Since the end of the Cold War, there has been
strong bipartisan dedication to the idea that America’s future will be written
in the Asia-Pacific. The Obama administration has argued the case most
forcefully. Hillary Clinton, when she was secretary of state, wrote:
“The Asia-Pacific has become a key driver
of global politics. Stretching from the Indian subcontinent to the western
shores of the Americas, the region spans two oceans — the Pacific and the Indian
— that are increasingly linked by shipping and strategy. It boasts almost half
the world’s population. It includes many of the key engines of the global
economy, as well as the largest emitters of greenhouse
gases.”
In theory, the concept of an “Asian Century” —
meaning that the world’s political and economic center of gravity is shifting to
Asia in the 21st century — is correct. one in three people on Earth is Chinese
or Indian. Northeast Asia — including China, Japan, South Korea and Taiwan — has
enjoyed astonishing levels of economic growth since the latter part of the 20th
century with booming export sectors and emerging middle-class consumer bases.
The global production and supply networks that have taken shape in Asia produce
much of what we consume so voraciously in the West. The Northeast Asian
countries are also major consumers of energy imported from the Middle East,
making them geopolitically important powers.
Contrary to popular opinion, however, the same
Asian countries that are supposed to drive the Asian Century are in the midst of
serious economic slowdowns. Asia watchers have known for years that Japan has
been largely stagnant economically and rapidly aging, but so are South Korea and
Taiwan.
Then there are China’s troubles. While
economists have accepted that China is perhaps heading toward long-term
stagnation, the foreign policy community is stubbornly resisting the new
reality: A Chinese slowdown is becoming a defining fact of Asian
geopolitics.
So are we living in an Asian Century or aren’t
we? That is an open question. The economic and demographic outlooks in the
region cast doubt on the robustness of Northeast Asia’s future growth. The
United States should look to South and Southeast Asia for the future of Asian
growth. If India and the nations of Southeast Asia enact pro-market reforms,
they will take off economically.
Asia’s economic quagmire
The prospect for an Asian Century is based on
economic growth in the region. Yet, South Korea is rapidly aging.
It faces a heavy debt burden and lives under constant threat from North Korea.
And it isn’t big enough to carry Northeast Asia forward by itself.
Japan is big enough, but has barely budged economically for a generation. Private wealth creation is occurring, but it is offset by public debt. Two-and-a-half
years after Prime Minister Shinzo Abe was elected on promises to bring Japan
back, deep economic reforms have not occurred.
This leaves China. Talk of an Asian Century
usually implies “led by China.” But economic problems have been brewing in China
since 2003. Unless difficult remedies are adopted, it is headed for
stagnation.
From 1978-2002, Chinese pro-market reform was
partial and uneven, but it was persistent and
it created an economic miracle.
In 2003, a new government under Communist Party
General Secretary Hu Jintao decided the core of the economy should be
state-owned banks lending to state-owned enterprises, so that these badly-run
firms could continue to invest,
employ large numbers of people, and control what were seen as strategically
important sectors.
Market forces would still play an important
role, but policy would tilt back to the state. The pace of investment growth
jumped from 12 percent in 2001 past 26 percent in 2003, more than four-fifths by
state-controlled enterprises. Extremely rapid investment lasted almost a
decade.
At first, it seemed to work. Chinese companies
borrowed, invested, produced and exported. The economy grew and the world was
China’s oyster.
But the apparent effectiveness of this new, state-led model was a
mirage.
Developing under the façade was not the greater
productivity that arises from market reform but increasing dependence on
domestic credit and foreign consumption.
The global financial crisis exposed these weaknesses.
First, foreign demand plummeted. The Communist
Party responded by conducting arguably the biggest stimulus in modern times,
through yet more bank loans. Credit grew 32 percent in a single year.
Many people want to borrow enormous amounts
when demand falls, and some of those people live in
Washington DC. But the inevitable outcome is a painful debt burden. China’s
could now be considered the world’s worst (if not, Japan’s probably is). The highest estimate has it closing on $30 trillion.
