Babes in the Asian Woods (2009+)

• Detailed Comments (Asia Literacy: Don't Put the Cart Before the Horse   A Strategic Approach to Asia-Literacy)

Addenda

• A: Economic and Geo-political Risks from Asia-illiterate Policy Making
• B: Assessing China's Economic Performance (China may not have the solution, but it seems to have a problem)
• C: Complications in Assessing 'Asia' in Terms of Western Economics
• D: Outline of "Australia alone! .... And illiterate" and CPDS Comments

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']

[See also outline of Waller K., 'Is Australia truly ready for the Asian century’, The Conversation, 23/11/11, and comments on it by the present writer below]

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 most of those who are supposed to be most expert in the area - because: (a) Western analysts typically try to 'understand' Asia from a Western perspective but don't understand it from an 'Asian' perspective; (b) those who do have an understanding of 'Asia' seem unable to explain clearly what that actually means; and (c) practitioners accept that it is different without trying to understand it.

One long-term expert observer of East Asia's increasing economic power and political influence has a quite apocalyptic view of Australia's prospects, if this situation is not remedied (see Addendum D: Outline of "Australia alone! .... And illiterate" and CPDS Comments).

However even if Australia's predicament is not so grim, proper understanding is critical because, unless the 'Asian' perspective is recognised:

• analysis conducted on the basis of the Western models can be grossly misleading - because they may deal only with the Westernised 'face' that has been put on traditional arrangements that operate quite differently (or, in the case of China, with the Westernised 'face' that China might have put on if it had not been so large that this was not seen to be necessary);
• 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 assessing economic performance was a significant factor in 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.
• it can be impossible to properly understand aspects of Western societies that are invisible to those immersed in them, yet blindingly obvious when examined from another point of view.

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 (see Looking for the Invisible Elephant).

Moreover observers who clearly do understand 'Asia', and advocate lifting Australia's standards to cope with the emerging challenge, risk taking an overly-simplistic view of what is required if their knowledge of 'Asia' is not balanced by the considerations that experts in other areas could suggest if only they were aware of the 'Asian' dimension (see Lifting Australia's Standards in Response to 'Asia'?).

• What does an 'Asian Century' Imply?
• Undiscussed Incompatibilities
• Business engagement faces fundamental structural obstacles
• Babes and polite-faced wolves
• Asia literacy for Beginners is not Good Enough (A Strategic Approach to Asia-Literacy + Understanding China: Focusing Education on the Under Fifteens Would be Fatal)
• Better Understanding the West

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 articles outlined above (see Lack of Asia Literacy in Australia's Governance Crisis).

Why?

What does an Asian Century Imply?

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 with which Australians are familiar (see Some Thoughts on the 'China Era', Understanding East Asia's Neo-Confucian Systems of Socio-political-economy and Unsustainable Economic Models?).

In simplest terms an 'Asian century' arguably implies that intuitive, hierarchical and autocratic groups would prove better able to deal with ongoing economic and political challenges than rational individuals operating within the framework of individual liberty, a rule of law, democratic governance and profit seeking enterprises that Western societies have adopted.

Unsustainable Economic Models? speculates about two possible scenarios that could emerge because of the incompatibility between East Asia's neo-Confucian systems of socio-political-economy and the international financial / economic / political 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 draw down reserves accelerates until it becomes vital to either put the brakes on the economy and cope with high unemployment, or try to borrow in international markets with an under-developed financial system. 

This scenario implies that what some expect to be an 'Asian century' could turn out to be little more than an Asian decade (see also Asian Millennium or Asian Decade?).

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

Undiscussed Incompatabilities

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

In the first article, for example:

• reference was made to proposals are being developed (eg by Mr Rudd's envoy, Richard Woolcott) for an Asian Community which would hopefully avoid conflicts like those amongst European societies. However, a fair case can be that the failure to confront differences in cultural assumptions was a major factor in those conflicts in Europe (see Fragmentation of the Global Order in Competing Civilizations) - because of the resulting misunderstandings and poor communication. Similar causes seem to have a role in some current international conflicts which adversely affect Asia and the Middle East (see Discouraging Pointless Extremism);
• reference was made to the possible emergence of complementary or even integrated rules for financial regulation across the Asia-Pacific region. There are however obstacles to this - such as the difference between Western-style concepts of a 'rule of law' and East Asian 'rule-of-man' traditions (see Obstacles to Effective Global Regulation). Practical progress is unlikely to be facilitated by those who don't even mention such differences;
• suggestions (by Diane Lin) were cited about changes in China's economic model to be more like Japan's became in the 1970s and 1980s - without mentioning the economic hole that Japan fell into in the 1990s because of the incompatibility between its financial system and the global financial and monetary regime established under Western cultural traditions (see Japan's Predicament);

In the second article:

• reference was made to the need for a 'transparent' approach to foreign investment by Australia's Foreign Investment Review Board. 'Transparency' is appropriate under Western rule-of-law traditions (where the goal is to facilitate independent initiative) - but is incompatible with the rule-of-man traditions that characterise the (east) Asian economic models (where the goal is to ensure that initiatives are not independent). The concept of 'transparency' has no place in societies that don't rely on the abstract concepts that the West inherited through its classical Greek heritage (see also comments on obstacles to financial 'transparency' in The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998);
• it was suggested that Australia needs to work with Asian regulators in order to develop economic opportunities in Asia. This amounts to operating under 'Asian' economic models that seek to eliminate independent initiative

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.

Business engagement faces fundamental structural obstacles

Business is apparently being encouraged to engage with 'Asia' because of its growth and market opportunities by those (eg economists) who have no apparent idea of the structural obstacles to such engagement (see East Asia in Competing Civilizations and Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics).

As the former noted Western societies are organised to facilitate rational decisions and initiative by individuals (eg by a rule of law and capitalistic emphasis on profitability in the use of capital). However East Asian societies such as Japan and China are organised on the assumption that individuals are compliant components in a society-wide 'organism', where there are no fixed rules (which are needed to facilitate individual rationality) and decisions are based on consensus within educated / intuitive / hierarchical / autocratic groups.

Babes and Polite-faced Wolves

East '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 'winning without fighting', deception, invisibility for the most powerful, 'holding up a mirror' so that when others look all they see is a reflection of themselves, 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.

In particular proposals for re-vamping Australia’s defence strategies in the face of apparently growing militarism in China focused on increasing Australia’s conventional military and security capacities. Yet a vastly broader response is probably needed – because of the linkage between many different types of actions (eg military, business, social, political and even criminal actions) under Art of War approaches to strategy (see Comments on Australia's Strategic Edge in 2030);

'Babes in the Asian woods' have tended to be eaten by the polite-faced wolves. For example there are reasonable grounds for suggesting that what is now seen as a potential 'Asian century' represents the realization of Japan's 1930's aspirations for an 'Asian Co-prosperity Sphere' through traditional non-militaristic 'Art of War' tactics.

Also 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 encouraging one's enemy to turn their 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 and the Need for Nation Building 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.

It is understood that in SE Asia, offshore Chinese communities (descendents of refugees from China during one of its internal wars) have at times been seen to have a disruptive influence on local economic and political systems (eg by gaining economic power by working as ethnic networks, influencing / corrupting local political systems and supporting  collaboration between commercial operations and organised crime). 

It has been suggested that much of Indonesia's economy is controlled by Chinese Diaspora, and that revenues are often recorded in Singapore, thus influencing the economic statistics and tax revenues of both nations (personal communication for a contact with business dealings in the region). Similar 'Chinese' influences are undoubtedly involved in Australia (and the present writer was directly exposed to what seemed to be similar influences from the dark side of Japan exerting generally-unrecognised pressure on Queensland's political and economic directions in the 1980s).

There are indications that Australia's future is being put at risk as decisions about economic policies and international relations reflect the lack of Asia literacy that prevails amongst opinion leaders and decision makers (see Risks from Asia-illiterate Policy Making).

Asia literacy for Beginners is Not Good Enough

'Asia literacy for beginners' has seemed to be all that is promoted  in Australia.  Educators, for example, have been 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 illustrated the difficulties of doing this at more than a 'beginners' level (see Bringing Balanced Understandings about Islam into Australian Schools).

Such 'Asia literacy for beginners' is almost useless because a reasonable degree of sophisticated understanding of East Asia is needed before it is possible to even understand why understanding is difficult (see Understanding 'Asia').

However one advocate of a realistic understanding of China suggested merely accepting that it was different without attempting to consider why this is so - and this would be a serious limitation because there are risks which would thus not be understood (see Making Sense of the Chinese Way).

Another proposal was to abandon efforts to promote 'Asia literacy' (as this merely reveals what divides Australia from Asia) and instead focus on research into common challenges. However, while the latter is necessary, it is not sufficient.

Asia Literacy: Don't Put the Cart Before the Horse (email sent 14/3/12)

Professor Kanishka Jayasuriya,
University of Adelaide

Re: Beyond Asian literacy: understanding what makes us the same, The Conversation, 14/3/12

Your article suggests that an ‘Asian literacy model’ (focused on language, history and cultural difference) has to date been the basis of Australia’s research into Asia, and that this focus on what divides us should be replaced by a research emphasis on common challenges.

On the basis of no involvement in formal ‘Asian studies’, but an independent effort to ‘reverse engineer’ the intellectual basis of Japan’s post-WWII economic miracles (see East Asia in Competing Civilizations) , I would like to submit for your consideration that:

• There has been no serious ‘Asia literacy’ demonstrated in academic proposals to boost Australia’s engagement with Asia (see Asia literacy for Beginners is not Good Enough);
• Australia’s and global efforts to engage successfully with East Asia have often been unsuccessful and dysfunctional as a consequence of a lack of real ‘Asia literacy’ (eg see Babes in the Asian Woods and the section on Economic and Geo-political Risks from Asia-illiterate Policy Making in particular).

There is certainly (as your article suggested) a need to focus on challenges that apply to the region as a whole, but no point in seeking joint solutions until there is real understanding of how East Asian societies with an ancient Chinese cultural heritage go about dealing with challenges (including those posed by powerful foreigners). Some reasons to suspect that your proposal for collaboration in the search for solutions to common challenges might not be straight forward are outlined in Eurocentric Aspirations in a World of Rising 'Asian' Influence.

I would be interested in your response to my speculations.

John Craig

Some suggestions are outlined below about: (a) what might be addressed in a more strategic approach to boosting Asia-literacy; and (b) the need to educate those who provide policy advice to governments and business leaders (rather than school children) in the first instance.

A Strategic Approach to Asia Literacy (email sent 23/3/11)

Ben Jensen
Program Director, School Education,
Grattan Institute

Re: Language skills vital in an Asia-led world, The Australian, 23/3/11

I should like to suggest that the issues involved in boosting Asia-literacy are much more complex than improving individuals’ knowledge of Asian languages, history and culture that your article suggested. For example, there are fundamental weaknesses in some major ‘Asian’ systems of socio-political economy that appear to make them dependent on the economic dominance of Western societies (and thus perhaps not sustainable), and also risks to Australia’s prospects and security that flow from the pervasive lack of Asia-literacy in relation to current public policy issues.

My interpretation of your article: Australia is not educating people to succeed in a world led by Asian countries. Students are not performing as well as their Asian peers. Asian language education in Australia is poor (with too few teachers and students). Yet Australia’s economic prospects depend on continued Asian growth. Education should aim at what children will need to be able to do in 2050 – when Asian economies are forecast to be the world’s largest. Careers will depend on being able to cope in Asia. Parents should demand Asian languages for their children. it will take many years to even train the needed teachers. There is a need for a plan to boost Asia literacy.

In building a case for increasing Asia-literacy, I respectfully suggest that attention needs to be focused not only on the needs of children but also on the even more urgent needs for community leaders to gain some understanding of strategic issues such as:

• The radically different epistemologies of societies with an ancient Chinese cultural heritage that give rise to quite different approaches to: knowledge; power; governance and economic goals (see East Asia in Competing Civilizations);
• The neo-Confucian systems of socio-political economy that have been developed in East Asian societies such as Japan and China that lack a Western cultural heritage, and their implications for others. For example:
  • the demand deficits / savings gluts that those systems apparently require seem to be: (a) closely involved in a novel form of industrial protectionism through financial system distortions that is not easily perceived by the Asia-illiterate (see Resist Protectionism: Your call is decades too late); and (b) a significant factor in the emergence of the global financial crisis (see Impacting the Global Economy);
  • the neo-Confucian states are arguably more interested in disrupting a global order than in taking a leading role in it, as observers assume that they would if they behaved in the same way as their Western equivalents - see Eurocentric Aspirations in a World of Rising ‘Asian’ Influence;
• Traditional Art of War strategies. Recent proposals by Professor Ross Babbage for re-vamping Australia’s defence strategies in the face of apparently growing militarism in China focused on increasing Australia’s conventional military and security capacities. Yet a vastly broader response is probably needed – because of the linkage between many different types of actions (eg military, business, social, political and even criminal actions) under Art of War approaches to strategy (see Comments on Australia's Strategic Edge in 2030);
• Whether the future will really be led by ‘Asian’ countries – so that Australians need to make the adjustments required to succeed in a (say) neo-Confucian environment (an environment in which traditions such as universal values, individual liberty, egalitarianism, a rule of law, financial transparency, reliable statistics, democracy and capitalism would no longer dominate) – see Future of the World: Again?.

General comments on the need for a more strategic approach to Asia-literacy are in Babes in the Asian Woods. This includes comments on: (a) the inadequacy of the widespread calls for boosting Asia-literacy simply in terms of educating students in Asian languages, history and culture; and (b) the many areas in which community leaders risk blundering into policy mistakes because of their pervasive lack of Asia-literacy.

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

John Craig

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Understanding China: Focusing Education on the Under Fifteens Would be Fatal (email sent 13/4/11)

Professor David Goodman
China Studies Centre
University of Sydney

And

David Morris
Vice Chancellor’s Office
University of Sydney

Re: Why every child under fifteen should learn to speak Chinese, The Conversation, 12/4/11

Your article suggested that Australians need to better understand China (by both learning the language and direct engagement), as those who do not have the skills to succeed in the emerging China-centred environment will be fearful and angry. And to oversimplify, you also suggested that this requires: (a) training more language teachers, (b) rationalising courses and (c) promoting a national focus on China.

I should like to respectfully submit that, in boosting understanding of China, there is primarily a need to raise the ‘Asia-literacy’ of those who advise Australia’s political leaders (eg bureaucrats, economists, business, research institutions, unions, associations, media) because only by boosting their understanding of what is different about societies with an ancient Chinese cultural heritage will it be possible to realistically judge whether the assumptions made in your article are valid (ie that China will become the world’s largest economy, and that engagement with China on its own terms is Australia’s best response).

Some reasons for suggesting a ‘policy-maker’ oriented approach in the first instance are outlined in Babes in the Asian Woods. The latter suggests for example that:

• ‘Asia-literacy for beginners courses’ (eg for children) are all that seem to be on offer, and are grossly inadequate;
• Different scenarios need to be considered in relation to China’s rise (as this might, for example, prove unsustainable or result in regional arrangements that are incompatible with Australia’s institutions). These scenarios can’t be properly evaluated either by Asia-illiterate policy makers, or by those who understand ‘Asia’ but don’t also have a deep understanding of the current international political and economic environment;
• There appear to be innumerable (probable) mistakes being made by Australian policy makers because of their lack of Asia literacy.

There is no doubt that Australia needs to better understand China, but it would be fatal to target under-fifteen year olds as the front line in boosting such understanding. A much more strategic approach seems to be needed (eg as suggested in A Strategic Approach to Asia Literacy) .

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

Regards

John Craig

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Email response from David Goodman (received 13/4/11)

Thanks for your email.

Well of course I don't agree that targeting young people would be fatal.

I might possibly agree that targeting young people at the expense of everything else would be misguided, but wasn't aware that this is what we were arguing.

And, yes, the prescriptions you suggest, are also part of what's needed.

My concern is that we discuss and interact at all levels and all generations.

Best
David

Better Understanding the West

Finally, examining 'Asia' from a Western viewpoint potentially impedes understanding of Western traditions themselves – because it is possible to be blind to what surrounds an observer every day (as water may be to a fish) though important features might be obvious when examined from another point of view.

For example Christianity seems to be of foundational importance to the success that Western societies have achieved in recent centuries (see Christian Foundations of Liberal Western Institutions.  In particular, the Judeo-Christian tradition allowed the emergence of simplified problem spaces in which rationality could work as an effective means for problem solving (ie social, economic and political contexts in which ‘truth’, the notion that abstract ideas model reality, can usefully be used).  This may not obvious to those immersed in that tradition, yet be apparent from the viewpoint of East Asian societies with an ancient Chinese cultural heritage – where information is used to transform reality directly (ie to transform individuals or communities) rather than to seek ‘truth’ (see Australia's National History Curriculum: Making Education Futile and Highlighting the Importance of Christianity?).  It is understood that some Chinese observers (whose traditions do not empower individuals in this way) have suggested that the West's religion (ie Christianity) is the main foundation of its traditional strengths (personal communication)

 

Misunderstandings

• Misunderstanding the 'Asia' Factor in GFC
• Realism on China: Or Reinforcing Misconception of 'Asia'?
• Making Sense of the Chinese Way
• Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics
• Matusik 5 - August 2011: Featuring 'Babes in the Asian Woods'
• Embracing Asia Requires Understanding
• Discovering "A Good Idea of what China's Identity Really is" Requires Thinking Outside the Square
• Eyes Wide Shut at Davos? (Is China becoming Capitalistic?)
• Soros might also see the world through blinkers
• Misleading Comparisons with Japan's Post-1990 Recession + No! Western bond markets are nothing like Japan's
• Re-reading the China Story
• Correcting a Few Misconceptions
• China can't be properly understood in terms of Western economics
• China's Bigger Secret
• Communism Versus Confucianism: The Continuing Contest in China

Problems in Economic Policies

• Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems
• Preventing Economic Stagnation
• Ending Policy Paralysis
• RSPT Won't Hurt Miners: But Pity Help Naive Australians
• Getting out of the Economic Quicksand
• Economic Renewal
• China can't fix the global currency crisis without economic disaster
• Resist Protectionism: Your Call is Decades Too Late
• An Alternative to Scapegoating Capitalism
• World facing 'Crisis of non-Capitalism': Non-economist (But the real problem seems to be in Asia)

Problems in International Relations

• Asia's Superpower Shuffle
• Economics is only One Factor in Diplomacy
• The Need for Asia Literacy in US and Australian Foreign Policy
• 'Global Trends 2030' Report: Looking Inside the 'Black Box' of Cultural Differences
• Grand Strategy
• US can't play a 'conciliation' role in Asia without understanding it
• Can Australia Help China and the US to Get Along?
• Preparing for Economic Warfare
• Soft Power and Australia's Defence Capacity
• Eurocentric Aspirations in a World of Rising 'Asian' Influence + Nice try, but it can't happen
• China's Plans
• Time May not be on China's Side (A Simple View of Confucianism)
• Asian Millennium or Asian Decade?

   

There are indications that policy decisions by governments reflect the lack of Asia literacy that prevails amongst opinion leaders and decision makers. Examples are presented below of misunderstandings, and of consequent problems in economic policies and international relations.

Misunderstandings

• there seems to have been no understanding of the nature of 'Asian' systems of socio-political-economy (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 a role 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

• another Australian prime minister who not only spoke Chinese but was perceived to understand China:
  • was initially seen as likely to improve relationships;
  • 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;
  • then experienced 2 years of troubled relationships between Australia and China;
  • encountered conflicts with China in relation to climate change at the Copenhagen summit; and
  • later made rude remarks about China [1].

  Ultimately he seemed to advise the US Secretary of State that it might be necessary to use force against China if other means to integrate it into the international order proved unsuccessful - advice that risked merely reinforcing misguided perceptions about the challenge of peacefully creating an integrated global political and economic regime;

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  Realism on China: Or Reinforcing Misconception of 'Asia'? (email sent 8/12/10)

  Editor
  The Australian - NOT FOR PUBLICATION

  Re: ‘Rudd’s realism on China is in the national interest’ , editorial, The Australian, 7/12/10

  Your editorial (which is outlined below) supported the (Wiki) leaked advice by Australia’s former prime minister to the US Secretary of State, namely that all efforts must be made to integrate China into the international political and economic system, but that if all else fails it may be necessary to use force.

  However I should like to suggest that this is misleading because: (a) China simply can’t be integrated into the international system, so Mr Rudd is in effect advocating conflict; (b) history shows that the use of force may not be constructive in integrating incompatible systems; and (c) there are internal limitations in China’s system that are likely to lead it to long term problems, and many options available to others (especially to the US) that have nothing to do with the use of force.

  These points are developed further below.

  John Craig

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  Outline of Editorial and Details of Response

  An interpretation of ‘Rudd’s realism on China is in the national interest’: China could have anticipated Kevin Rudd’s realism on China in his leaked March 2009 conversation with US Secretary of State. He spoke of enticing China into deeper diplomatic agreements and building regional trade networks, while adding that containing China by force was an option if ‘everything goes wrong’. Just because a country is not Australia’s best ally, it is not an enemy. China’s President invited Australia along for a ride with China in 2004 – but China needs to understand that Australia won’t be a client state to ensure access to mineral and energy exports. Critics will claim that Mr Rudd will offend China which has displayed no hostility to Australia, and that emphasis should be on deepening connections – expecting civil relationships, better human rights practices. This is idealistic rather than realistic. DFAT has often taken such a view because of the way the Communist Party has transformed China – though it has remained autocratic, ruthless and pursued its own interests single-mindedly. China has expanded its military capacity – as it must do to protect its interests. But its naval capacity poses potential risks to others – and conflicts (eg with Taiwan) could emerge that Australia gets drawn into. Australia’s best interest would be served if China is integrated into international economy and community of nations – preferably evolving into a democracy with a rule of law. But this is not what has happened. Dissent is suppressed. China’s proud nationalism makes it impossible to have other than subservient relationship – as China struggles to accept that other nations can have legitimate interests. China and Australia can cooperate. A diplomatic / miliary standoff against China is unlikely – but Mr Rudd was right to recognise the possibility.

