Bigger IS richer: Hugh White responds to Stephen Howes

Illustration: Andrew Dyson
Written by Hugh White

Is Indonesia a richer country than Australia?  I think it is because its GDP – in PPP terms – is larger than Australia’s. Stephen Howes disagrees.  His post makes a very good point about how low per capita GDP remains in Indonesia and other booming economies – much lower than in Australia.  But at the risk of seeming to split hairs, I think that tells us that Indonesians as individuals are not richer than Australians.  It does not mean that Indonesia is not richer than Australia as a country.

So which matters more – individual wealth or aggregate national wealth?  Of course it depends on what we are trying to measure.  Per capita GDP is more important when we are measuring individual welfare, and of course that counts.  But national wealth is important when we are interested in the capacity of a country to achieve national goals.  In my line of work – defence – it is important as a measure of the country’s capacity to build armed forces. But is also helps us understand a country’s capacity to fund other national priorities – including, for example, education.

My piece in The Age a couple of weeks ago that prompted Stephen’s reply mentioned the Indonesia school program.  My point was that Indonesia is wealthy enough as a country to build schools for itself, so out funding for schools simply diverts Indonesia’s own spending to another, presumably lower, priority.

More deeply, I think the point about relative levels of national wealth is important in the way Australia sees itself in relation to our neighbours.  I think most Australians still see Australia as a rich country surrounded by poor countries – and as a strong country surrounded by weak countries.  It has always been that way.  Now that is changing.  The shift in relative economic weight and therefore national power away from us and towards our neighbours is a major change in our national situation which we are reluctant to face.

Just as Americans seem to be reluctant to address the implications of the shift in relative power to China, we are reluctant to address the implications of the shift in relative power from us to Indonesia.  Of course Indonesians will be poorer than Australians for a long time to come, but Indonesia will be richer, and on some critical measures more powerful, than we are.

That is not to say that Indonesia becomes threatening, but it is to say that we have to start taking it a lot more seriously.  We need to stop seeing it as a country notable mostly for its poverty, and stop seeing our relationship to it primarily as that of a rich donor helping a poor neighbour – as an object of our charity.  We need to start seeing it as a country notable for its strength, and relate to it as an important partner in regional affairs.

Hugh White is Professor of Strategic Studies and Head of the Strategic and Defence Studies Centre at ANU, and a Visiting Fellow at the Lowy Institute for International Policy.

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Hugh White

Hugh White is Professor of Strategic Studies and Head of the Strategic and Defence Studies Centre at ANU, and a Visiting Fellow at the Lowy Institute for International Policy.

2 Comments

  • Hi Hugh,

    Thank you for thought-provoking comment, one aspect of which is in need of a response. You write that:

    “So which matters more – individual wealth or aggregate national wealth? Of course it depends on what we are trying to measure. Per capita GDP is more important when we are measuring individual welfare, and of course that counts. But national wealth is important when we are interested in the capacity of a country to achieve national goals. In my line of work – defence – it is important as a measure of the country’s capacity to build armed forces. But is also helps us understand a country’s capacity to fund other national priorities – including, for example, education.

    My piece in The Age a couple of weeks ago that prompted Stephen’s reply mentioned the Indonesia school program. My point was that Indonesia is wealthy enough as a country to build schools for itself, so out funding for schools simply diverts Indonesia’s own spending to another, presumably lower, priority.”

    GDP may be more relevant in assessing defence capabilities, when what matters is the absolute size of one’s army vis a vis one’s opponent’s army, but in education surely what matters most is GDP/Capita, which reflects a country’s wealth with respect to the actual size of the task confronting it. Indonesia may have quite a lot of money available to spend on education but it also has many, many more students than Australia, which makes its task harder.

    Also, in this comment, and in previous comments you make bold claims about aid fungibility — i.e. “so out funding for schools simply diverts Indonesia’s own spending to another, presumably lower, priority” — yet the certainty of your claims here is not in line with the actual empirical evidence on the matter, which is ambiguous. Fungibility is a theoretical possibility but, on the ground, the available evidence suggests that it is not a practical inevitability.

    Finally, you fall into the trap of talking about a state, in this case Indonesia, as if it were a homogeneous unit, as opposed to an amalgam of competing groups whose success or not in accessing resources is a reflection of their relative power. Elites in Indonesia may prioritise military spending but I rather suspect the poor place much higher value in education, and benefit from it a lot more. Yet the poor are also relatively disempowered, and so are unlikely to be able to shift spending priorities with related to domestic revenue. Should we really punish them for this by ceasing to fund their schooling? I’d suggest that instead there is a perfectly legitimate role for aid here: targeting funding to enhancing their welfare.

    cheers

    Terence

  • Hugh states that Australia’s “funding for schools simply diverts Indonesia’s own spending to another, presumably lower, priority.” I think this merits reconsideration, as while aid often does displace public spending, this is not always and not necessarily in a bad way.

    A classic example of this is the Rockefeller Foundation’s investments in agricultural productivity in Asia. As this article in the WSJ (http://online.wsj.com/article/SB118556810848880619.html) states, “The Green Revolution’s benefits reverberated well beyond food, allowing developing nations like India to set aside fears of famine and focus more on building modern economies by investing in other industries.” It’s not inconcievable that AusAID’s school-building efforts enable the Indonesian government to refocus its public expenditure in a similarly productive way.

    Furthermore, it seems unlikely that a self-interested and relatively functional democratic government like Indonesia’s would stop investing in its voting poor just because AusAID put a few million dollars into Indonesian schools. As Stephen Howes’ post (https://devpolicy.org/bigger-but-poorer-something-to-get-used-to/) points out, more than half of Indonesia’s population is obviously poor. Any government that wants to stay in power will have clear incentives to keep poverty reduction a high priority, whether AusAID is building schools or not.

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