China has already spent so much that return on
more spending is low. This is the main reason growth has slowed. China’s debt is
so large, that a good deal of its capital will be spent paying it back. This is the main reason growth will continue to
slow.
There are other reasons. In the 1980s reform
period, farm production soared, permitting
extra farmers to seek higher-paying jobs in cities as manufacturing workers.
This helped make China the world’s factory. Natural resources like water have
since been savaged, so there is no potential for land to drive growth again
unless fundamental policies are changed, such as the right for individuals to
own land.
An expanding labor force has been a key element
of Chinese growth. But like Japan already and Korea now, China will rapidly move
from a young to an old country, and old countries have tended to stagnate economically.
A final way to achieve growth is through
innovation. China has successfully imported foreign technology, both legally and
by stealing intellectual property.
As countries climb the technological ladder,
however, innovation becomes harder. China’s attempts to spur innovation are
top-down, which can work for individual projects but cannot match the ability of
the private sector to innovate across many sectors. The latter is what is needed
for sustained growth.
The Chinese economy has not yet stalled, but it
is on the path to stalling. According to Credit Suisse, Chinese private wealth
may have actually shrunk in 2013. Constant government intervention will not reinvigorate the economy; what’s needed is a
resumption of market reform.
The Communist Party claims to know this. In
2013, it offered what many considered profound reforms, supposedly giving the market the “decisive role.” But the platform was flawed from the beginning, as is becoming increasingly apparent.
China could get a huge economic boost from
land, the same one the US is getting. China has the shale.
Yet tapping it would require Beijing to mimic America by allowing private
ownership of rural land, competitive energy markets, and unbiased protection of
innovative technology. None of these are on tap.
There has been some progress in finance. Bank
licenses are being issued to
private companies. But it will take decades for private banks substantially to
erode the state’s share of banking assets, which exceeds 90 percent.
More radical steps are needed. one under
discussion would allow money to leave the country freely, among other things
pressuring banks to be more responsible. But the proof will come only if this
initiative is fully implemented.
The clearest reform failure concerns
state-owned enterprises. The 2013 reform manifesto went the wrong way by calling
for private investment in these SOEs, throwing good money after bad.
Policy steps since have also headed in the
wrong direction. Large SOEs are being merged with
each other to get even bigger, when what is needed for innovation and
competition is for the state sector to shrink.
It’s not certain that China will stagnate
economically. But the country wandered off the right path in 2003 and, without
radical change, will end up stuck well before 2023. Without China, there is no
Asian century.
Tick, tock — the demographic
clock
East Asia’s rise is the big economic story of
the past half century. China’s astonishing, explosive growth since the death of
Mao Zedong is unique in all economic history; no other country has ever grown
that fast for that long. But the future is never a simple extrapolation of past
or current trends.
Over the past two generations in East Asia,
roughly the past generation in Southeast Asia and perhaps the past decade or so
in India, development was abetted by what economists call “the demographic
dividend,” which is the once-only transition from higher to lower fertility
levels. During this period, the working age population grows faster than the
population as a whole. Not only does this increase the availability of manpower
but, with the right policies, can also encourage higher savings and investment
rates.
But East Asia’s demographic dividend has
already been cashed and there will be no repeat. Now the region faces
increasingly heavy and adverse demographic headwinds.
The United Nations Population Division reckons
fertility has plummeted over the past 50 years in most of Asia. Since the early
1960s, births per woman have fallen by 70 percent in Eastern Asia, by nearly 65
percent in Southeast Asia (i.e., Indonesia, Thailand and Vietnam) and by nearly
60 percent in South Asia (i.e. India, Bangladesh and Pakistan).