  Mr Rudd’s suggestion was ill-advised and likely to be misleading because:

  • He is, in effect, advocating conflict with China, as China cannot be integrated into the prevailing international system. The variation of Japan’s neo-Confucian system of socio-political-economy that China’s Communist Party was encouraged to develop is (like many others in East Asia) fundamentally incompatible with the prevailing Western-style global system which takes liberal democratic capitalism as its norm (see Some Thoughts on the 'China Era' and Making sense of the Chinese way ). For example, under neo-Confucian systems of socio-political-economy:
    • Power is exerted and societies are controlled in quite different ways. Government traditionally involves intellectual elites influencing the way others think (hopefully to promote ‘harmony’). Democracy and a rule of law at best put a Western ‘face’ on such systems (eg as in Singapore – see Proposed ASX Takeover: Lifting the Level of Debate) – a ‘face’ which China has not found its necessary to put on because of its size. Others’ views may be noted on the incompatibility between China’s political process (based on relationships between elites and subordinates) and the prevailing international expectation about getting agreements through discussions amongst leaders (see Time may not be on China’s side);
    • Financial systems are not set up to allocate resources to independent enterprises pursuing the profitable use of capital. Rather they tend to involve resource allocation on the basis of consensus amongst social elites (eg China’s Communist Party) and their subordinates in the pursuit of market share / cash flow (ie to build an ethnic community’s economic power). Mercantilist use of savings to increase economic power (rather than profitability) leaves banks with poor balance sheets that would lead to financial crises if current account surpluses were not maintained by supressing consumption so that savings exceed investment (and thus avoid any need for international borrowing). These systems involve a novel / generally-unrecognised form of protectionism whereby resources are transferred from the community generally to subsidise favoured production (see Resist Protectionism: A Call That is Decades Too Late). However the associated macroeconomic distortions are unsustainable unless trading partners are indefinitely willing and able to absorb increasing debt levels to overcome the demand deficits in economies that need perpetual current account surpluses. In trying to resolve risks to the global financial system and to future global economic growth, the G20 has been unable to deal with (or even to adequately confront) the imbalances that are required by the incompatibility between East Asian systems of socio-political-economy and the liberal democratic-capitalist basis of the prevailing international regime (see G20 in Korea: Unreal Optimism?);
  • Rather than integration into the prevailing international system, China’s most likely aspiration is the creation of some sort of limited (ie non-global) international ‘Confucian’ order which is separate to the prevailing global international order (see Creating a New International 'Confucian' Political and Economic Order, 2009). Though this would be disruptive and inconvenient, it would not in itself be fatal to efforts to create a more effective global system;
  • History shows that force may not be a constructive means for integrating incompatible systems. For example:
    • The US’s attempt to use force to contain Communism through war in Vietnam in the 1960s and 1970s was not a sparkling success. Communism was ultimately contained when Communists (particularly those in the former Soviet Union) realised that their system did not work. War in Vietnam simply confused the ideological issue with nationalism;
    • The US was advised by the ‘Neo-cons’ (an influential faction under former-President Bush) to use force in Iraq presumably to overcome the risk of Islamist revolutions in the Middle East by forcefully turning a rogue state into a hopefully-successful democratic capitalist model for the Middle East. The problem was, and remains, that (as in East Asia and Afghanistan) Iraq lacks the cultural and institutional foundations needed for such a system to be effective (see Fatal Flaws). Thus the outcome of using force to transform Iraq (massive loss of life and ongoing instability) has been anything but satisfactory. Far more could probably have been achieved by a focus on discrediting Islamist ideologies in the minds of potential recruits to extremists’ causes (see Discouraging Pointless Extremism, 2002)
  • China’s systems or socio-political-economy is likely to experience long term problems because of its internal limitations (eg see Are East Asian Economic Models Sustainable? and Heading for a Crash?) and there are many steps that others (particularly the US) could take which have nothing to do with veiled threats to use force if China does not adapt (see China may not have the solution, but it seems to have a problem)
• advisors to the business community seemed ignorant in important ways about what Australia is really dealing with in Asia.

Making sense of the Chinese way (email sent 7/10/10)

Greg Rudd,
GPR Asia

Re: The Chinese way is here to stay, so get used to it, The Australian, 7/10/10

I would like to try to add value to your worthwhile efforts to introduce some level of realism into Australia's understanding of Asia (and China in particular). Such understanding is long overdue (see Babes in the Asian Woods).

My interpretation of your article: It should be accepted that China is different, rather than trying to change the world. One senior Chinese said that Kevin Rudd sought to use Chinese leadership style in Australia - the right style, but wrong country. Australia is a small country in a changing world heavily dependent on trade and capital inflows, and is not prepared for the changes that will emerge as growth arises from developing rather than developed economies. China and India (with huge populations) care only about themselves. Civil conflict in China is avoided only by continued growth. Western global institutions will be increasingly by-passed or infiltrated. China's hybrid model is preferred in Africa as it creates more wealth. Asia's elite simply see a return to influence, rather than something new. And doing business in Asia is different to Australia. The rich have to be 'thieves'. Leaders in China's institutions get small salaries, so wealth is gained by arranging exclusive contracts for relatives with state-owned enterprises. Being the Australian prime minister's brother would have been a licence to make money - under Asian traditions. People jump queues in China because otherwise they will miss out. Individuals and families have to look out for themselves - as they can't rely on leaders to look after them. The corruption culture arises from this. There are so many Chinese they seek to impose their habits and customs on others. China is coming. This doesn't mean that it is necessary to play by China's rules. German business sees China as hard - because of emphasis on exaggerated politeness, and inability to know what they are thinking. Chinese don't trust each other. China is not the enemy - simply different. It should be treated as Chinese treat each other - with suspicion. Australia needs a stable China. The West deals with corrupt countries with hypocrisy (ie ignoring what is happening). Australia needs to recognise how the world works - while trying to improve the way it works. But most people don't want to look at reality. Australia must support China, but not be weak, as weakness is not respected. Australia needs to be on the front foot - in relation to looming risks: currency wars; looming protectionism; nationalism; climate change; military muscle flexing by China. China and Asia don't speak with one voice - there are many. Somehow it has to be made to work.

It may be possible to understand why China / Asia is like it is, rather than merely accepting that it is different. Some speculations about this are in East Asia in Competing Civilizations (2001). The latter refers (for example) to the consequences of ways of problem solving that arise in the absence of the West's classical Greek heritage.

Moreover your suggestion that Australia (and the world) simply has to get used to the Chinese way (and East Asian ways generally) is simplistic, because that 'way' has been parasitic on the rest of the world - in the sense that it involves economic models that depend on macroeconomically unsustainable domestic demand deficits which: (a) require the rest of the world (especially the US) to have the willingness and ability to perpetually run large current account surpluses and accumulate ever-larger debts; and (b) ultimately are likely to make global economic growth unsustainable. My reasons for suggesting this are outlined in Structural Incompatibility Puts Global Growth at Risk (2003), Understanding East Asia's Economic Models (2009), Impacting the Global Economy (2009) and Too Hard for the G20?.

Your article points to the fact that those who are rich in China have to be 'thieves' (eg exploit their positions in state-owned enterprises to enrich their families). However this is not the basis for a durable economic model. China's economic model (like that of Japan before it) involved social elites coopting (stealing?) income from the rest of their societies for high rates of investment in industrial capabilities and infrastructure without worrying much about the profitability those investments achieved (see China can't be properly understood in terms of Western economics). So long as such transfers from potential consumers can be greater than the amount of investment, there is no need to borrow in international capital markets - so it does not matter much if savings are not used profitably. However these surplus savings were the basis of the domestic demand deficits that made such economies 'parasitic' on the rest of the world. And as the rest of the world loses its ability to tolerate this, the fact that dishonesty has been at the centre of major East Asian economic models is likely to start to matter a great deal (see Heading for a Crash? and A Fundamental Problem: Balancing Supply and Demand)

The Chinese way may be here to stay - in which case Australia faces major adjustment challenges (see Some Thoughts on the 'China Era'). Or China may not be here to stay in anything like its current form, and in that case the adjustment stresses China faces will be huge.

John Craig

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Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics (email sent 23/11/11)

Ken Waller,
Director,
APEC Study Centre at RMIT

Re: ‘Is Australia truly ready for the Asian century’, The Conversation, 23/11/11

Your wide-ranging article raised many economic considerations in relation to Australia’s future engagement with Asia. I should like to submit that cultural factors are even more important as these have resulted in Neo-Confucian social, economic and political systems in East Asia that are quite unlike, and thus can’t be properly understood in terms of, the Western precedents that are the conventional basis of analysis. My reasons for suggesting this are outlined in Babes in the Asian Woods.

My interpretation of your article: Given relative decline by US / Europe, Australia’s future is clealy linked to North Asia / Indonesia / Vietnam, yet this raises difficulties. China has major responsibilities – especially in moving from an export-dominated economy to domestic demand. Exchange rate issues are critical. US needs to resolve its budget gridlock. Bilateral negotions between US and China (rather than other institutions) may be needed. Tensions over China’s investments in Australia need resolution. Post-Doha there is a need for new methods to promote open trade. TPP proposals at recent APEC meeting were useful – though simply involving more countries may be insufficient. While Europe’s debt crisis and fragility of euro may be resolved, they will impose constraints for years. Australia should be generally immune to Europe’s crisis, providing it does not affect global economy – especially, but not only, due to mining boom whose benefits are broadly spread. There are some problems of dumping into Australia. Transparency in China’s pricing policies is important. Australia needs to further improve its ability to benefit from open trade and investment.(eg by increasing competitiveness and productivity, and sharing gains across the community).

Moreover, in relation to the issues raised in your article, it is suggested that:

• China, no more than Japan, is likely to be able to shift from an export-dependent economy to one based on domestic demand, ie to survive without the protection that current account surpluses provide to their non-capitalistic financial systems (eg see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy, 2009; Structural Incompatibility Puts Global Growth at Risk, 2003; Mikuni A., Why Japan can't deregulate its financial system, 2000, The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998);
• Concerns are increasingly expressed that China’s economy (whose post-GFC rapid growth has been critical to Australia’s mining boom, employment and tax revenues) could be heading for serious problems (see Heading for a Crash?). The latter presents my 2010 speculations about the source of risks, as well as some external observers’ more recent concerns;
• The fundamental problem arguably lies not in exchange rates, but in the financial systems that (following Japan’s post-WWII lead) have been a significant component in the economic miracles enjoyed in East Asia (see Getting out of the Economic Quicksand, 2011);
• Transparency (which you suggested is needed in pricing policies) is simply not part of the way in which things are done in China (eg see East Asia in Competing Civilizations, 2001; and The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998);
• Australia has long had many unexploited options to improve the competitiveness and productivity of its economy. Some speculations about these are outlined in Lifting Productivity: Considering the Bigger Picture, 2010);
• Australia’s relationships with North Asia (China in particular) apparently involve both prospects of economic collaboration and defence analysts’ concerns about rising militarism by the PLA (see concerns expressed in the article reviewed in Comments on Australia's Strategic Edge in 2030, 2011). My comments, moreover suggest that a much broader response to this is required than is likely to emerge from traditional defence logic, and that those dealing with both economic and defence issues (as well as many others) need to collaborate. The pervasive lack of real Asia-literacy amongst analysts and opinion leaders makes this task very challenging. This difficulty might be reduced by emphasising a A Strategic Approach to Asia-Literacy rather than the Asia literacy for beginners that seems to be the traditional focus of Australia’s educational institutions.

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

John Craig

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Matusik 5 - August 2011: Featuring 'Babes in the Asian Woods' - Email sent 9/8/11

Michael Matusik,
Matuski Property Highlights

It is pleasing to see your efforts to stimulate thinking amongst your contacts about the broader world context in which Australia must operate. Specifically I refer to two articles included with Matusik 5 (namely Ruthven P., ’How Australia and China compare’, BRW 30/6-6/7/11 and Stammer D., ‘We’ll continue to prosper from China’s growth’, The Australian, 27/7/11). However there is a need for a more Asia-literate approach in commenting on China than was exhibited in those articles.

Both these commentaries reflect serious deficiencies in understanding the challenges involved in Asia’s rising influence – deficiencies that are anything but unusual (see Babes in the Asian Woods).

Phil Ruthven’s article suggested (amongst many other things) that: “It will take decades for China to match Australia’s 2011 ….. standard of living. This is the reason why Australians need to be careful in expecting first world behaviour and attitudes in terms of democracy, business practices, legal systems and other things we take for granted”

In Don Stammer’s article it was suggested that:

• China will increasingly affect Australia’s economy and investment markets;
• the key features of China’s reforms that led to its growth were “increasing the role for private ownership; ending collectivised farming; opening China to world trade, investment and travel; maintaining high rates of saving and capital spending; and continuing the tight control of the population in a one-party state”:
• given China’s high savings it is likely to become the world’s main source of outbound investment – and this is likely to involve increased investment in Australia, which will bring benefits in terms of jobs, wages and taxes paid.

Phil Ruthven is wrong to imply that China might gradually mature and adopt Western style political systems, business practices and legal systems as its income increases. China’s growth has been based on a variation of the neo-Confucian system that Japan pioneered that has been the basis of economic ‘miracles’ across East Asia (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy). Those systems derive from ancient Chinese cultural traditions that are fundamentally different (in terms of the nature of knowledge, power, governance, strategy and economic goals) from the classical Greek and Judeo-Christian heritage that are the basis of the West’s social, political and economic institutions (see East Asia in Competing Civilizations). The key features of China’s reforms that facilitated rapid economic growth were not those suggested by Don Stammer – but rather a process for accelerating economic learning orchestrated by elites within a social hierarchy. How this works simply can’t be understood or analysed within the framework of Western concepts (see China can't be properly understood in terms of Western economics).

The most fundamental and significant point of difference from Western traditions involves rejection of the relevance of abstract concepts (ie universal values, ideas, laws, profits) as the basis for problem solving by rational individuals – ie of the institutional basis for progress in Western societies (see Cultural Foundations of Western Strengths in Competing Civilizations). The artificially simplified social environments that Western societies created to allow rationality to work relatively well (ie via individualism, a rule of law, profit seeking enterprise, and democracy) have not been created in China (any more than they are part of the way Japan’s system actually works). It can be useful to think of such systems as being like whole-of-society bureaucracies (where decisions about complex beyond-the-rational problems are conventionally reached through consensus and collegiality rather than by individual rationality).

Attempts to explore the practical consequences of these cultural differences are in: Some Thoughts on the 'China Era' (which suggests the sort of ‘homework’ that is needed to comment meaningfully on China’s rising economic and geo-political influence); China's Bigger Secret (which suggests that the pervasive influence of the Communist Party in China is not as significant as the (Confucian) way it uses its influence, virtually as China’s ‘nervous system’); Making sense of the Chinese way; China's Development: Assessing the Implications (which attempts to assess the strengths and weaknesses of China’s systems); and Creating a New International 'Confucian' Political and Economic Order (which speculates about the type of international regime that might be compatible with China’s institutions – based on parallels with the China-centred ‘world’ that existed in Asia prior to the expansion of Western influence. 

An apparently realistic commentary on current political debate amongst China’s leaders is What direction will the Chinese government take after 2012? (Lao Zi, Online Opinion, 8/8/11). The significance of this debate appears to be the rising demand for a return to Mao-era social equality from the ‘reds’ who are concerned about the Confucian social hierarchy that has been the basis for stimulating China’s rapid advancement (see Communism Versus Confucianism: The Continuing Contest in China). Neither side in this debate has any interest in democracy or a rule of law.

Don Stammer is undoubted right in expecting China to increasingly affect Australia, but: (a) this influence will be political as well as economic; (b) no distinctions are made between business, politics, war and even criminal activity; and (c) traditional Art of War strategies feature deception and efforts to encourage opponents to weaken their own capabilities. In a 2003 visit to Australia, China’s president noted that China had developed ‘strategic’ relationships in Australia, a remark whose significance was not clarified (see China as the ‘Future of the World’). Across SE Asia, political influence and corruption associated with the Chinese diaspora have long been a major source of concern, and organised crime (triads) have allegedly had the same sort of role as a private army for social elites as the Yakuza have in Japan’s system (see Seagraves’ Lords of the Rim: The Invisible Empire of the Overseas Chinese). Stresses in trying to develop a relationship between such systems of socio-political-economy and Australia’s institutions can be illustrated by the case of Singapore (see Proposed ASX Takeover: Lifting the Level of Debate).

And the economic benefits of China’s influence on Australia are neither as certain nor necessarily as benign as Don Stammer suggested. East Asian systems of socio-political-economy feature distorted financial systems which have contributed to (and are highly dependent on) the international financial imbalances that form an important part of the background to the global financial crisis (see Impacting the Global Economy) . In other words they depend on the willingness and ability of trading partners (mainly the US) to run huge current account deficits and accumulate increasing debt levels indefinitely. In the emerging global environment such methods are unlikely to be viable (see Heading for a Crash?). The high savings rate that has provided China (and Japan) with scope for massive offshore investment is the other side of financial imbalances that make global growth unsustainable (Structural Incompatibility Puts Global Growth at Risk, 2003). And investments made on the basis of China’s business practices (which favour maximizing turnover with little regard to profitability) would be anything but a formula for ensuring that Australians gains significant tax revenue from Chinese investment in Australia’s mining industry (see RSPT Won't Hurt Miners: But Pity Help Naive Australians)

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

John Craig

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Embracing Asia Requires Understanding - email sent 11/4/12

Jennifer Westacott,
Chief Executive,
Business Council of Australia

Re: Earl G., Embrace Asian Century, says BCA, Australian Financial Review, 12/4/12

In this article Greg Earl referred to the BCA’s recently expressed concerns about Australia’s engagement with Asia (eg that an inconsistent approach to regulating investment in Australia could be damaging). I should like to submit for your consideration that the issues involved are more complex than the ‘economics’ focus of BCA’s analysis indicates.

An interpretation of the above article: BCA is confronting emerging opposition to foreign investment (eg divisions within Coalition over Asian investment in agriculture and mining). BCA (Jennifer Westacott) suggests that there are benefits in encouraging Asian capital. New FIRB chairman (Brian Wilson) flagged greater scrutiny of state-owned companies. Senior Chinese business figures had complained about business restrictions in Australia and America. BCA suggests that investment management will be a key test of the federal government’s Asian century white paper. BCA also refers to: realigning diplomatic services; the need to be attractive to students; increasing attention to China, India, Indonesia and Vietnam; an increasingly difficult business environment in which Australia’s competitiveness is under challenge; the need for greater commitments to bilateral relationships in Asia; boosting competitiveness and removing impediments to engagement; teaching students about Asian languages and culture in schools; and businesses ensuring that staff are capable of competing in Asia.

As I understand it Greg Earl’s article was based on Assessing Australia’s Trade and Investment with Asia: Supplementary Information (which complements the BCA’s December 2011 submission, Assessing Australia’s Trade and Investment with Asia, to the federal government’s Asian century white paper).

While that submission covered many important issues, it did not seem to reflect much understanding of the cultural dimensions involved in ‘embracing Asia’. The economies in East Asia that might be the major source of capital inflow are characterised by neo-Confucian systems of socio-political-economy that are quite different to Western-style democratic capitalism. And those differences need to be clearly understood by both government and business in considering how investment should be managed. In simplest possible terms, those systems can be said to be:

• built around intuitive, hierarchical and autocratic groups (rather than around rational individuals, whose initiative Western institutions are designed to facilitate); and
• non-capitalistic in the sense that the goal of ‘business’ is not to earn profits for investors, but rather (as agents of the state / ethnic community) to use the community’s savings to create production capacity which boosts the economic power of that ethnic community (ie the economic goal tends to be mercantilist, rather than meeting the needs of communities as consumers).

Serious errors in economic policy and international relationships can be made without understanding of such issues (eg see Economic and Geo-political Risks from Asia-illiterate Policy Making).

It is anything but sufficient to suggest teaching students about Asian languages and cultures in schools (see Asia literacy for Beginners is not Good Enough). Rather a much more sophisticated understanding is required by governments and business leaders (eg see A Strategic Approach to Asia-Literacy), though even understanding why a sophisticated understanding is needed requires a fair degree of Asia literacy (see reasons in ‘Comments on Australia’s Strategic Edge in 2030’).

Moreover it is anything but certain that the world is at the start of what in future will be seen as an Asian century (see Asian Millennium or Asian Decade?). The social inequalities and macroeconomic imbalances that are built into the neo-Confucian systems may prove self-limiting, just as they did with Communist systems.

John Craig

• EU efforts to boost understanding of China, which is recognised to be increasingly economically important, are equally constrained by a lack of real Asia-literacy.

BICCS: Discovering "A Good Idea of what China's Identity Really is" Requires Thinking Outside the Square (email sent 7/1/12)

Gustaaf Geeraerts,
Director of Brussels Institute of Contemporary China Studies (BICCS)

I noted with interest an endorsement of the role that BICCS is playing in improving EU understanding of ‘China’s identify’ (in Bartram D., EU seeks better understanding of China, China Daily, 29/4/2011).

“….. the Brussels Institute of Contemporary China Studies (BICCS), ….. was set up in 2006 to address Europe's growing interest in contemporary China. The institute aims to increase European understanding of contemporary China and its impact on world affairs. [Emphasis added]

"It was always my experience that in Europe, the view we had about China was not what I had seen when I was there on the spot," says Gustaaf Geeraerts, founder and director of BICCS. "I always had this wish to set up an institute that could provide more balanced information on what was happening in China. "It is certain that China is going to affect our lives more and more. Our future welfare will be determined to a large extent by what China is doing. Our mission is to develop a more strategic view of how to deal with China in the next 10 to 20 years. It is important to have a good idea of what China's identity really is." [Emphasis added] …. “

However, while the BICCS’s website refers to numerous relevant studies of China’s activities and relationships with the EU, it seems to me (on the basis of 2 decades study of differences between Western and East Asia paths to development) that adequate understanding will be impossible until what is happening is examined from an ‘Asian’ viewpoint. In particular starting with EU assumptions about the primacy of a rule of law (which seems foundational to BICCS’s approach) arguably creates a fundamental barrier to your desired good understanding of China’s identity.

Some, undoubtedly inadequate, speculations about what might be involved are outlined in:

• Competing Civilizations (2001+) - see in particular suggestions in the section on East Asia about fundamentally different approaches to: knowledge; power; governance; strategy; and economic goals by comparison with what seem to be the Cultural Foundations of Western Strength; and
• China's Development: Assessing the Implications (2003+)

Viewing events through Western assumptions parallels and concepts can be misleading (as is illustrated further in Babes in the Asian Woods, 2009+).

I would be interested in your response to my speculations.

John Craig

• Participants at the World Economic Forum in Davous in early 2012 seemed equally unaware of what is involved in non-capitalistic East Asian systems of socio-political-economy - and many reportedly thought that China should now save capitalism because capitalism had saved China.

Eyes Wide Shut at Davos? - email sent 2/2/12

Jeremy Warner,
The Telegraph

Re: It’s now up to China to save capitalism, The Telegraph, 27 January 2012

It is difficult to believe that so many of the participants in the World Economic Forum at Davos could be as ignorant as your article implied. You suggested that: (a) most at Davos believe that the world faces a crisis of capitalism, and that most future growth is likely to come in Asia and emerging economies elsewhere; and (b) some believe that, as capitalism saved China, it is now up to China to save capitalism.

