22 March 2019
Asian Century ... on a Knife-edge

Asian Century ... on a Knife-edge

Here is the text of my speech to the Australian Institute of International Affairs in Perth, Australia, on 20 March 2019.

A big thank you to everyone for coming this evening. I came to your December meeting where our President Allan Gyngell made an excellent speech, and I had the great pleasure of meeting some of you then. It's nice to see you again.

As you know, I am making a brief presentation of my recent book, “Asian Century … on a Knife-edge”.

Why another book on the Asian Century?

First, why did I spend over two years writing this book?

In short, I am fascinated by the whole economic, social and political transformation which is taking place in Asia.

But there were also three more specific reasons:

First, I believe that Australia has succumbed to a case of “Asian-Century hype”. Too many Australians have an excessively rosy impression of Asia’s development. Some Australians, notably in the business sector, even seem attracted to authoritarian style government like in China. It seems a more efficient way to get things done. To my mind, this is dangerous thinking.

I believe that, while Asia has achieved great things these past few decades, Asia also faces numerous great challenges, and its continued development is not guaranteed. Asia’s future is sitting on a “knife-edge”.

Second, many Australians suffer from a “China obsession”. True, China is Asia’s biggest economy and Australia’s most important economic partner. But there is a lot more to Asia than China. Indeed, I predict that through the 21st century, India will rise to become Asia’s biggest economy. According to the UN, India’s population could reach 1.5 billion by the year 2100, some 50% bigger than China’s 1.0 billion. The Indian government is more committed to economic reform, and the Indian economy is growing faster than China’s.

While India does have its problems, its democratic institutions are solid. And in the year 2100, I believe that India will still be India. I believe that it will be more politically resilient than authoritarian China. I really wonder if the Communist Party can hang onto power for another eight decades.

I thus applaud the Australian government for its new India Economic Strategy. But much more needs to be done to implement the Strategy.

The ASEAN countries of Southeast Asia are also very important, especially Indonesia, our closest big neighbour. In that context, I also applaud the recent Indonesia-Australia Comprehensive Economic Partnership Agreement. Hopefully this can be ratified and implemented as soon as possible.

The third motivation for my book was the China threat syndrome that has taken hold in the US. Many of the things that Donald Trump has to say about China are true, even if we don’t like the way that he says them. But in my view, the biggest threat to America is not China, it is America itself. Washington has allowed US to become a polarised and divided country as globalisation and technological change sweep through the country.

Instead of giving tax cuts to the rich, the US government needs to investment more in education, research and infrastructure. Otherwise, America could become like India today -- a country of billionaires, paupers and lousy infrastructure.

America would also be stronger if it valued the friendship of its traditional allies. For example, many European countries share Trump’s concerns about Chinese trade policies and cyber activities. It would also make sense for the US to join the TPP.

Now, I would like to move on to the heart of the book.

There are two main sections. First, a stocktaking of Asia’s economic and social development. And second, seven challenges for realising an Asian century.

Taking stock of Asia’s economic and social development

In my stocktaking, I draw four main conclusions.

First, I argue that although Asia’s economies have developed rapidly, Asia is actually suffering from "stunted" economic development. In fact, no large Asian economy has caught up to world leaders like the US and Germany in terms of GDP per capita or economic, business and technological sophistication, and there is no likelihood of that happening in the future.

One telling statistic is that productivity in Japan’s services sector is only half that of its manufacturing sector. A similar story can be told for Korea and China. And these same three countries are also suffering from very rapid population ageing, which is dragging their economies down.

Moving to the second point. We often hear talk of Asia’s emerging middle class. In my view, this is still more myth than reality.

While Asia has managed to dramatically cut poverty, only about 15% of Asians could be considered middle class. One half of Asia’s population is stranded between poverty and the middle class, in a zone of vulnerability and near-poverty. And in the cases of Japan and Korea, the middle class is actually declining, as it is in many Western countries.

Moving now to my third conclusion. We hear a lot of talk about Asia’s emerging super-powers, China, India and Indonesia. In my view, these countries are fragile super-powers, and China is particularly fragile. It is true that China is making great progress in the technology area. But this is not the whole China story. Overall, China’s economy is weighed down by debt, an ageing population, and weak productivity. Its domestic society and politics is held together by growing repression and controls. And its international behaviour is highly assertive and even aggressive, and it has very few friends -- perhaps just North Korea, Pakistan, Venezuela and Russia.

The economic power of China, India and Indonesia owes more to their large populations than to their economic and technological sophistication. China’s GDP per capita is only one-quarter that of the US, and those of India and Indonesia are even further behind.

