Babes in the Asian Woods

• Detailed Comments
• Addendum A: Measuring Economic Performance
• Addendum B: Time May not be on China's Side
• Addendum C: Risks to Australia from Asia-illiterate Policy Makers

Introduction

Suggestions have been presented about ways to reduce the risks Australians face in coping with the emergence of a real 'Asia century' in the near future - eg due to the damaging effect which the global financial crisis (GFC) has had in the US and Europe on whose support Australia has traditionally relied.

Australia needs to develop solutions to deal with the Asian century - and quickly because the GFC has accelerated growth disparity between US / Europe and Asia. Mark Johnson (formerly Macquarie Bank) says US damaged its status with Arab world and Asia by Iraq war and GFC. Thus Australia must invent its own solutions (eg different investment rules for state-run / Chinese companies) - because of impact of GFC on US. Australia is part of global shift to Asia Pacific and involved in APEC whose purpose is coping with the Asia-Pacific century. One goal of current APEC meetings (identified by Singapore's PM) is to promote trade / economic activity. APEC was conceived by Hawke Government and includes world's three biggest economies. Its task is becoming harder because of GFC. Peter Brain (NIEIR) notes that state capitalist economies are recovering fast - and this will affect trade relations, foreign policies, dominant economic ideology. Kevin Rudd is trying to formalize structures to avoid conflicts like those in 20th century Europe. He believes existing arrangements are not broad enough - ie don't cover regional security, economic growth, trade and investment. Asia has world's largest militaries - many with nuclear weapons. Richard Woolcott (Rudd's envoy) expresses concerns about competition over territory / resources and environmental / energy challenges. There is also a need: (a) for regional architecture to deal with: proliferation, WMD, illegal movements of people, transnational crime, terrorism, climate change; and (b) to recognise how badly wrong things can go - as Europe's experience shows. This does not however propose the level of integration now in Europe (eg with ECB). Owen Harries argues that Rudd is trying to ride two horses- China and US and reduce the risk of them conflicting. Australia's position is boosted by participation in the G20. It is also promoting an 'Australian model' for regulation (as a good, rather than 'nasty western', model). New rules will need to be developed to deal with investment by state-run Chinese companies. Complementary or even integrated, financial rules may emerge across the region. Diane Lin (Pengana Asian Equities Long Short Fund) says China's development model is shifting into high value-added as Japan did in the 1970s and 1980s. Thus demand for Australia's resources will grow more slowly. (Clark A., 'The risks in the region', Australian Financial Review, 7-8/11/09)

There is a lot more to this for Australian business, than a decline of US influence. It implies a stronger more strategically relevant Asia. Recent Asialink National Forum concluded this requires skills to deal with those at the core of economic future. How ready is Australian community? Australian institutional investors still don't accept an Asian century - whereas overseas it is obvious. By 2020 Asian economies will be 43% of global GDP. Asia already accounts for over half Australia 2-way trade. Australia's largest trading partner (China) is now for the first time a country with which Australia has no shared experience, and which is not an ally. There is a need to develop new skills - mostly a business responsibility. Lack of community understanding is holding back Australia's engagement - eg in terms of inward investment. Australia has economic strengths, and needs to work with foreign regulators / share technology. Business must promote 'brand Australia', and seek greater transparency by FIRB. Australia must have a new generation able to communicate with major trading partners. Work is being done on supply side - boosting required knowledge and skills (including language skills). But there is also a need to increase business demand for an Asia-literate workforce - one goal of Business Alliance for Asia literacy. There is a need for increased understanding at all levels in society. Asian economies will not necessarily do business on Asian terms, so there is a need to appreciate Asian needs and perspectives [1]

China has become the world's second largest economy, upsetting the status quo of the last century. In 1820 China still had 30% of world GDP - and Japan was minor appendix that owed much of its civilization to China. But when industrializing imperialist western powers came, Japan adjusted while China resisted. China declined in every way from 1840s - while Japan became an imperial power. Japan lost WWII, but won the peace. Chinese Communist victory and Cold War made Japan into US protégé - and Japan enjoyed an economic miracle. In the 1980s Japan was expected to become #1 economically, but it never achieved this. From 1949 to 1976 Chinese economy remained closed under Mao, and economically marginal. In 1979 China's new leadership reversed economic policy - and achieved 3 decades of amazing progress since then. While China prospered, Japan declined. This will have geo-political consequences (eg render US-Japan security treaty less viable). Asia contains many geo-political fault lines. Major changes in Asia are occurring while US suffers economic woes, policy confusion and is mired in Afghanistan. Japan was an economic rival, but was geo-politically obedient - but China may not be. China has frailties - but it is clear that while 19th century was Europe's, the 20th the American century, the world has now entered the Chinese era. Doing business will require dealing with the challenge of China's competitiveness - which needs lots of homework (Lehman J., 'Uncertain times as we enter the China era', The Australian, 20/8/10) [See CPDS comments in Some Thoughts on the 'China Era']

However the main risk that Australia faces, which is illustrated by the views quoted in these articles, is the result of the lack of 'Asia literacy' even amongst those who are supposed to be most expert in the area - because Western analysts try to 'understand' Asia from a Western perspective but don't understand it from an 'Asian' perspective.

