Power rises in the east

Asia is being created before our eyes, and so is the 21st-century world.

DESPITE the understandable focus on the Middle East and Central Asia in the wake of the September 11, 2001, terrorist atrocities, the most important long-term trend in world affairs is the shift in economic and political power to Asia.

As countless books have put it, China's growth is doing what Napoleon forecast two centuries ago and is "shaking the world".

Goldman Sachs, the investment bank that coined the acronym BRICs to connote the future impact of four big emerging economies -- Brazil, Russia, India and China -- believes China is on track to overtake the US as the world's biggest economy as soon as the late 2020s, while India could pass the US by 2050.

The direction is clear: Asia will get richer and stronger, probably for a long time to come. Asian companies will become more prominent in international business, as competitors for Western ones, as purchasers of Western assets and as sources of new technology.

That will be painted as a threat to Western livelihoods by many politicians, but in truth the effect will be positive: the trade and innovation generated will make the West richer and stronger too, just as the rapid post-war growth of western Europe and Japan helped enrich the US during the half-century that followed. But it will change the global balance of power. Neither the US nor Europe will be able to dominate world affairs any longer; Asia will demand an equal seat at the table. Yet this trend is not as simple as it looks. There is no single entity called Asia. Asia is divided and the process of rapid economic development is going to divide it further in political terms.

The rise of Asia is not just, or even mainly, going to pit Asia against the West, shifting power from the latter to the former. It is going to pit Asians against Asians. This is the first time in history when there have been three powerful countries in Asia at the same time: China, India and Japan. That might not matter if they liked each other, or were somehow naturally compatible. But they do not, and are not. Far from it, in fact.

Asia is becoming an arena of balance-of-power politics, with no clear leader, rather as Europe was during the 19th century. China may emerge as the most powerful of the three, but as with 19th-century Britain it is unlikely to be capable of dominating its continent. A new power game is under way, in which all must seek to be as friendly as possible to all, for fear of the consequences if they are not, but in which the friendship is only skin deep. All are manoeuvring to strengthen their positions and maximise their long-term advantages.

The relationship between China, India and Japan is going to become increasingly difficult during the next decade. An array of disputes, historical bitternesses and regional flashpoints surround or weigh down on all three. Conflict is not inevitable but nor is it inconceivable. If it were to occur -- over Taiwan, say, or the Korean Peninsula, or Tibet or Pakistan -- it would not simply be an intra-Asian affair. The outside world inevitably would be drawn in, and especially the US, given its extensive military deployments and alliances in Asia. Such a conflict could break out very suddenly.

Managing the relationship between China, India and Japan promises to be one of the most important tasks in global affairs during the next decade and beyond, comparable to the need to find peaceful ways to manage the relationships between Europe's great powers during the 20th century. The opportunity, in terms of commerce and of human welfare, is tremendous, if the relationship is handled well. But so is the danger if the relationship goes wrong.

Managing this relationship will also be difficult because as India and China grow and expand their trade and overseas investment, their economic and political interests are going to overlap more and more, with each encroaching increasingly on what the other considers to be its natural backyard. The overlapping of interests is already happening, as China reaches across to Africa through the Indian Ocean for resources and as India reaches across to East Asia, through the Malacca Strait between Indonesia and Malaysia, for markets and commercial partners.

The most basic point, though, is that even without overt hostility the politicians and strategic planners of all three countries will feel obliged, by their sense of national responsibility and of historic opportunity, to compete for advantage, to prepare for the worst, to build alliances and networks against each other, just in case circumstances change. A senior official at India's Ministry of External Affairs, one of the least hostile men possible, put this especially appositely in an interview in March 2007: "The thing you have to understand is that both of us (India and China) think that the future belongs to us. We can't both be right."

Asia is being created, before our eyes. So is the 21st-century world.

A FAVOURITE topic among columnists and scholars during the past five years has been the fact that the world's politics and economics seem to have been inhabiting different planets. Politically, the world has been going to hell in a handbasket ever since September 11: wars in Afghanistan and Iraq, confrontation with Iran, friction with Russia, further terrorist attacks all over the globe. The US, patron saint of globalisation, democracy and free-market capitalism, has lost prestige and influence.