In Eastern Asia, childbearing has been
sub-replacement since about 1990, and is currently estimated to be about 25
percent below the level required for long-term population stability. Southeast
Asia and South Asia as a whole are still above the replacement level — albeit
barely — but many countries or areas within those regions are also already below
replacement levels. Under the shadow of its harsh and punitive one Child Policy,
China has seen below-replacement fertility since the early 1990s — but South
Korea, with no such program, has had below replacement levels since the
mid-1980s, and Japan has registered almost unremitting sub-replacement fertility
since the late 1950s.
Barring an influx of immigrants, three things
inevitably happen to a country with a fertility rate below replacement level.
The working age (15-64) population peaks, and falls into long-term decline. The
same thing happens to overall national population. And third, the population
starts to gray. Smaller families rather than longer lives are the principal
force that drives the aging of a society. All these trends are transforming
those Asian societies that have sub-replacement fertility. The pace of change
depends on how steep the fertility decline is and how long it lasts.
Japan is the world’s oldest society, ever —
with a median age above 46 years, and more than a quarter of its people 65 or
older. Japan’s conventionally defined working age population began to fall in
the early 1990s and is now 10 million (nearly 12 percent) smaller than in 1995.
In 20 years, Japan’s median age may be nearly 53 — and almost a third of its
citizens may be senior citizens.
South Korea’s working age population is peaking
more or less today and is on course to shrink by about 13 percent over the next
20 years. The ROK’s median age is already above 40, and in 20 years it may be
almost 50; over those same two decades the percentage of the population who are
old will double, from 13 percent to 27 percent.
Beijing’s National Statistics Bureau has
already reported that the China’s working age population has also started to
shrink. Over the next 20 years, the U.N. Population Division expects a drop in
Chinese working age groups by more than 60 million (about 6 percent — but
gaining speed, and shrinking by about 1 percent a year in the
mid-2030s).
With shrinking workforces and old populations,
economic development becomes harder. Better health, improved education,
technological innovation and a better “business climate” can raise productivity.
But economic math is unforgiving: Increased output comes from labor, capital or
improved total factor productivity. With falling labor inputs, and greater
claims on what would otherwise have been savings and investment by a growing
retiree population, pressures against rapid economic growth are formidable. A
pronounced deceleration may also be in store.
Demographic fundamentals suggest the “age of
heroic economic growth” is probably already over. It’s not fanciful to suggest
that we are now witnessing the zenith of the “China Dream.” In other parts of
the world, including India and parts of Southeast Asia, demographic prospects
look more promising. There are no guarantees, but changes in policies and
institutions could unlock the economic promise of these prospective
trends.
The geopolitics of a new Asian
Century
Northeast Asia’s prospective stagnation poses
three sets of questions for America. First, what does a stagnating yet
aggressive China mean for regional security? Second, how does the stagnation and
aging of Japan, which is dependent on America, affect our strategic position in
Asia? Third, which nations will be the new sources of global economic
growth?
US policy toward Asia has assumed a linear
progression in China’s development, with the expectation that Beijing would
continue to grow at the same rates that it has for the past 30 years, while
becoming more militarily powerful and diplomatically assertive. Washington hoped
to “shape the choices” of an inexorably rising China.
Beijing could choose to become a responsible
power, stepping into its assigned role as a provider of global public goods such
as freedom of the seas, non-proliferation, etc. Or it could become a rival and
aggressor in Asia and face the consequences of an American-led balancing
coalition. Since the United States did not know what path China would take, it
crafted a two-pillar strategy: Engage with China to increase its stake in the
international system while balancing its growing power. The assumption behind
this strategy was the continued “rise” of China.
Stalled Chinese growth will force strategists
to rethink this assumption. We will likely face a China growing at slower rates
with increasing domestic problems and with less growth in military capability.
This China could take two distinct paths. It could turn inward and put aside its
territorial ambitions and its challenge to US leadership. This inward turn might
lead to genuine social and political reforms. Alternatively, it could become
more aggressive and recalcitrant.