The difference is critical because, unless the 'Asian' perspective is recognised:

• assumptions being made about an 'Asian century' may simply be wrong. For example, 'Asia' may be much harder to deal with, or wracked by economic reversals. Moreover failure to understand 'Asia's' way of 'measuring' economic performance was a significant factor in to the global financial crisis (GFC) and also a threat to its economic future;
• proposals for developing a regional community through APEC to minimize the risk of conflict (or integrated financial regulation) have little prospects of success, while some  steps that are being mentioned as necessary to promote 'Asia-literacy' could primarily have the effect of exposing Australia to exploitation;
• 'babes in the Asian woods' risk being eaten by polite-faced wolves. Substantial strengthening of Australia's institutions seem advisable to avoid such a fate. The lack of real Asia literacy by Australia's opinion leaders (eg academics, politicians and the media) is already creating increased risk of poor policy decisions by governments.

Reasons for these suggestions are developed further below.

Unfortunately these issues tend to be be put in the too-hard basket and 'Asia literacy for beginners' is all that really seems to be promoted in Australia. And in 2010 , China was described by one observer as the 'invisible elephant' in the room - because Australia's economy had become highly dependent on China's rapid growth but this was not mentioned at all in the federal election campaign.

China is critical to Australia's future, but has not been mentioned in 2010 federal election campaign. Without China Australia would have been in trouble through GFC, just as much as other countries, despite government stimulus. Without China, Australia would have faced something like Greece's austerity cuts, and the helplessness of US policymakers. However Australians have not yet started to confront the issues that China poses for their future. The China boom is simply assumed to be assured and benevolent. This boom poses more challenges than the alternative (ie involves dependence on an even narrower economic base than when Australia rode on the 'sheep's back'). This, while providing rapid income growth now, could lead to massive volatility (eg given huge rapid changes in coal / iron ore prices). China requires much broader appreciation and policy preparation. While China has been an invisible elephant in the election campaign, it is very real (McCrann T., 'China, our invisible elephant', The Australian, 21/8/10) - see also Looking for the Invisible Elephant

Detailed Comments

There is no doubt about the importance for Australia of developing more effective ways to deal with 'Asia'. However it is vital to do so with more attention to an 'Asian' perspective of 'Asia' than is shown by those cited in the above articles (see Lack of Asia Literacy in Australia's Governance Crisis).

Why?

Firstly the 'Asian century' may be vastly different to what is being assumed - because, when examined from an 'Asian' perspective, it is clear that the dominant economies in East Asia (ie those with an ancient Chinese cultural heritage) operate on the basis of traditions that are radically different to the Western traditions (which have, for example, involved individualism, rational problem solving, democratic capitalism) with which Australians are familiar (see Understanding East Asia's Economic Models and Unsustainable Economic Models?).

The latter speculates, for example, about two possible scenarios that could emerge because of the incompatibility between East Asia's economic models and the international financial / economic regime established under Western traditions, involving either:

• the emergence of a 'China-centred trade-tribute system' (somewhat like that which existed in the region prior to European expansion) as the real but behind-the-scenes way in which control of the region is exerted, despite the symbolic role played by Western-style entities such as APEC or apparently democratic governments in some nations;

Illustration:  The alleged involvement of an Australian politician in attempting to facilitate a Chinese investment in a mining project in the expectation of a large commission, and his counter claim that his international networking is a good example for other politicians, illustrates differences between the way business and government operate in Australia and in 'Asia'.

Outline of Issues

Media reports suggested that:

• LNP took a dim view of Mr Johnson's involvement in the Australia China Development Association which funded his extensive overseas travel and events organised by his electorate staff. It also accepted that Mr Johnson, in trying to negotiate a coal export deal that was hoped to generate a $12m commission, had made use of his position as an MP in order to further his personal business interests (Parnell S 'I'm not embarrassed by ACDA networking', Australian 21/5/10);
• Michael Johnson never saw fit to separate his business and personal affairs (Parnell S 'Failure to lead leaves Tony looking weak', Australian, 21/5/10) ;
• Mr Johnson denies the existence of a slush fund but is unable to explain why much more was paid from an account used to earn interest on political donations than he paid into it. He suggests that expected commission would have gone to Australia China Development Association, and that his global networking activities set a good example for other politicians (Parnell S 'Johnson unable to explain $125,00 transfer to campaign', Australian,  25/5/10)

While the present writer has no way to judge the validity of such allegations, it is noted that a lack of separation between personal interests and official functions is the basis of the crony capitalism and corruption that often characterises 'East Asian' business and government - because: (a) economic activity is coordinated through social relationships rather than by a search for profitability by independent enterprises; (b) government takes a central role orchestrating economic activities; and (c) it is expected that subordinates will provide gifts to those who assist them. It has been noted (eg in China) that those with good state connections are the ones who became rich by organising economic production because it is presumed that they will act on behalf of the community as a whole.

Because of such traditions an increasing 'Asian' influence in Australia seems likely to further the breakdown in the separation between private interests and public functions (and increased corruption) that has emerged in recent years (eg see Reform of Queensland Institutions - or a Rising Tide of Public Hypocrisy?) mainly as a result of increasing private sector involvement in / influence over public sector functions. Concern about such conflicts of interest had led to the creation of the Westminster tradition of a professional politically-independent public service in the UK in the mid 19th century, but politicisation of public services over the past 2 decades has reduced constraints on the abuse of political power for private benefit.

• the emergence of financial crises in major East Asian economies in a post-GFC environment in which their domestic macroeconomic imbalances (ie domestic demand deficits / high savings rates) and poorly developed financial systems are no longer protected by current account surpluses with countries such as US. 

In brief: Other major economies (especially US which, for decades has played the role of the world's 'customer of last resort' for geopolitical reasons) can not indefinitely provide excess demand. This transition is clearly coming closer noting: (a) US policy statements about the need to emphasise export-driven growth; and (b) emerging concerns about unsustainable 'sovereign debts' (which arguably constitute stage 2 of the GFC).  And the US's likely inability to sustain excess demand is being compounded by pressure for higher wages from Chinese workers - which will accelerate the growth of domestic demand.