My interpretation of your article: UK is now in recession. Some at Davos blame: the euro crisis; UK government’s fiscal squeeze; and the Bank of England’s delayed monetary stimulus. However the problem is Europe-wide, not just in the UK – and US growth is also affected. Emerging market representatives at Davos blame European governance. Debt mutualisation is needed, but leaders won’t confront this for fear of electoral backlash. Those at Davos expect solutions to be found in 2012 because they have to be. Business disinvestment in advanced economies (now significant for years) has increased due to the European debt crisis. Companies unable to earn a return focus on cost reduction (eg by head-count cuts), and look to emerging markets in Asia and Latin America for growth. Western economies could be leap-frogged by the developing world in terms of competiveness / infrastructure. No one at Davos has advocated the deregulation and supply-side reform needed to overcome the problem. Instead there is an air of capitalist guilt. There is again a strong contrast between Western gloom and Asian optimism (eg it was suggested that to 2030 85% of the growth of middle class will be in Asia). Much growth is expected from developing world. Asia’s low debts and large foreign exchange reserves contrast with the West’s heavy debts, and need for years of de-leveraging. Robert Shiller (Yale University) believes this will take til 2017, an estimate Joseph Stiglitz (Columbia) sees as optimistic. Some suggest that capitalism saved China, so China now needs to save capitalism

While non-capitalist market economies like China’s have indeed depended on Western-style capitalism, this dependency (combined with the problems in advanced Western economies to which you refer) imply that the non-capitalistic economies will soon face even more severe difficulties in what is likely to amount to Stage 3 of the Global Financial Crisis.

My reasons for suggesting this are outlined in more detail on my website. In brief it is suggested that:

• Capitalism (ie a profit-focused approach to investment) is not characteristic of major East Asian market economies, and difficult cultural obstacles exist to adopting such an approach;
• East Asia’s non-capitalistic systems of socio-political-economy require domestic economic distortions (ie demand deficits) and the latter have global macroeconomic consequences that have played a role in generating Stages 1 and 2 of the Global Financial Crisis in recent years (ie the credit-fuelled asset bubbles that burst after 2007, and the debt constraints that now exist in the developed world);
• The expectation that future growth will be strongest in emerging economies and that advanced economies face years of de-leveraging and slow growth imply that emerging economies such as China’s will lose the protection that current account surpluses have provided for poorly developed financial systems. Borrowing to balance future current account deficits will pose serious difficulties;
• East Asia faces significant structural obstacles, in addition to obvious current economic difficulties in China. Many of these cannot be properly understood in terms of Western (ie democratic capitalist) analogies, as these simply don’t reflect the way neo-Confucian systems of socio-political-economy work;
• Liberal Western democratic capitalism can be reinvigorated without reliance on autocratic non-capitalistic systems such as China’s – and it is not obvious that there are any satisfactory alternatives.

One way to open the eyes of those potential leaders at Davos who expect others (eg emerging economies or Western politicians) to solve the problems facing developed Western economies could be to advocate a more serious understanding of East Asia’s strengths and limitations (eg perhaps as is suggested in A Strategic Approach to Asia-Literacy). Such understanding is not easy (and, in fact, a fair degree of ‘Asia literacy’ is arguably needed before it can even be understood why understanding is hard).

John Craig

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Detailed Comments

Capitalism

Capitalism can be said (overly-simplistically) to involve directing savings towards investments on the basis of expected profitability. Such an approach to allocating capital has both advantages and limitations (see The Advantages and Limitations of Financial Criteria). However profit-focused investment has been economically advantageous over the past couple of centuries. It facilitates decentralised decisions and initiative by rational individuals, just as the West’s emphasis on individual liberty, a rule of law and democracy has done (see Cultural Foundations of Western Strength).

Non-Capitalism in East Asia

Neither individuals nor individual rationality are features of the neo-Confucian systems of socio-political-economy that have been the basis of rapid modernisation in East Asia – a region that can usefully be thought of as the realm of the ‘intuitive / autocratic group’. Eisuke Sakakibara (a Ministry of Finance official, sometimes known as Mr Yen) pointed out in 1993 that Japan had a ‘non-capitalist’ market economy (see Beyond Capitalism, The Japanese Model of Market Economics). The implications of this were also outlined by Akio Mikuni in 2000 (see Why Japan cannot deregulate its financial system, JPRI Working Paper No. 68). And Japan not only encouraged the adoption of the methods that had been the basis of its non-capitalistic system of socio-political-economy amongst the so-called Asian tigers, but apparently had a significant influence on China’s transition from Maoist-style communism in the 1970s (according to Eamonn Fingleton, a long term close observer of ‘Asia’, especially of Japan).

There are massive cultural obstacles in East Asia to the adoption of Western style systems of liberal democratic capitalism that are fairly obvious to anyone who seriously considers the issues (eg see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998). The latter referred to: fundamental differences in the way information is used; the need to change economic goals from economic 'power' to financial returns; the inseparability of economic issues from questions of social / political power; and the lack of appropriate legal systems. However, as few seem to have thought about such constraints, the implications of the most significant ‘clash of civilizations’ in recent decades (see An Invisible Clash of Financial Systems) have apparently gone over the heads of most Western observers - as illustrated by the ignorance recently displayed at Davos.

The East Asian ‘non-capitalistic’ market systems that have been the basis of economic ‘miracles’ are based on social (cronyist) networks rather than arms-length financial calculations and feature mobilizing national savings through state-linked financial institutions and directing these to state-linked enterprises that are expected to pursue nationalistic economic goals with most emphasis on maximizing turnover and cash flow. Limited attention is paid to capitalistic profitability. Such mercantilist practices constitute a novel form of industrial protectionism, but make it hazardous to borrow in international capitalistic financial markets. Thus domestic demand has had to be suppressed to ensure current account surpluses, so that investment can be funded from domestic savings. The advantages of suppressing demand to ensure current account surpluses was demonstrated to emerging economies in SE Asia and elsewhere by the 1997 Asian financial crisis. Japan and China were seen to be protected because they had built up large foreign exchange holdings – and this practice was then adopted much more widely (eg see Leadership by Emerging Economies?).

Note added later: Is China becoming 'capitalistic'?

One response to a copy of the Eyes Wide Shut at Davos? email, was:

"As I have mentioned to you in the past, I find your reliance on Asian history a proactive perspective, I simply believe the China I see and work with every day is morphing from a neo-Confucian systems of socio-political-economy to a Western capitalistic economy (at least at the individual level) at an extremely high velocity that your analysis seems to not capture." (Personal communication 3/2/12 from the president of a US company with business interests in China who prefers to remain anonymous)

The present writer's attempts to work through the implications of that (on the ground and thus useful) observation raised questions about: (a) whether what individuals do matters under China's system; and (b) whether what is being observed is actually 'capitalistic' (ie profit focused investment) or merely a greater emphasis on 'business' within a traditional framework.

Email 1 sent 3/2/12

Thanks for your feedback. I do not have access to such insights and value yours, as I only visit China as a tourist. I would be interested in any references that I could cite to where such changes have been documented. As I see it: (a) what individuals do has little impact on the way China’s overall political and economic system functions; and (b) such as shift at the individual level (which the Internet and some other pressures are likely to accentuate) implies a disconnect / incompatibility between the individual level and the way the system as a whole operates in China. Ultimately I suspect that this implies a breakdown in the system associated with either revolution, or oppression. 

I would greatly value .... any thoughts on whether an evolutionary, rather than a revolutionary, transformation of China’s system might be achievable. The methods that I have suggested for responding to problems in the developed world would have very nasty effects in East Asia unless an evolutionary adjustment is possible.

Email 2 sent 3/2/12

I wonder if there is a problem with terminology here.  

‘Capitalism’ is a particular approach to business / commerce – one where the return on capital (ie profit) drives decisions.  

Is what you are observing in China evidence of a shift towards ‘capitalism’, or merely an increase in the commercial / business orientation of ordinary Chinese following the end of the socialist (ie collectivist) era? Traditionally I understand that (particularly offshore) Chinese have had a very strong commercial / business orientation, but not a ‘capitalistic’ orientation. Such an approach to commerce / business focuses on producing and selling things (ie on a strong turnover and cash flow), but not on profit margins.  Confucius encouraged people to become rich by saving, rather than by making a ‘profit’.  And if everyone seeks to become rich by saving, rather than by setting prices so that a significant return on capital is achieved, then the net effect is a ‘demand deficit’ in the economy which has serious macroeconomic implications. It also potentially explains the financial and economic problems the world is suffering, because: (a) what I understand to be the traditional Chinese approach to business would be in real trouble if it encountered ‘capitalistic’ financial systems (as was perhaps illustrated by the 1997 Asian financial crisis), and: (b) the reaction to that (ie suppressing demand for whole countries) generates the financial imbalances that have played a major role in generating Stages 1 and 2 of the global financial crisis.. 

Thus it is important to know whether you are observing Chinese people becoming more ‘capitalistic’, or merely more business-oriented within traditional cultural frameworks.

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Further exploration of this issue followed:

Email received 14/2/12

First let me say that I think many of your logic extensions are quite sound generally (I just question certain of the foundational elements). I do believe the long term result of China’s unsustainable export economy will be profound for its people and governance. I simply believe that the strategy is premised on a long term profit motivation under which global market share gains achieved through predatory prices were the first priority (which in turn create the illusion of following a neo-Confucian “community interest” model where profit doesn’t matter) when in fact the regime’s advancement in western capitalist business education and theory starting after the Nixon opening has been the foundation.

In turn, at the entrepreneurial level, human nature dictates an evolution form community interest to personal interest at light as the concept of profit and personal gain are introduced. This is what I see and I think the best way to observe this is to spend time in the streets personally.

Regardless of which vie is correct, either way, when the export bubble breaks which we all know must happen due to the excess leverage of the western world the consequences are going to be extreme and to your very good point I don’t believe the markets grasps this at all.

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Emailed reply 16/2/12

.......

I presume that the suspect ‘foundational elements’ that you suggest that I have extended more-or-less logically involve those which lead me to question whether China (as a national / community and as individuals) has a long term ‘profit’ motivation in the sense of earning a return on financial capital. In relation to this:

• There are indications that my conclusion about the difference in economic motivations is valid – and not just in terms of long-term versus short term goals. Moreover:
  • This seems certainly to be the case for Japan. While China is not Japan (ie Japan seeks to operate as a single social system whereas China involves many such systems) and there are thus many ‘China’s, there are features of the ways of thinking that are quite similar;
  • Faked economic statistics seem to be more of a feature of China than they are of many other economies (eg see comments in China: How Much Stress Can the System Take?), and this seems likely to derive from a lack of reliance on ‘abstracts’ which is compatible with limited concern for ‘profit’;
  • An attached document (The Coming China Crash) contains various other observer’s view that point in a similar direction;
• The ‘foundational elements’ that I am building on involved: (a) collecting and seeking to understand a huge number of documents about the way Japan in particular functions; and (b) a background while working for government of experience in seeking to use strategic management techniques (which have similarities to what seems to be done in East Asia) to stimulate organisational and economic change (see Background note).
• I would value any specific thoughts on which ‘foundational elements’ I am relying on seem most insecure;
• While early study in China of western business education and theory needs to be recognised, this does not necessarily imply that such study was based on seeking practices to copy. It might also involve to seeking understand the competition, and what ‘face’ needs to be presented to the external world to prevent others perceiving any need to look too closely at what is actually happening (which I understand is one feature of traditional Art of War tactics).

You suggested that a trend from community to personal interest is ‘human nature’ as the concept of profit / personal gain are introduced. In this regard, I note that a contact has recently pointed to the breakdown of his long-established friendship with a Japanese individual who suggested that their relationship prevented him from playing a proper role as within Japanese society. For some it seems, being part of a community seems more important than being an individual and pursuing self-interest.

.......

John Craig

An Australian observer, Reg Little, who has studied China's rapid modernisation from the viewpoint of its traditional (especially Confucian) culture and was arguably one of the first Western observers to predict this transition was asked for an opinion about whether China was becoming 'capitalistic'. His response indicated that Western concepts such as communism and capitalism had little relevance to understanding China.

"Chinese are better educated, vastly more strategic, and now play with Western ideology (Capitalist or Communist). Chinese culture and classics scorn "profit" and respect "benevolence", in the art of government. Chinese are supremely practical and anticipate and use to advantage, but rarely conform with, Western assumptions and expectations. Chinese education (Daoism) proofs its best students against belief in and reliance on abstractions (all ideology) and rationalism (train track thinking). Chinese inhabit a cerebral universe. partly a product of a unique history, that few from the West comprehend. Chinese culture pervades and shapes all of East and South East Asia, which owe little to Greece and Rome' (Personal communication 17/2/12)

Preliminary CPDS Comment:

• while it is reasonable to point out the difficulties of understanding China on the basis of Western concepts, it none-the-less seems possible to understand China providing China's traditional rejection of the Western notion of 'understanding' is first recognised (see Understanding 'Asia');
• if 'profit' is traditionally scorned and 'benevolence' is respected in government many (and some adverse) consequences can be expected. For example, 'benevolence' implies that some (elite) group has must acquire the power and resources to be benevolent (ie able to dispense largess to domestic and external inferiors). Combined with a distain for 'profit' this implies the: (a) the macroeconomic distortions outlined below must emerge because a Ponzi-like approach is taken to investing national savings, and; (b) a financial crisis is likely to derail progress in the longer term when trading partners can no longer compensate for those distortions (see below)

One Case: In early 2012 it was suggested that a Chinese businessman who was perceived to be individualistic and entrepreneurial: (a) had been smuggled out of China to Hong Kong many years ago; (b) wrote critically about China's leadership, and the need for liberalization; (c) suggested that 'the Communist Party is interested in quick ways to make money'; (d) found that involvement in his media business from China and from the Hong Kong government was suppressed; (e) believes he could have made more money by political compliance - and that it is important to do more than make money; (e) starts businesses from the bottom up - by reference to focus groups; (f) believes that the world is harmed more by idealists more than by pragmatists; and (g) believes that China will be liberalised eventually into an open society because people's hearts and minds have changed as a result of exposure to the outside world [1]

CPDS Comment: The above reflects elements of both: (a) what is understood to be the framework of traditional Chinese thought; and (b) what can be perceived as a Western-style liberal capitalistic perspective. Whether this reflects a truly 'capitalistic' approach depends on whether access is gained to capital for business undertakings because of investors’ expectations of profit or that what is proposed is the community interest. The 'communitarian' approach to investment requires a demand deficit / savings glut that has serious macro-economic consequences for the global economy (because of the need always for new savings to be available to bolster the eroding balance sheets of financial institutions).

Other perhaps-relevant suggestions are in Confucian Renewal in China which comments on suggestions China might seek political reform through non-democratic performance-based means of promoting legitimacy.

In April 2012 the Western head of a business that is majority owned by the Chinese government (Minmetals) suggested that state owned companies compete vigorously against each other (eg denigrate each other in the Chinese press). This is quite different to the collusion between Japanese companies in the 1980s. There has been quite a different approach over the past 3-4 years with a shift away from size of investments to return on investment - and it is necessary to have done that work to get finance from China's authorities [1]

CPDS Comment: Will estimating return on investment make any real difference when 'connections' dominate business relationships and finance has to be obtained from 'authorities'? These and other structural obstacles were outlined in Understanding the Cultural Revolution (1998) - eg differences in way information is used; the inseparability of economic issues from questions of social / political power; and the lack of appropriate legal systems.

Macroeconomic Consequences

The global macroeconomic consequences of large demand deficits / savings-gluts in many countries that lacked well-developed capitalistic institutions were, of course, profound (see Structural Incompatibility Puts Global Growth at Risk , 2003 and Impacting the Global Economy, 2009). The effect was similar to the build-up of unspent savings that Keynes identified as a factor in the Great Depression of the 1930s. Those demand deficits meant that global growth could only be maintained if their trading partners (especially but not only the US) were willing and able to perpetually run current account deficits and increase their debt levels (as borrowing was needed to offset the current account deficits). The latter was possible so long as asset values kept increasing faster than debts, but since Stage 1 of the Global Financial Crisis erupted in 2008 this: (a) no longer seems likely; and (b) could lead to another financial crisis when / if a 'bubble' emerged and burst.

The Global Financial Crisis Continues

It’s now up to China to save capitalism provided a reasonable account of the difficulties facing Western-style capitalism (eg sovereign debt constraints that compound the need for household deleveraging) that arguably constitute Stage 2 of the Global Financial Crisis.

However there is a need to recognise the complementary difficulties facing non-capitalistic systems of socio-political-economy such as China’s, which are likely to lead to the Global Financial Crisis, Stage 3.

China’s inability now to depend on Western-style capitalism to compensate for domestic demand-deficits (ie by providing excess demand and taking on ever increasing debts) adds significantly to the risks it already faces (see outline in Heading for a Crash?). The latter referred to structural constraints that seem more serious than the more obvious short term economic challenges associated with wasteful spending and property bubbles (eg to environmental problems, a soon-to-be-rapidly aging population, and political / social stresses associated with extreme wealth imbalances and corruption).

In relation to the challenges facing East Asia’s non-capitalistic market economies, it is noted also that:

• China needs (say) 8-9% pa growth to provide jobs for a growing workforce to avoid political and social instability, yet this is now leading to a situation in which it will eventually have to run current account deficits, and need to borrow to offset these. China has been heading towards trade deficits for some years – due to weak export markets and efforts to boost domestic demand with high rates of investment (eg see V. Phani Kumar, China set to swing from trade surplus to trade deficit, MarketWatch, 22/9/09). Moreover China’s overall current account surplus (including positive contributions from offshore investments) has recently declined significantly (eg see Black A., Data Bolster China's Currency Case, WSJ, 16/11/11; and China records huge February trade deficit, 12/3/12). The fact that advanced economies must now rely on demand from China and other emerging economies (as made clear in It’s now up to China to save capitalism) will accelerate China’s trend towards current account deficits (a predicament that is also in prospect for Japan – see Japan's first trade deficit since 1980 raises debt doubts, Reuters, 25/1/12).
  • Note added later: In March 2012, it was reported that Japan: (a) experienced a full year current account deficit in 2011, (b) was experiencing its first current account deficit in two decades, and (c) that the need to borrow in international markets for government bonds is likely to force up interest rates and threaten a fiscal crisis [1];
• It is by no means obvious how future borrowing to offset current account deficits can be met. For example:
  • Borrowing can’t be done safely from capitalistic (ie profit seeking) international financial markets, if one’s banking / economic system is not geared to take profitability seriously (as was clearly demonstrated by the 1997 Asian Financial Crisis);
  • Running down foreign exchange reserves to offset current account deficits will merely increase trading partners’ need to rely on demand from currently surplus economies (such as Japan, Germany and emerging economies, particularly China), and thus accelerate the run-down of the latter’s foreign exchange holdings;
  • Creating a new international monetary system which is independent of the $US’s role in recent decades as the world’s reserve currency (as countries such as China have suggested for some years) will not solve the problems associated with the macroeconomic imbalances that non-capitalistic systems impose on the global economy, or make the task of macroeconomic management any easier (see comments on China’s proposal for reliance on a basket of currencies or IMF Special Drawing Rights);
  • One potential source of capital from which China and other non-capitalistic market economies might seek to borrow to offset future current account deficits would be Middle Eastern oil revenues – as oil revenues also generate large current account surpluses and foreign exchange holdings for some countries. The problem with this is that, while both China and many oil-rich economies in the Middle East might all prefer alternatives to reliance on Western-style capitalistic / profit-focused financial systems, the Middle East seems unlikely to be happy about lending in soft currencies such as the yuan. Rather there seems to be a preference in parts of the Middle East for developing even-harder monetary systems (ie those based on gold). And reliance on gold as a monetary base, imposes much harsher constraints on authorities’ ability to take action to counter a demand deficit / savings glut than does reliance on fiat currencies (noting that the gold standard was significant factor limiting policy options during the Great Depression);

• in December 2011:

  •  61% of global investors surveyed reportedly expected that China would experience a banking crisis because of misallocation of resources in less than 5 years (and that this would lead to serious political and economic instability) . Only 10% expected that China would escape trouble [1];
  • a plausible parallel was suggested between the bursting in the early 1990s of of Japan's 1980s' investment bubble and China's current situation (see outline of The Coming China Crash) - though it was apparently written without considering the cultural factors that gave rise to such difficulties;

• in early 2012 indicators suggested problems in China’s economy, noting the apparent discrepancy between the official 8.9% pa growth rate in the final quarter of 2011, and other (real economy) data indicating stagnation / contraction and a decline of China’s imports (see Evans-Prichard A., China’s very mysterious economic data, The Telegraph, 26/1/12);

• Any significant and sustained decline in imports by China will potentially expose many others in ‘Asia’ to risks of financial crises. China’s current account surplus (which has been fairly large with US and Europe, ie hundreds of $US bn pa) has been has been much smaller overall (ie tens of $US bn pa), because of deficits that exist with many countries that provide China’s economic inputs. China’s has in effect been providing protection against financial crises in other countries with poorly developed financial systems, by helping to eliminate / minimize their need to borrow in profit-focused financial markets.

The difficulties facing China (and its likely response to them) simply can’t be understood in terms of Western (ie rational democratic capitalist) analogies. For example:

• one of China’s problems seems to be the incompatibility of the social-equality aspirations of its nominal ‘Communism’ and the social hierarchy centred on the so-called Communist Party that China has used to manage a non-capitalistic market economy through Confucian practices (eg see Communism Versus Confucianism: The Continuing Contest in China);
• strong social hierarchy can furthermore make it very difficult to respond to unforeseen potential immediate disasters (eg the so-called 'black swan' events that can erupt suddenly from the interaction of a multiplicity of minor environmental changes) because the nature of the problem may not be able to be communicated quickly.

A general account of difficulties in developing economic policy and managing international relations where ‘Asia’ is not understood is attempted in Babes in the Asian Woods.

Options Available to Liberal Democratic Capitalism

It’s now up to China to save capitalism suggested that ‘radical deregulation and supply side reform (are) vitally necessary in Western economies to kick start investment and growth’, but that no policy makers, bankers or business leaders have yet made a case for this. 

Some suggestions about how the crisis facing liberal Western-style democratic capitalism might be addressed are mentioned briefly in Getting out of the Economic Quicksand (and in more detail in China may not have the solution, but it seems to have a problem). Those suggestions:

• seek to reinvigorate a simple form of ‘capitalism’ (ie profit driven investment) because: (a) no matter what social / environmental goals need to be achieved, there is a need for an economic mechanism that effectively links supply and demand, and none of the currently-available alternatives (eg socialism and neo-Confucianism) seem to do so (see also Balancing Supply and Demand); and (b) the development of complex financial products potentially creates economic instability (see Restricting the Role of Financial Services?);
• basically involve: strengthening institutions; using innovative methods to boost the supply-side / productivity / incomes of developed economies; constraining credit for consumption or the purchase of purely ‘financial’ assets; tightening welfare systems; reducing the need for military spending using ‘soft power’ techniques; and heading off Stage 3 of the Global Financial Crisis by assisting countries that must soon lose their ability to rely on current account surpluses to protect poorly developed financial systems (eg Japan and various emerging economies, especially China );
• go well beyond deregulation / market-liberalization as the basis for supply-side reforms because, while liberal markets require individuals / enterprises to compete, they: (a) do not ensure that the external supports needed to compete successfully exist; and thus (b) potentially simply reinforce pre-existing severe disadvantages that face some individuals / regions. [The latter problem, it can be noted, is particularly severe in resource rich countries - see Curse of Natural Resources];
• seek to do more than ‘kick start investment and growth’ because, given the structural defects in the global financial system, simply increasing growth cannot be sufficient (see Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems );
• require leadership from within the general community (especially by those in business and finance) as well as by political leaders – which is contrary to views reportedly expressed at Davos to the effect that “It is all up to politicians now …. They either act or they don't. There is little the business community can do or say." (Guerrera F. ‘This Year, Davos Doesn't Deliver’, WSJ, 28/1/12);
• would require complementary initiatives to develop a global system in which all would have a reasonable prospect of success. Some now-outdated suggestions on the character of such an order and how this might have been encouraged were outlined in Defusing a Clash (in Competing Civilizations, 2001) and in A New 'Manhattan' Project for Global Peace, Prosperity and Security (2001) respectively.

