that could trip up Asia s economies and ours do rate a mention in the bowels of the 300-page document.

But it doesn t join the dots. Asia s environmental problems are dismissed merely as among the various challenges to be overcome bumps along the road. As for our own environmental problems, the government s existing policies have them well in hand.

And it would be unfair to single out the Gillard government as unwilling to face up to the seriousness of our problems with the natural environment and start integrating them into its forecasts and projections.

That s just as true of almost all economists and business people. While most economists (and some business people) are prepared to acknowledge particular environmental problems climate change, water, soil, fish stocks, biodiversity they re not prepared to see them as symptoms of a much bigger problem: we may be reaching the physical limits to continued growth in natural resource use.

So, just like the white paper, they continue to put worries about environmental problems in a box marked environment , which they keep separate from the box marked economy , where they do their forecasts and longer-term projections of economic growth.

It s an uncontroversial statement that the global economy the production, consumption and other economic activities of humans exists within, and depends on, the natural environment, the global ecosystem.

And it s obvious to anyone with eyes that certain economic activities are doing damage to the ecosystem, which is already rebounding on the economy in the form of costs and disruption (hurricane Sandy, for instance). It s not hard to believe these costs and disruptions are likely to multiply unless we start organising the economy very differently.

It thus makes all the sense in the world for economists to integrate the environment and the economy when thinking about what the future holds. So why don t they? Because they never have, and find the idea pretty frightening.

Economists standard way of thinking about the economy effectively assumes away the environment. That s because their conventional model which has changed little in the past 100 years is built around the prices charged in markets, whereas most environmental assets clean air, clean water, good soil, reasonably reliable weather can t be bought and sold in markets.

Thus most of the costs and benefits generated by the ecosystem are external to the model and so liable to be overlooked. Schemes such as the carbon tax are attempts to put a price on greenhouse gas emissions and so get them into the price mechanism (and the model).

So you can bolt bits of the environment onto the model, but you have to do it case-by-case, which is hardly satisfactory. As Professor Herman Daly has said, if the survival of your society is external to your model, you probably need a new model .

The funny thing is, if you re still not sure why so many scientists doubt it will be physically possible for Asia to grow as big as economists project, the clues are all there in the white paper. To put things in context, at present the developed world accounts for just 15 per cent of the world s population, but 51 per cent of gross world product.

The 19 per cent of the world s population living in China has a standard of living equivalent to 20 per cent of America s. The white paper expects that to reach 40 per cent in just 13 years.

For India and Indonesia, accounting for a further 21 per cent of the world s population, their standard of living could also double, from 10 per cent to almost 20 per cent. And, of course, living standards in other parts of Asia are also supposed to be rising rapidly, meaning more than half the world s population is applying to join the profligate rich club.

Have you any idea what that would mean in additional use of the world s energy and other natural resources?

The white paper advises that, in the 19 years to 2009, Asia s energy consumption more than doubled and its share of world energy consumption jumped from 25 per cent to 38 per cent. China is now the world s biggest energy consumer.

Having gone from consuming less than half as much energy as the US in 2000, China now consumes slightly more. It accounts for almost half the world s coal consumption. It s the world s largest consumer of steel, aluminium and copper, accounting for about 40 per cent of global consumption for each. It s predicted to be 90 per cent dependent on imported oil by 2050.

In 2009, fossil fuels accounted for about 82 per cent of Asia s energy mix. Asia accounts for about 40 per cent of global greenhouse gas emissions up from 31 per cent in 2001. China recently overtook the US as the world s largest emitter.

The white paper happily assumes effective global action to limit climate change will be forthcoming, so makes no allowance for it in its projections.

It s not the done thing for economists to imagine we could ever run out of natural resources. Prices may rise a bit, but this will merely call forth the solution to the problem, whereupon prices will fall back. And every textbook leaves you thinking this process happens seamlessly.

So, no need to worry. Our faith in unending growth remains unshaken.

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How Asia is catching up with the rich West

Asia's transformation into the world's most dynamic economic region has been a defining development of our time. The pace and scale of its rise have been nothing short of staggering.

That's the story according to Julia Gillard's white paper on the Asian century, and it's right.

"Over the past 20 years, one third of the world's population has re-engaged with the global economy and more are set to do so," the paper says. "Living standards for billions of people in Asia have improved at a rate not previously experienced in human history."