And 'Asian' financial systems appear to involve resource allocation by elites based on the consensus of subordinates (with a view to maximizing market share rather than profitability). This can't be sustained as growth has to shift to reliance on domestic demand - as this will cause current account surpluses to reverse into deficits and thus require international borrowing to sustain growth.  

Foreign exchange reserves can provide only short term protection.  When it becomes necessary to use them to cover a current account deficit, the result must be that export markets contract even faster and the need to drawn down reserves accelerates until it becomes vital to either put the breaks on the economy and cope with high unemployment, or try to borrow in international markets with an under-developed financial system 

Moreover 'Asian' economic traditions played a significant role in the global financial crisis and increase the risk of future financial crises (see Addendum A: Measuring China's Economic Performance below), and failure to understand what is involved is increasingly hazardous (see Addendum C: Risks to Australia from Asia-illiterate Policy Makers).

Secondly, these undiscussed incompatibilities have implications in relation to the suggestions for Asia itself and for 'Asia-literacy' in Australia recorded in the above articles.

There is a real possibility that 'Asia-literacy' is being promoted as a slogan for changes which its domestic advocates do not realize would make Australia's increasingly subject to exploitation and control.

Thirdly, Asia is not kind to 'babes in the woods'. Though it is polite to allow others to maintain face, there are traditionally no Western-style universal ethics, which favours concern for the welfare of weak outsiders. The Art of War needs to be understood, because in East Asia strategy really does traditionally involve deception, invisibility for the most powerful, getting close to one's enemies, exerting power by manipulating what others think, 'winning beforehand' by weakening enemies internally and bureaucratically-coordinated whole-of-society actions that won't be suspected by those who are unaware of the possibility.

'Babes in the Asian woods' have tended to be eaten by the polite-faced wolves.

The possibility that a form of traditional 'Art of War' strategy may have had a role in creating conditions leading to both of the events (ie the 'war against terror' and the GFC) which the first above article identified as undermining the position of the US (and Europe) was indicated in Attacking the Global Financial System? (2001). The US's idealistic desire to spread the benefits of democratic capitalism to the less fortunate (by defeating tyranny (ie ignorance) on the battlefield, or providing markets to stimulate economic globalization on its preferred democratic-capitalist model) may have been a case of imperial over-reach. Or that over-reach may have been facilitated, on the basis of strategies that involve turning one's enemy's strengths into weaknesses.

There is a need to confront the question of how Australia can be successful when its traditional reliance on the US and European powers is limited. The issues that may need attention are suggested in Australia's Governance Crisis Though the latter was written with a different purpose, it perhaps also constitutes a first-draft theory about the institutional improvements Australia needs to safely operate more independently. The biggest risk Australia faces lies with people who think they understand the complexity of 'Asia', but lack the institutions to ensure that their understanding is reliable.

At the very least, if Australia tries to adapt to an 'Asian century' without dramatically strengthening its institutions, it will be found that those who try to advance the public good by speculating about regional / national public policy concerns (such as those the above articles referenced) will find themselves manipulated as puppets (as the Hawke government may have been in first suggesting APEC), as power will go to those who invisibly do deals in back rooms for the benefits of themselves, their cronies and their ethnic groups. Ideals such as egalitarian and democracy will count for nothing.

There are indications that Australia's future is being put at risk as policy decisions by governments reflect the lack of Asia literacy that prevails amongst opinion leaders and decision makers (see Risks to Australia from Asia-illiterate Policy Makers).

Finally, 'Asia literacy for beginners' is all that seems to be promoted  in Australia.  Educators, for example, are willing to teach about language, social behaviour and business practices, but steer clear of the strategically important issues such as radically different ways of thinking, the nature of power / governance / economic goals / strategy that characterise the more economically influential communities. Without the latter insights, engagement with (east) 'Asia' is likely to be pointless at best, and hazardous at worst.

There is evidence of a weak engagement with 'Asia' by Australians. For example:

• the study of Asian languages in schools has sunk to a new low despite the prime minister's goal of promoting 'Asia literacy' [1]
• Government and Opposition agree on the need to promote Asia literacy at a forum sponsored by Asialink of Melbourne University. Australia's 'engagement' with Asia is claimed to be significant on the basis of trade volumes, yet most of this merely reflects commodity exports. Australia invests little in Asia and has only small diplomatic representation. Other major engagements involve students in Australian institutions and tourism. For many students their experience is likely to be ambivalent. Most study of Asian languages in Australia is at primary school level. The issue is not being taken seriously [1]
• Students are quitting languages such as Indonesian and Chinese - putting them in the too-hard basket PM's 'solution' to the problem (2008 National Asian Languages and Studies Program) was developed before problem was properly understood. Fewer than 6% of Year 12 students study Asian languages. And 94% of those studying Chinese have Chinese backgrounds. All who study Kerean have Korean backgrounds. 99% of those who study Indonesia abandon it by year 12. Japanese has broader appeal - but even here it is increasingly only those with Asian backgrounds who study it.  [1]

Moreover Preparing for the Asia Century (a special report in The Australian of 21/5/10) illustrated the 'beginners' level of Asia literacy that is what mostly seems to be on offer. Despite well-intended reference to the need for more than language teaching and reference to advanced courses of study of history and culture, advocates of 'Asia literacy':

• gave no clear indication that they might be able to say what the differences between the more influential 'Asian' and Western world-views and ways of doing things actually were;
• offered no comments on the strategic implications of such differences.