• Suggestions by George Soros (formerly a prominent investment fund manager, and a current advocate of reform to global financial systems) that social and political instability are likely in developed countries, while emerging economies offer the best prospects for stability, seem misplaced

Soros might also see the world through blinkers (email sent 12/2/12)

John Arlidge

Re: George Soros on the Coming U.S. Class War, Daily Beast, 23/1/2012

My attention was recently drawn to your report on George Soros’s current view of world events, and I would like to suggest for your consideration that he may be as blinkered as most of those who attended the recent WEF Conference at Davos seemed to be (see Eyes Wide Shut at Davos?).

As I understand it, Soros is primarily concerned because of the feedback effect between financial markets and asset values that can give rise to asset bubbles (ie if ‘everyone’ decides to invest in X, then the price of X is likely to go up - so this justifies everyone’s investment and encourages more investment, until the bubble bursts – see his Alchemy of Finance). Such concerns have validity.

However it is naïve to suggest that this feature of capitalistic practice is solely (or even primarily) responsible for the financial and economic dislocations that have occurred. A much broader range of factors were clearly involved (see GFC Causes). And, as suggested in Eyes Wide Shut at Davos?, the dependence of the non-capitalistic systems of socio-political-economy in East Asia on the high levels of demand that these features of Western-style capitalism allowed: (a) was a major factor in generating the financial crisis - because their dependence required reserve banks such as US Federal reserve to allow asset bubbles to expand dangerously to prevent global growth stalling; and (b) remains a threat to economic viability and social / political stability in East Asia – and similar dependence on current account surpluses remains a threat to the stability of emerging market economies elsewhere.

Anyone who thinks that the ‘Occupy’ movement (which your article suggests that Soros has supported) has a good understanding of the world’s current problems has rocks in their heads. There is a parallel between the simplistic notions now being developed by people who suddenly find that life is getting hard (eg by the ‘Occupy movement’} and the One Nation phenomenon in Australia in the 1990s, which also reflected the frustrations and naivety of those who found themselves the victims of economic change. The good news for countries such as the US is that (while temporarily disruptive) the democratic political process is capable of enabling such disaffected factions to gain a better understanding of the naivety of their ‘solutions’. However this method of ‘educating’ the marginalised does not exist in non-democratic regimes and it is there that (as in the 1930s) most social and political instability seems likely.

Ways of reforming capitalism to reduce the risks that concern Soros are available (eg as suggested in Eyes Wide Shut at Davos?). This would require legislative change (ie the stroke of a pen) and considerable economic adjustment to cope with a down-sized financial services industry. However removing the protection that non-capitalistic systems of socio-political-economy have gained from the high levels of demand (and imports) that rapid asset appreciation in developed economies allowed will place the former in very serious difficulties (as their constraints on adjustment are cultural, and thus much more profound).

John Craig

• Suggestions that the problems facing Western economies are like the problem facing Japan through its post-1990 recession are misleading because structural distortions in Japan's financial system (and in other East Asian economies that have experienced economic miracles) are not present in Western economies, and these distortions contributed to both Japan's post-1990s experience and to the financial imbalances that put global growth generally at risk. 

Misleading Comparisons with Japan's Post-1990 Recession?

It was pointed out to the present writer that proposals outlined below (ie that counter-cyclical responses will be inadequate to deal with US economic challenges) are different from the conclusions emerging from Richard Koo's work. In brief it was suggested that:

In terms of what policy response the U.S. alone has control over, Koo's work seems definitive. Both Hoshimoto and Koizumi learned the hard way that in a balance sheet recession (Japan's driven by corporate impairment, the US's by private sector credit) that the politics which drives a reduction in government spending in order to close the budget deficit, results in the opposite of the intention - the budget deficit widens considerably and the economy suffers a further collapse since tax revenues decline sharply. At the current juncture with stimulus worn off no one is picking up the component of spending which ensures positive inflation, therefore you would expect a reversal in flows leading to a contraction in aggregate demand and deflating asset prices. Ultimately, this results in an even greater stimulus program implementation. None of these measures are good, since deleveraging is necessary, but the problem is that under the magnitude of total debt in the system the chances are great for a slippage into a deflationary spiral especially. in the case of the U.S. where a dependence upon foreign credit is paramount. Ideally, the U.S. should solicit treasury purchases from its domestic institutions. That does seem to be occurring.

Ultimately, all of the above should occur as political will makes a reversal when asset prices collapse. This is assuming that Bernanke's untested tools to not hold up asset prices. Bernanke et al know all this but they require commodity price speculation to be squeezed out of the system and the collateral damage of asset prices is unfortunate but necessary to force a reversal of political will towards even further gov't spending - all of this towards the ends of inflating away the debt, and all at the risk of hitting the foreign credit limit. The U.S. is ugly, but other beauty contestants will appear uglier during their own crises (Europe, China).

Eric Janszen take's Koo's work on this point further. He says that the stimulus must be in productive sectors not the financial sector in order for it to work. Moreover, he points out that government debt levels are not nearly as high as they were in the 50s/60s. And, that government debt was never the problem - the real problem being that government had to absorb private sector debt and credit.

However as the present writer understands it the argument by Nomura’s chief economist (Richard Koo) is that there a strong parallel between the US’s (and many other countries’) current situation and the problems that Japan has been through over the past 15-20 years, and that government de-leveraging at the same time as the private sector does so would be economically devastating. In a CNBC interview Koo reportedly said:

"...When the entire private sector is de-leveraging, you need the government to be in there taking these un-borrowed funds in the private sector and put it back into the income stream. And that's basically what Japan was doing for the last 15 years.

And from the Japanese perspective, we see the whole world going through the same de-leveraging process after the bursting of the bubble and then you see governments all trying to de-leverage at the same time. And that is not a very good prospect given what we went through."

However, while this raises tactically relevant considerations, strategically Koo’s argument needs to be placed in context because it is arguably anything but a disinterested view. In particular:

• The financial systems that are used in the neo-Confucian systems of socio-political-economy that Japan originated and disseminated across East Asia as one basis of the region’s ‘economic miracles’ are fundamentally different to the ‘capitalistic’ models in Western societies. The strength of the latter lies in the initiative of rational individuals – and such initiative is facilitated (say) by a rule of law and by financial systems based on seeking the profitable use of capital (see Cultural Foundations of Western Strength). However neither individuals nor rationality are emphasised in societies in East Asia that have achieved economic miracles on the basis of the neo-Confucian systems of socio-political-economy that Japan pioneered (see East Asia in Competing Civilizations). In such systems government is by man (social relationships focused on elites) rather than by law, and there is no emphasis on profitability in the use of capital. Social consensus and a desire to maximize market share (rather than profitability) guide investment. The result is not only a form of industrial subsidy that is not obvious to the Asia-illiterate but also a requirement to suppress domestic demand so as to achieve current account surpluses and thereby avoid the financial crises that would be experienced from having to borrow in international capitalistic (ie profit seeking) financial markets.  (see Mikuno’s Why Japan cannot deregulate its financial system, Understanding East Asia's Neo-Confucian Systems of Socio-political Economy and Structural Incompatibility Puts Global Growth at Risk). 
• That incompatibility has been the basis of a ‘clash of civilizations’ revealed by imbalances in, and attempts to change, the global financial system that have not been well understood by Western observers, largely because Japan put on a democratic capitalist ‘face’ and said little about the nature of the incompatibility that would have been glaringly obvious from its viewpoint for decades (see An Invisible Clash of Financial Systems and Japan's Predicament);
• Japan’s financial crisis at the end of the 1980s was radically different in origin and effect to the US’s current predicament. Japan’s state-controlled financial institutions (lacking the disciple of a profit motive) had created huge quantities of credit in the 1980s by monetarising Japanese land (ie using its increasing value as the basis for ever increasing credit) and investing heavily in: (a) what proved to be industrial over-capacity; (b) property and infrastructure; and (c) acquiring foreign property and businesses. This was little different to what had happened in previous decades, except that previously industrial capacity which generated strong cash flows had been the main target. When the 1980s bubble burst, Japan did not write off the bad debts in the banking system and move on (which was the traditional basis for allowing an economy to recover) presumably because doing so would have discredited Japan’s governing social elites (ie the bureaucracy, which controlled both the banking system and Japan’s major companies, and the ultranationalist Yakuza gangs whose predecessors had initiated Japan's process of modernisation by sponsoring the Meiji restoration and who currently both maintain social discipline and control Japan’s construction industry, which had been received massive financing for domestic and international property investment and for infrastructure development). Rather those bad debts remained (mainly unacknowledged) in the banking system and this severely constrained banks’ operations. Moreover Japan’s ultimate response to economic stagnation was not only massive ongoing capital investment funded by government borrowing, but also creating credit at virtually zero interest much of which (because of the weak domestic demand for credit) was transferred offshore through Yen carry trades where it helped stimulate both asset bubbles and demand (including demand for Japanese exports);
• The international financial imbalances that arise both from the need to suppress demand in East Asian economies that employed variations on the Japanese model and from Yen carry trades played a major role in the origin of the asset bubbles that led to the global financial crisis. Moreover advice from Japanese sources about the need to maintain strong growth in the US clearly influenced the US Federal Reserve in adopting dangerously easy monetary policy. Alan Greenspan frequently argued that preventing deflation required easy money policy, though deflation was a risk that Japan faced, not the US.

There is no doubt that the US needs to maintain the quantity of economic activity, and that austerity by both the public and private sectors would probably lead to a recessionary spiral.

However what is arguably even more important is that the US and similar countries increase the quality (ie productivity and competitiveness) of economic activity (perhaps by the means for accelerated economic learning suggested above) so as to increase private incomes (and thus capacity for private investment and tax revenues) while presumably also constraining consumption spending so that the effect of growth is not merely to stimulate economies with distorted financial systems and domestic demand deficits (eg Japan and China) and so that domestic savings are increasingly available to meet capital needs.

Doing this successfully would probably cause financial stresses, and perhaps crises, across East Asia (including Japan) because strong growth would no longer be able to be maintained while maintaining current account surpluses and avoiding the need to borrow internationally. However the fundamental issue at stake is whether human societies in future are primarily to be controlled within a liberal framework by rational individuals (as citizens, employers, employees, politicians) or autocratically by social elites who orchestrate and then enforce consensus amongst their subordinates. Will the future world be governed by a rule of law, or a rule of man?

The present writer's ‘take’ on Bernanke’s efforts is that, though the situation is very complex, they largely constitute an attempt to ‘do unto others as others have long done to the US’ (to encourage $US carry trades because of the weakness of the domestic demand for credit, and thus to encourage demand to strengthen elsewhere and aid in reducing financial imbalances while indirectly boosting US growth) – see Currency War?.

Moreover while Eric Jansen’s suggestion about ensuring that spending focus on productive sectors is excellent, this can’t be guaranteed (and is unlikely to be achieved) if such a stimulus is allocated politically. However if the ‘stimulus’ takes the form of significantly increased revenue for private firms (by a process for accelerated economic development such as that suggested above), then it is likely to be invested in productive activities.

While reduced spending / borrowing by an impaired sector must be replaced by the government or the impaired sector (once recovered) in order to ensure positive nominal GDP growth and avoid deflationary risks, it needs to be recognised that international transactions are part of that equation (ie exports provide growth without a requirement for domestic borrowing / spending, while imports have the reverse effect).

In order to get growth without continuing to expand debts, the US and other countries with significant current account deficits need to eliminate the drag imposed by international financial imbalances – by strengthening the productivity and international competitiveness of their economies. It also needs to be recognised that the imbalances that have emerged partly reflect the mercantilist economic strategies adopted in Japan (and also elsewhere in East Asia) apparently in an attempt to disrupt the effectiveness of Western-style political and economic systems that the US has championed around the world. Unless and until the imbalances that arise from macroeconomically distorted neo-Confucian systems are overcome, their trading partners (and the world economy generally) can not even stand still economically without accumulating ever-increasing debts.

A purely tactical (ie counter-cyclical) response to a situation that reflects structural macroeconomic distortions in major East Asian economies would simply reinforce geopolitical risks that have been developing for decades. This needs to be pointed out US / European policy-makers.

No! Western bond markets are nothing like Japan's  - email sent 7/9/11

Richard Milne and Michael Mackenzie
Financial Times

Re: Are Western Bond Markets Turning Japanese?, Financial Times, 7/8/11

The answer to your question is ‘No’, because there are major structural differences between Japan’s financial system and those in Western societies – see Misleading Comparisons with Japan's Post-1990 Recession.

Japan’s and mainstream Western financial systems operate on opposite sides of the international financial imbalances that arise largely because of fundamentally different financial systems.

In brief: The strength of Western societies lies in the initiative of rational individuals – and such initiative is facilitated (say) by a rule of law and by financial systems based on seeking the profitable use of capital (see Cultural Foundations of Western Strength). However neither individuals nor rationality are emphasised in societies in East Asia that have achieved economic miracles on the basis of the neo-Confucian systems of socio-political-economy that Japan pioneered (see East Asia in Competing Civilizations). In such systems government is by man (social relationships focused on elites) rather than by law, and there is no emphasis on profitability in the use of capital. The result is not only a form of industrial subsidy that is not obvious to the Asia-illiterate but also a requirement to suppress domestic demand so as to achieve current account surpluses and thereby avoid the financial crises that would be experienced from having to borrow in international capitalistic (ie profit seeking) financial markets.

The differences between Western financial systems and those adopted under East Asian systems of socio-political-economy makes Japan’s experience in the 1990s essentially irrelevant to (or perhaps even counter-productive) in relation to solving the current difficulties facing major Western economies. Those undeclared differences also played a significant role in causing the current difficulties (see Impacting the Global Economy).

John Craig

Similarly attempts by analysts to understand Japan's economic history and China's difficulties and options in responding to economic stagnation in developed economies (and whether the adoption of Western-style solutions as advocated by the World Bank are realistic) seem unrealistic.

Re-reading the China Story - email sent 6/9/11

Stephen Grenville
Lowy Institute

Re: Don’t misread the China story, BusinessSpectator, 6/9/11

Your article questions the concerns that Michael Pettis has expressed about China’s ability to deal with its economic challenges.

My interpretation of your article: As advanced economies slipped into recession in 2008, many doubted that China and other emerging economies could continue to grow without reliance on exports. But they did so. Doubts about decoupling have again re-surfaced, and are expressed particularly by Michael Pettis. He identifies problems related to: (a) policy deficiencies (eg bad debts and over-investment from 2008 stimulus) that resulted from allowing regional / local governments to further increase China’s already high rate of investment; and (b) the limits to convergent growth (ie the rapid economic catch-up by low income economies). Japan is an example of the latter (ie it experienced 4 decades of rapid catch-up growth on the basis of strong institutions, technology and entrepreneurial experience, and then suffered stagnation in the 1990s). However convergence is not likely to slow China now, as it still has a long way to go to reach the technological frontier when it can no longer make easy gains from borrowed technology. Dani Rodrik and Barry Eichengreen examined many other countries’ experience of convergence, which showed that it is neither automatic nor always interrupted. If China, India, Brazil and the rest of non-Japan Asia are to save the world economy by fast growth then must get a lot right. And this is where Pettis’s point about China’s investment matters. Inevitably some investments will be white elephants – but China does not seem to have over-built generally. 40% of GDP investment is needed for 10% pa GDP growth. There is a still a need for significant housing and infrastructure investment. Increased consumption could offset loss of exports to advanced economies. Big wage increases would produce a defacto appreciation (reducing external imbalances). China’s huge savings rate (reflecting the high retained profits of SOEs gives room to absorb the bad debts in overall government sector. Thus adjustments that keep China’s growth in track could be made. However Pettis may be right. Consumption is only 35% of GDP and would have to grow much faster than GDP. But China’s challenges are much easier than America’s (which has to raise taxes to reduce budget deficits and rain in the external deficit by expanding exports). If Pettis is right the world economy is in trouble.

I should like to submit for your consideration that China’s challenges are far more complex than your article suggested because of the incompatibilities between neo-Confucian systems of socio-political-economy in countries such as Japan and China and established international economic and financial institutions that are founded on democratic capitalist principles.

In particular it is noted that:

• Japan’s rapid post-WWII growth was not based on simple convergence reliant on strong institutions and entrepreneurial experience (contrary to the suggestion in your article). Entrepreneurship (ie independent business initiative) was not a feature of Japan’s economy. Major companies are owned by state-linked bureaucratically-controlled banking systems and industrial development was accelerated by the traditional role that highly-educated Confucian bureaucratic elites play in East Asian societies (see East Asia in Competing Civilizations). Industry policy based on ‘vision development and administrative guidance’ worked because the process was not distorted by democratic constraints on the bureaucracy. However this process for guiding industrial development to maximize market share did not ensure the profitable use of savings (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy). Thus it was necessary to avoid the need to borrowing in international capitalistic (ie profit seeking) financial markets – and this was achieved by limiting domestic consumption and maintaining a very high savings rate so that: (a) current account surpluses resulted; and (b) distortions in the banking system (ie poor balance sheets) were never revealed because of strong cash flows. However Japan could not afford to expose its financial system to the checks that are required on Western financial institutions (see Mikuni’s Why Japan can't deregulate its financial system);
• Similar constraints have applied in other countries in East Asia that have achieved economic ‘miracles’ by adopting variations on the Japanese model (including China where the (so-called) ‘Communist’ Party seems to play the traditional role of elite authoritarian bureaucracies). Asian Countries with ‘crony-ist’ financial systems (rather than capitalistic / profit-seeking systems that would favour independent entrepreneurs) experienced financial crises in 1997 where they did not have the protection of current account surpluses, and were quick to copy the example of countries (such as Japan and China) that had benefited from this protection (see Asia's Next Financial Crisis). As the latter noted a cultural revolution would be required for many East Asian economies to operate under Western / US financial principles, because of (for example): fundamental differences in the way information is used; the need to change economic goals from economic 'power' to financial returns; the inseparability of economic issues from questions of social / political power; and the lack of appropriate legal systems;
• The necessity to maintain current account surpluses (a practice that eventually extended to emerging economies worldwide) had a distorting effect on the global economy (see Structural Incompatibility Puts Global Growth at Risk, 2003 and Impacting the Global Economy). Global economic growth could only be maintained if trading partners were willing and able to maintain large current account deficits – a role that the US was long able to play because of the strength of its financial system, but which must ultimately prove unsustainable;
• The risk that China faces as a result of weak demand from developed economies is not just the result of a lack of export markets, so much as the future lack of current account surpluses to protect its non-capitalistic financial system from the need to borrow in international markets (see Heading for a Crash?). This is not a constraint that can be overcome by boosting domestic consumption or significantly increasing wage rates. The latter would merely reduce international imbalances, and hasten the arrival of the presumably-China-centred Asian Financial Crisis Mk 2;
• The alternative that will be sought will be much more likely to involve the creation of an international order that is not organised on Western-style democratic capitalist principles (see Creating a New International 'Confucian' Political and Economic Order), or trying to ‘capture’ control of the international financial system so economic directions could be controlled by social elites, rather than by entrepreneurial individuals (see comments on proposals for creating a new global reserve currency through the IMF).

The challenge facing Western democracies that have relied on capitalistic (ie profit seeking) financial systems is primarily one of understanding what is going on – because attempts to interpret neo-Confucian systems of socio-political-economy in terms of Western concepts and analogies tend to be misleading (eg see China can't be properly understood in terms of Western economics).

However the counter-cyclical policies that have been attempted in relation to economic difficulties since 2008 are clearly no longer sufficient in the face of structural imbalances (see Counter-cyclical policy can't solve structural problems). Moreover there are signs that this is finally being recognised. For example the president of the World Bank recently highlighted this, in the context of suggesting how China could solve its own and the world’s economic problems by conforming to Western-style democratic capitalist expectations.

World economic leaders need to rebalance their thinking. Fiscal and monetary policies need to be complemented by a focus on structural dynamics worldwide. China’s growth has been a source of strength in the crisis, but its (export and investment-led) growth model is unsustainable. It risks being caught in a middle income trap. China’s leaders are well aware of the problem – and the 12^th 5 year plan points to solutions. A group of Chinese and international experts are developing plans to put this into practice. A critical question is how China can complete its transition to a market economy (eg by changing role of government, creating rule of law, expanding the private sector, promoting competition, and deepening reforms of land, labour and financial markets). The pace of open innovation will need to be accelerated. China can achieve ‘green’ growth, as well as provide quality public services and social safety nets. China also needs to strengthen its fiscal system (ie bring all public resources on budget), and work on its global role. China is preparing to address its challenges, and developed countries would be wise to do so also. (Zoellick R., ‘Rebuilding China's growth engine’, BusinessSpectaror, 2/9/11)

Unfortunately the World Bank’s idealistic aspirations are unlikely to be realistic. China simply can’t adapt easily to those ideals (see Eurocentric Aspirations in a World of Rising 'Asian' Influence). However China can be expected to try to ‘capture’ the World Bank.

Capturing Invaders: There is a story about an invading force coming to a Chinese region, where it encounters an old bureaucrat on the road who invites the invaders’ leader to become emperor. This suits him fine, so he is installed with great pomp and splendour and given 100 concubines to keep him amused. Periodically he decides on some law or other that he thinks should be enacted. Patiently the old bureaucrat [who, unlike the new emperor, knows how things work in the absence of a rule of law and has the connections] explains why this would not work in China, so the new emperor (like the old one) goes back to his concubines and forgets about the complex business of government. In some respects that is probably what happened to the US in Japan after WWII [and again in the 1990s].

If ideals like those expressed by the World Bank president are genuinely to be achieved there is a need for a far more Asia-literate and determined approach – perhaps along the lines speculated in Addressing Imbalances.

John Craig

• a business observer argued that those who doubt the durability of China's rapid growth are blinded by Western conceit and don't really understand what is happening. However arguments he quoted also illustrated the lack of Asia-literacy that characterises so many Western observers and analysts

Correcting a Few Misconceptions - email sent 25/9/10

Michael Pascoe,
c/- Editor ,
Sydney Morning Herald

Re: 'Chindia - you ain't seen nuthin yet', Sydney Morning Herald - Business Day, 23/9/10

Your article suggested that those who doubt the durability of China's rapid growth are blinded by Western conceit and don't really understand what is happening. However your article itself may also illustrate the lack of Asia-literacy that characterises so many Western observers and analysts (see Babes in the Asian Woods) - because their ignorance applies not only to aspects that imply strength, but also to those that imply limitations.