China followed the first path in the 1990s as
it undertook serious economic reforms and dealt with a host of related domestic
problems. True, China was a growing security problem for the US, but its
leaders’ main focus was on economic growth and reform, joining the World Trade
Organization and dismantling the state-owned enterprise structure. Asia was more
peaceful as a result.
The second path has historical and contemporary
precedent. Mao increased regional tension during times of great domestic stress.
Sometimes he did so to rebuild “revolutionary fervor” for ambitious domestic
projects. For example, he stirred up trouble in the Taiwan Straits during the
Great Leap Forward. His successor Deng Xiaoping attacked Vietnam in 1979 partly
to consolidate his grip on power and begin his reform program.
Xi Jinping has a contemporary model for
externalizing domestic problems in Vladimir Putin. Russia is also in decline and
has been more aggressive despite its long-term decay. Like Putin, Xi is
consolidating power and removing his political enemies. He is engaging in
Maoist-style campaigns at home to build up fervor for his politically risky
anti-corruption campaign. Xi’s end game seems to be centralized control
unhindered by political opponents. So far, this internal campaign has not been
accompanied by external passivity. Xi is both rhetorically and strategically
committed to a more aggressive foreign policy.
Thus America is likely to face a China less
powerful than we anticipate — yet also a more difficult and aggressive China. on
one hand this could be dangerous. The project of “the great Chinese revival”
will take on new importance as a means of legitimacy for Xi.
On the other hand, the United States will have
more options and leverage as a result of Chinese economic stagnation. In terms
of national wealth, China does not have much of a chance of catching up to the
US It will not become a geopolitical
competitor, but rather remain a nettlesome regional challenger. If the US can
muster the political will, it will have many options to balance China’s power
and help create an Asia that fits its interests and principles.
That leads to the next challenge — Japan. Tokyo
is a vital ally, with a strong leader in Prime Minister Abe who envisions a
peaceful and liberal Asia. But unless Japan takes bold steps to compensate for
its workforce shrinkage, and uses the Trans-Pacific Partnership to enact
structural economic reform, it will have fewer resources and less manpower. A
quickly graying Japan may want the US military to remain in Japan, and will
remain a key ally, but Tokyo may have to tend to its increasingly social
burdens. The United States will have to find additional allies and bases in
Asia.
We must turn our gaze to South and Southeast
Asia. India, Vietnam, Malaysia, Indonesia and the Philippines all have strong
demographic profiles. They are the “new Asia.” They have tremendous latent
economic potential. If they reform markets the way their Northeast Asian
brethren did, they will drive economic growth and could be strong partners for
America. The Trans-Pacific Partnership is the way to achieve this. If the final
agreement is a market-oriented one, it will liberalize the economies of Vietnam
and Malaysia. Indonesia will start to feel pressure to do the same. The United
States can also encourage needed reforms in India’s economy, too.
Fast-growing Indian and Southeast Asian
economies could provide the resource base for higher defense spending. If the US
can knit together a coalition committed to the same interests and principles, it
will be able to face Beijing better. If the United States wants an Asian
century, it is time to look south.
Will it be an Indian
century?
Thanks in part to China’s slowdown and its
unfavorable demographic future, India has a chance to carve out more space for
itself in a rapidly changing Asia. A more business-friendly Indian government
under Prime Minister Narendra Modi has renewed optimism about a country with
more than 1 billion people.
India officially grew faster than China in the
final quarter of last year (although it used a new way of measuring output).
Finance Minister Arun Jaitley predicts that next year, the Indian economy will
expand by more than 8 percent.
Washington has several reasons to seek a closer
relationship with New Delhi. Both countries bend over backward to deny that
their partnership is aimed at China, but it’s no secret that they share concerns
about Beijing’s rising clout and willingness to throw its weight about
internationally. India is also an oasis of stability in a region roiled by
radical Islam. An uptick of violence in Afghanistan, as well as a surge in
terrorism and sectarian killings of minority Shiite Muslims in Pakistan,
underscore the relative calm of India.