Yet in 2003-07 the world enjoyed the best four years of growth of any time in the past four decades. Trade has boomed and the fruits of that growth have been shared on every continent, with even sub-Saharan Africa expanding gross domestic product at annual rates of 5 per cent-plus. Asia has led the way, with average annual growth for the region, including Japan but excluding the Middle East, of 8.7 per cent.

Even the US, troubled by Iraq and divided in its domestic politics, has had a surprisingly buoyant economy.

How can this be, columnists and scholars ask? Surely bad politics eventually will have an economic impact? When turmoil broke out in the financial markets on both sides of the Atlantic in August 2007, making a US recession look a real prospect, they appeared to be getting their answer. Except for one thing: the turmoil had no obvious link to the world's bad politics, unless in some peculiar way the actions of al-Qa'ida in Iraq had weighed down on the US sub-prime mortgage market and on a suddenly weakened British bank, Northern Rock. They hadn't, of course. Economics had remained separate from politics and had passed through its own cycle of confidence, excess and readjustment. The real explanation for why political woes and economic joy could coexist for so long should be divided into two halves.

One half is the fact that the war in Iraq has helped to amplify global growth and to share it more widely than before: it did so by contributing to the trebling, quadrupling and eventually quintupling of oil prices, which caused a huge boom in oil-producing countries, including (but not only) the Middle East. At the same time, shortages of mines and worries about political instability interrupting supply helped bring about sharp rises in commodity prices, with the costs of materials such as copper, nickel, iron ore, zinc and uranium soaring. That in turn has boosted growth in commodity-producing countries.

In the past, economists would have called a rapid rise in oil prices a shock, one that, together with costly commodities, would hurt growth in the rich, consuming countries and probably cause inflation. But that hasn't happened because energy and commodities matter less in rich, developed economies that are led by the services sector because control over inflation by central banks is more secure and credible and because the open markets of globalisation have restrained overall price rises and enabled economies to be more flexible and adaptable. Only now, in 2008, is inflation coming to be a global problem, as those commodity price rises combine with abundant Asian savings to produce a new money-fuelled inflationary bubble.

That is the first half of the story: political turmoil boosted growth by making resources scarcer, rather than harming it. The other half depended on luck, geography and history.

The turmoil has taken place in parts of the world -- the Middle East and Central Asia -- in which today's great powers are either neutral or on the same side, and none is located nearby. There has been war, terrorism, instability and a lot of name calling, but it has not pitted the big economic powers against each other. Those big economic powers are the US, the European Union, Japan, China and increasingly India, Russia and Brazil.

They may have had disagreements about Iraq, and even more about Iran, but not ones that threatened conflict or, crucially, that put investors and traders in any doubt about the future openness of these economies to one another. The world was lucky that Osama bin Laden had set up headquarters in Afghanistan rather than in North Korea, Burma or Pakistan, next door to China or India; and it was lucky that Iraq and the rest of the Middle East are no longer scenes of superpower rivalry, as was the case during the Cold War. So the political and economic planets have remained separate.

Such fortunate separation is likely to continue for as long as the main arenas of political tension or conflict remain distant from the main arenas of growth, trade and investment. Essentially, that means for as long as political tension stays away from Asia.

THE war on terror, or by terrorists, will wax and wane. The first year in office of whoever is elected as the US's 44th president will be a nightmarish one, devoted principally to extricating the US from Iraq and finding some way to pacify or contain that region, including Iran. But while the 43rd President's principal legacy will be that nightmare, the true long-term task for the next president, the probable source of their legacy, will lie in Asia.

"Asian drama", the phrase that Swedish economist Gunnar Myrdal used for the title of his 1968 book was, as his subtitle put it, "An inquiry into the poverty of nations". Myrdal's drama was about overpopulation, poverty and the danger of what we now call failed states. Today's Asian drama is an inquiry into the prosperity of nations, and into what happens when several big neighbouring countries become prosperous at the same time. They have done so in a process that is associated less with Myrdal's ideas than with those of the man with whom he shared the 1974 Nobel prize for economics, Friedrich Hayek, an Austrian economist who settled in London in the 1930s and who in the '70s and '80s became the intellectual idol of Margaret Thatcher.

