-Caveat Lector- WJPBR Email News List [EMAIL PROTECTED] Peace at any cost is a prelude to war! STRATFOR.COM Global Intelligence Update December 22, 1999 Asia's Future Centers on China and Japan Summary Grappling with the future of Asia means we must tackle two central questions: the extent to which Asia can recover from the economic disaster of 1997 and the political consequences of that collapse. The Asian economic crisis marks the end of an era. The future of Asia depends on the future of China, the region's largest nation, and Japan, Asia's largest economy. Analysis Asia's explosive economic growth lasted for several decades and embraced most of east and southeast Asia. The universality of growth profoundly impacted the region's psychology, particularly at a time when the United States was in decline. It seemed that a lasting change of the guard was underway. Not only was there a sense that Asia was surpassing the United States as the center of international economic life, but there was a deeper belief that the very nature of international power was changing. For the United States, power rests on the three pillars of economics, politics and the military. In recent times, Asia, and particularly Japan, has rested its power almost exclusively on economic growth. Prior to the economic crisis in 1997, Asia appeared to be surpassing the United States economically and seemed to be redefining the meaning of international power by rendering traditional, politico-military considerations obsolete. Asia's rapid economic growth overshadowed the need for military competition. Moreover, the United States provided for the military defense of much of Asia. The U.S. Navy served to protect the region's strategic interests, including shipping lanes, while keeping in check potential regional powers, like China and Russia. With intra-regional disputes muted by the shared economic focus, Asia did not have a great politico-military power. Nevertheless, the theory went, Asia's economic vibrancy rendered American military power moot. Indeed, American expenditures on military power had undermined its own economic competitiveness. After The Asian Economic Crisis The Asian economic crisis shattered the region's self-image. Asia would no longer be the vibrant center of the global economy. A new consensus emerged with the view that Asia had sown the seeds of its own disaster. Far from being miraculous, Asian economic growth was the problem. The economy that had fueled Asian growth had also undermined capital structure. After all, any economy can grow if it is indifferent to profit. It can compete on price and it can afford investments that would appear irrational in an economy that measures success by rates of return on capital. Much said about Asia prior to 1997 was, in retrospect, overblown nonsense. After all, if the Asian savings rate, work ethic and discipline were all dedicated to a fundamentally flawed project then Asian excellence was itself flawed. This realization has been psychologically shattering. Lacking any politico-military power, Asians had to confront the illusion that they were at the dynamic center of the global economy. The burning issue in Asia, particularly in Japan, was a project in self redefinition that highlighted unique excellence. Asia will emerge from the current economic crisis in a markedly changed condition, but it will remain an influential and potentially dangerous region. East Asian and Pacific nations comprised 29.4 percent of the world's GDP in 1997. This unbalanced over-dependence on the economy as a measure of power will give way to a more balanced reality, in which economic power by itself will be supplemented by political and military power. China exemplifies this tendency. In the face of serious economic, China has sought to stabilize itself by resorting to other types of power. It has tried to revive an ideological defense of its government. It has used military and political forces to suppress opposition. And it has projected a more complex profile beyond its borders, moving from a country primarily interested in economic relations to a nation interested in great power status. Beijing has made it known that it expects to exercise international political power based not only on its economic strength, but on its military power. Thus, one major consequence of Asia's economic crisis is the return of Asia to a more normal, balanced status in the world. China has already returned to a self-image in which power rests on military and political power as well as economics. We expect that the rest of Asia will return to this more traditional understanding. In particular, Japan, the second largest economy in the world, is likely to abandon its reliance on economic growth in favor of a more balanced approach, adding politico-military power with the purely economic. The future of Asia depends on the future of China, the largest country, and Japan, the largest economy. This view is quite traditional. Of course, these countries are vastly different, but they share two things in common. First, both of their economic experiments have encountered profound difficulties. Second, each will face serious domestic political consequences, which will have severe repercussions for the world. The Turmoil in China China has managed, at least publicly, to minimize its economic problems. All Asian economies lack transparency, which means that they are able to falsify many of the statistics about themselves and therefore appear healthier than they are. China has three advantages in this. First, it is so vast, with many of its regions so backward, that the sheer collection and collation