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Address to the Law Society of Western Australia - The rise of Asia's consumer class: opportunities for Australia



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Address to the Law Society of Western Australia - The rise of Asia’s consumer class: opportunities for Australia

Tuesday, 15 May 2012

E&OE…

[Opening remarks omitted]

Tonight I will talk about the rise of Asia’s consumer class because I believe the growth of Asia’s middle class is going to be a defining characteristic of the 21st century.

As we all know, the region is in the middle of a historic transformation. Global power that has been held by Europe and North America for the past couple of hundred years is rapidly shifting from West to East and it is going to change the dynamics of international system as we have known it.

Asia’s re-emergence is being propelled by its huge demographic advantage - a large, youthful populations driving a low-cost, export-led model of development.

According to the Asian Development Bank’s Asia 2050 Report, if Asia:

“continues to follow its recent trajectory, by 2050 its per capita income could rise sixfold in purchasing

power parity (PPP) terms to reach Europe’s levels today. It would make some 3 billion additional

Asians affluent by current standards. By nearly doubling its share of global gross

domestic product (GDP) to 52 per cent by 2050, Asia would regain the dominant

economic position it held some 300 years ago, before the industrial revolution”.

The total number of middle class consumers in Asia is expected to grow by more than 1.2 billion

people by 2020 - that is an additional 1.2 billion.

According to our own Treasury forecasts this “would mean that by the end of this decade

Asia would have more middle class consumers than the rest of the world combined,

with China surpassing the United States as the world's single largest middle class

market in dollar terms" in the world.

China's middle class is already estimated at around 160 million people but this figure only represents

12 per cent of its current population.

And if India follows a similar path to China, two-thirds or approximately 3.2 billion of the world’s middle

class could be located in the Asia Pacific region by 2030.

According to World Bank, India’s “young demographics will result in nearly 20 million more

people joining the labour force, every year, for the next two decades”.

The OECD also claim that "India could witness a dramatic expansion of its middle class,

from 5-10% of its population today to 90% in 30 years. With a population of 1.6

billion forecast for 2039, India could add well over 1 billion people to its middle class

ranks by 2039".

Closer to home, Indonesia’s gross domestic product is now greater than Australia’s based on

purchasing-power-parity, that is according to the IMF, and one estimate suggests, “Indonesia’s

middle class has grown from 1.6 million in 2004 to approximately 50 million today,

and this number is estimated to reach 150 million by 2014”.

Citigroup analysts also believe that Indonesia will be the fourth-largest economy in the world by 2040,

accounting for 5 per cent, about 4.8 per cent, of global output.

One way of testing some of these theories is to look at the sharp rise in the purchase of consumer

and luxury goods.

I visited Indonesia two weeks ago and I was reminded, as we found our way through the traffic in

Jakarta, in peak hour, that in 2010 for example, 850,000 new cars and 8 million new motorcycles

were sold in the country. And believe me it seemed as if every single one of them was on that road

that day!

Almost as many two-wheel scooters were sold in Indonesia last year, a country with 245 million

people, as in India with its population nearing 1.2 billion.

So what does this mean for Australia?

The re-emergence of Asia as an economic powerhouse does mean significant economic benefits to

Australia.

We need to play to our strengths as a nation. Already we are reaping the benefits of Asia’s demand

for our energy commodities and of our 10 top trading partners eight are in the Asia Pacific.

As well as the mining and resource exports we also need to strengthen our manufacturing base and I

believe that high value niche manufacturing, high-quality manufactured goods will be in demand.

Our Treasury has also identified food and services such as health, education, finance and tourism, as

opportunities for Australian businesses to increase in Asia’s consumer market.

We all know that due to incredible demand for our commodities - iron ore and coal - China is our

largest export destination, but what you may not be aware that in 2010 China overtook the United

Kingdom to become Australia’s most valuable tourism market. Its contribution to the Australian

economy was over $3 billion and that was up almost 20 per cent on the previous year.

The ‘total inbound economic value’ of the Chinese tourism market has increased by 17 per cent on

average since 2001, each year on average. Arrivals from China are now three-times their 2001 level.

Likewise, the importance of the Indian market to the Australian tourism sector is similarly significant

contributing $800 million to the Australian economy last year. India is expected to climb from

Australia’s ninth most valuable market, to our fifth most valuable market by the end of the decade.

Of particular interest I hope to the gathering here this evening is the potential in the area of legal

services - and of course Australia brims with quality law firms, with talented lawyers.

The growth of Asia’s consumer class offers benefits for Australian law firms seeking to expand

operations in the region.

The importance of the Asian market for the world’s leading law firms has increased dramatically in

recent years, and part of that has to do with developed economies in Europe and North America

struggling to rebound after the financial crisis of 2008.

I also visited Singapore recently, on the way back from Indonesia, and there is no doubt about it,

Singapore has led the way in capitalising on the immense potential for growth in this area of legal

services.