My interpretation of your article: Those who are caught up in China 'housing bubble' and US-consumer-dependency yarns are blinded by Western conceit, and don't have a clue. Four recent papers (by Adam Cagliarini and Mark Baker; Phillip Lowe - RBA; Michael Power - Investec Asset Management; and Clinton Dines - BHP) prove this. Dr Power argues China is finishing its labour-intensive growth phase and starting capital intensive growth, while India is entering labour intensive phase. Export dependence argument is invalid, as China's net exports have been less than 1.5% of GDP - and the US share of China's exports is only 20%. China's exports to US are low value-added items - whereas China exports higher-value added content to the developing world. Dines argues that conceited West does not understand how the game has changed - and how little China needs it. California is considering buying high speed trains from China. Power notes that low-value export story is changing, and that domestic demand (eg for cars) is rapidly rising. Lowe points out that Asia's importance to Australia is now well understood, but that financial news from Europe / US is still most studied. China has been, and is, urbanising and this has generated huge demand for iron ore and coal. As a result Australia's GDP now correlates more with China's than with US's. US is undermining its claims to be the baseline of global capitalism (eg with quantitative easing / printing money). Current concerns about Commonwealth Games problems in India should not obscure the very real progress that is being made. No one really understands the Chindia story because it is too big.

The Asia-illiteracy problem can be illustrated by the Changing China lecture delivered in February 2010 by Clinton Dines (BHP Billiton China's former CEO). The lecture provides a useful account (based on on-the-ground experience and language fluency) of the pragmatic intuition that was the basis of China's rapid economic progress, and seems likely to guide its further transformation. However Mr Dines:

• started by saying that he does not really understand the basis of those methods - and this unfortunately leads to an inability to anticipate their limitations;
• refers to the fact that China's system of political economy is based on ancient traditions that are quite different to those of Western societies, but does not spell out that the Western traditions with which China's (neo-Confucian) system is incompatible involve such elements as individualism, liberty, egalitarianism, truthfulness, financial and statistical transparency, rationality, democracy, a rule of law, rights (whether individual or collective), universalist ethics, contracts and capitalism (ie profit seeking enterprise);
• suggests that China's leaders showed great wisdom in 1978 in planning a new economic path that did not require international debts, but did not mention that: (a) Japan may have suggested those methods to China's leaders at about that time (according to Eammon Fingleton); and (b) those methods arguably render global growth macroeconomically unsustainable, because not everyone can have the domestic demand deficits / excess savings that this requires (see Structural Incompatibility Puts Global Growth at Risk, 2003).

In relation to various points made in your article it is noted that:

• China's dependency has not been on US consumers but rather on the strength of the US financial system, and the US's post-WWII willingness to allow its markets to be used to drive economic globalization on what it hoped would be democratic capitalist principles (see Understanding East Asia's Economic Models and Impacting the Global Economy). What China needed was not just exports markets but rather an ability to grow without having to borrow in international financial markets - as decisions made on the basis of 'pragmatic intuition' (rather than capitalistic calculations of expected financial returns) would otherwise inevitably have led to the sorts of financial crises that were experienced across Asia in 1997 in countries that (unlike Japan and China) were not protected by current account surpluses;
• emphasis on exports to the developing world (which seems to be what 'everyone' is now hoping to rely on) is a formula for future financial and economic crises - because those economies tend to lack well developed financial systems and were forced to adopt export-led development strategies in order to maintain current account surpluses, and thus not be reliant on international capital markets (see Who's Got Superman?) ;
• history suggests that there are fundamental internal limitations in mercantilist economic models (ie those involving state-sponsored development of economic capabilities in order to accumulate a stock of 'treasure', rather than those that are responsive to consumer demand on the basis of profitability signals) - see Balancing Supply and Demand;
• given the clear financial limitations on the US's ability to keep trying to support globalization on the basis of Western values such as those mentioned above, the creation of an international political, economic and financial order based on 'Asian' values (as Japan first sought in the 1930s) is now likely to be sought (see Creating a New International 'Confucian' Political and Economic Order);
• the implications of 'Asian' economic power can not be assessed solely in terms of the economic dimensions that are the subject of your article (see Some Thoughts on the 'China Era' and Economics is only One Factor in Diplomacy);
• one observer's suggestion you reported, ie that China might now shift from a labour-intensive to a capital-intensive growth phase, reflects a lack of awareness of the reality of economic globalization over the past half century (see Defects in Economic Tactics, Strategy and Outcomes); and
• the technology for high speed trains that China might potentially sell to the US was allegedly effectively 'stolen' from European and other foreign firms (eg see China: A future on track) - and this is unlikely to be a sustainable tactic.

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

John Craig

• expert economic analysts presented an account of the limitations of China's development model in late 2010 that, while adequate if dealing with a Western-style economy, resulted in significant misunderstandings in relation to China.

China can't be properly understood in terms of Western economics - email sent 29/9/10

Professor Martin Wolf
Financial Times

Re: 'Wen is right to worry about China’s growth', Financial Times, Sept 21, 2010

Your article provided an excellent account of the limitations of China's economic model from the viewpoint of Western economics. Specifically it highlighted: the dependence of China's economy on investment; funding of that investment through transfers from China's consumers; the limitations on that tactic; and the difficulties of arranging a shift to consumer-based growth.

My interpretation of your article: China's premier noted that China's economic development lacks balance, co-ordination and sustainability. China's catch-up development is similar to that of Japan (prior to mid 1970s) and South Korea (from early 1960s to 1997). Some see limits in rapid monetary growth, credit bubbles, price overshoots and bad debts. But credit growth is normalising, capital adequacy (11.1%) and non-performing loans (2.8%) are reasonable. Financial sector won't create unmanageable crisis so long as government finance is sound. A rapidly urbanizing country with 8-10% pa growth can absorb excess capacity. Michael Pettis suggests source of problems in that growth is unbalanced - ie heavily associated with investment as a source of demand and driver of supply. In one sense it is the most 'capitalist' country ever. From 1997 to 2009 gross investment rose from 32% to 46% of GDP, while consumption fell from 45% to 36%. While rising investment is the main driver of growth, productivity growth was also important in early 2000s - but is now waning. This is an extreme version of the Asian development model - as in Japan / South Korea earlier. This production-oriented approach is characterised by: transfers from households to manufacturing via low interest rates on savings, repressed wages and a depressed exchange rate; very high investment; rapid export growth; and high external surpluses. This model has been successful but eventually runs into constraints of massive over-investment and misallocated capital. Also it is hard to change the model because too much of the economy depends on hidden subsidies. China's scale will shift the price of imports (eg raw materials) against it, and so accelerate decline in profits. China requires rising investment to maintain given growth. Eventually investment will stop rising and growth will slow. China will then face the problem Japan found in sustaining demand as the rate of investment collapses. Given massive dependence on investment, any decline in expected growth could produce huge recession. One answer could be another government stimulus. Better answer is faster growth of consumption - by shifting income from corporate sector. This implies squeeze on profits (by higher interest rates, wages or exchange rate) and potentially risks an investment collapse, with dire consequences for demand. China's growth is now high because consumption is low - so China may be on an investment treadmill. China's catch-up growth has been very impressive, because it has been so unbalanced. But the longer the imbalance remains, the more painful the adjustment will be.

This analysis would be adequate if China's was a Western-style economy. But it isn't because the consensus-based pragmatic intuition that is the basis of China's investment decisions (like that of Japan before it) is anything but 'capitalistic' (ie guided by considerations of profit). Rather it seems to be based on ancient Chinese traditions that have little relationship with Western methods (see Correcting a Few Misconceptions).

Overlooking cultural dimensions in seeking to understand China's economy is inadequate, because it is thus impossible to see :

• why it is necessary that the transfers from consumers for investment have to be so large that they result in a domestic demand deficit / excess savings, and thus generate large current account surpluses. Where profitability is not the basis for investment decision making, it is vitally important not to be dependent on borrowing from international capital markets that operate on Western principles (see Understanding East Asia's Economic Models). Claims about capital adequacy and non-performing loans mean nothing in societies that see little to be gained from such Western notions as 'truth' and 'rationality' (and where deception is the core of Art-of-War strategy);
• how the need for current account surpluses by such economies: (a) contributed to the global financial crisis (see Impacting the Global Economy); and (b) may ultimately make global growth macroeconomically unsustainable (see Structural Incompatibility Puts Global Growth at Risk (2003) and Too Hard for the G20?); and
• the probability that China will be unable (as Japan was before it) to engineer a shift to consumer based growth, and the likelihood that (rather than attempting to adapt to Western-style economic principles) effort may be directed mainly towards creating a 'neo-Confucian economic world' (equivalent to Japan's attempt to create an Asian Co-prosperity Sphere in the 1930s) in which it would be hoped that economic models based on 'Asian' values could be sustainable (see Creating a New International 'Confucian' Political and Economic Order).

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

John Craig

• there seems to be no awareness of the implications of traditional 'Art of War' strategies for dealing with powerful outsiders which emphasise deception and 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

• attempts to understand political and social stresses in China can be overly simplistic without consideration of the neo-Confucian methods that have been the basis of China's rapid modernisation.

Communism Versus Confucianism: The Continuing Contest in China (email sent 6/6/11)

Michael Sainsbury,
The Australian

Re: Redder than red is the new revolution, The Australian, 4/6/11

I should like to try to add value to your interesting account of political tensions in China, by speculating that features of the neo-Confucian methods that have been the basis of China’s rapid modernisation need to be considered in order to better understand the severe difficulties that China is facing and the contest between Confucianism and resurgent Communism that seems to be re-emerging.

In brief your article (of which an outline appears below) seemed to me to address: (a) the growing challenges to China’s so-called Communist Party by those with ‘redder’ [ie real Communist] goals; (b) China’s shift from market-oriented economic activity due to concerns about political stability; (c) the renewed emphasis on, and criticism of, Mao; and (d) diverse suggestions about Western-style (ie effectively democratic capitalist) reforms in China.

It is suggested for your consideration that:

• China’s economic modernisation has been a result of the adoption of a variation on the neo-Confucian system of socio-political economy that Japan pioneered. China, like Japan, adopted a market economy, but not ‘capitalism’ (ie independent profit-driven economic activity);
• Though undertaken behind a ‘Communist’ face, Deng’s market-oriented reforms in China is 1978 seem to have involved a counter-revolution (with discrete outside help) against Mao-style Communism by China’s traditional (Confucian) social elites, whom Mao’s Cultural Revolution had sought to eliminate;
• The criticism of Mao that your article mentioned (ie his failure to ‘break any rules’) makes little sense from a Western perspective, but if examined from a Confucian viewpoint it constitutes a damning criticism (ie of Mao’s inability to really transform China’s society or economy);
• It is overly simplistic to suggest that the global financial crisis (GFC) demonstrated only weaknesses in capitalism, as macroeconomic imbalances implicit in neo-Confucian systems of socio-political-economy in East Asia were also a significant factor;
• The methods that have been the basis of rapid economic modernisation have now become part of China’s problem, because:
  • The political stresses emerging in China arguably reflect: unacceptable inequality; a breakdown of the morality traditionally expected of social elites; and the difficulties of maintaining control of an increasingly complex and sophisticated society through traditional Confucian techniques;
  • China’s non-capitalistic / neo-Confucian economic model is probably headed for crisis in the post-GFC environment;
• The reforms that your article mentioned (which would shift China westwards towards democratic capitalism) are unlikely to be adopted, because:
  • China’s economic modernisation has depended on control through a social hierarchy centred on the Confucian (so-called Communist) Party, and economic activity would be severely disrupted if the associated social relationships were disrupted; and
  • China may have an (invisible) ‘emperor’ (ie the PLA) whose intervention, which could be either on the side of the 'red' or the ‘redder’ factions, could be decisive.

The above undoubtedly inadequate speculations are outlined in more detail below.

John Craig

---

Outline of Article and Detailed Comments

My interpretation of your article: Mao is back in fashion in China. Many preferred his era in which people could trust each other, and people’s relationships were as comrades rather than, as now, dependent on money. The Communist Party organised a celebration of the Party’s 90^th anniversary – but others are unimpressed. Bo Xilia is one of China’s increasingly powerful princelings (children of original revolutionaries) who introduced revolutionary songs, and anti-corruption campaigns directed against gangsters and officials. He is promoting himself as ‘redder than red’, China is in transition with all groups of people having their own interests. There is nostalgia for the past, as workers are laid off, and officials lose interest in reforms that would restrict their power. In the Mao era, workers had high status. But after reform and opening up, authorities can’t have total control of society. The inertia of past thinking persists (as shown by red campaign in Chongqing). Government critic (Lin Mingli) says that China’s politics are turning left as authorities don’t face reality. Authorities are fooling the people with a ‘red’ campaign. The revolutions in the Middle East are causing resurgent hardliners concern. Beijing has been concerned since a dissident writer gained Nobel peace prise. As protests in Middle East spread, China’s communist party cracked down on dissidents. China’s formidable internal security apparatus continues to be strengthened. The capitalist revolution (the reform and opening up instituted by Mao’s successor Deng Xiaoping) seems to be running out of puff. The privatisation of state-owned businesses has ceased. China’s stimulus package was thrown at government businesses. Public enterprise has stabilised at 30% of economy, after falling quickly. The GFC, which cast Western capitalist model in poor light, has emboldened left wing of party and slowed reform. At National People’s Congress Wu Bangguo (the party’s No 2) announced the ‘Five Nos’ (ie rejection of multiple political parties; separation of executive, legislative and judicial powers; a bicameral / federal system; privatisation) to prevent chaos. This was seen to repudiate democracy proposals by reform-minded premier (Wen Jiabao). As in Singapore, democracy would only apply within the ruling Party rather than involving a multi-party system. There is always debate and tightening before leadership changes in China. Mao Yushi (from reform minded think tank, Unirule) recently criticised ‘Mao thought’ as a guiding party principle. Mao, he suggested, was never able to break any rules, but rather was bound by them. Pro-Mao advocates have called for him to be tried for libel. This fierce debate underscores China’s progress over 30 years from agrarian society to world’s second largest economy with growing middle class. A corrupt official class and wealthy individuals linked to party have emerged – all of whom oppose change. The next steps in reform (freeing protected sectors, loosening capital controls, creating an effective legal system) seem too hard for now. Authorities don’t seem to know how to deal with increased social complexity in China. They saw collapse of Soviet Union where authorities rushed to mass participation that led to their own demise. There is no unified approach to dealing with civil society. Vocal activists are repressed, but government is also seeking to regulate (ie control) growth of independent organisations. Also civil society is not monolithic. Individual activists don’t represent larger civil society. The big problem is creating a functioning legal system – to make China a country of laws (as leaders promise). The party has to make juridical system independent of the party, as without checks and balances to deal with rampant corruption the middle class will be increasingly unhappy. The government is aware of concerns about unjust society. China is moving forward on health and welfare and creating fairer commercial legal system – but not for society / civil rights sector. An independent legal system would bolster Party’s legitimacy. The longer term question is how the party will manage different sectors of society that have never before participated in public policy debates.

Your article suggested that the reforms in China that were introduced under Deng Xiaoping involved ‘capitalism’ – and that the defects in capitalism demonstrated by the global financial crisis have led to a political shift to the left and to a drift away from market-oriented reforms.

However, that is perhaps an over-simplification of the situation, because:

• while reforms under Deng created a market economy, it was a neo-Confucian market (ie one orchestrated through a social hierarchy by highly-educated elites) rather than a capitalistic market economy (ie one given direction by the efforts of independent enterprises to make profits) - see also A Simple View of Confucianism. As is frequently noted, business is conducted in China in terms of relationships (ultimately to the ruling elite – ie the so-called Communist Party). The neo-Confucian systems works in creating effective economic capacity by drawing upon the consensus of subordinates and their sense of social obligation, rather than reliance on decentralised initiative or on central planning (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy). In this respect China’s economic model resembled the Japanese model (from which it perhaps derived with Japan’s assistance in about 1979). The fact that Japan has a non-capitalistic market economy was noted at one stage by Eisuke Sakakibara (‘Mr Yen’), though few Western observers seemed to understand what he was talking about. In China’s case the model differed from Japan’s situation in that: (a) the so-called Communist Party (rather than the bureaucracy) took the lead in orchestrating economic development – noting its reported central role in controlling information flows; (b) associates of the Communist Party (rather than companies financed by state controlled banks as in Japan) have owned state-supported industries; and (c) a Communist, rather than a democratic capitalist, ‘face’ was shown to the outside world;
• Mao’s Cultural Revolution had sought to eliminate China’s Confucian traditions (ie rule by educated elites who had controlled society for centuries on behalf of Emperors by influencing the ways others’ think, on the basis of wisdom they derived from a study of history). Traditional Confucianism had constrained China’s modernisation – as shown by China’s long failure to adapt to Western expansion. The reforms introduced by Deng involved a counter-revolution by traditional elites (with external encouragement) based on evidence that a variation on China’s Confucian traditions (ie neo-Confucianism) had provided the basis for modernisation across East Asia using methods developed and then disseminated by Japan. Neo-Confucianism differs in that it incorporates Daoism which disputes the benefits of reliance on traditional wisdom and encourages learning from others (and incidentally regards good and evil as equivalent);
• The fact that Mao was said to have been unable to ‘break rules’ is significant, because the essence of the ways of thinking that dominate in East Asian societies with an ancient Chinese cultural heritage is a rejection of abstract concepts (such as universal values or laws) – see East Asia in Competing Civilizations. This is significant because the means used to orchestrate social and economic change under Confucian traditions involve attempts to ‘break’ (rather than comply with) laws / rules. For example, Western economics seeks to be a science and understand the ‘laws’ that govern economic systems. Neo-Confucian elites seek to change such ‘laws’ by accelerating learning within real economic systems – a practice which leads to perceived ‘economic miracles’ (eg instead of specializing in their labour-intensive areas of initial comparative advantage as Western economic ‘rules’ suggested, the capacity to compete in capital-intensive production was emphasised). The fact that Mao was seen to be unable to actually ‘break rules’ (ie transform China’s society or economy) was a serious failing from a Confucian viewpoint;
• It is not realistic to suggest that the global financial crisis simply demonstrated weaknesses in capitalism – as it was also driven by macroeconomically unsustainable imbalances in East Asian systems of socio-political economy (ie the demand deficits and savings gluts that were needed to protect non-capitalistic economic systems from financial crisis). This had required trading partners (especially the US) to compensate (as otherwise global growth would have stalled) with excess demand encouraged by easy money policies, and the latter ultimately created asset bubbles and the GFC (see Misunderstanding the ‘Asia’ Factor in the GFC and An Alternative to Scapegoating Capitalism);

Your article noted that China is being forced to change because of its successful transition over 30 years from an agrarian society to a major world economy. However its difficulties are complicated by the fact that the neo-Confucian methods used to manage rapid modernisation have now apparently become part of the problem. Thus, though resurgent-Communism probably offers no workable economic model, the position of those who have led in China’s economic modernisation is no longer assured. Your article, for example, drew attention to China’s current drift away from market-oriented economic activity, towards state-driven activities.

The social and political stresses in China are undoubtedly as severe as your article suggested. Inequality has increased massively because China’s economic modernisation has preferentially benefited state insiders, and this is incompatible with China’s nominal Communism. Corruption has become endemic, perhaps partly because the morality that traditionally characterises Confucian elites tended to be eroded under neo-Confucianism, perhaps because its Daoist component disregards traditional values. Moreover the methods used for exerting control of society under Confucian traditions (ie superior ability to access information and thus influence others’ thinking) tend to become much harder as: widespread education is encouraged; higher levels of education lead to ‘enlightenment’ rather than mere personal development; and the knowledge a society requires becomes more complex and technologically sophisticated.

Moreover it is increasingly likely that China is facing economic (as well as social and political) problems due to its approach to economic modernisation (see Headed for a Crash?). The latter suggests that the risk of short term economic dislocation (due to a property bubble and rising inflation) is not China’s major economic problem. Rather the dependence of neo-Confucian systems of socio-political economy on trading partners with strong financial systems and a willingness and ability to maintain large current account deficits is likely to prove a fatal defect in the medium-longer term.

None-the-less the next stages of reform probably can’t be like the liberal Western-style changes speculated in your article (ie freeing protected sectors, loosening capital controls, creating an effective legal system to make China a country of laws, preparing different sectors of society to participate in political debate), because:

• China’s economic modernisation has depended on hierarchical control by an elite who draws upon the support of their social subordinates. Liberal political or economic reforms would break the relationships that enable the economy to work, and be highly disruptive. A trend your article noted, ie seeking to bring a form of civil society into an integrated hierarchical framework centred on the so-called Communist Party, would be consistent with maintaining an authoritarian system. But neither a significant role for independent entities outside that hierarchy nor anything like ‘political debate’ as understood in Western societies would be compatible;
• Liberal outcomes (though perhaps needed to make China's political and economic systems more workable) could be prevented by China’s (apparent) ‘emperor’. Traditionally Confucian bureaucracies (whose role the so-called Communist Party seems to have mimicked) controlled society as loyal agents of the Emperor (the source of power). It seems possible that the People’s Liberation Army (PLA) may have been playing an undeclared role as China’s virtual ‘emperor’ in China’s post-Mao neo-Confucian era. If the Confucian (so-called Communist) Party has been governing China as the loyal agent of the PLA, then the latter’s likely top-level preference for the ‘red’ (rather than the ‘redder’) factions (noting a report in 2012 suggesting that the PLA itself is heavily involved in 'business' activities) and its apparent militaristic aspirations could prove decisive - though the likely preference for the 'red' factions at middle and lower levels in the PLA makes this uncertain.

• 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)

Problems in Economic Policies

• the expansionary fiscal policies advocated by the IMF in response to the GFC may have been economically harmful because (as a result of the IMF's lack of Asia-literacy) a structural economic problem was mistaken for a purely cyclical one;

Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems
(email sent 27/5/11)

Professor Tony Makin
Griffith University

Re: ‘Heavy price for going all the way with DSK’, The Australian, 27/5/11

Your article suggested that the Keynesian response to the global financial crisis (GFC) that the IMF promoted (ie high levels of public spending) has contributed to ongoing problems (ie high levels of public debt, and the risk of sovereign defaults in some countries).

My interpretation of your article: The resignation of Dominique Strass-Kahn (DSK) as managing director of IMF has raised questions about whether the role should go to a European. But prime issue should be economic / financial competence. DSK raised IMF’s profile, but for the wrong reasons – as GFC (North Atlantic Banking crisis) emerged. In response IMF not only advocated useful monetary / fiscal measures, but Keynesian fiscal policies. Claims that this saved the world from depression are unprovable. The Keynesian approach was incompatible with IMF traditions. Exhorting governments to spend their way out of trouble, encouraged some to get into more trouble as profligate spending increased public debts (and contributed to increasing sovereign debt concerns especially in Europe). IMF now lends most to European nations. UK / US deficits peaked at 10% of GDP, and public debt levels skyrocketed. US has managed to avoid public debt / currency crisis because East Asian nations irrationally use their excess $US’s to soak up US government bonds, despite very low interest rates. Under DSK IMF’s lending standards were relaxed, so moral hazard increased. IMF’s Keynesian advocacy was used to justify excessive fiscal stimulus measures in Australia – even though Australia’s banking system was relatively sound, and a floating exchange rate provided protection against the worst effect of GFC just as during Asian financial crisis (when IMF had seen no need to special fiscal measures to promote recovery). If money had not been wasted on fiscal stimulus, Australia would not have needed new taxes to fill its revenue hole.