For example:

• Sid Myer (head of Asialink and Chairman of National Asian Languages and Studies in Schools Program) advocates educational reforms preparing for the Asia century, as does Asia Education Foundation in relation to language education. There is a need to boost the supply of teachers able to provide Asia-literacy, as well as a demand through creating employment opportunities. There is a need to emulate trading partners ability to speak English and think Asian. Asia literacy involves more than language - ie also history, geography and cultural nuances. Sheree Vertigan (Australian Secondary Principals Association) endorsed Asia literacy, noting that students are Eurocentric in the way they see the world - and they need to be aware of (a) the many opportunities in Asia and (b) that one can't just decide to do and work there  (Powell William, 'Challenges for New Generations');
• Professor Anthony Miller (ANU) suggested that proposed national curriculum approach to Asia was inferior to that of a 1940s textbook. There is a need to: understand major Asian civilizations; impact of estern colonisation; the effect of initial Japanese victories in WWI. Given its location, Australia needs to be Asia-literate - and this must involve history as well as language. This would help: people understand the need for languages; and understand why democracy does not mean the same ting; and why there are differences in business ethics, attitudes to law / human rights etc ('History is the key to understanding')
• Australia has dumbed down so far as to be unable to speak to people in the region in their own language. Asia is rising fast, and Australia is being left behind. Rhetoric about improving Asia literacy is just that. In 1960 40% of secondary students studied a foreign language - now it is jsut 12%. There is a need for far more (eg 60%) to learn foreign languages.  programs are needed to boost Asian language study and immersion in Asian in experiences in Asia. (Lindsey T., 'The power of speech')
• Australia needs to understand  Islam and Muslims because of (a) its position near Asia which houses nearly 1bn Muslims; (b) 911 events heightened scrutiny of Islam. Learning from One Another: Bringing Muslim Perspectives into Australia  presents information about this. It was written by Eeqpbal Hassim and Jennet Cole-Adams (Australian Curriculum Studies Association), and suggested originally by Shahram Akbarzadeh (National Centre for Excellence in Islamic Studies, Uni of Melbourne) ['Values and diversity: A work in progress']
• Australians are drawn to non-Asian writers in relation to Asia. Despite Australia's exposure to Asia most study is of Australia / Europe.  The  Australian Education Foundation commissioned Australian Council Education research (ACER) to investigate study of Asian content - and found little exposure to Asian content. This is unlikely to change unless Asian content is made compulsory [Kirby K. 'Left to languish, thanks to Jay Gatsby']
• Students are getting their boots muddy in the cause of Asian education - because of institutional belief in immersion in the field - according to Kent Anderson, ANU. ANU School (established as part of ANU College of Asia and the Pacific) traces development back to realization after WWII that Australia did not understand Asia - and was thus unprepared for war. It provides diverse courses - including study of Art of War ('Muddy boots are real deal')
• Alex Kostogriz (Deakin University - Centre for Teaching Asian languages and Culture) argues for improving Asian language / cultural literacy. It aims to both increase the supply of language teachers, and to promote such teaching in schools (McGilvray A. 'New centre aims to take languages to all comers')
• Asialink' Leaders Program helps Australians engage more meaningfully in Asia. It aims to improve both knowledge and networks of those who are already engaged - according to Julie Fraser. Culture is seen to be all-important. There is a deep examination of history - and consideration of why things happened. Tony Milner (ANU) hosts leaders program retreats. Major companies see advantages in executive participation. There is a need to understand significant differences between the way Australians and Singaporeans see things - which can be masked by common use of English. More generally there is value in the program because it enables understanding that many people's behaviour can be explained by their cultural background (Nicholas P 'Better skills for better leaders', )
• Schools and business have joined forces to boost high school student's interest in and understanding of Asia. The Asia-literacy Ambassadors - Partnering Business and Schools project brings them together. It builds on Business Alliance for Asia Literacy established in 2009. Andrew Fitzsimons (Dapto High School) emphasises forging ties between local businesses and Asia ('Schools forging links')
• in-country immersion aids in Asian language teaching (Mullane K 'Heated exchanges on the path to happiness',)
• proposed national curriculum is being examined to see whether it gives enough importance to Asia. Understanding Asia's importance has inspired Asia Literacy Ambassador's program. This is not just about language. Personal attributes of adaptability, resilience and sensitivity to cultural environment are seen as more important. Major multinationals will increasingly be Asian. One observer suggested that there was not really much difference between Australia and Asia, and that success mainly required enjoying and appreciating Asia (Dunn J. 'It all comes down to culture',)
• on Kangaroo Island students are undertaking a project to make a video filmed entirely in Indonesian. The project is is primarily a language studies assignment (Conley J., 'Schools linked by 5000km bridge')

One item that was promoted in the context of improved 'Asia' literacy (ie that related to understanding Islam and Muslims can be used to illustrated the difficulties of doing this at more than a 'beginners' level.

Bringing Balanced Understandings about Islam into Australian Schools
Email sent 12/7/10

Katherine Schoo,
Executive Director,
Australian Curriculum Studies Association

Re: Learning from One Another: Bringing Muslim Perspectives into Australian Schools

My attention was drawn to your teacher resource booklet jointly published with the National Centre for Excellence in Islamic Education, through an article in Brisbane's Sunday Mail

My interpretation of that article: Every Australian school student would be taught positive things about Islam and that Australia is a racist country under a plan outlined in Learning from One Another: Bringing Muslim Perspectives into Australian Schools which was published by Australian Curriculum Studies Association and Centre for Excellence in Muslim Sudies (Melbourne University). It argues that prejudice and ignorance about Islam and Muslims requires that students embrace difference and diversity. The authors are offering seminars to teachers.('Positive Islam pushed', Sunday Mail, 11/7/10)

Might I respectfully suggest that considerable care is needed in developing any such document to ensure that a balanced perspective is provided, as there seems to be dysfunctional 'baggage' associated with Islam that wouldn't be revealed by Islamic idealism any more than it would be obvious by simply considering radical Islamism. The nature of that 'baggage' (ie politically and economically damaging practical consequences of the world views that have been elaborated around Islam) is speculated in Thoughts on Hizb-ut-Tahrir in Australia.