of economic statistics is impossible. Second, China is a communist country. This means that it has a bias in measuring economic activity in terms of output rather than profitability. One can go bankrupt on high output. In addition, as a communist country, it regards economic statistics as political property and therefore tends to falsify those statistics. Finally, it maintains an Asian banking system with accounting rules that do not assure high levels of fiduciary responsibility. Particularly when trouble arises, Asian banks have the ability to manufacture more satisfactory realities than would otherwise be the case. While no one, not even the Beijing government, has a clear idea of what is happening in the Chinese economy, it is clear that the economy is much worse than China had hoped after the 1997 crisis. It is also clear that Beijing is extremely concerned about the social and political consequences of economic failure. Under Deng, China abandoned its ideological justification for its government in favor of a functional justification. Say what you might, the economy worked. Following 1997, it is difficult to ignore the fact that it is not working. Returning to Maoism is hardly the solution. Thus, the government has been using direct measures to maintain control, from suppressing Xinjiang separatists to crushing Falun Gong. It is important to understand the extraordinary domestic transformation China has undergone since 1995. The government responded to the economic crisis by imposing powerful social, political and security controls on the population. Clearly, Beijing has been worried, and with good reason. Under Deng's redefinition of socialism, the government's legitimacy depended on its economic performance. Now, the economy is doing poorly, with little reason to expect improvement. So support for the government needs to be gathered through means other than economic. A tremendous tension underlies China. Coastal China continues to look to the exterior for economic relations that enable growth, while inland China sees, in this region, the seeds of destruction for a united China. In the 1990s, China's coastal region performed extraordinarily well, but Chinese leaders are wary of foreign forces. Now the government is increasingly depending on inland China to serve as its foundation. This is a very old story in China. Over the century, it has vacillated between an isolationist peasant-based economy and an open, merchant-based economy. In the former model, China is poor but virtuous and the emperor is secure. In the latter, some Chinese are rich, others are poor and the emperor is vulnerable to the plots of the coastal merchant's foreign friends. Mao chose the former peasant-based course and closed off China from the imperialists. Deng tried to control the open model and have the best of both worlds. While the economy surged, all sins were forgiven. Now that the economy is weak, no sin can be overlooked. Beijing cannot simply seal off the coastal cities. They can throw out foreign telecommunications companies. But the government and its officials are themselves so deeply enmeshed in trade with the West that enclosing China is a difficult option, short of a massive governmental purge and a reign of terror like the Cultural Revolution. The government has neither the stomach nor the legitimacy for such an undertaking. Therefore, in spite of China's weakened economic condition, official and unofficial ties with foreign businesses will continue, resulting in an intensifying disparity between coastal entrepreneurs and the rest of the country. Beijing will try to tax the entrepreneurs to placate the countryside. The entrepreneurs will resist, and tensions will rise. Can the tensions be contained? Can China resist the manipulation of foreign business interests and their Chinese allies without triggering a massive reaction form the interior? Beijing's policy under Jiang has been to attempt to balance these forces, to maintain a massive if lessened degree of commerce with the West while using the interior to control the coastal officials. It is a balancing act that is difficult to maintain and in Chinese history, one which usually tilts to one side. Mao was no fool. He took an extreme course because he knew he would lose control if he tried both. We therefore expect a massive shift in China in the coming decade. On the whole, the greatest probability is for a serious fragmentation of China's national fabric. Toward the end of the decade, China will resemble China of the 1920s more than China of the 1990s. Another possibility is a massive return to the anti- Westernism of the 1950s and 1960s. Beijing can maintain its national integrity by following the Maoist road. However, given government corruption, and the deep involvement of senior party official's families in foreign trade, it is an unlikely outcome short of a Maoist rebellion. Our forecast is for a deeply troubled China, increasingly torn by domestic strife, with a government, in the face of it, alternating between brutal repression and helplessness. In short, as with Russia, one should not confuse China's facade with its reality. The Rise of Japan With China in turmoil, the nation likely to take a leading role in Asia is Japan, even though it is not a role that Japan relishes. We should, however, bear in mind two important facts. The World War II generation responsible for Japan's defeat has died and the post-war generation that made peace with being a purely economic country has been discredited by the country's decade of economic failures. Thus, the new generation regards the war as ancient history and is deeply