I should like to submit for your consideration that the IMF probably promoted a counter-cyclical fiscal response to what is in fact a structural problem because of the lack of Asia-literacy that seems to prevail in the IMF (see The Asian Connection in the Public Debt Problems Facing Developed Economies).

The latter suggests that:

• the distorted financial and monetary systems that characterise countries with neo-Confucian systems of socio-political-economy oblige them to suppress domestic demand so as to ensure current account surpluses, and thus rely on the willingness and ability of trading partners (especially the US) to continue incurring current account deficits and increasing debts. [This, it may be noted, explains what your article described as the 'irrationality' of Asian countries continuing to buy US government bonds at very low interest rates. Significant currency appreciation would otherwise generate current account deficits and expose their non-capitalistic financial systems to a repeat of the Asian financial crisis];
• the IMF does not seem to have the Asia-literacy to deal with this aspect of the problem.

There is nothing unique about the IMF in this respect as a similar lack of Asia-literacy constrained the G20’s ability to get to grips with the international financial imbalances that now seem likely to make global growth unsustainable (see Too Hard for the G20?). And it seems to be almost impossible to make sense of East Asian economic and financial systems purely on the basis of Western-style economics (see Complications in Assessing ‘Asia’ in Terms of Western Economics).

John Craig

• preventing economic stagnation in the US was suggested to require boosting economic growth (eg through stimulatory fiscal policy). Such purely counter-cyclical policy must be inadequate - yet understanding why a sustainable economic solution demands overcoming the constraints imposed by international financial imbalances requires a degree of Asia literacy that has not yet been exhibited by Western leaders.

Ending Policy Paralysis - email sent 16/8/11

Stephen Grenville,
Lowy Institute

RE: Curing the US policy paralysis, Business Spectator, 16/8/11

As I interpreted it, your article suggested that the US’s ‘policy paralysis’ (concerning its prospective economic recession) could best be resolved by easier fiscal policy (ie by stimulatory spending to restart economic growth which would in turn boost tax revenues). It also suggested that: “Without the ongoing growth of the emerging economies, the world outlook would be dismal indeed“.

I should like to submit for your consideration that without a strong US economy the prospects for emerging economies are dismal indeed, because many of the latter have had to rely on export-led development strategies in order to avoid the risk of financial crises (see Limiting the 'consumer of last resort').

Moreover changes to US fiscal policy are not the key to overcoming constraints on US growth (or that of developed economies generally). In the face of persistent current account deficits many such economies face a macroeconomic ‘drag’ (ie a demand deficiency) unless they are willing and able to continue increasing their public and / or private debt levels (see Economic Recovery is Constrained by Dead Weight Economies). The primary requirement for sustained growth is to remove the source of the persistent international financial imbalances that have led to this situation (ie the distorted / mercantilist financial systems that have apparently been part of the ‘economic miracles’ in major East Asian economies). In theory the G20 was set up to promote international collaboration in resolving the causes of financial instabilities, but it has singularly failed to do so (see Too Hard for the G20? and G20 in Washington: Waiting for Hell to Freeze Over?). Some suggestions about how progress in resolving this impasse could be accelerated are in China may not have the solution, but it seems to have a problem.

The latter includes suggestions about boosting the growth of developed economies through tactics that have nothing to do with government fiscal policy – namely by accelerating the market-oriented development of effective industry clusters and thus the productivity and competitiveness of the enterprises in those clusters.

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

John Craig

• 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)

• 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 with a mercantilist goal (ie to maximize turnover / cash flow / economic power) on the basis of their connections' / subordinates' consensus with limited concern for capitalistic 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.

• debates about the proposed Singaporean takeover of the Australian stock exchange (ASX) and Australia's future reliance on access to investment from 'Asia' have been characterised the total absence of any real Asia literacy (see Proposed ASX Takeover: Lifting the Level of Debate; Pollies need Asia-literate help in deciding on Asia links;and Blocking the ASX Takeover: The Effect on Australia's Image in Asia );

• proposals for dealing with US economic difficulties seem focused on reform of trade regimes between 'Asia' and the US, whereas the core problem arguably lies in distorted financial systems (a problem that is not understood due to a lack of Asia literacy).

Getting out of the economic quicksand (email sent 13/11/11)

Professor Peter Morici
University of Maryland

Re: Pass the China Currency Bill (your email of October 10 reproduced below)

I should like (belatedly) to suggest a better alternative to that outlined in your email. You suggested seeking to reduce the obstacle that trade imbalances pose for US economic recovery by penalizing Chinese imports with tariffs if China does not revalue its currency. In brief my alternative is to reduce the need for deficit countries (such as the US) to borrow to fund spending (eg by boosting domestic income and reducing credit-based spending). This would constrain the ability of countries such as China to neutralise their current account surpluses in ways that keep exchange rates artificially low. The need to suppress demand (and thus rely on strong exports) has its origin in Ponzi-like financial systems in countries such as Japan and China (ie systems dependent on a constant inflow of new cash in order to maintain the appearance of solvency for reasons suggested below), and financial system reform (rather than exchange rate changes) seems likely to be most effective.

There is no doubt that your basic thesis is valid – ie that the US economy will struggle to recover in the face of large structural demand deficits in other economies (eg China) because such mercantilist practices mean that large amounts of US income are not translated into domestic demand, and maintaining growth requires ever increasing US debts – which is unsustainable unless asset values are rising strongly. The trading partners (especially the US and developed economies in Europe) of countries that maintain domestic demand deficits in order to protect distorted domestic financial systems are in effect being forced to try to achieve economic growth while standing on ‘quicksand’ (ie continually increasing their overall debt levels).

However reliance on tariffs in order to force an exchange rate adjustment in the hope that will get the US out of the ‘quicksand’ seems undesirable because:

• The trade imbalance has its origin in the ‘non-capitalistic’ financial systems in economies (such as China) which have adopted variations on the neo-Confucian system of socio-political economy that was the basis of Japan’s post-WWII economic miracle. Whereas Western societies’ strength has been based on the initiative of rational individuals, neither individuals nor rationality have been featured in the neo-Confucian models that are based on ancient Chinese cultural traditions that lack the West’s Judeo-Christian and classical Greek heritage (see East Asia in Competing Civilizations). Western societies support institutional arrangements such as a rule of law and a capitalistic search for profit in the use of savings in order to create simple predictable environments in which individual rationality can be reasonably effective – but neither of these applies under the neo-Confucian systems that Japan pioneered. The absence of serious concern for profitability in the use of national savings, makes it impossible for such economies to borrow in international (profit seeking) financial markets, and thus requires that their domestic demand be severely suppressed so that they experience a current account surplus. Thus, as noted above, their trading partners are left standing on economic ‘quicksand’ (ie forced to continually increase their debt levels if global growth is to be maintained);
• Adjusting exchange rates is an inadequate method for affecting trade imbalances. For example the Plaza Accord in the 1980s, which was intended to deal with the US’s large trade deficits with Japan by adjusting exchange rates, had essentially no effect (see Inadequacy of Currency Re-alignment). Where a countries’ financial system is geared to directing savings into production and limiting the credit available for consumption, trade imbalances are inevitable no matter what exchange rates apply. Thus the real challenge is to force financial system reforms in East Asia, rather than simple exchange rate adjustments. [Moreover a floating exchange rate is no guarantee that a country's financial system is not distorted in ways that lead to significant trade imbalances - see Why Japan can't deregulate its financial system];
• Structural demand deficits do not just characterise China – but also arise in Japan (and also in many emerging economies who apparently sought Asian-style export-led development as a defensive tactic because of the weaknesses of their domestic financial systems). For different reason Germany and various major oil exporters also contribute to the financial imbalances that have played a significant role in their trading partners' accumulating debts;
• Imposing trade restrictions invites retaliation.

Some (updated) suggestions about how to get out of the economic ‘quicksand’ are outlined in China may not have the solution, but it seems to have a problem. In brief this involves methods to reduce / eliminate the need for countries such as the US to borrow in order to fund economic growth (eg by novel techniques to increase incomes and the tax base, and by constraints on the use of credit for spending). Needless to say such tactics would make it impossible for countries with large trade surpluses to neutralize the pressure that such surpluses generate for upward revaluation of their currency. This should generate pressure for significant changes in East Asian financial systems (ie current account surpluses would be no longer available to protect state-linked banking systems that direct national savings to state-linked enterprises with limited regard to profitability). Financial system reform would in turn allow changes in exchange rates like those the China Currency Bill sought.

John Craig

From: Peter Morici
Date: 10 October 2011

Pass the China Currency Bill

The China Currency Bill is the most significant jobs bill Congress could pass. It enjoys the bi-partisan support of nearly 80 Republican and Democratic Senators, yet President Obama and Speaker Boehner oppose it, illustrating both are out of touch with the problems besetting the American economy.

The nearly $600 billion trade deficit is destroying more American jobs than the mortgage crisis, too much business regulation, and high health care costs combined.

Americans haven't forgotten how to make things or compete. Unlike what President Obama would have us believe, Americans are not undereducated dolts, unenlightened in the ways of global competition. Rather through a failure to act on issues the President has identified-Chinese mercantilism-and on issues where his ideology prevents action-the development of abundant U.S. energy-Americans are being denied their fair opportunity to compete.

Simply, the U.S. economy suffers from too little demand for what Americans make. Americans are spending again, but since the first quarter of 2009, the trade deficit is up 55 percent. In the second quarter, it was nearly $600 billion or 4 percent of GDP-thanks almost entirely to surging imports of subsidized imports from China, barriers to U.S. exports into the Middle Kingdom and higher oil prices.

Every dollar that goes abroad to purchase Chinese goods or oil that does not return to purchase exports is lost purchasing power that could be creating American jobs. Halving the nearly $600 billion annual trade deficit would create at least 5 million jobs.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent-simply, it prints yuan and purchases about 450 billion dollars annually in currency markets to keep its currency and exports cheap. In the bargain, it uses some of those dollars to subsidize oil imports and drive up gasoline prices in the United States.

In addition, China provides domestic industries with more than 200 export subsidies and blocks competitive imports of U.S. cars, alternative energy products and just about anything else it chooses to promote. Currency manipulation, subsidies and insidious barriers to the sales of foreign products ranging from cars to solar panels violate the letter and spirit of China's WTO obligations to promote freer trade and provide open access to foreign goods in its markets.

All President Obama does is complain, Speaker Boehner prefers to do even less, and both, with feet planted firmly in the past, cling each to ideological prescriptions that do little to address these problems.

President Obama remains faithful to Food Co-Op Capitalism-more government spending, income redistribution, overregulation, industrial policies, and free trade agreements that don't reduce the trade deficit and destroy jobs. Meanwhile Speaker Boehner adheres to Knickers Era Capitalism--indiscriminant cuts in taxes, spending and regulation. Both have failed America-the former since 2008, when the Democrats took control of the House and bloated the bureaucracy and deficit, and the latter during the first six years of the Bush presidency.

The China Currency Bill would permit U.S. firms and workers harmed by China's 40 percent undervalued currency to obtain relief through offsetting duties until China stops intervening in currency markets. That should jog China into finally compromising on the issue. If not, it would move some jobs back to the United States that should not have left in the first place.

American companies like GE and Caterpillar who have outsourced American jobs and corporate functions to China and are now clients of Beijing's protectionism have convinced President Obama the China Currency Bill is protectionist and would start a trade war.

What China does is protectionist and America is already in a trade war-China is throwing rocks and President Obama is throwing words.

China is bullying America, President Obama refuses to stand up to the bully, and Speaker Boehner is just fine with that.

Growing up in a tough blue collar neighborhood and the smallest boy at school, I learned whining about bullies doesn't work. Sometimes you just need to get a big stick and strike back. After a few hard blows, even big bullies can be brought to reason.

The world is a messy place and full of nasty people. Americans must address it as they find it, not as Mr. Obama's friends in neatly pressed Brooks Brothers suits tell us it should be.

Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.

Peter Morici

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Economic Renewal - email sent 5/1/12

Professor Peter Morici,
University of Maryland

Your recent email (reproduced below) seemed to deal with many of the fundamentals that will be required for US economic renewal, and was undoubtedly correct in suggesting that “To rebuild prosperity and the middle class, Washington must better grasp statecraft and rethink approaches to free trade.”

However I submit that: (a) most economic leadership must come from outside the political system; and (b) rethinking financial systems is more important than changing trade regimes. My reasons for suggesting this are that:

• The competiveness and productivity of enterprises (and thus their ability to generate high wage employment opportunities) is significantly influenced by the overall economic system in which they are operating (eg by the support that is available, or not available, from other elements in an industry cluster). Leadership in accelerating market oriented change within such economic systems can potentially improve the competitiveness and productivity of all affected enterprises providing the process can be divorced from democratic politics (see A Case for Innovative Economic Leadership which is written in an Australian context; Economic solutions are beyond politics; and Probable Breakthrough in Understanding Economic Development). Such leadership by neo-Confucian social elites has arguably been the basis of the post-WWII economic ‘miracles’ that have been observed in East Asia. However it is likely that protocols can be devised under which similar outcomes can be achieved within a democratic capitalist context;
• Poorly developed financial systems have been features of many economies whose productive capacity (accelerated in some cases by neo-Confucian social elites) has eroded the job and income prospects of the US middle class. Success has depended on the willingness and ability of their trading partners (especially the US) to borrow heavily to provide levels of demand that compensated for the demand deficits needed in countries with poorly developed financial systems. As suggested previously in Getting out of the Economic Quicksand financial system changes to constrain borrowing for consumption (if combined with measures to boost productivity, incomes and the tax base) would be likely to treat the cause of trade imbalances by requiring the development of more reliable financial systems in East Asia and various emerging economies elsewhere.

Your article made useful suggestions about refocusing financial systems on the ‘real economy’, but (as suggested above) more than this may be needed.

John Craig

From: Peter Morici [mailto:pmorici@rhsmith.umd.edu]
Sent: Wednesday, 4 January 2012 7:21 PM

Chicago Tribune
January 4, 2012

Saving the middle class: An agenda for economic renewal

Peter Morici

The hollowing out of the middle class is a potent campaign issue. Almost everyone - even affluent professionals and entrepreneurs - wants to identify with the middle class, but increasingly, the genuine middle is a tough place to be.

Since 2000, the median income of working-age households has fallen more than 10 percent. With the top 25 percent of earners grabbing a much larger slice of a shrinking pie, income losses for folks in the middle and working classes are much greater.

Lost jobs and stagnant wages have put 100 million Americans - 1 in 3 - below or close to the poverty line. Ten million Americans are permanently unemployed - many are displaced professionals or recent college graduates.

Globalization makes American technology, finance and resources more valuable, and individuals producing and managing those enjoy soaring incomes. But free trade pits ordinary American office and factory workers against legions of capable Chinese and others, and destroys jobs without creating enough new opportunities in exporting activities.

China and other countries are careful not to let free trade suck them into permanent dependence on Western technology and banks. Their governments require American and European firms to establish on their soil research and development, sophisticated manufacturing activities and financial activities.

Through business acumen and shrewd government policy, emerging economies have captured more of the jobs and wealth that globalization creates than the free play of markets would require.

U.S. policymakers cry foul, but those governments will not willingly abandon successful approaches to economic development. To rebuild prosperity and the middle class, Washington must better grasp statecraft and rethink approaches to free trade.

Taxing the rich to finance longer unemployment benefits or a $20-a-week payroll tax holiday are palliatives. To create enough high-quality jobs and sustain the middle class, America must better play to its strengths in technology, resources and finance.

American technology is buttressed by a superior network of colleges of science engineering and corporate R&D activities, supported by federal grants, loans and tax breaks.

Too many engineering students are foreign-born and return to their home countries - taking American technology to compete for U.S. jobs. Universities should be required to adjust admissions and tuition policies to ensure more engineering students are educated to work in the U.S. economy. High schools should emphasize the importance of studying science and engineering as a national value, much as they promote social activism, multiculturalism and careers in public service.

Too often, federally supported R&D results in patents worked abroad - consider how little Apple or Microsoft technology results in U.S. manufacturing jobs. Federal policy should require that patents accomplished with some federal support be worked in the United States to be honored by the courts, otherwise competing firms should be permitted to manufacture those products here.

Innovations in solar power and other alternative energy technologies will dramatically reduce petroleum use in 20 or 30 years, but for now, the United States will continue to use oil and import 10 million barrels a day, greatly taxing jobs creation and growth.

At $100 a barrel, prudent development of U.S. reserves could cut imports in half, and coupled with better use of abundant natural gas and wiser application of emerging internal combustion technologies, the United States could become an energy exporter within a decade. All that is lacking is the national leadership.

For decades, Wall Street financial houses accelerated U.S. growth - innovative products fostered the more efficient use of capital. But in recent years, those creative energies morphed into the buccaneer pursuit of big bonuses and nearly dealt a lethal blow to American capitalism.

The recent crisis and new regulations are causing large Wall Street banks to acquire regional institutions that cannot cope with the quagmire of federal rules, concentrating control over capital and causing banks again to focus too much on trading and not enough on making loans, especially to heartland businesses.

The time has long passed to separate again commercial banks from the Wall Street casinos, break up the largest banks so that none controls more than 5 percent of U.S. deposits and offer banks more streamlined regulation befitting the purpose of taking deposits and making loans. Leave the financial engineering to the cowboys on Wall Street but don't let them bring their six-shooters into town.

The agenda to restore growth and the middle class is clear. It's not Robin Hood policies - those won't halt economic decline. Rather, it's the tough work of ensuring engineers educated and technologies developed in America build America, developing conventional energy instead of sending environmental challenges and jobs abroad, and cutting banks down to size to again serve their communities.

• similarly suggestions by a well-respected international commentator about China's potential role in resolving what seems likely to become an international currency crisis that could seriously disrupt the global economy seemed inadequate because of a lack of understanding of China's character.

China can't fix the global currency crisis without economic disaster - email sent 8/10/10

George Soros,
Soros Fund Management

Re: 'China must fix the global currency crisis', FT.com, October 7, 2010

Your article provided an account of the role which capital account controls play in China's economy and then suggested that China must fix the emerging global currency crisis by steady revaluation of its currency (though China's government would need great insight to see the benefits of thereby reducing its own power).

My interpretation of your article: There is concern about the misalignment of currencies, which Brazil suggested might lead to a currency war. Prevailing exchange rates are lopsided because China has pegged its currency to the $US - while most currencies fluctuate. China strictly controls its capital account, while most currencies don't distinguish current and capital transactions. China's currency is thus undervalued, and China has a persistent trade surplus. This also allows Chinese government to skim off a significant slice of the value of China's exports without reducing people's work incentives (an arrangement that is better than taxation). The discretion this gives government in the use of the surplus is the secret of China's success. It protected China from the financial crisis. Since crisis, China has been in driver's seat - influencing exchange rates worldwide. China's dominant position is now endangered by external and internal factors. Impending global slowdown has increased protectionist pressures (eg via currency market interventions). If other's imitated China's capital market interventions, China would lose its advantages. Also capital markets and global economy would be disrupted. Internally consumption has fallen as percentage of GDP. Additional capital investments offer low returns. Consumption must now grow faster than GDP. There are thus external and internal reasons for allowing renminbi to appreciate - though this needs to be part of internationally coordinated process of adjustment. US imbalances are mirrored in China. US faces deflation, China inflation. US consumption (70% of GDP) is too high. US needs fiscal stimulus rather than quantitative easing that puts pressure on all currencies but renminbi. US also needs renminbi to rise to ease trade deficits and alleviate debt burdens. China should accept higher renminbi and slower growth if living standards rise. China's public would be satisfied - only exporters and the surplus accruing to China's government would suffer. A large rise would be damaging, but 10% pa would be tolerable. China's government (which benefits from currency surplus) would need foresight to accept less power in order to gain advantages of coordinating international economic policies. China's rise requires it to consider the needs of its trading partners. Only China can initiate a process of international cooperation - offering renminbi rise as enticement. China has elaborate machinery for domestic consensus building, and needs to engage in this internationally. This would lead to rest of world accepting China's rise. China has become a world leader - and, if it fails to live up to its responsibilities, the global currency system and world economy could break down. This would also reduce China's trade surplus, and this should better be achieved while increasing living standards rather than as a result of global economic decline. Without international cooperation, the world is headed for great turbulence and disruption.

Your article makes a good case for gradual renminbi appreciation and for China to take a lead in promoting international cooperation. Unfortunately China is probably structurally incapable, because of the character of its system of socio-political-economy, of taking the initiatives you suggest are needed to head off disruption of the global economy. My reasons for suggesting this are:

• there is no doubt (as Michael Pettis and your article suggested) that China's rapid economic development has been a product of diverting income from potential consumers to investment (eg by control of the capital account). However China's methods for controlling investment (like those of Japan, though in different ways) has tended to be based on communal consensus amongst elites oriented to increasing cash flow, rather than on calculations of expected profitability. Thus the state-orchestrated transfers from consumers have had to be larger than the amounts of investment, to avoid the need to borrow in international markets with suspect balance sheets. And this fear of having to borrow externally has been the driver of the excess savings that have contributed to the international financial imbalances that are now leading to a global currency crisis. If a current account deficit emerged (eg by increasing domestic consumption or by failing to manipulate the capital account) then China (like Japan) would probably experience a financial crisis because it would be forced to borrow in international currency markets to maintain economic growth (see China can't be properly understood in terms of Western economics and Heading for a Crash?);
• China's ability to develop consensus internally is based on neo-Confucian social relationships - and this can't be extended to regions where others are not prepared to accept the social superiority of China's elites (see comments on 'Time on China's side in power stakes'). Some thoughts on the China era suggests why China's (and Japan's) aspirations in international relations are thus likely to be limited to creating an 'Asian sphere' in which international relationships are not conducted through institutions based on Western-style democratic capitalist practices. Others will have to lead in any new process to promote global international cooperation, and will probably find that China's role is limited to attempting to frustrate their efforts in order to increase its influence within a narrower 'Asian' sphere.

In order to resolve the obstacles to continuing global economic growth, it is likely to be much easier (and more feasible) for leadership to be taken by countries such as the US. How this might be achieved is speculated in China may not have the solution, but it seems to have a problem. Those initiatives would have adverse consequences for countries such as China, so simultaneous efforts to provide support would be appropriate.

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

John Craig

• Australia's Treasurer issued a call for world leaders to resist pressures for protectionism that could disrupt the global economy without apparently recognising the producer protectionism that has been implicit for decades in the financial systems adopted in East Asia

Resist Protectionism: Your Call is Decades Too Late (Email sent 12/10/10)

Hon Mr Wayne Swan,
Treasurer

Re: Swan at NYSX, BusinessDay, 12/10/10

The above article reported that you urged world political leaders to resist protectionist policies, because protectionism could put the global economy at risk..

Undoubtedly protectionism is a serious risk. But your call is far too late, because a form of protectionism of producers has been built into the financial systems established in East Asia. Moreover that form of protectionism has already put the world economy at risk, though it has apparently been invisible to 'Asia-illiterate' economists and Western leaders.