Today's Asian drama is a much more upbeat and inspiring story than the one that preoccupied Myrdal, for it is lifting hundreds of millions (eventually it will be billions) of people out of the squalor in which they and their forebears have lived for centuries, it is lengthening and enriching lives and generating new wealth, ideas and confidence. It is knitting Asia into a single, vibrant market for goods, services and capital, one that stretches from Tokyo to Tehran.

If that process of integration and economic growth continues, as it should, it will form the single biggest and most beneficial economic development in the 21st century, providing dynamism, trade, technological innovation and growth that will help us all. In the second half of the 20th century, the world's most advanced country and biggest economy, the US, benefited hugely from the growth and development of western Europe and Japan. Now, in these early decades of the new century, the rich countries can expect to enjoy a similar boost from the growth and extra trade provided by Asia.

As well as knitting them, however, this drama is also grinding together Asian powers that had previously kept a strict economic and political separation from one another. China, India and Japan are bumping against each other because their national interests are overlapping and in part competing. Each is suspicious of the others' motives and intentions and all three hope to get their own way in Asia and further afield.

To have three great powers at the same time may be unprecedented for Asia but it is not for the world. There was a similar situation in Europe during the 19th century, when Britain, France, Russia, Austria and, until German unification, Prussia, existed in an uneasy balance in which none was dominant and none was entirely comfortable, but which nevertheless coincided with a period during which Europe prospered and became firmly established as the world's dominant region.

Whether you consider Europe's 19th-century experience with balance-of-power politics as a good or bad omen for Asia depends on how long a sweep of history you consider and on what you think are the most crucial differences between modern times and the world of 150 years ago. If you take a long sweep, then the precedent is bad, since Europe's power balance ended in two devastating world wars. On the other hand, it kept the peace on the continent for about half a century, which would count as an optimistic prospect today.

Today the barriers against the use of war as a tool of national policy are far higher: nuclear weapons, public opinion, international law, instant communication and transparency all militate against conflict, though they do not rule it out altogether. The barriers against colonial or quasi-colonial ambitions are higher still. China and India may battle for influence over Burma, but neither is likely to invade it and turn it into a colony. Nevertheless, Asia is piled high with historical bitterness, unresolved territorial disputes, potential flashpoints and strategic competition that could readily ignite. There are at least five known flashpoints where it is already clear that any could involve the major powers: the Sino-Indian border and Tibet, North and South Korea, the East China Sea and the Senkaku-Diaoyutai islands, Taiwan and Pakistan.

Imagine that you are a senior defence strategist or planning official in India, China or Japan. You know your government is professing friendship towards all its neighbours, pursuing "smile diplomacy" all around. You also know that your country's economic interests are spreading and deepening, that so are your neighbours' and that they are likely to get stronger in future. What would you do?

The answer is that, while acknowledging your fellow great powers' intentions may prove to be honourable and amicable, you would propose that your country build up its military and technological capabilities and strengthen its military and diplomatic alliances as a form of insurance policy, recognising that times change.

With an eye on the distant future, you would propose that your country should have a space program, taking in rockets, satellite launches and, for prestige purposes, moon landings. With an eye on the medium term, you would propose a strengthening of your navy, especially by adding aircraft carriers and submarines to project power throughout the Indian Ocean, China seas and the Pacific; and you would seek to invest in the development of an indigenous aircraft manufacturing industry in case supplies of imported aircraft and components became harder to obtain.

For the shorter term, you would propose that your country order more of the most advanced aircraft that your foreign suppliers are willing to sell and that you should keep on improving your offensive and defensive capabilities with and against short and longer-range missiles.

That is what China and India are doing. It would be too strong to say they are in an arms race, but it could reasonably be described as a strategic insurance policy race. Most recently, China has been expanding its military spending at almost 18 per cent a year while India's defence budget has risen by 8 per cent. Most likely, China's rate of spending growth will ease somewhat while India's will accelerate, as and when its public finances permit.