It is not constructive to simply provide indiscriminate information to teachers without helping them to understand what works and what doesn't work (as argued more generally in relation to Proposed National History Curriculum: Information without Understanding?). More than a 'beginners' approach is necessary in relation to understanding the Muslim world, just as it is in relation to East Asia where a 'beginners' approach seems to be considered sufficient (see Babes in the Asian Woods). Even in meeting the needs of Muslim students, teachers must be aware of more than the ideals of Islam. People are more important than ideology.

I would be interested to learn what steps your Association has taken to ensure a balanced perspective in this document, ie one which takes account of the practical political and economic consequences of Islamic assumptions.

John Craig

 

• China may not have the solution, but it seems to have a problem

Addendum A: China's Economic Performance (Email sent 29/3/10)

Jackie Range

Re: your article 'Locked in with China', Australian Financial Review, March 20-21, 2010

Your article implies that China's apparent economic strength is the result of lies. The following email exchange with a Chinese economist ... [first on 23/3/10 and then on 24/3/10, 14/4/10, 16/4/10(a) and 16/4/10(b) commenting on his response to original email]..... suggests other consequences of China's disregard for economic 'truth'.

The core point is that abstract concepts such as truth are not a feature of societies with an ancient Chinese cultural heritage (see East Asia in Competing Civilizations), and this extends not only to economic statistics but also to measures of the performance of enterprises and the financial system (ie to profitability) - a fact which has had serious adverse global implications

John Craig

Addendum B: Time may not be on China's side (Email sent 20/4/10)

Rowan Callick
The Australian

Re: 'Time on China's side in power stakes', The Australian, 16/4/10

I would like to support your suggestion in the above article (which I have outlined below) that it is easy to misread China's power and intentions. However misreading can mean many things, and (contrary to your suggestions) time may not be on China's side, for reasons that are argued in more detail below. In brief it is suggested that:

• your description of how the Chinese state functions, and its consequent incompatibility with current global institutions, seems realistic;
• a big-picture / civilizational view is needed to understand China's institutions, strengths, limitations and likely international influence. The issues involved are complex, because they involve moving away from familiar intellectual frameworks (eg whether or not rational decision making can be trusted). Arrangements in Western societies (eg the role of law and money) make rationality fairly reliable, but are much weaker in societies with an ancient Chinese cultural heritage;
• the consequences of these differences are equally complex (eg the economic performance of East Asian societies depended critically on the now-compromised strength of the US's financial system; China lacks leadership capabilities relevant to truly global institutions; variations on the East Asian economic model that Japan pioneered can't really be exported except to societies with a Confucian cultural heritage (such as China); and China's international influence is likely to impede, rather than contribute to, any viable future global order);
• the absence of commitment to public truth (a consequence of the adoption of a neo-Confucian path to modernisation) is a major obstacle to China's aspiration of gaining international respect (eg because it forces suppression of dissent) and to its medium term economic prospects (because this puts financial institutions at risk). China might do better by creating an environment in which its people can think for themselves, rather than relying on Confucius' advice.

I would be interested in your response to the above speculations.

John Craig

• Misunderstanding the 'Asia' Factor in GFC
• RSPT Won't Hurt Miners: But Pity Help Naive Australians
• China's Bigger Secret

There are indications that Australia's future is being put at risk as policy decisions by governments reflect the lack of Asia literacy that prevails amongst opinion leaders and decision makers. For example:

• there seems to have been no understanding of the nature of 'Asian' economic model (ie that pioneered by Japan as the basis of its pre-1990 economic miracles, and adopted in various ways elsewhere in east Asia) and of:
  • its structural incompatibility with global financial systems established on 'Western' principles;
  • the possible effect of this incompatibility in recent world history; and, in particular;
  • the way in which this contributed to global financial instabilities;
• a former Australian prime minister, for example, seemed poorly informed about the causes of the excess savings (and international financial imbalances) that had played in the global financial crisis.

Consequences of a Lack of Asia Literacy: Misunderstanding the 'Asia' Factor in GFC (email sent 28/5/10)

Glenda Korpooral
The Australian

Re: 'The question is: has the Reserve got it right', Australian, 28/5/10

Your article described the views of a former Australian Prime Minister (Mr Paul Keating) about the causes of the global financial crisis (GFC). Many of your points seem valid.

However, there is a serious defect in Mr Keating's claim that the high savings rate in 'Asia', which undoubtedly contributed to the GFC, was primarily due to harsh IMF responses to the 1997 Asian financial crisis. This illustrates the widespread lack of 'Asia' literacy amongst Australia's opinion leaders.

