Weekly Analysis: Asia in the Global System
Summary:
There were more important things going on than Kosovo last week.
The U.S.-Chinese summit turns our attention to core global
issues, such as the relationship between the United States on one
hand and the two great Eurasian powers, Russia and China, on the
other hand. The prognosis is not good.
Analysis:
As the war in Kosovo lurches on, there remain broader and more
lasting issues to consider than the mysteries of NATO policy
making. More important matters were being dealt with in
Washington as President Clinton met with Chinese Premier Zhu
Rongji. Beyond the question of U.S.-Chinese relations, the
entire issue of Asia's status in the world system was on the
table. To be sure, there was a fundamental connection between
the events in Kosovo and the summit in Washington. The fate of
Kosovo province is, from a broad perspective, quite unimportant.
What is most significant about Kosovo is that it is the occasion
of the first, sharp disagreement between the United States and
Russia since the collapse of the Soviet Union. As U.S.-Russian
relations deteriorate, U.S.-Chinese relations necessarily
improve. Russia and China are in the process of entering into
what they call a "strategic alliance" whose primary purpose, in
our opinion, is to limit the power of the United States globally,
and particularly in Eurasia. Indeed, depending on how far this
relationship goes, we could be seeing the reemergence of the
Eurasian pact that seemed to be in place from 1948 until about
1962. We have spent a great deal of time recently discussing the
evolution of events in Russia, but relatively little discussing
Asia. Zhu's visit is an opportunity to consider the other part
of the Eurasian geopolitical equation and, more importantly, the
role of Asia.
1998 was very much the year of Asia and economics. It was as if
the entire globe was obsessed with one issue: how bad will the
Asian meltdown be and how badly will it affect the rest of the
world? In a sense, the obsession has died down because we have
the answer. The Asian meltdown is extremely serious, but it is
more serious for some countries than others. From a global
perspective, it has been a depressant, but not a terrible
depressant. Neither Europe nor the United States has been dragged
into recession by the decline in Asia and it appears that if
recession is in the cards for either, the causes will be cyclical
and internal, rather than of Asian origin. In other words, Asia
turned out to be much more important to Asia than to the global
economy. No doubt many sectors in the United States and Europe
were badly hurt by the Asian depression, but there is no escaping
the fact that, taken as a whole, the broad claims of global
interdependence did not bear up to empirical or historical
scrutiny.
This logically reduces the importance of Asia to the world, at
least on the economic level. We have seen Asia collapse in
extreme and unexpected ways, and the consequences to the rest of
the world were simply not that important, when taken as a whole.
With that information integrated into the global knowledge base,
it was inevitable that Asia, understood in primarily economic
terms, would be relegated to a secondary role. Whether Asia
recovers and to what extent, is an important issue, but not an
earth shaking one. The earth will do quite well under any
circumstances.
Now, there is no question but that Asia has bottomed out for the
short-term. What is less clear is whether the bottoming is merely
the beginning of a cyclical upturn in a general downtrend or
whether it represents a historical bottom from which new heights
will be reached. In our view it is likely the former rather than
the latter. Japan, far more than China, remains the engine
driving the Asian economy. Japan has not made serious strides to
solve its problems. Indeed, it has been moving in the opposite
direction by reducing Bank of Japan rates to absurdly low levels
in a desperate attempt to stabilize the banking system. As a
consequence of this strategy, Japan deals with a short-term
problem at the expense of exacerbating the long-term problem.
Japan's fundamental problem remains extraordinary economic
inefficiency as reflected in unsupportable rates of return on
capital. The inefficiency of Japan's economy means both that its
ability to generate investment capital internally is severely
limited and that its ability to utilize what investment capital
it has available is similarly limited. As a result, Japan is like
a bird that just can't get off the ground. Japan is now in a
historical bind, which means that it will continue to fall
behind. It is in a downward spiral in which there is always an
uptick that can be confused with a recovery, but it is more an
optical illusion than a reality. There are some economies that
are having stronger upticks than others and, in general, most of
Asia appears to be bottoming for now. But, rather than gaining
momentum, the recoveries appear to be straining against gravity.
The term malaise still applies to most of East and Southeast
Asia.
China is the most difficult to read for several reasons. One is
the extraordinarily unreliable nature of its statistics. First,
there is the legacy of communism, in which statistics were
understood to be political weapons. Second, there is the more
recent heritage of a non-transparent banking system. Finally,
there are genuinely different definitions of things, such as the
meaning of growth. Whatever is happening in China, it is clear
from Chinese actions that the internal pressure of economic
problems and of dislocations has already led to substantial
shifts in political and social policy. In other words, we have
seen the consequences of an economic downturn even if the public
statistics remain ambiguous.
Which brings us to the crux of the matter and a point we have
been making for several months. The degradation in the region's
economic life has pushed economic factors to the back burner, and
elevated political factors to the front burner. There are two
reasons for this. First, during a roaring expansion, the
fascination with economics makes political questions appear
trivial and even irrelevant. Second, during an economic
downturn, dividing the economic pie becomes a much more difficult
and politicized task than dividing an expanding one. When there
isn't enough to go around, or where there is simply less than
there was before, the question becomes "who is the loser," where
previously the question was the much easier, "who wins the most?"