Japan would also pursue such strategic insurance if it did not have constitutional constraints on the size and nature of its military, and a close alliance with the US to depend on. But like China and India, Japan has a space program, is doing everything it can to upgrade its navy short of buying aircraft carriers and is doing the same for its air force. It will be quite a surprise if China does not have aircraft carriers by 2020 or so, and India has already announced that it will have at least three. Both are energetically engaged in buying and improving their fighter-aircraft fleets and their missile capabilities. All three are taking part in joint military exercises and sending observers to each other's war games.

In November 2007 China even sent one of its naval ships on a visit to Japan, a first for the Chinese navy. Japan and India, though, have been working on a stronger insurance policy by building a military network among the democracies and quasi-democracies of Asia and the Pacific, formally in Japan's case, informally in India's, linking the forces of Australia, the US, Singapore, India and Japan in exercises, inter-operability programs and the like. The network is not aimed explicitly at China, but the Chinese are fully aware of what is driving it.

The newest element in Asia is the emergence of three regional powers simultaneously. But the biggest single element is China's rise, as it forms the centrepiece around which all else is taking shape. China, thanks to its open economy and low labour costs, is the hub of an Asian production and trading network.

The new strength of its public finances and its newly confident and sophisticated foreign policy means China is playing a central role in providing development aid to poorer Asian countries.

Japan's aid program is far larger, but it is less strategically focused and is more constrained by the apparatus of multilateral aid channels such as the World Bank. India's acceleration of economic growth and trade is likely to impinge on China's focal position, but for the moment it is China's growth and the extension of its interests through the Indian Ocean and into Africa that are impinging more on India. Above all, however, China's political system makes it Asia's centrepiece. An authoritarian government can be more decisive and is freer to act strategically, especially in aid and arms sales. But it also gives rise to greater fears and more mistrust.

Such fears do not arise because China has acted or even spoken aggressively in recent years: it hasn't, except towards Taiwan. They arise because of China's sheer size, because of its millennium-long history as a regional hegemon that treated many other states as vassals and, most of all, because its political system and decision-making processes are opaque. Mistrust and suspicion about China's political intentions are echoed, too, in mistrust about its corporate activities, especially given the involvement of the state and state-owned companies in the sectors in which China has been investing heavily overseas, such as natural resources.

There is suspicion, at times, about Japan, largely because of its 20th-century history, but that suspicion is mitigated by its democracy and by its close relations with the US. Suspicion of India is held only by its closest neighbours in South Asia.

The main problem in Asia is fear and suspicion of China. It is not going to go away.

WHAT, then, can be done about it? What can be done to ensure that, in this new balance-of-power politics that is arising in Asia, suspicion of China does not provoke tension that damages economic and societal relations between the region's main powers or even actual conflict over one of the many flashpoints and border disputes? What can be done, in other words, to manage the inevitable rivalry between China, India and Japan, and those three powers' relationships with strong, involved outsiders such as the US and Russia? In my new book. Rivals: How the Power Struggle Between China, India and Japan Will Shape Our Next Decade, I offer nine recommendations about what outsiders in the US and Europe and insiders in Japan, China and India should do during the next few years to manage the situation and, it is hoped, to benefit from it. These proposals -- their adoption or rejection -- might also be used as indicators of whether, during the next decade or so, Asia's powers are heading towards a constructive, co-operative relationship or a more destructive, competitive one.

How will this Asian drama end? The answer is that it won't: it is going to be a permanent feature of world affairs, and arguably the most important single determinant of whether those affairs proceed peacefully and prosperously or not. The drama will pit new, rising powers against the world's long-established Western powers; and it will pit Asia's new powers against each other and against the region's first moderniser, Japan. In economics and business, the competition will have overwhelmingly positive results. In politics, we cannot be so sure. The implications of this new Asian drama can be summed up in two different images of how Asia might look in 2020: the first could be termed plausible pessimism and the second called credible optimism.

The plausibly pessimistic view begins with the risk that China will go through its Japanese-style adjustment to a lower investment economy in a rocky rather than a smoothly handled manner. (By Japanese-style, this means following Japan's example in the '70s, when Japan absorbed a currency revaluation and the aftermath of the oil shock by moving sharply up-market and becoming energy-efficient.)