My interpretation of an article in which you were quoted: Australia's Treasurer, Wayne Swan, in an address at the New York Stock Exchange has urged world leaders to resist protectionist pressures and argued for currency reform to maintain global economic recovery. In recent financial crisis, protectionism was avoided, and keeping markets open brought economy back from the brink. Now IMF is failing to fix growing rift between China and US over currencies. Mr Swan suggested that there are many areas where reform is needed, not just in currencies. World growth could be stifled if tensions are not resolved. Mr Swan has upbeat view of 'Asian century' that is helping Australia to grow - and contrasted this with gloom in much of developed world. He compared Asia's rise with emergence of US as an economic super-power early last century.

In East Asian economies that followed variations on the Japanese economic model, a form of protection of producers is achieved by financial systems that divert income from potential domestic consumers to financing strategic investment with limited regard for profitability (see Understanding East Asia's Economic Models, 2009). Those transfers are achieved partly by manipulating capital flows (including currency values), and also by paying low wages and by maintaining financial systems that pay low interest on savings and make credit readily available for investment but not for consumption. This form of protectionism achieves much the same effect as tariffs, but is much less transparent. Because investments tend to be based more on communal consensus than on expected profitability, borrowing in international markets risks financial crises, so those transfers from potential consumers to investment have to be so large that they result in a domestic demand deficit ('savings glut'), and a need for other economies to be willing and able to continue borrowing indefinitely to provide demand in excess of their domestic incomes. This in turn makes global growth macroeconomically unsustainable (see Impacting the Global Economy, 2009 and Structural Incompatibility Puts Global Growth at Risk, 2003).

While the current risk of protectionism is seen to relate to a potential 'currency war' between the US and China, it needs to be recognised that:

• similar 'wars' have a long history, and started well before China's emergence as a significant economy (see An Invisible Clash of Financial Systems?, from 2001);
• currency manipulation (eg undervaluing China's currency relative to the $US) is only one of the ways in which such transfers are achieved, and are not essential. For example, Japan has achieved similar outcomes with a floating currency (noting, for example, Why Japan cannot deregulate its financial system, 2000);
• currency reform will not solve the problem. For example, the Plaza Accord between Japan and the US in 1985 involved a major change in the relative value of their currencies, but did not significantly change the trade imbalance between them, because other factors were more important (see The Inadequacy of Currency Re-alignment, 2003).

Australia is not a disinterested bystander in relation to these issues. The failure of economic reforms since the 1980s to reverse Australia's traditional ('lucky country') dependence on basic commodity exports, has linked Australia's economy to the fortunes of countries whose systems of socio-political economy are neither understood (see Babes in the Asian Woods) nor problem free (see Some Thoughts on the 'China Era').

The world economy has been at risk for decades because of the producer protectionism implicit in East Asian financial systems. And current obstacles to global economic growth can't be removed until those problems are officially acknowledged. Unfortunately your NYSX address did not do this, any more than world leaders generally have done to date (see G20: Avoiding key Issues and Too Hard for the G20?).

John Craig

• in the face of stresses on households due to rising home mortgage interest rates, proposals were advanced for tighter government controls of banks on the assumption that profiteering, rather than the higher international cost of capital were the cause of the problem. Other symptoms were seen of communities (through their political systems) making scapegoats of capitalistic institutions (eg banks and major businesses). Arguably this arose from an inability to fully understand that the problems that Western societies were experiencing in the post-GFC environment were not simply due to the excesses of capitalistic greed;

An Alternative to Scapegoating Capitalism (Email sent 7/11/10)

Matthew Stevens
The Australian

Re: ‘New distrust of capitalism bad news for business’, The Australian, 6/11/10

Your article suggested that the growing distrust of capitalism is bad for business. It is also likely to be bad for the economy and society generally. Moreover the non-capitalistic economic models that prevail in East Asia need to be considered in discussing the challenges to capitalism that you mention.

My interpretation of your article: Canada’s rejection of BHP’s bid for Potash Co was out of character with its open door approach to investment. A trend to re-regulation, provincialism and protectionism has emerged as communities seek responses to failures at root of GFC. The pillars of capitalism and commercial globalization are distrusted. Minority governments face new uncertainties – a trend that has been developing for a decade, but that the GFC intensified. Globalization was endorsed by national governments, but now communities are asking whether this is good for society. Bank bailouts while the public suffered did not seem right. This has started a beat-up on banks and big business. BHP’s attempted takeover of Potash created emotionalism. Australia’s reaction to proposed merger of ASX with Singapore’s exchange required complex assessment by financial and foreign investment regulators, but this quickly degenerated into under-informed certainty about negative impact of the sale and Australians becoming serfs to Asian capital. In Asia, Australia’s biggest threat is seen as rising tide of protectionist sentiment – and ASX debate reinforced this. Furore developed over interest rates, bank profits and the idea that governments have to do something to constrain the banks whose balance sheets and management qualities helped during the GFC. Opposition Treasury spokesman (Joe Hockey) suggested that banks benefiting from deposit guarantee (which disappears next June) should not be allowed to invest in international banks (as ANZ wants to do). However ANZ wants to invest in Asia banks that take more deposits than they invest (as is usual in Asia). ANZ suggested that Hockey’s 9 point plan was dangerous, and could have come from Chavez.

There is no doubt that many communities are under stress and governments don’t really know what to do – and have resorted to cheap populist policy options (see Australia's Governance Crisis and the Need for Nation Building, from 2003). The latter refers, for example, to problems such as complexity and globalization which have put democratic systems under pressures that they are ill-equipped to deal with, and led to the rise of populists. It also refers to the lack of Asia-literacy that makes it essentially impossible for opinion leaders to understand the challenges to capitalism that have been gathering strength for decades.

As Eisuke Sakakibara (a senior Ministry of Finance official, who used to be known as ‘Mr Yen’) argued “Japan’s economy is best described as a non-capitalistic market economy” (Beyond Capitalism: The Japanese Model of Market Economics, 1993). And variations on Japan’s non-capitalistic economic model were adopted across East Asia (see Understanding East Asia's Economic Models) and played a role in causing the GFC (see Impacting the Global Economy). Such economic models are non-capitalistic in the sense that economic activities are not coordinated by a search for profits by independent enterprises, but rather by social relationships amongst ethnic elites and their subordinates in an attempt to maximize market share and cash flow. And the financial systems associated with those economic models are also ‘non-capitalistic’ in the sense that rather than seeking profits they are a mechanism whereby the savings of the entire ethnic community is made available to subsidise state-supported export-oriented enterprises (see Resist Protectionism: The Call is decades Too Late).

Because such economic and financial systems are non-capitalistic (ie have no real emphasis on profitability) it has been essential to avoid borrowing in international markets, so very high savings rates have been maintained (eg by paying low wages and low interest rates) to provide more than enough capital for investment. Savings in excess of investment (ie ‘savings gluts’) implied domestic demand deficits – and the latter made global growth macroeconomically unsustainable (eg see Structural Incompatibility Puts Global Growth at Risk, 2003). For many years, East Asia’s trading partners (mainly the US) tried to counter-balance those demand deficits with excess demand financed by inflating asset values with cheap credit (presumably because it was believed that neo-Confucian models of socio-political economy would eventually transform into Western-style democratic capitalism). However the bursting of those asset bubbles led to the GFC, and to a situation in which the global economy is now likely to suffer a long term demand deficit and stagnate.

There is no doubt that, as your article implied, it is not helpful to scapegoat the institutions of capitalism (eg domestic banks and big business). The problems that emerged were at least as much due to the effect on international financial systems of the non-capitalistic economic models that were adopted in East Asia. And inappropriate blame is also the result of a gross lack of Asia-literacy (see also Babes in the Asian Woods and Proposed ASX Takeover: Lifting the Level of Debate).

Some suggestions about more constructive ways to remedy these problems are in A Nation Building Agenda.

John Craig

• similarly perceptions that global economic problems primarily reflect a 'crisis of capitalism' seem to be well wide of the mark - a failing that reflects a lack of understanding of the effect of the non-capitalistic economic practices that characterise major East Asian economies

World facing 'Crisis of non-Capitalism': Non-economist - email sent 13/9/11

George Magnus
UBS

Re: Allen P., World facing ‘Crisis of capitalism’: economist, CNBC, 13 Sep 2011

In this coverage of your recent UBS research report, it was suggested that:

“With growth still low or depressed from the last peak in growth in early 2008, Magnus said a new recession or "double dip" would in fact be the continuation of a recession that started three years ago following the collapse of Lehman Brothers.

Magnus believes, therefore, that focusing solely on austerity measures is not going to produce economic stability and a return to sustainable growth.

“The problem needs to be considered more widely, encompassing our system’s lack of capacity to create jobs and strengthen income formation," he said. “

There is little doubt about the validity of your conclusion (ie that austerity measures to reduce debts are not going to ensure a return to sustainable growth). However this is not really a crisis of capitalism because the ultimate problem facing the world economy is the structural demand deficits that characterise the non-capitalistic market economic models that have been the basis of economic ‘miracles’ in East Asia. Those non-capitalistic models are macroeconomically-unbalanced and thus require that their trading partners be willing and able to perpetually increase their debt levels merely to keep the global economy afloat.

My reasons for suggesting this are outlined in the email reproduced below.

In the early 1990s, a senior official in Japan’s Ministry of Finance (Eisuke Sakakibara) published a book (Beyond Capitalism) which described Japan’s economy as a ‘non-capitalistic market economy’. However no one apparently bothered to ask what was meant by ‘non-capitalistic’, or what would be the consequences of applying ‘non-capitalistic’ economic practices to a substantial segment of the world’s economy. My speculations about those consequences are in Structural Incompatibility Puts Global Growth at Risk (2003), while some speculations about what might be required to achieve the goal your research report suggested is the face of large ‘non-capitalistic’ economies are in referred to in Preventing Economic Stagnation.

There has certainly been a lack of attention to deficits (ie what you referred to as an ‘Deficit Attention Disorder’) but more fundamentally there has been a lack of the Asia-literacy required to understand the source of those deficits.

John Craig

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But the real problem seems to be in Asia - email sent 10/9/11

Jeff Cox
CNBC

RE: Behind the Selloff: US Is Struggling, Europe Is Worse, CNBC, Sept 9, 2011

Your article suggested that:

“The latest turmoil in Europe is overshadowing efforts to revive the US economy, indicating that markets will continue to struggle until the debt crisis in Greece and other EU nations is finally resolved.”

With respect I should like to submit for your consideration that, no matter what is done in the US and Europe, that global economic growth cannot be sustainable until the international financial imbalances that require “Asia’s” trading partners to accumulate ever increasing debts to overcome structural demand deficits in countries such as Japan and China are overcome – eg see Economic Recovery is Constrained by Dead Weight Economies, Counter-cyclical policy can't solve structural problems and Should Fixing the International Financial System Start in Asia?

John Craig

• international observers suggested that imbalance problems in the international financial system could be resolved by (in effect) enabling the IMF issue Special Drawing Rights (SDR) without any apparent understanding of the neo-Confucian systems of socio-political economy whose structural domestic macroeconomic imbalances are major factors in the international imbalances. One suggested that new SDRs these should be backed by the hard currency reserves of countries with large reserves - such as Japan and China (see A Good Idea that Probably Won't Work), while another suggested (on behalf of the so-called 'Beijing Group) that the IMF should effectively just 'print money' as the basis for issuing SDRs on behalf of the G20, However reform of the international monetary system seems unlikely to be effective in the absence of the massive changes required in East Asia to eliminate their structural dependence on international financial imbalances - and this seems unlikely to be appreciated until there is close study of how and why those systems work (see Should Fixing the International Monetary System Start in 'Asia'?)

   

• suggestions that the 'hard landing' (that, in early 2012, many observers expected in China in a year or two) could be avoided merely by currency appreciation and increased reliance on domestic demand appear overly simplistic (see Avoiding a Hard Landing in China?)

Problems in International Relations

• a foreign affairs expert suggested that Australia advise the US about developing a power sharing relationship with China in Asia without any mention of the 'civilizational' issues involved.

Asia's Superpower Shuffle (email sent 4-5/9/10)

Professor Hugh White,
ANU

Re: 'Our role in Asia's superpower shuffle', The Australian, 4-5/9/10

I noted with interest your observations about the geopolitical issues that China's increasing power raises for Australia and the US, and your suggestion that Australia should encourage the US to shift to a power-sharing relationship with China.

However that analysis made no mention of the 'civilizational' dimensions of the possible transition in power in this region (ie of the fact that China's neo-Confucian system of socio-political-economy differs in many fundamental ways from the individualistic-democratic-capitalist practices of Western societies such as the US and Australia - see East Asia in Competing Civilizations).

Those difference have huge implications. For example, an 'Asian' region operating on neo-Confucian traditions would be very hard for Australians to deal with in the absence of a high level of Asia-literacy, and could well fact prove to be an unsustainable 'bubble' because of its critical dependence on the waning strength of US financial systems (see Babes in the Asian Woods).

Some suggestions about the sorts of 'civilizational' issues that Australians need to be on top of before they are in any position to sensibly advise the US about its approach to Asia are in Some Thoughts on the China Era.

I would be interested in your response to my speculations.

John Craig

• a business observer suggested that in any future conflict between China and the US, Australia should side with China because this is in Australia's economic interest - a view which reflected ignorance of the importance of social, cultural and political dimensions that need to be considered in diplomacy. It also appears ill advised given suggestions that: (a) China's young military officers  (like their counterparts in Japan in the 1930s) seem keen to prove China's capabilities [1]; and that (b) senior US military officers note that they have no contacts what-so-ever with their counterparts in China, which was never the situation in relations with the Soviet Union even at the height of the Cold War [1]

Economics is only One Factor in Diplomacy - Email sent 8/9/10

Tim Hughes,
Venture Capital Management

Re: 'Playing diplomatic games', Courier Mail, 6/9/10

In this article you suggested that, in the event of a serious dispute between China and the US, it would be in Australia's interests to side with China because of Australia's economic dependency.

My interpretation of your article: In 2006 the US Secretary of State asked Australia for help in 'containing China' - despite the fact that China is now Australia's major trading partner and central to our economic welfare. However the US alliance is at the heart of Australia's defence strategy. US has expressed concern about China's increasing influence, and made Taiwan something of an issue. However Australia's well being is more dependent on China than on US - so that in the event of a major conflict between US and China, Australia would have to support China. Anything else would be economic suicide. A defence treaty with China may be more in Australia's interests than remaining at beck and call of US. Australia has followed US into wars that have nothing to do with us - just as had been done with UK which (in time of greatest need - 1942) abandoned Australia and demanded that Australia's troops defend UK rather than fight against Japanese. Dominant view however is that Australia's cultural, social and political ties with US are such that siding with US would be inevitable - though the economic damage would be huge. Defence planners need to place more emphasis on national economic interest than they do at present.

However, despite the fact that US authorities are as Asia-illiterate as their Australian counterparts and that the US has often blundered in the use of its power because of a lack of awareness of the consequences of cultural differences, the cultural and social differences between China and Western societies have implications that need much closer consideration (see Some Thoughts on the 'China Era'). Within an economic 'world' based on China's neo-Confucian social, economic and political practices, Australians' traditions (eg individualism, rationality, private enterprise and democracy) would be entirely ineffectual in ensuring Australians' welfare.

If a significant conflict between the US and China could be a real prospect, then Australia's economic planners arguably need to consider how economic dependence on China could be reduced (eg by methods such as those speculated in A Case for Innovative Economic Leadership). At present, determined efforts are being made to promote collaboration, rather than conflict, between China and US - but the major source of potential conflict (the international financial imbalances that result from the macroeconomically unsustainable demand deficiencies required by East Asian economic models) is continuing to fester (see Too hard for the G20?)

John Craig

• US and Australian foreign policy seem to be constrained by a lack of Asia-literacy in sensibly considering an appropriate response to China's rise

The Need for Asia Literacy in US and Australian Foreign Policy  (email sent 8/6/11)

Paul Kelly,
The Australian

Re: US bull wants help in the China shop, The Australian, 8/6/11

I should like to suggest for your consideration that US Foreign Policy has been, and remains, seriously misguided because of a lack of Asia literacy.

Your report on a recent US Studies Centre conference highlighted US concerns about, and desire for Australia’s help in dealing with, the rise of China. It also noted growing awareness that the US neglected Asia over the past decade while concentrating on the Middle East as a result of the 911 attacks.

My interpretation of your article: US Studies Centre Conference recognised that in post-911 era US invested too much of its strategy, resources and military in land wars. Dennis Richardson (DFAT) started conference by declaring that he had toasted killing of Osama bin Laden, because the only way to deal with some terrorist killers was to imprison or kill them. The last decade has seen Australia’s relationship with the US deepen (eg with reduced criticism of US, free trade agreement, closer intelligence links, tighter military ties and stronger private networks (eg US Studies Centre, Australian American Leadership Dialogue and the Lowy Institute). While US made strategic mistakes, Australia (though going along) had emerged relatively unscathed. Nicholas Burns (US diplomat) said that US would not retreat into isolationism – and had over-invested in Middle East and under-invested in Asia. This raised the question of whether China had won the decade. Hugh White suggested that future historians may see 911 as distracting the US from its focus on China – and that China’s challenge to US’s uncontested primacy in Asia would raise complex and important issues for Australia. Burns said that while last decade had been difficult, talk of US decline was overdone, and that the US will ask more of its allies. This may require more than niche military role Australia has played. US’s approach is to engage China while building strategic relationships with India, Japan, South Korea and Australia. The US’s model was described as better than China’s, and Burns argued that strength was the key to peace with China and that this required ongoing military dominance in Asia (in collaboration with Japan, South Korea and Australia). Gareth Evans suggested that talk of US military dominance was not helpful. The challenge to Australia’s foreign policy is being part of alliance with US, if this is defined in terms of maintaining military dominance over China. Australia’s foreign minister (Kevin Rudd) has accepted this for some time, but Opposition foreign affairs spokeswoman (Julie Bishop) saw China as an opportunity rather than a threat, and did not agree with Rudd’s tough line on China. Since 1950s, Australia has mobilized ANZUS to its own benefit, but now US is seeking to mobilize Australia – and Australia needs critical judgement about this.

In relation to the issues raised in your article, it is submitted that:

• Australia’s former foreign minister (Gareth Evans) is right in arguing that suggestions about a strategic contest between the US and China being conducted primarily in terms of military dominance in Asia are counterproductive. The US has primarily been challenged by ‘Asia’ in the sphere of economics and finance – and this is the main threat to its military dominance. Any response to that challenge needs to be very broadly based, because (as is traditional under Asian Art of War strategies) the challenge will continue to be broadly based (see also Comments on Australia's Strategic Edge in 2030);
• Recognition that 911 diverted US governments into a ‘war on terror’ which posed less risk than challenges from Asia is long overdue. A strategic contest has been under way for decades between the democratic capitalism (as in the US and Australia) and the neo-Confucian systems of socio-political economy (involving non-capitalistic markets and control through social hierarchies) that Japan originated and spread across East Asia – though this has been invisible to the Asia-illiterate (see Invisible Clash of Financial Systems in Competing Civilizations, 2001). And the possibility of some sort of link between the 911 events and that strategic contest was not hard to see in 2001 (see Attacking the Global Financial System?). Bringing down the global order based on Western-style democratic capitalism would be seen as desirable by both Asia’s neo-Confucian elites and Islamist extremists;
• The dominance of US (and to a lesser extent Australian) geopolitical strategy by military matters and the corresponding failure to consider the practical consequences of different cultural assumptions are arguably the major reason that: (a) the ideology of Islamist extremists has not yet been discredited (eg see Hitting Osama, but Missing Islamist Extremism); (b) the US and its allies remain bogged down in land wars; and (c) relevant options for responding to the challenge posed by China’s rise seemed to be beyond participants in the US Studies Centre conference that your article reported on.

Some suggestions about a very broadly-based response to China’s challenge to democratic capitalism that could be put forward to US contacts by Australia’s leaders are outlined in ‘Comments on Australia’s Strategic Edge in 2030’.

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

John Craig

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'Global Trends 2030' Report: Looking Inside the 'Black Box' of Cultural Differences (email sent 15/12/11)

Matthew Burrows,
Counsellor,
National Intelligence Council

RE: Ignatius D., ‘America 2030: Study Predicts Grim Times’, The Australian, Dec 14, 2011

The above article outlined issues that are being considered in relation to the forthcoming Global Trends 2030 report, and also nominated you as the main author. I should like to try to add value to that useful exercise.

I note that the previous version of this report, Global Trends 2025: A Transformed World , made only passing references to the impact of cultural factors on the international system and went into no detail about what those cultural features actually were, or what effect they were likely to have.

It is to be hoped that the proposed Global Trends 2030 report will be different, as cultural differences appear to have strategically significant implications that are anything but obvious unless they are considered in depth. For example:

• East Asian economies seem to be built on cultural traditions (eg rely on a-rational / intuitive groups) that are quite different to those of Western societies (whose institutions are built to cater for rational individuals) - see East Asia in Competing Civilizations and Understanding East Asia's Neo-Confucian Systems of Socio-political-economy. And those differences have apparently had important impacts on the global economy (see Impacting the Global Economy);
• There is a very real possibility that the US has failed to detect efforts over many decades using traditional Asian Art of War tactics to undermine the US’s status and the liberal institutions it has championed (see Asian Strategy and Economic Context in ‘Comments on Australia's Strategic Edge in 2030’).

Unfortunately available indicators suggest that the forthcoming report risks not providing enlightenment in this respect. For example, no mention of cultural features was made in either: (a) an outline of the intention of the Atlantic Council’s Strategic Foresight Initiative; or (b) Uri Dadush’s Long‐Term Economic Outlook for the United States and its International Implications (which seems to be a significant input to the proposed Global Trends 2030 report). And an outline of discussions related to Global Trends 2030 in May 2011 made only the same sort of passing references to culture as Global Trends 2025 (ie ‘culture’ was mentioned, but there was no suggestion about looking inside that particular ‘black box’).

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

John Craig

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Grand Strategy - email sent 16/12/11

Professor Geoffrey Garret
US Studies Centre
Sydney University

Re: America’s place in the world: two views, Financial Review, 16/12/11

I should like to put forward an alternative to a few of the points made in the above useful article, ie that: (a) the US is on top with global reach culturally, politically, economically and militarily; (b) the US has the resilience to rise above the severe problems it has experienced over the past decade (eg costly and inconclusive wars and the worst recession since the Depression); and (c) the US’s ability to prosper in the ‘Asian’ century is strengthened by its network of allies in the region.

The US has, so far, proven completely unable to come to grips with the cultural issues that have driven changes in the geopolitical order and contributed to the decline in its own position in recent decades. The US consistently assumes that cultural power involves the dissemination of its own traditions, rather than seeking to understand and influence others’ fundamentally different cultures and behaviours. For example, the democratic capitalism that the US sought to liberate Iraq to create as a model for the Middle East depends on numerous cultural and institutional preconditions (eg the notion of individual liberty) that simply don’t exist in the Middle East (see Fatal Flaws). The system that the US sought to introduce works reasonably well in the US, but it can’t work without those preconditions. Yet such issues were not even officially considered.