Singapore is presenting itself as a leading hub for legal services in Asia, certainly challenging the

previous dominance of Hong Kong. Singapore is claiming to have a business-friendly policy and

regulatory framework, and there is no doubt that coupled with its strategic location, it is an ideal

location for firms looking to establish a footprint in South and Southeast Asia.

To date Singapore has successfully positioned itself as an international arbitration centre for the

region, particularly for India, Vietnam and Indonesia.

It also has an expanding presence in the energy and mineral resource sector, and companies such as

Shell, BP and Chevron are basing their regional headquarters in Singapore.

It is in Singapore that large amounts of capital are being raised to fund the mega energy and resource

projects in the region.

The importance of Singapore to Western Australia’s economy was highlighted during Premier Colin

Barnett’s recent visit to open a WA trade and investment office in Singapore.

Singapore is already a substantial source of foreign investment in WA, in areas such as real estate,

hospitality and telecommunications, and is increasingly playing a role in the resources sector.

In 2011, trade between WA and Singapore was worth about $7.5 billion.

There have been a number of significant reforms in Singapore to make its attractiveness as a regional

legal hub more assured.

Last Friday week ago I was honoured to have dinner Singapore’s Minister for Foreign Affairs and

Minister for Law, Mr Shanmugam. He has announced that a second round of licences would be

awarded to foreign firms allowing them to practise local law in the country.

We had a pretty interesting conversation about the standing of different law firms. He, in a former life

before politics, was a senior partner and head of litigation & dispute resolution at Allen & Gledhill

which is Singapore’s largest law firm, by the number of attorneys.

He left there to take up a position within Prime Minister Lee’s Cabinet and the media in Singapore are

full of stories of what a pay cut he had to take in order to be a Minister in the Prime Minister’s Cabinet.

They are suggesting he took a 90 per cent pay cut and as the Cabinet Ministers are paid in the

millions, he must have been doing pretty well in a Singaporean law firm!

During his legal career, he was described as one of the ‘twin titans’ of litigation and ‘one of the finest

all-round legal talents in the country’. He was also one of the youngest lawyers to be appointed to the

role of senior counsel of the Supreme Court of Singapore at the age of 38.

So during a fascinating dinner, he confirmed that the six firms who currently have licences - Clifford

Chance, Herbert Smith, Allen & Overy, Norton Rose, White & Case, and Latham & Watkins - they

have all established a significant presence in the country.

A number of law firms are making a case to be admitted in the second round of licences and I know

Freehills, DLA Piper, Eversheds, K&L Gates and Linklaters are all expected to apply. There could be

others, I don’t know.

But this step follows earlier legislation that was put in place with overseas firms able to acquire a

stake of up to 33 per cent in local practices and share profits with Singapore partners.

This comes at a time of significant movement in the legal landscape.

Merger talks between Allen & Overy and Allen & Gledhill came amidst reports that Freshfields

Bruckhaus Deringer were preparing to relaunch operations in Singapore, having taken the decision

five years ago to concentrate on China and Japan.

Now what this means for the Australian Government? There is a key role for the Government to play

and this is to continue to negotiate and finalise bilateral free trade agreements.

When we were in Government, the Coalition under the Howard and Costello Government, we had a

pretty strong record of negotiating free trade agreements.

In fact we concluded a number of bilaterial free trade agreements in that time, including with

Singapore, the United States - which was a big one - and Thailand.

The current strength of Australia’s trading relationship with Singapore can be traced back to

Singapore-Australia Free Trade Agreement that was signed by the former Howard Government in

2003.

This is a pretty comprehensive agreement that provides tariff-free access - given that Singapore is a

very open economy anyway, you could aks why do we need a free trade agreement with Singapore -

but it did provide tariff-free access for goods, greater market access for services, and improved

cooperation in areas such as competition policy, education and intellectual property standards.

The benefits of this free trade agreement are significant. Prime Minister Lee recently credited the

Howard-era agreement with growing bilateral economic ties.

According to the joint communiqué released after the sixth Singapore-Australia Joint Ministerial

Committee, both governments noted that the agreement “had helped anchor Australia’s

interests in the region, and catalysed further economic integration between Australia

and ASEAN”.

Trade in services has also performed better since implementation of the agreement, and Australian

exports to Singapore are outpacing those to the rest of the world.

A key outcome of the agreement was of course the easing of conditions on the establishment of joint

ventures involving Australian law firms.

The number of Australian law degrees recognized in Singapore also has also doubled from four to

eight.

There are currently six free trade agreements between Australia and other countries - New Zealand

and four signed under the Howard Government. One has been signed under the current Labor

Government, that was the ASEAN Australia New Zealand free trade agreement - there are nine

underway but I have to say most of them were commenced under the Howard Government.

There are been very little progress in any of them since that time.

I think it is fair to say the current Minister for Trade hasn’t signed a single free trade agreement under

his watch and he has a person antipathy for bilateral free trade agreements.

He recently went so far as stating that a free trade agreement with China is “overrated”.