We can see this in the internal politics of every country. But
what is now emerging are not the ongoing internal tensions from
Indonesia to Japan, but the less expected and in many ways more
important tensions between nations. Nonsense about borders no
longer mattering can be sustained during periods of tremendous
prosperity, when the flow of investment capital makes it appear
that borders are irrelevant. However, in periods of capital
shortage, when nations compete for every dollar or yen, who gets
what and when they get it, can become matters of terrible
urgency.
We are now in a period where interdependence is real, but it
leads to political friction. Low-friction and interdependence
exist when a win-win situations is possible. That situation
exists when economies are growing quickly. When economies are
stable or contracting, interdependence creates win-lose
relationships. And when that happens, nations compete. More
important, nations tend to interfere in the internal affairs of
other nations. For example, in a growth economy, economic
decisions made by one country may have consequences for another,
but those consequences are subsumed in a general expansionary
environment. In declining economies, economic decisions that
affect other nations are not covered up, and therefore nations
tend to interfere directly in each other's decision-making
process, through means ranging from interference in internal
politics to generating countervailing policies. As a result,
national interdependence increases frictions and expands the
scope of political competition from the purely economic as
nations seek levers with which to control each other.
The most dangerous situation is one in which there exists what
might be called asymmetric vulnerability. That has emerged in
U.S.-Chinese relations and U.S.-Japanese relations. The economic
downturns in both countries have made them extremely vulnerable
to shifts in U.S. economic policy. There is no reciprocal
relationship, however. Shifts in Chinese and Japanese policy do
not affect the United States in an equivalent fashion because of
the booming American economy. This creates a situation in which
U.S. actions irritate China and Japan without giving them
countervailing levers. American behavior is not circumscribed by
a fear of retribution and the United States proceeds oblivious to
the consequences. The result is that the weaker country, unable
to compete in purely economic terms, seeks extra-economic levers
with which to control the behavior of the other.
Consider U.S.-Chinese relations and the manner in which political
considerations have supplanted economic relations. China's
economic downturn has forced the Chinese government to deal with
social unrest by political means. One manifestation of this, and
not necessarily the most important, has been the repression of
democratic activists. Washington, for its own political reasons,
is highly sensitive to those questions, particularly when there
are few economic consequences to bear for their concern. In
China's reduced circumstances, Washington is not particularly
afraid of economic repercussions and therefore is free to attack
China's human rights policies. Now China, unable to retaliate
economically, is forced to look for countervailing power.
That countervailing power is geopolitical in nature. What we
have seen, over the last few months, is China shifting its focus
from using economic tools to manage its relationship with the
United States and other countries, to using geopolitical tools.
Thus, China's relationship with Russia, a subject that has been
regarded as both archaic and trivial over the past generation,
has now moved to the forefront, although most observers don't
recognize the sea change yet. When the Chinese speak to the
Americans now, it is no longer in terms of economic opportunities
and joint ventures as an offset to American pressure on a variety
of issues. Rather, it is the geopolitical pressure that comes to
the fore.
That is why relations between China and the United States will
remind people of pre-1972 relations more than post-1972. We are
not talking about Maoism or the Cultural Revolution. Rather, we
are talking about a reversal of the anti-Soviet alignment between
the United States and China that took place in 1972. China is
reminding the United States constantly of the geopolitical
consequences of American economic and political pressure.
Indeed, as this progresses, the military dimension joins the
political as purely economic considerations take second place.
This is true throughout Asia. Where previously something such as
Mitsubishi's new joint venture in Indonesia dominated
sophisticated conversation in Asia, today the geopolitical
question of whether Indonesia can survive as an integrated nation
takes the fore. Likewise, the military balance between China and
Taiwan has become critical. In addition, Japan's military stance
toward North Korea has emerged. And, the Spratly Island
controversy is on the front burner. And so on.
Throughout Asia, the agenda is no longer economic. Both in
internal and external policies, the primary issues are now
political and they will, over time, become military. The next
quarter will see intensifying tension within the region and
between some countries in the region and the United States.
Increasingly this will be expressed in politico-military terms
rather than economic terms. We are continually struck by how
much more important Japan's politico-military relationship has
become to Japan today, than it was only ten years ago.
Simply put, there are consequences to economic downturns that go
beyond economics. If we accept the idea that Asia has entered a
long-term period of economic malaise, then it follows that that
malaise will have critical consequences beyond politics. The
dramatic deterioration in relations between the United States and
China is one critical manifestation of that, but it is not the
last. The entire relationship between the United States and
Eurasia is being dramatically redefined. We believe increasingly
that a Sino-Russian entente designed to limit American power is
already growing beyond its embryonic state.
This poses an interesting question for an Asia unused to posing
its questions in geopolitical rather than economic terms. As
tensions between Russia and China on one side and the United
States on the other side grow, how will the rest of Asia respond?
During the Cold War, the answer was easy. The United States
offered allies membership in its trading bloc, which was an
enormously beneficial relationship. It was the foundation of
Asian prosperity and its benefits far outweighed the politico-
military risks. The world has changed and economic relations
with the United States, on terms the United States is prepared to
tolerate, are far less openhanded. What is the relationship of
the rest of Asia, and in particular Japan, to the competition
between North America and Eurasia? Each Asian nation will have
to walk through a political mine field in order to preserve their
economic relations. The age of economics is being replaced once
more by the more permanent geopolitical relationships.
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