suspicious of Japan's economic road to greatness. This is the generation that will define Japanese politics in next decade. Members of this generation understand that Japan's decade- long depression cannot end by the traditional solution of an export surge into the United States. They also understand they cannot force a Japanese recovery without a massive overhaul of the country's financial system. Understanding this difficulty, they realize that they must export, but not simply to the United States. They are therefore looking to Asia, and experimenting with ideas such as Asian Monetary Funds, Asian Common Markets and other Asian solutions to Asian economic problems. This new generation also understands that to make this happen, an Asian political framework must be created. With Europe as a model, they see that such a framework is not wholly incompatible with a close security relationship with the United States. The new generation is also aware that European countries, even with bad memories of World War II Germany, nonetheless accept German leadership if not primacy. By analogy, they know that a similar scenario can be tried in Japan. The thinking about economic solutions leads inevitably to the political framework and with that, military underpinning. Much nonsense exists about Japan being unarmed. With a defense budget of some $35 billion, Japan's defense spending exceeds that of both Russia and China. Tokyo has the second-largest navy in Asia - behind the United States -- a substantial standing army, and its technology is second to few. The military option is Japan's for the taking, should it choose. In our view, the post-war consensus within Japan about Japanese political life cannot long survive the economic disaster of the 1990s and the passing of the generations that crafted that consensus. The first decade of 2000 will mark a transition from Japan thinking of itself as a great economic power to Japan thinking of itself as a great power, period. Given the de- synchronization of the global economy, we think Japan's shift is inevitable. This shift will intensify competition within the United States. As Japan seeks markets in Asia, including in China, it will face stiff competition with the United States. Asian countries will find themselves in a position in which they must make complex strategic choices, rooted in economic, political and ultimately military concerns. The opportunities for misunderstanding between the United States and Japan will be substantial. Indeed, they will be inevitable. In fact, signs of such a shift in Japanese thinking have already begun to appear. Discussions regarding the military's posture have become less taboo as Japan is forced to reconsider its vulnerability in the region. The government has already opened debate on participation in U.N. peacekeeping forces, which will inevitably lead to discussions on the relevance of Article 9 of the Constitution, which bans Japan's use of military force to settle a dispute. Japan has already begun to prepare for its own multi- purpose reconnaissance satellite system, engaged in joint naval exercises with neighboring nations, and debated the addition of aerial refueling capabilities to its defense forces. De-synchronization is a process in which massive segments of the world economy begin moving in different, and even contradictory, directions. If we are correct, and the strains on China will prove more than the government can manage, then it follows that with the U.S. economy moving one way and the Japanese economy moving another, and with both obsessed with exports, the opportunities for friction will be substantial. When our expectation of a United States moving into economic problems later in the decade is factored in, the friction is only likely to increase. The Rest of Asia As China's internal pressures intensify and Japan becomes more assertive, the Korean Peninsula will become the epicenter of tensions in Northeast Asia. The Korean Peninsula is both a remnant of the Cold War and a traditional focal point of conflict between China and Japan. In addition, both North Korea and South Korea have recently accelerated moves to break out of U.S-imposed constraints. The North is pursuing a diplomatic offensive and the South is seeking to limit its reliance on the U.S. military. In Southeast Asia, Indonesia will continue to be the center of attention as it struggles to maintaining unity and redefine its role among its neighbors. Strategically, Indonesia attracts the attention of China, Japan, and the United States as it lies astride major Asian shipping lanes. As well, the separatist struggles in Indonesia may well redefine relations among Southeast Asian nations as they struggle with the concept of non-interference over the fear of a separatist domino effect should Indonesia disintegrate. For the rest of Asia, domestic affairs will be conditioned by the growing influence of Japan and the increasing resistance by the United States to Japanese influence and power. It will be a time when there are opportunities for playing the two powers against one another. There will be times when lesser nations are trapped between them. Indeed, it is our view that the next decade will be marked by countries -- from South Korea to Singapore -- trying to calculate their best interests between the opportunities of Asian economic, political and military structures dominated by Japan and their relations with the United States. It will not be a simple or easy time for any of them. (c) 1999, Stratfor, Inc. **COPYRIGHT NOTICE** In accordance with Title 17 U. S. C. 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