My interpretation of your article: A former Australian prime minister, Paul Keating, argued that GFC had its roots in the fact that the IMF had been too tough on Indonesia during the 1997 Asian financial crisis. The IMF's pressure on Indonesia encouraged other Asian nations to save like crazy. So countries like China built up huge surpluses in subsequent years. The US Federal Reserve tapped into this Asian saving to fuel a boom in US. There is general agreement (as argued in David Wessel's book on the GFC) that ill judged easy money policies of the long Greenspan years (1987-2006) were a prime factor in the GFC. Wessel argued that: (a) Greenspan Fed kept rates low too long (b) Fed ignored signs that housing market was becoming a bubble, and that sub-prime was a risk; (c) Greenspan had too much faith in markets. RBA is now seeking to be different to Fed under Greenspan (eg raising interest rates and expressing concerns about a housing bubble). But has the RBA got it right? There is a reluctance amongst consumers and many businesses to spend, and the RBA's tools are blunt. Australia's housing boom is being driven by: state policies; strong population growth; and lack of infrastructure. Increasing interest rates to cool the boom also reduced investment in construction. The federal government seems to be trying to cool demand by its proposed RSPT. Paul Keating argues that there remains a great big cloud of excess savings in Asia and that there is a danger of contagion from concerns about problem in Europe.

Long before the 1997 Asian financial crisis some major 'Asian' countries (notably Japan and China) had constrained domestic consumption and thus accumulated excess savings. For example, the Plaza Accord between the US and Japan in 1985 involved an attempt to correct trade imbalances by changes to exchange rates - though the origin of the imbalances arguably lay in Japan's economic model, which even then was associated with the accumulation of excess savings which required capital imports into the US in order to counter-balance the US's trade deficits.

Moreover, when one looks at the intellectual basis of the economic model that was the basis of Japan's pre-1990 economic miracles, and which later spread in various forms throughout much of Asia, it is clear that it depends critically on excess savings, because of the lack of any serious emphasis on the profitable use of capital (see Understanding East Asia's Economic Models). There are 'civilizational' reasons for this (ie the lack of the emphasis on abstracts in organising social, political and economic transactions that Western societies have relied upon because of their classical Greek heritage).

The financial crisis of 1997 (which exposed the problems arising from crony capitalism in countries that had not protected their financial systems from external scrutiny with high savings rates) encouraged many other 'Asian' countries with poorly developed financial systems to increase savings as an alternative to the financial system reform the IMF advocated. Arguably such reform would have been almost culturally impossible (see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998; and my summary of Why Japan can't Deregulate its Financial System, 2000).

The 'easy money' policies adopted by the US Federal Reserve under Alan Greenspan (which helped lay the foundations of the GFC) were certainly a response to excess savings in Asia. Tho problem was that those excess savings created a 'demand deficit' in the global economy, which needed to be compensated by 'excess demand' elsewhere. And the Federal Reserve under Greenspan apparently felt obliged to ensure that the US provided this. For example, Alan Greenspan often referred to the need for easy money policies in order to guard against the risk of deflation - though this was a risk that Japan faced (because of its 'demand deficit' economic model) not a risk that the US itself faced (see Structural Incompatibility Puts Global Growth at Risk, 2003). After all, for decades the US had assumed that its goal of promoting the world-wide spread of democratic capitalism would be best achieved by acting as 'consumer of last resort' so as to maintain global growth.

Australia is at a similar risk of making poor policy choices, because its decision makers also lack real Asia literacy (see Babes in the Asian Woods).

John Craig

• there seemed to be no official understanding of the meaning of the symbol associated with China's traditional religion that was incorporated into 2010 New Year displays on Sydney's Harbour Bridge (see Sydney's 2010 New Year's Eve Celebrations: Awakening Which 'Spirit'?, January 2010)
• the federal government's controversial proposal for a Resource Super Profits Tax as a way of increasing government revenues from Australia's resource exports may have the reverse effect (ie reduce overall government revenues) because it would favour takeover of those sectors by (east) 'Asian' companies whose conventional market-share-rather-than-profits-focused business practices would tend to significantly reduce the tax base (ie profits) that the RSPT seems to be targeting as a proxy for the value of the resource itself;

RSPT Won't Hurt Miners: But Pity Help Naive Australians (email sent 26/5/10)

Hon Mr Wayne Swan, MP
Treasurer

Re: 'A Tax that will boost growth', The Australian, 24/5/10

Your article suggested that the proposed Resource Super-Profit Tax (RSPT) won't be a burden to miners. This is probably true - because paying it is likely to be optional / unnecessary for the companies that presumably aspire to gain control Australia's export oriented mineral and energy production in future.

My interpretation of your article: The RSPT has been designed to promote mining industry growth. Overall high-profit miners will pay a bit more tax. Taxes will return to the levels they were before the mining boom. Under RSPT lower margin miners will pay less tax than under the royalty system (which taxes production not profit) - and marginal mines will be more viable. Three design principles work together to exempt the normal return and risk premium of investment from tax (ie refundability of deductions if a project winds up; transfer of deductions between projects; and bond rate uplift factor that maintains the value of these deductions over time). Under RSPT a mining project would only pay if capital costs are first recovered - unlike the situation with royalties. Also there is no tax on the expected risk premium on investor's capital. So a project with high risk levels is more likely to benefit from a refund. Transferability means that government guarantees recovery of losses by transferring them to another project (rather than just carrying them forward). An uplift factor is also allowed to ensure that the value of losses is not eroded over time. Suggestions have been made that the use of the government bond rate as a hurdle rate on investment return ignores the risks inherent in mining. However in fact the government is guaranteeing that deductions (rather than being refunded) will be either used or refunded with interest paid in the meantime at government bond rate. Refundability makes the investment as safe as a bond, so the bond rate is appropriate. The RSPT avoids problems associated with the Petroleum Resource Rent Tax (ie that losses are potentially trapped inside projects). The RSPT will deliver broader economic benefits because it will allow: cuts in taxes for small business; infrastructure investment; and increases in mineral exploration and national savings.