Recovery will eventually come and the Chinese growth story will resume, but only after a recession and asset price collapse, perhaps exacerbated by a recession in the US. Such a bruising experience will lead to public pressure for political reform, posing the biggest challenge to Communist Party rule since the Tiananmen Square uprising in 1989. But that pressure will again be violently rebuffed and the party will accentuate its nationalist credentials to retain its grip on power. Such a nationalist move would produce increased tension with Japan, a reduction in co-operation with the US over North Korea, and a spate of mutual truculence between China and India over their border disputes and over Chinese support for Pakistan and Bangladesh.

Lord only knows what would happen if a terrorist attack on the US were to prompt a US invasion of Pakistan, since India would be tempted to cross Pakistan's southern border while the US was crossing from the west.

In these awkward times, the deaths of Kim Jong-il and the Dalai Lama might occur, prompting China to install a new military government in North Korea, rejecting proposals for unification of the peninsula, and to use brutal methods to suppress an uprising by Buddhist monks in Tibet that would make the one in March look like a picnic. Pan-Asian institutions would be stillborn in this fractious environment, as would efforts at serious co-operation over global warming.

Japan, becoming even more worried about North Korea and China, would finally revise its constitution to permit expanded military capabilities. Taiwan would be an ever-present source of worry over an imminent conflict between China, Japan and the US. There could even be a short, exploratory exchange of fire over that very issue. The warm glow of the 2008 Beijing Olympics would then be remembered only through a thick smog of tension.

Now look on the brighter side. The credibly optimistic view is that perhaps China will take its economic adjustment in its stride, after merely a short, sharp pause in growth, resuming expansion, albeit at a slower rate than the 10 per cent to 12 per cent of recent years. By 2020 its economy could be at least three times larger than it is today, and the same could well apply to India, too, as it uses its rising tax revenues to build modern infrastructure and a proper system of primary and secondary education. More open trade with other South Asian countries, initiated by a more confident India, would help lift hundreds of millions of Bangladeshis and Pakistanis out of poverty in the second decade of the 21st century, and hundreds of millions of Indians would be better off, too.

Japan, with more market-oriented reforms and a corporate sector galvanised by the prospect of Chinese competition, could experience a productivity surge similar to that enjoyed by the US during the '90s, enabling it to overcome the burden of an ageing population and, more important still, to become more confident in international affairs.

In such a climate, China, Japan and India, encouraged by the Americans and Europeans, would work together to build pan-Asian institutions within which to manage their disputes and differences. All would be made permanent members of the UN Security Council. When the North Korean regime collapses and the Dalai Lama dies, the three Asian powers' first instincts would be to talk and exchange ideas rather than to act unilaterally. A plan would be struck to unify the two Koreas under the supervision of international peacekeepers and with the help of aid from Japan, China, the US and the EU, among others.

The introduction of the election of Hong Kong's chief executive by universal suffrage after 2017, a step made possible by this harmonious atmosphere, could then increase interest in the use of democracy in China itself as a way to ease tensions and resolve disputes. The emerging middle class in China, irritated by its rising tax burden and lack of political rights, will begin to put pressure on the Communist Party, through protests and the media, to follow Hong Kong's example. The party's fifth and sixth generations of leaders decide it is time to make concessions, reasoning they can now repeat the success of Japan's Liberal Democratic Party since 1955 and seek to maintain power even in a multiparty system.

Whatever happens, in some ways, Asia already is one, to echo the famous first sentence of Kakuzo Okakura's 1903 book, The Ideals of the East. In other ways, it is becoming a single entity. How it does so, with three of the world's most powerful countries sitting side by side, undergoing disruptive transformations and subject to huge domestic and international pressures, is going to be quite an adventure. The stakes in Asia are enormous for all of us.

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This is an edited extract from Rivals: How the Power Struggle Between China, India and Japan Will Shape Our Next Decade, by Bill Emmott. Published this month by Penguin Australia, 314pp, $49.95 (HB). Copyright Bill Emmott 2008.

source: http://www.theaustralian.news.com.au