As a model for Asia’s smaller countries to
emulate, India — democratic and pluralistic, with a large English-speaking
middle class — appeals naturally to Americans. The thriving, 3 million-strong
Indian-American community acts as a bridge between the two countries. Though the
state continues to play too large a role in its economy, the legacy of socialist
founders, India also hosts a dynamic private sector that has more in common with
its counterparts in the United States and Britain than with China’s opaque,
state-controlled firms. Under the right circumstances and provided it follows
the right policies, India could outpace its northeastern rival in coming
decades. The United States should welcome this.
At its core, an American bet on India is a bet
on its economy. This means the overarching goal of policy toward India should be
to help economic reform. At the same time, Washington should strive to deepen
trade ties to bind the two democracies more closely to each other.
Both the Indian economy and the US-India
economic relationship could do better. Growth in India has averaged a robust 6.4
percent since the launch of economic reforms in 1991. But the legacy of more
than four decades of socialism before that means India still lags behind much of
East Asia. With an annual gross domestic product of nearly $9.5 trillion,
China’s economy is five times as big.
In January, during President Obama’s visit to
New Delhi, the United States and India “elevated” their annual talks from a
“strategic dialogue” to a “strategic and commercial dialogue.” From now on, the
annual meeting between the secretary of state and India’s external-affairs
minister will be matched by a meeting between the US commerce secretary and her
Indian counterpart.
But if the past is any indication, however,
Washington often misses the forest for the trees in its relations with India.
Short-term interests of individual firms are given the highest priority, but
these do little to advance the strategic goal of boosting India’s economy and
strategic heft.
After Modi’s back-to-back summit meetings with
Obama in Washington and New Delhi, American officials are seeking ways to deepen
economic ties; a bilateral investment treaty and Indian membership in the
Asia-Pacific Economic Cooperation forum are ideas that keep
resurfacing.
Others, such as exporting liquefied gas to
energy-hungry India, are newer. Some of Modi’s signature initiatives, including
building so-called smart cities equipped with modern infrastructure, bringing
high-speed Internet connections to much of the country and turning India into a
manufacturing hub have attracted attention from America’s private companies and
its government alike. But they need to be fleshed out to determine the extent of
US involvement.
To prevent economic relations between India and
America from stagnating, Washington ought to adopt three goals.
First, it should encourage India to become a
more competitive, market-oriented economy as an end in itself, even if specific
reforms offer no immediate reward for American firms. For instance, India needs
better roads, but it would probably be Korean and Malaysian firms that would
build them.
Second, the United States should aim to remain
India’s top trade partner, counting goods and services. Secretary of State John
Kerry says he wants to quintuple US-India trade to $500 billion over the next
decade. Beyond that distant number, the United States should aim to beat China
in volume of bilateral trade with India. This ought to spur more day-to-day
attention to trade ties than a theoretical long-term target.
Finally, Washington should not allow individual
companies to hijack the agenda. To take one prominent example, India will
undoubtedly benefit from opening up its retail market to Walmart, but this is
not the most pressing economic issue the country faces.
India needs to take advantage of Modi’s
historic mandate to liberalize its labor and land markets, slash inefficient
food, fuel and fertilizer subsidies, and privatize bloated state-owned companies
that drain the national exchequer. As India’s economy grows and becomes more
outward-looking, many of these decisions will likely benefit American firms.
More importantly, they will unleash India’s economic potential. Though the
United States cannot make policy for India, it can provide assistance to
would-be Indian reformers who look to it for ideas and expertise.
During the Cold War, the United States
understood that economic development and grand strategy went together, and that
it had a stake in the economic success of countries as different as Japan and
Indonesia. Today, the future of Asia hinges, in no small measure, on India. If
India succeeds, Asia will look dramatically different, almost certainly in a
positive way, for the United States and the world.
This essay is adapted from a piece that
appeared in the Washington Examiner.