Unfortunately your analysis above seems to ignore: (a) the relationship between the proposed RSPT and the ability of mineral and energy exporters to artificially control the profits that are earned in Australia; and (b) the likely ability of vertically-integrated 'Asian' companies, who would be both mineral / energy producers and customers, to reduce the total tax revenues that Australians would gain from mineral and energy exports. .

Mining companies have long been able to adjust the the 'profits' that are made in Australia (and thus their exposure to income-based taxation) by: (a) locating their major corporate functions outside Australia; and (b) establishing both a 'mining company' to own and control mining and processing operations in Australia, and a 'trading company' to buy product from the 'mining company' (at prices that minimize the latter's profit and income-tax obligation) in Australia, and then on-sell the product to final customers.

There is nothing new about artificial 'transfer pricing' at below market prices. The Federal Government is understood to already seek to reduce revenue losses through such tactics. However the need for the Government to try to act as an export-pricing authority for raw and partly-processed mineral and energy commodities (and to closely supervise the transactions of 'mining companies') would be greatly increased by the RSPT because much more taxation would potentially be avoidable than under current royalty-oriented arrangements. One problem with detailed government supervision of 'mining companies' is that the competitiveness of the latter has often depended, not so much on the quality of available resources, as on their flexibility in introducing technological innovations in their mining / processing operations - which government supervision would inhibit.

However this is probably not the greatest risk. The RSPT would appear likely to significantly reduce the total taxation revenue that Australia gains from its resource exports because it would encourage takeover of Australia's resource industries by its major resource customers (such as China, Japan and presumably India in the longer term). Various observers (see articles outlined following this email) have have already drawn attention to the way an RSPT would: (a) reduce the market price that needs to be paid to buy Australia's best / most potentially profitable mineral and energy assets; and (b) have a much different implications for: mineral and energy customers in 'Asia' (who are simply concerned with resource security); as compared with current profit-oriented mining companies.

Note added later: It was suggested in June 2010 that the RSPT proposal would reduce the value of Australia's mines by about 40-45% [1]. This would make takeovers much cheaper.

The effect of the RSPT proposal on making it necessary to seek Chinese capital to fund mining projects was also noted [1]

However what has not yet been publicly noted is that if resource customers in 'Asia' own resource export firms they would be able to adjust the prices paid for commodities so that no 'super-profits' were earned by the mining operation in Australia. And, because systems of political economy in East Asia are radically different to those in Western societies (ie tend to involve cronyism and the obligations of subordinates to social superiors, with much less emphasis on a rule of law and the concept of profitability through which economic activities are coordinated in liberal societies - see Understanding East Asia's Economic Models), there may be little scope for the Federal Government to exert any influence over the prices that were charged within vertically integrated 'Asian' companies. Australian authorities would have no basis for insisting that (say) Chinese companies operated in accordance with Western profit-focused business practices. Thus: no 'super-profits tax' might ever have to be to be paid by such operators; state royalties would need to be refunded by the Federal Government; and any losses incurred by mining operations would be subsidised

The RSPT sounds like a brilliant idea for Japan and China. The case for real 'Asia-literacy' (see Babes in the Asian Woods) seems to be getting stronger. Economic analysts who are apparently unaware of the way in which the strategies of East Asian enterprises and economies differ from those in Western societies (eg their orientation to maximizing market share rather than profitability) can not provide reliable advice to Australians.

John Craig

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Advantaging Takeover of Australian Mining by typically-Asian Mineral Customers: Outline of Articles

Fortescue Metals CEO (Andrew Forrest) warns that China will tighten its grip on Australian mineral industry under planned RSPT. A leading Chinese entrepreneur noted that plans for a major equity investment in a SA project would continue. Local and foreign banks have backed away from financing Fortescue projects because of potential impact of RSPT. But there does not seem to be any Chinese opposition to the tax. China sees the ability of Australian companies to develop mining projects being removed. A Chinese businessman noted that the tax would discourage investment in Australia's mining projects, but those interest in securing raw materials supplies would find investment attractive (Burrell A.,, 'New tax fortifies China's hold', Australian, 20/5/10)

The resource tax rebate on loss-making enterprises may favour China. Chinese investor seeking resource security could be major beneficiaries of RSPT according to president of Australia China Business Council in WA (Duncan Calder). Lower profits available to investors would not be a problem for Chinese investors with downstream processing operation. Under the proposed tax China would face less competition for projects from rival sources of capital (Burrell A. 'China could reap rebate on mines', Australian, 22-23/5/10

RSPT will eventually result in Australia's government writing a cheque for losses incurred by Chinese government in a failed mining venture. China will be main beneficiary of RSPT as there are two groups of investors in resource projects - those interested in profits (like Australian mining companies) and those interested only in resource security as part of economy as a whole. The RSPT is good news for the latter because it makes resources cheaper and includes refunding losses on unsuccessful ventures. China is the world's largest resources user, and focuses on resource security rather than profits (Hughes T. 'Super tax China's cup of tea', Courier Mail, 24/5/10)

• there seems to be no awareness of the implications of traditional 'Art of War' strategies which involve (amongst other things) efforts to weaken opponents' internally and thus to 'win beforehand' in any future conflict - an issue that needs to be seriously considered in view of the unwise steps that Australian leaders have been encouraged to believe was in the national interest over the past 2-3 decades (see Australia's Governance Crisis). As noted in the article referenced below, China's (bureaucratic) political elites attempt to secure their power base by marginalizing any potential competitors. Moreover:
  • Queensland's political system has been heavily influenced by ultra-nationalist Japanese elements in the 1980s who presumably had such goals, and by business / criminal networks amongst Chinese Diaspora subsequently who have a reputation for influencing governments throughout SE Asia  (see also Reform of Queensland Institutions?);
  • in the early 1990s, 'reform' of Queensland's machinery government nominally pursued idealistic goals, but in practices was notable mainly for displacing the accumulated knowledge and experience from Queensland's public sector and thus laying the groundwork for the dysfunctions and crises that have plagued that state ever since (see Queensland's Worst Government)

China's Bigger Secret (Email sent 30/7/10)

Colleen Ryan
Australian Financial review

Re: 'China's big secret', Australian Financial Review, 16/7/10

I should like to suggest that China's 'big secret' is not the pervasive influence of the Communist Party, as Richard McGregor suggested in the book your article reviewed. Rather it is the way in which power is exerted.