Just between 2000 and 2006, about a million people were lifted out of poverty every week in East Asia alone, we're told.

Japan, South Korea, Singapore and, more recently, China and India doubled their income per person within a decade. Some went on to repeat this achievement two or three times.

By contrast, it took Britain more than 50 years to double its income per person during the Industrial Revolution of the late 18th and early 19th centuries.

Why so long? Because the Industrial Revolution was driven by the invention of new technology and it took a while for new inventions to come along and for their use to spread through the economy.

These days, the economy sitting at this "technological frontier" is the US. In principle, the fastest pace at which America's income per person - its material standard of living - can grow is determined by the pace of what today we call "innovation". And that's not fast - say, 2 per cent a year.

So with the rise of Asia we're seeing a phenomenon economists call "catch-up and convergence". Because all the improved machines and better ways of doing things have already been invented and are sitting on the shelf, so to speak, it's not hard for all the countries well back from the technological frontier to catch up with the leader by employing the new productivity-boosting technology. As they do, their standard of living converges on the leading economy's.

This is what happened in the West in the first 30 years or so after World War II. The economies of Europe (and Japan) grew very strongly and closed most of the gap between their living standards and America's.

Now that process of catch-up - and the global spread of the latest technology - has shifted from the developed countries to the developing countries. Japan was the first, followed by South Korea, Hong Kong, Singapore and Taiwan, with China getting going in the 1980s and India in the 1990s. More will follow.

Of course, transforming your economy from developing to developed can't be as simple as taking new technology off the shelf, otherwise all the poor countries of the world would be growing as fast as Asia is.

So how have the Asians done it? What have they got right that the others haven't?

The various countries' success hasn't followed a simple recipe, the paper says, but some common patterns have emerged in recent decades.

Many economists explain Asia's rise mainly in terms of its switch from the post-war policy of "import replacement" (seeking to grow by protecting your industries from competition with imports) to export-led growth.

If, as part of this, you allow foreign multinational corporations to set up factories in your country, they bring in the capital need to pay for building those factories, as well as access to the latest foreign technology and the knowledge of how to use it, which ends up being transferred to local technicians and managers and spreading to local firms.

But that's not how the white paper tells it. "Nearly all the high-performing Asian economies deliberately set out to support prosperity by investing in people, building capital and undertaking institutional change, including expanding the role of markets," it says.

Asia's young people enjoyed marked improvements in their access to education and its quality as governments invested in their youthful populations and dramatically transformed their education and training systems.

"With the benefits of a good education and employment-creating reforms, large numbers of young people have become productively employed as they reached prime working age."

Open global trading systems (created by the successive rounds of multilateral reductions in protection under the predecessor to the World Trade Organisation, to whose trade-promoting rules China signed up in 2001) and the construction of vital infrastructure to reduce transport costs have been drivers of integration between Asia and the rich economies, but also between the Asian economies themselves.

Intricate regional production networks have emerged, along with increased flows of "intermediate goods" (components) between countries in the region. Specialisation within the region, and the consequent economies of scale, have given the region a powerful advantage, particularly in manufactures.

Here's a point that ought to be obvious to older Australians - since they've been able to observe it over their lifetimes - but too few people understand: Asia's most successful economies have continually evolved.

"As incomes have risen in population-dense economies such as Hong Kong, Japan, South Korea and Taiwan, and as their labour-intensive activities have become less competitive, Asia's high performers have refocused their production on new areas of consumer demand - developing domestic markets and specialising in high-skill activities."

What oldies should have noticed is the way, over the years, the production of simple, labour-intensive goods - such as clothing, footwear and toys - has migrated from one country to another.

Why? Because, contrary to the propaganda of the unions and the Left, Asian workers get their cut from being exploited by wicked "transnational corporations".

As countries' economies grow, workers' real wages rise.

As well, a fair bit of the prosperity is ploughed back into raising the education level of the workforce.

Eventually, the workers' labour gets too expensive to continue using them to produce simple labour-intensive goods, so production of such goods shifts to the next, undeveloped Asian country.

In the first country, production shifts to using the more-skilled workforce to make more sophisticated manufactures. As well, more of the country's production shifts from export to being bought by the now-more-prosperous locals.

The white paper predicts, as this evolutionary process continues, within 13 years - 2025 - China will be the world's biggest economy, India will be third, Japan forth and Indonesia 10th. China will account for a quarter of gross world product and Asia for almost half.

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