I take issue with that and it certainly would be contradicted by a report by the Australia-China

Business Council indicating that in the last financial year the two-way trade was worth around $113

billion.

The fact is, Australia commenced its negotiations on a free trade agreement with China in 2005 and

has held 18 rounds of negotiations since 2005.

It is interesting that negotiations for a New Zealand free trade agreement with China also commenced

in 2005 and they completed their negotiations in 2008, so New Zealand has had a free trade

agreement with China for quite a number of years.

New Zealand-China bilateral trade has grown rapidly. It is now about NZ$13.3 billion. In 2011, New

Zealand exports to China totalled almost $6 billion, and that was equivalent to a 22 per cent increase

over the previous year.

New Zealand and China are on track to meet their goal of doubling two-way trade to NZ$20 billion by

2015.

And they are competing with us because New Zealand has this free trade agreement they are getting

tariff free access to the Chinese market - and in a number of agricultural areas as well.

In particular our rock lobster producers are very unhappy that rock lobster from New Zealand arrives

tariff free where Australian producers have to add about 15 per cent to it.

So if we are going to benefit from the growth in Asia’s middle class, strong leadership for more

bilateral free trade agreements is definitely needed.

The current free trade agreements under negotiations are with Japan, South Korea, China, Malaysia,

India, Indonesia, the Gulf Cooperation Council, PACER Plus (which is the Pacific), and the latest is

the Trans Pacific Partnership - the TPP - which has been championed specifically by Singapore and

the United States.

We believe that as well as completing free trade agreements we need to maximise opportunities for

Australia in the Asia Century.

Central to this are a number of policies that we will be announcing in more detail closer to the

election, but will focus on our deeper engagement with Asia.

For example Tony Abbott announced last Thursday night in his budget-in-reply speech that we are

going to work urgently with the States to ensure that at least 40 per cent of Year 12 students are once

more taking a language other than English, and we are trying to achieve that within a decade.

We believe that if Australian businesses, including our leading law firms, are going to capitalise on the

opportunities arising from Asia’s re-emergence, the ability to speak a second language particularly an

Asian language will be increasingly important.

As Tony put it, if Australians are going to make their way in the world we can’t rely on other people

speaking our language.

I think that it is vital for us to have a body of people in Australia who are able to speak an Asian

language, to understand more of the culture, understand more of the region in which we live.

The study of foreign languages in Australia has been serious decline for some time. I was disturbed to

learn that just 300 non-Chinese heritage students studied Mandarin at Year 12 level in 2009 across

Australia..

Between 2000 and 2008, there was a 21 per cent decline in primary enrolments in Japanese, a 17 per

cent drop in those studying it as a second language in Year 12.

I was Minister for Education under the Howard Government and I recall in about 2007 one of our

universities here was seeking to close its Indonesian school and came to the Government for

approval and I wouldn’t give it them. I urged them to make this work. “You can’t possibly close down

the only Indonesian language school in Western Australia.” I managed to prevail but I regret to say it

has now been closed down; this government gave it approval to close it down.

It seems to me given the importance of our relationship with Asia and the proximity of our shores, that

an investment in young people to speak an Asian language or at least understand Asian languages

and culture would help us prepare for the seismic changes that are underway.

Another key initiative about which I have spoken on a number of occasions is the idea student

exchange.

I have consistently spoken about the need for the Australian Government to support greater two-way

student exchange opportunities between Australia and countries in our region.

Years ago, 1951, the Menzies Government at the time established a scheme, the Colombo Plan, and

the idea was to bring the best and brightest students from our region to Australia and that worked very

well until 1985.

There are generations of young Asian students who studied in Australia under the Colombo Plan. The

Indonesian Vice President Dr Boediono, is a recipient of a Colombo Plan Scholarship at UWA and I

am told that seven of the current Indonesian Cabinet studied at Australian universities.

The Indonesian Foreign Minister and the former Trade Minister both graduated from the Australian

National University.

The students who studied in Australia under the Colombo Plan developed a lasting impressing,

hopefully a good one, and an understanding of Australia and our way of life. It built a legacy of

enduring friendships and understanding between the peoples and countries in our region.

What I think we need to do is now focus on two-way exchange, encourage a body of young people in

Australia to spend some of their tertiary education living and studying in another country. And the

universities in the Asia Pacific are now amongst some of the best in the world - the University of

Tokyo, the University of Hong Kong, Peking University, National University of Singapore.

Some of these universities are absolutely world class and I would like to see a Colombo Plan in

reverse capturing the spirit of Menzies era and the Colombo Plan by ensuring young Australians

spend time living and studying in schools and universities and tertiary institutions in our region.

There is absolutely no doubt that the investment in the Colombo Plan was priceless and we should

again be investing for the future with our students studying overseas.

It is important that we prepare for a future where Australia looks to Asia.

It can be best summed up by saying our geography is our destiny. We must make the most of every

opportunity that it presents to us - in government, business, the private sector, the public sector -

working hand in hand to capture those opportunities.