My interpretation of your article: China seems to visitors to have endless possibilities and to be free-wheeling and unregulated. However naive foreigners eventually discover complexities that engulf them. The Communist Party is never visible, yet its tentacles are pervasive (see The Party by Richard McGregor). Communist party has cemented its grip on power, rather than surrendering to market. The Party has marginalised all opponents - so that it alone has the ability and skill to run the country. No alternative is allowed to exist - and this is how Party maintains its stranglehold (with state ownership of strategic industries, Party Committees in all major companies with total control over choice of personnel, the introduction of unions and Communist Party Committees into privately owned companies). The involvement of Communist Party committees (with responsibility for the functions that matter most) is never publicly disclosed. The GFC convinced China's leaders of the superiority of their system. The Communist Party system is both (a) rotten, corrupt, costly and often dysfunctional; but also (b) flexible enough to absorb everything thrown at it (Ryan C., 'China's big secret', Australian Financial Review, 16/7/10).

Under 'Asian / Confucian' traditions, power is traditionally exerted by having control of access to information (most particularly by bureaucracies). Making decisions is the traditional Western criteria for having power, but this is the role of subordinates in 'Asia' (eg see Asian Power and Politics). This origin of this approach and its implications are further explored in the detailed comments on Time may not be on China's Side.

It is necessary also to recognise that 'marginalizing all opponents' who might have the ability and skill to run anything is not likely to be simply applied within 'Asian' nations such as Japan and China, but rather is a component of traditional Art of War strategies to defeat foreign opponents (eg by behind the scenes suggestions to opposing leaders about steps which superficially seem constructive to them, but which have the effect of hollowing out opponents' competences, particularly in handling information).

Australia's governance competencies have been 'hollowed out' very severely in recent years (arguably as a consequence of politicisation of public services by political leaders who believed that it was necessary to overcome 'bureaucratic resistance', but in doing so eliminated any serious reality checks on their often inadequate policies) - see Decay of Australian Public Administration. As a result, the competencies needed to provide realistic information to key decision makers has been severely weakened, and Australia is increasing at risk from the half baked policies of political populists (see On Populism).

No one will ever know whether Australia's leaders were subjected to outside encouragement to 'hollow out' the competencies needed for effective government, but in a regional environment in which the ability to access practical information and experience is now becoming the basis for economic and political power, it seems highly desirable to begin reversing the damage that naive politicians have done as soon as possible.

John Craig

• the federal Treasury appears to assume that the commodity boom being experienced in 2010 will not (in contrast to all similar booms in the past) be followed by a bust, because of the long term strength of Asian demand for Australia's resources (see Bassanese D., 'Treasury banks on extended boom', AFR, 17/5/10) an assumption that is highly suspect for reasons that the Asia-illiterate will have no way to understand (see Are East Asian Economic Models Sustainable? and Is Time on China's Side?);.

The core issue is that Asian economic miracles have been based on resource allocation by social elites on the basis of their subordinates' consensus with limited concern for profitability. Financial crises can only be avoided by maintaining a high rate of savings through large domestic demand deficits and associated current account surpluses (thus avoiding the need for external creditors who would be concerned about bad balance sheets). The ability of traditionally developed economies to support 'Asian' economic models with excess demand (and continually increasing debts) is limited, and appears likely to disappear because the unsustainability of large sovereign debts has been recognised.

• an Australian prime minister who not only spoke Chinese but was perceived to understand China: (a) was initially seen as likely to improve relationships - but ultimately proved unsuccessful in doing so; (b) spoke early in China of being a 'true friend' of China and as such offered criticism of its human rights record in Tibet -  and found that such advice was not appreciated; (c) then experienced 2 years of troubled relationships between Australia and China; (d) encountered conflicts with China in relation to climate change at the Copenhagen summit; and (e) ultimately made rude remarks about China [1]

Furthermore lack of understanding of Islam and Muslims (which can be viewed as an 'Asia literacy' question) has arguably led to Australia's participation in a 'war against terror' that effectively amounted to a 'war against ignorance' that could probably have been resolved more cheaply and easily in the academy rather than on the battlefield.

Explanation:  Australia engaged in military adventures under a 'war against terror' label without any real discussion of the strategic issues involved ( see Debating Iraq: A Nil all Draw). Moreover it seems that Islamists extremists are primarily motivated by political agendas related to the political and economic failures of Muslim-dominated societies in the modern era, which they presume is the result of 'external' oppression. However that failure is arguably actually the result of 'internal' oppression (related to communal pressures that inhibit the changes required for economic prosperity) which the Islamist agenda would arguably actually worsen (see Discouraging Pointless Extremism).

That this is an issue requiring an 'Islam-literate' response is suggested in About Arabic Thought and Islamic Science which argues that the broader world view that Islamic intellectuals have erected around the religion of Islam has reinforced the 'internal oppression' that constrains progress in such societies.