My fourth conclusion concerns the US. Over the past 70 years, the US has done much to support Asia’s development through its open markets, its security arrangements, and the liberal international order that it led.

This has also helped make America stronger. America does much more business with Asia than with Europe. And America has had many friends in Asia.

This now seems to be changing. Japan, South Korea, Australia and Southeast Asia now feel that the US may now be a less reliable ally.

That is my downbeat assessment of the state of Asia.

So what are the main challenges for realising an Asian Century?

Seven challenges for realising an Asian Century

First, I identify two economic challenges:

1) getting better value from Global Value Chains (GVCs).

I always ask my students where their iPhone was made, to which they respond China. But the reality is more complex. The iPhone is made through a GVC which starts with design and conception in California, includes components from Japan, Korea, and Taiwan. It is assembled in China by a Taiwanese company. The total value added in China is only 10% of the total.

The same story can be told for my beautiful shirt which is made in Vietnam, but was actually designed in Italy, and made from French fabric. All our Vietnamese friends did was "sew, trim and cut" the shirt.

China in particular is trying to get more value added, but industrial upgrading is very challenging. Countries like Malaysia and Thailand, which participate in GVCs, have not managed to graduate to high value-added economies. They are stuck in middle income traps, meaning that they are not likely to graduate to high-income economies.

2) making the most of urbanisation.

People are moving from the countryside to Asian towns and cities at a world record rate. This is helping drive economic growth.

And so Asia has some of the world’s best cities -- Singapore, Tokyo and Seoul. In these great Asian cities, governments have worked hard to try to create their own versions of Silicon Valley. But there has been very little success to date.

And what is more worrying is that Asia has some of the world’s worst and most polluted cities -- Dhaka, Kolkata, Manila, and Jakarta. Many Asian cities are exposed to the impact of global warming. And it is very possible that cities in countries like Indonesia and the Philippines, as well as Pacific nations, will produce many climate refugees in the years to come.

Two social challenges --

3) “inclusive development” or the ability of all Asians to participate in the economy and society. While certain social groups suffer from discrimination, prejudice and persecution in all countries, the situation is much more grim in Asia than in Western countries, especially for women, youth, LGBT, and indigenous and religious minorities. Some estimate that Japan’s GDP could be 10-15% higher if women’s participation in the economy was the same as men.

When groups like these suffer from discrimination, prejudice and persecution, it makes our economy weaker and also our society weaker.

4) demography and ageing populations. Asia has rapidly ageing populations in Japan, Korea, China and other countries, which are dragging their economies down. In particular, China’s working age population has been falling for 6 years now.

But there are very youthful populations in countries like India, Indonesia, the Philippines. These latter countries face the challenge of providing both education and training, as well as jobs for its youth. The Arab Spring showed us the risks that can arise in societies with very high youth unemployment.

One win-win solution for both groups of countries is migration from labour surplus countries to labour shrinking countries. But there is too little of this at the moment.

Two political challenges

5) democracy -- we can celebrate the transformation of the formerly authoritarian South Korea and Taiwan into democracies, as they climbed the development ladder. But this has not been the case in China, and for the moment at least the CCP seems firmly entrenched and more authoritarian than ever.

China’s authoritarian government may have been effective in the early stages of its development. But in my view this is no longer the case. Authoritarian politics imposes great costs in terms of the loss of personal freedoms and human rights abuses, and also great costs for the economy.

6) economic crime -- as Asia has moved to the centre of the global economy, it has also moved to the centre of the global criminal economy, with human trafficking and smuggling, IP theft, money laundering, corruption, and cybercrime.

As OECD has shown, China is the world capital for fake and counterfeit goods. Buying counterfeit handbags and clothes when we are on holidays seems like fun. But innovators are discouraged when the work is ripped off. And we can encounter health and safety risks when we buy counterfeit medicine, or if our plane buys a counterfeit spare part.

And lastly there is geopolitics. The relative peace that Asia has enjoyed for the past 70 years has been critical for its economic development. But now we are in the midst of a geopolitical competition between China and the US for political leadership in Asia. I will also come back to this issue.

Will Asian governments tackle these challenges?

Tackling Asia's challenges

My overall assessment is that Asia’s leading economies will not tackle these challenges effectively. Japan has been avoiding reform for over two decades, and Korea and China are also avoiding reform now. Vested interests block reform. And in China the CCP is concerned about the possible instability from reform.

My view is that economic dynamism in many Asian countries will fizzle out, much like Japan’s dynamism fizzled out. Japan has only averaged 1 per cent annual economic growth these past two decades.

Strangely, Donald Trump could be a strategic gift to China. If he can push China to open up and restart its reform, this would be a very good thing for China and the world economy.

So what is the future for the Asian economy?

What future for the ASIAN CENTURY?

Asia now accounts for about 40% of the world economy, roughly the same as the West. If Asia muddles through in the coming years, it will have the dominant share of the world economy. China and India would become the world’s biggest and second biggest economies, while Indonesia would become fourth.

But Asia would still be way behind the West in terms of GDP per capita, and economic, business and technological sophistication. So that would be a weak Asian Century. Asia would be big, but backward.

But there are many risks to Asian Century. There are flash points between various Asian countries -- like North Korea and the South and Japan; China and Taiwan; Japan and China; South China Sea; and China and India. These tensions between Asian countries suggest that Asia does not even exist as a cohesive region.

Perhaps the greatest risk to an Asian Century is continued peace and harmony in Asia.

Peace and harmony in the Asia=Pacific

I would now like to come back to my seventh challenge, that of living together in peace and harmony. This point is probably of most direct relevance to the work of the AIIA.

Since the end of World War 2, the US has been the great power in Asia. It provided security to its allies and partners. It offered open markets, including for China. It led the liberal international order which enabled Asian economies to develop.

But now China has made it clear that it should resume its historical leadership role in Asia.

This is ironical in a way because China is way behind Asian countries like Japan, Korea, Taiwan, Singapore, Hong Kong and Malaysia in terms of GDP per capita, democracy and human rights.

But China is big and size matters. And China is now throwing its weight around.

It believes that Asians should manage Asia. It does not like the US’s alliances with Japan, Korea and Australia. It wants the US to leave Asia.

And China has taken several initiatives to demonstrate its regional leadership -- like the Asian Infrastructure Investment Bank, the Belt and Road Initiative and others.

Some analysts have argued that rivalry between the old power, the US, and the new rising power of China, would lead to war. This is known as the Thucydides Trap, recalling the conflict between the rising power of Athens which resulted in conflict with Sparta, as documented by the ancient Greek historian Thucydides.

In fact, there are now many people who argue that we are in the middle of a new Cold War. It is certainly true that tensions between the US and China are very high. And the whole US establishment now sees China as a strategic competitor, rather than a partner.

This new reality has several components:

-- cyber conflicts;
-- information war;
-- trade war;
-- technology competition as we see in the case of Huawei.
-- competition for allies, as China is seeking to befriend SEAsia in particular.

What does all this mean for Australia?

Australia in the cross-fire

Australia is now caught in the crossfire between China and the US in light of our close economic partnership with China and our military alliance with the US.

Australia needs to be more vigorous in doing the following things:

-- diversifying our economy -- reducing our economic reliance on China and strengthening our economic relations with India and Indonesia.

-- pushing the US to remain engaged in Asia.

-- being more effective in handling our relations with China -- we may be fundamentally different, but we can still work together. When appropriate, we must stand our ground and defend our national interests. We should also try to convince China that it would do well to strengthen its soft power.

-- being more active in working with other partners, such as how we worked with Japan on the TPP.

The other main thing that Australia needs to do is to be ready for surprises. Some people call these “black swans” or grey rhinos.

Here are a few obvious ones:

-- China and the CCP seem rock solid. But history shows us that authoritarian regimes don’t last forever. And Chinese history shows us that dynasties do not last forever. Be prepared for the unexpected to come out of China's opaque politics.

-- Asia is highly vulnerable to natural disasters, and because of climate change, natural disasters are becoming more frequent and intense. If high population neighbours like Indonesia and the Philippines get hit by more natural disasters, Australia will get drawn into helping even more, for example, by accepting natural disaster refugees.

-- the Rohingya crisis in Myanmar shows how vulnerable Asia is to ethnic unrest. Myanmar is not the only ethnically diverse country in Asia. Both India and Indonesia have very large indigenous populations who suffer from discrimination.

-- Taiwan is another case which could hold surprises. China is now expressing growing impatience with its desire for Taiwan to become part of China. At the same time, the Taiwanese people have less and less interest in becoming part of China. And the Trump administration is now becoming more active in its support of the Taiwanese government. Taiwan could be Asia's greatest flashpoint.

Australia must be prepared for such surprises because history shows that the world is full of surprises.

Thank you

Thank you so much for listening to me! The great thing about making a presentation like this is the challenging questions that an audience like you ask. I look forward to trying to answer your questions.
Tags: asia, asian century ... on a Knife-edge, aiia, Australian Institute of International Affairs

Social share