There are also reasonable grounds for postulating that some of the main problems the US has experienced over the past decade (eg the War against Terror and the Global Financial Crisis) have been partly a product of traditional Art of War tactics directed against it (probably) by one of its allies in the Asia Pacific region (eg see The Need for Asia Literacy in US and Australian Foreign Policy and 'Global Trends 2030' Report: Looking Inside the 'Black Box' of Cultural Differences). There are also sound reasons to suspect that:

• the US economy will not easily get out of its present difficulties without recognising their source, and that structural changes may be needed in its economic system rather than merely boosting traditional forms of growth (whether by stimulus or initiative) – see Getting out of the Economic Quicksand; and
• a deep understanding of the cultural dimensions would make it much cheaper to ensure security in the Asia Pacific region in coming decades, yet those considering this question do not seem to be attempting to, or capable of, dealing with this (see Comments on Australia's Strategic Edge in 2030).

John Craig

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US can't play a 'conciliation' role in Asia without understanding it - email sent 9/1/12
[Modified slightly]

Zbigniew Brzezinski
c/- Editor, Foreign Affairs

Re: Balancing the East, Upgrading the West, Foreign Affairs, Jan-Feb 2012 (adapted as US can engage the East while enlarging the West, The Australian, Jan 9, 2012).

To oversimplify somewhat, your useful article seems to suggest that future US geopolitical strategy should be based on ‘enlarging’ the West, while playing a conciliation role in Asia.

My interpretation of your article: Great powers must have a long term strategic vision to avoid being mired in current conflicts. The US must revitalize itself, promote a larger West while accommodating China’s rise. Enlarging a stable / democratic West combines power with principle – and will encourage the emergence of a universal democratic political culture. US should also engage the East - while improving relationships between China and Japan / India. To do this requires: (a) domestic renewal of US (eg by more education / innovation emphasis); and (b) continued engagement in Europe, and encouragement of EU. A democratic law-based transformation is possible in Russia, and Turkey could enter the EU. If an enlarged West is not promoted, historical conflicts could re-emerge. The US’s role in Asia could be as balancer and conciliator – while respecting China’s traditional role in promoting stability in the region. Engaging China in a dialogue over regional stability could prevent problems developing – and ultimately be in China’s interests. US can’t use military power to ensure stability in Asia. US must support Japan / Korea, while not being drawn into war on Asian mainland.

However, while your suggestions make perfect sense from a traditional Western perspective, the role in Asia you suggest for the US can’t be undertaken successfully until the US (and the West generally) seeks to actually understand East Asia.

My reasons for suggesting this are outlined in more detail in Comments on Australia's Strategic Edge in 2030. The latter is a response to defence-oriented suggestions about strategy in the Asia-Pacific region published by an Australian think tank. My response speculated, for example, that:

• understanding East Asia (the realm of the intuitive / autocratic group) requires understanding societies whose institutions (unlike those in the West - the realm of the rational individual) are based on an expectation that understanding is impossible, and whose traditional strategies for dealing with powerful outsiders are based on deception / misinformation [modified];
• all elements in East Asia societies are involved in geopolitical contests, not just the state;
• economics has major strategic implications, but East Asian systems of socio-political-economy can’t be understood in terms of Western concepts (eg a rule-of-law, democracy and capitalism); and
• deception is a central element of the traditional East Asian Art of War strategies that now appear to have been deployed for decades. Everything in Asia may not be as it seems;
• alternatives to conventional geopolitical tactics are available that would be more likely to be effective.

There is a pressing need for real Asia-literacy in the US and the West generally if the desirable goals that your article suggested are to be achieved (see also The Need for Asia Literacy in US and Australian Foreign Policy). However, it is apparent that this does not exist, and has not seriously been sought in the US (see 'Global Trends 2030' Report: Looking Inside the 'Black Box' of Cultural Differences and Grand Strategy) any more than it has been in Europe (see Discovering "A Good Idea of what China's Identity Really is" Requires Thinking Outside the Square) or Australia (see Babes in the Asian Woods).

Even the ‘dialogue’ about regional stability that you suggest that the US engage in with China faces fundamental cultural obstacles that need to be considered (see Eurocentric Aspirations in a World of Rising 'Asian' Influence).

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

John Craig

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Can Australia Help China and the US to Get Along? - email sent 19/1/12

Brendan Nicholson
The Australian

RE: We must bridge China-US ties, The Australian, 14-15/1/12

It was somewhat amusing to note that (according to your article) Australia's foreign minister (Mr Rudd) has now proposed a role for Australia in brokering peaceful relationships between China and the US, because Zbigniew Brzezinski (at one time a prominent influence on US foreign policy) recently suggested that the US should take on the role of brokering peaceful relationships in Asia (see US can engage the East while enlarging the West, The Australian, Jan 9, 2012).

What makes this even more amusing is that neither Australia nor the US is likely to be able to do this until a serious effort is made to understand 'Asia' (for reasons suggested in US can't play a 'conciliation' role in Asia without understanding it, which comments on Brzezinski’s proposal).

It was also amusing to note that Mr Rudd believes that China's 'willingness to act as a responsible global stakeholder' enabled the world economy to recover from the global financial crisis relatively quickly. The problem with this is that the world has not yet recovered from the GFC (a phenomenon that was significantly due to international financial imbalances). Moreover the major constraint on recovery arguably remains the poorly developed financial systems in countries such as China that require domestic demand deficits (ie what Bernanke called 'savings gluts'), and thus require their trading partners to be willing and able to perpetually increase their debt levels if global economic growth is not to stall (eg see Economic Recovery is Constrained by Dead Weight Economies). As many economies are now manifestly running into debt limits, it is clear that economic / financial systems (such as those in Japan, China and various emerging economies) that require supressing domestic demand have been anything but ‘responsible’.

John Craig

• increasing concerns about 'economic warfare' seem to be focused on short term 'trading' attacks rather than on the bigger risks associated with the financial distortions associated with mercantilist economic strategies because of analysts lack of Asia literacy.

Preparing for economic warfare - email sent 21/8/11

Helen Rumbelow,
The Times

Re: Pentagon prepares for economic warfare, The Australian, August 20, 2011

I should like to submit for your consideration that the 2009 preparations for ‘economic warfare’ by the Pentagon that you reported may be misdirected.

My interpretation of your article: The Pentagon staged its first economic war game in 2009, and authorities are reluctant to talk about it. Economic war sounds preposterous – though less so as US debts increase. The military are worried about who owns US debt – and US vulnerability to a new kind of war. James Rickards was one of many Wall Street bankers involved in the event in 2009. The group was split into five teams (America, Russia, China, Pacific Rim and a ‘grey’ team reflecting terrorists). There were told to use financial or economic tools to bring their enemies to their knees. The result was the bankers scared the soldiers – because the world is now so interconnected. Paul Brackens (Yale School of Management) was involved in that and subsequent economic war game. He points out that the Pentagon, used to dealing in terms of military battles, found that this opened up new strategies. Economic warfare is not new. But this is different because holdings of others finances are deep, and they can be manipulated instantaneously. The US feared that enemies had their finger on the nuclear button, but the modern equivalent is pushing the button on T-bills. China is a huge threat, and Russia has waged economic war on its neighbours. Oil producers could switch to euros instead of $USs, while terrorists could trigger a financial crash via shady hedge fund or computer attack. Banks and bonds are now weapons. The military needs to understand the issues – as enemies could achieve more in financial space than through military operations. There could have been such an attack on US last year. John Bassett (Royal United Services Institute) says that UK Government is just starting to understand the risks. A concerted attack on US stockmarket could come from an economic rival. There is ruthless competition for global economic supremacy, which the West is not winning. At the end of the Pentagon session, China had won – and the soldiers wondered if it were only a game.

A scenario related to possible economic warfare directed against the US and Western-style democratic capitalism is outlined in Comments on Australia's Strategic Edge in 2030. In brief this suggests that:

• proposals to counteract China’s increasing militarism by changes to the composition and disposition of conventional forces would be quite inadequate, because in East Asia ‘war’ is traditionally conducted over decades primarily through the use of soft power techniques (eg by highly educated Confucian elites who use information to develop their own societies, while mislead opponents about what is happening and encouraging them to weaken their capacities);
• the neo-Confucian systems of socio-political-economy that have been the basis of ‘economic miracles’ in East Asia incorporate financial distortions that both subsidize industrial production, and require domestic demand deficits. They thus require trading partners willing to provide excess demand and tolerate ever increasing debts – a responsibility that the US, long the world’s ‘consumer of last resort’, willingly undertook hoping to achieve its own geopolitical goals (though doing so ultimately contributed to financial crises).

It is understood that traditional (long term) strategy in East Asia to defeat invaders is to start by to compliantly serving them, so as to cause them to become weak.

The economic war game conducted by the Pentagon in early 2009 came nowhere near understanding the possibilities that are outlined above. That exercise merely involved consideration of the manipulation of financial markets to generate losses, rather than the long term manipulation of whole social, political and economic systems. Similarly an analysis of Economic Warfare: Risks and responses (Freeman K, Cross Consulting and Services, June 2009) that was prepared for the US Department of Defence also considered only the risks associated with short-term attacks on financial markets.

To perceive the broader possibilities requires a high degree of Asia-literacy (ie understanding of how East Asian societies think and operate). Western universities have never gained this understanding because Western societies are founded on a belief in universal values, truths and laws – while East Asian societies lack the West’s classical Greek and Judeo-Christian heritage and make quite different assumptions (see East Asia in Competing Civilizations). And, more recently, post-modern fashions seem to have caused humanities and social science faculties to give up altogether in trying to explore the practical consequences of different cultural assumptions (see Competing Civilizations). Thus economists study Asian economies in terms of parallels with Western economic practices / ‘laws’, and can misunderstand how they operate. There has recently been debate in China about Mao’s heritage, with supporters highlighting the equality that existed in China under his rule, while detractors point out that Mao was unable to ‘break any rules’ (ie unable to make China’s society operate in ways that did not conform to established principles) – see Communism Versus Confucianism: The Continuing Contest in China. ‘Breaking rules’ (ie making things work in ways that they are not supposed to work) is central to Confucian techniques for government, and facilitates Art of War deception of enemies about one’s ‘shape’.

There is little doubt that economic distortions associated with East Asian systems of socio-political-economy:

• played a role in the financial crisis that commenced in 2008, though they were certainly not the only factor (see GFC Causes);
• have simply not been understood by either official US analyses (eg see US Evaluation of Financial Crisis?) or by international agencies (see Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems); and
• remain a serious complication in attempts to deal with government budgetary crises in 2011 (see Preventing Economic Stagnation).

There is also a possibility (though no certainty) that the attacks by Islamist extremists in 2001 may have primarily been to divert attention from economic risks to the power of Western societies that were actually much greater than those from terrorists (see Attacking the Global Financial System?). In other words, rather than using economic warfare to influence a conflict conducted in terms of ‘hard power’, it may be that ‘hard power’ was used to influence a primarily ‘soft power’ contest.

Winning what appears to be an economic war directed against Western societies should be possible if the nature of the problem is recognised and widely understood. How this might be achieved is speculated in China may not have the solution, but it seems to have a problem. Mercantilist economic strategies (ie state directed efforts to accumulating a stock of ‘treasure’ rather than meet the needs of citizens as consumers) were common in the 18^th century – but ultimately failed in the contest with capitalistic market economies arguably because the latter were better able to balance supply and demand.

John Craig

• Australia could be exposed to the cost of a huge and probably-ineffectual defence build up to counter the perceived threat posed by increasing militarism in China, and those massive costs could perhaps be substantially avoided by a 'soft power' approach (see Comments on Australia's Strategic Edge in 2030). The latter suggests that: (a) Asia-literacy is needed even to understand the authoritarian systems of socio-political-economy that China's military build up is presumably intended to defend and expand; and (b) there are probably 'soft power' methods that could better defuse the situation;

• an official review of Australia's defence capabilities in view of the changing strategic environment focused only on military capabilities, and ignored the 'soft power' techniques that are the core of traditional Art of War strategies in East Asia, and likely to provide better options for an Australian response.

Soft Power and Australia's Defence Capacity (email sent 25/6/11)

Hon Mr Stephen Smith. MP,
Minister for Defence

Re: Australian Defence Force Posture Review, Press Release, 22/6/11

Your press release noted that this Review (which is to be the basis of a 2014 Defence white paper) will focus on the geographic positioning of Australia’s defence forces in the light of significant changes in Australia’s strategic environment.

In commenting favourably on the Government’s general handling of the complex challenges raised by Australia’s economic dependence on China and concern about China’s rising military capacity, a journalist today drew attention to the resulting complexity of the review of the defence force posture that is to be undertaken.

My interpretation of ‘Trade and defence: our China line’ (Sheridan G., The Australian, 25/6/11): Australia is running a military hedging strategy against China, though ministers never say so. This is behind announcement (by Stephen Smith) of Defence Force Posture Review. China now affects everything. It was major factor in US decision to pull out of Afghanistan. It is a factor in ending Australia’s ban on uranium sales to India. And Australia’s government has been forgiven for mistakes in SE Asia, because of the region’s concerns about China. China is behind talks with US about more US military involvement in northern Australia. The Review will be conducted by Allan Hawke and Ric Smith (two former heads of Defence Department). It will examine: increased strategic significance of Asia-Pacific and Indian Ocean; growing military power in Asia-Pacific; disaster relief in the region; and energy security and security issues associated with offshore resource exploitation. The real dynamic driving this is the need to support the US military presence in the region. This is not a militaristic response to China, but simply an effort to consolidate US military presence. It is hard to assess China’s military budget – but China is probably the world’s second largest defence spender – and this is leading to a complex arms race in north Asia (an issue that Kevin Rudd addressed as prime minister, eg with 2009 Defence white paper). There are problems with the choice of Hawke and Ric Smith to undertake the review (eg it is an exercise in strategic assessment, not an exercise in accounting). Opposition under Brendan nelson and Malcolm Turnbull mistakenly saw the white paper as wrong – because it should not be assumed that Australia is on an inevitable collision course with China. But political leaders need to be able to speak about real defence issues. Australia seeks to partner China economically, and also draw it into a rules-based and norms based regional and global organisations. Both are needed to deal with divergent aspects of an emerging great power. The federal government has been handling the issue well.

However there is a need for a far broader strategic review process (perhaps in parallel with the announced positioning Review), because ‘soft power’ techniques are likely to be more important than military forces in any threats that arise, and in countering such threats. The most basic axiom of traditional East Asian ‘Art of War’ strategies is ‘to win without fighting is best’, and the determined efforts to do so that seem to have been under way for decades (eg through economic strategy) can’t be effectively countered now simply by changes in the geographic positioning of Australian or US Defence Forces.

My reasons for suggesting this are outlined in more detail in Comments on Australia's Strategic Edge in 2030.

John Craig

• an international observer suggested that the development of a new international order in the post-GFC environment would depend on China taking up its responsibilities - though China is unlikely to believe that it has any responsibilities except to itself and its 'tributaries'

Eurocentric Aspirations in a World of Rising 'Asian' Influence (email sent 9/2/11)

Martin Wolf
Financial Times

Re: How the crisis catapulted us into the future, 2/1/11

I must with respect suggest that your account of the post-financial-crisis world is Eurocentric, and lacks realism in relation to the role which ‘Asia’ can, and is likely to, play. Maintaining an effective global economic and political order requires a proactive approach, rather than waiting passively to see what China might do.

My interpretation of your article: GFC accelerated arrival of the future. New mood is one of wary optimism. Global output is now increasing again. Crisis was neither the beginning of depression nor the end of capitalism. Financial regulation has tightened, but within pre-existing intellectual / institutional framework. Private leverage in high income economies stopped increasing, and is now falling. Deleveraging is likely to continue. Crisis also marked reversal of global imbalances - which will not be of previous scale, though China continues accumulating foreign currency reserves (and this is perilous). Crisis also revealed eurozones' vulnerability to accumulation of public / private leverage (through directing savings into bad investments via undercapitalised banks). Deleveraging will be hard to manage. Aging populations will have serious fiscal impacts in high-income economies - and GFC brought this problem forward a decade - so managing public finances will be hard for foreseeable future. Changes in global balance of economic power have been accelerated - with significant relative gains by Brazil, India and China. Advanced economies had 63% of global GDP at PPP in 2000, but will be less than 50% in 2013. This also puts pressure on natural resources. Attitude to West (and US in particular) has changed. Respect for West's competence has been lost (due to military and fiscal problems). Shift to G20 symbolised that transformation. Davos meeting illustrated uncertainty about the future (eg whether US can avoid Japan's fate). Effect of private de-leveraging is unclear, and there are risks of renewed economic weakness / financial shocks. Eurozone mood is more optimistic - as determination to survive exists, though ability to achieve this is uncertain. China apparently has no plans for global economic and political systems, yet its success requires it to develop ideas about this given the responsibility it must take.

Your conclusion that China must take up what you describe as its ‘responsibilities’ by developing ideas about global economic and political systems seems unrealistic. China will not accept that it has any ‘responsibilities’ (noting the dominance of particularistic, and the lack of universalist, obligations). Also China's domestic political process does not operate in terms of developing 'ideas' but rather through seeking consensus amongst the subordinates of its social elites (which in China’s case now involves the Communist Party). This is not a political method that can be extended to the global level (see Time May not be on China's Side ). China's goal (like Japan's) is likely to involve the creation of an international order that operates on neo-Confucian principles, ie one without the constraints that democracy and capitalism impose on social elites (see Creating a New International 'Confucian' Political and Economic Order). But this would not be a new global order, and in fact would be an obstacle to the maintenance of any such order.

Other points made in your article would also benefit from consideration of the ‘civilizational’ issues involved. For example:

• So long as a Western-style international financial order survives, many East Asian economic systems will remain dependent on large financial imbalances because their financial systems apparently make national savings available to state-supported activities with limited regard to profitability – as suggested in Understanding East Asia's Economic Models and Resist Protectionism: A Call That is Decades Too Late; and
• The military and economic incompetence that Western societies (notably the US) increasingly demonstrate need to be considered in relation to traditional East Asian Art of War strategies – one of whose themes is to encourage opponents to do things that weaken their capabilities – ‘to win without fighting is best’.

Elaboration: Under ‘Asian’ traditions power is exerted through having access to strategic information in order to influence what others do – and the key to eroding others’ capabilities is to reduce their ability to handle information (see also China’s bigger secret). The latter notes the need to consider this in relation to the elimination of professional competence in governments in Australia. In relation to the US, it is not difficult to find indications of ‘Asian’ links in encouraging a US administration to believe that: (a) democratic capitalism has triumphed; and (b) freedom should be imposed by military force in the Middle East – though it was obvious at the time to anyone who understood the cultural preconditions required for liberal political and economic institutions to work that: (a) this would embroil the US in ongoing difficulties (see Fatal Flaws); and (b) the biggest challenge the US faced was a clash of financial system which was invisible to the Asia-illiterate and would be exacerbated if the US government was dominated by those with a security, rather than an economic, focus.

About paranoia: It is understood that in ‘Asia’ paranoia is normal. When things go wrong, one expects that one’s enemy is responsible, though one does not expect to be able to find evidence of how it was done. Some years ago I was criticised by an internationally prominent economist for expressing such concerns. However when he sought comments from the Asian studies faculty of his university he was told: ‘Professor, you are the new kid on the block’. [Note added later: The expectation that enemies might be responsible because of the subtle ways in which influence is exerted can, of course, be wrong. Paranoia may often be unjustified]

If there is to be a global order in future there is a need to do more than hope that China will contribute to one that conforms to European expectations. Some suggestions about proactive options that might worth considering are in China may not have the solution, but it seems to have a problem.

John Craig

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Nice try, but it can't happen (email sent 25/3/11)

Martin Wolf,
Financial Times

Re: How China should rule the world, FT.com, 20/3/11

Your article suggested that:

“China needs to develop its own view of how to use its influence. In doing so, it will have to start from a definition of its national interests and objectives. China’s overwhelming interest lies, I suggest, in a stable, peaceful and co-operative global political and economic environment. Only in such a world can China hope to sustain rapid development.

How should China achieve its aim? Broadly, it would be best achieved via further development of the rules-governed, institutionally based global system. The obvious alternative would be a hierarchical arrangement, with China at the apex. But such an approach would, I fear, lead to unmanageable conflicts with the other great powers. With this idea in mind, let us consider trade, payments, finance and resources.”

What you are suggesting is fundamentally and structurally incompatible with the way China works internally (eg see East Asia in Competing Civilizations and China's Bigger Secret). Thus is it not the way China would be able to work externally. China does not have a ‘rule based system’. Its neo-Confucian system involves a rule of man, not a rule of law – with the Communist Party elite (and presumably also the PLA) at the top. The alternative that you reject (ie a ‘hierarchical arrangement with China at the apex’ – which might perhaps be along the lines suggested in Creating a New International 'Confucian' Political and Economic Order) is the only system that is compatible with China’s internal arrangements – and clearly can only extend to part of the world (ie to those states that are prepared to be subject to such an order).

If a ‘rules-governed, institutionally based global system’ is to function in parallel, then it will be up to others to take the lead in maintaining it.

John Craig

• attempts to identify the implications for Australia of China's plans can cannot be assessed (as economists try to do) on the basis of economic analysis that does not consider the radically different character of the systems of socio-political-economy that exist in countries such as China.

China's Plans (email sent 4/4/11)

Dr James Laurenceson,
University of Queensland

Re: Don’t be scared, China’s plan is good for Australia, The Conversation, 3/4/11

Your article suggested that concerns about China’s new 5 year plan are misplaced (ie fears that arise because it embodies: slower growth; an emphasis on service industries and consumption – and thus perhaps less resources demand; and lower savings – and thus less scope for investment in Australia).

May I respectfully suggest that Australia’s exposure to risk as a result of developments affecting China’s economy cannot be assessed on the basis of analysis that does not consider the radically different character of the systems of socio-political-economy that exist in countries such as China (eg see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy). Broader reasons for concern should involve:

• the macroeconomic imbalances (ie demand deficits, and surplus savings) that are required to avoid financial crises where investment of national savings is orchestrated by social elites to maximize market share with limited concern for profitability. Those imbalances require trading partners with a willingness and ability to perpetually run large current account deficits and accumulate increasing debts – a feature which contributed to the global financial crisis (see Impacting the Global Economy) and clearly has reached its ‘use-by’ date (see US Backing away from Bretton Woods? and Currency War?);
• the fact that the international / regional order that China would need to enforce to ‘go it alone’ on its own terms would be incompatible with Australia’s traditions (eg see Creating a New International 'Confucian' Economic and Political Order? and China as the Future of the World?);
• the increasing militarism that China seems to be demonstrating – and the complexities of dealing with traditional Art of War strategies (see Comments on Australia's Strategic Edge in 2030);
• the risks that Australia faces because of the widespread lack of Asia literacy – eg associated with proposals to shift mining taxes onto profits, which counter-intuitively could well reduce revenues from that source (see RSPT Won't Hurt Miners: But Pity Help Naive Australians).

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

John Craig

• one observer validly pointed out the difficulties of correctly reading China's power and intentions, and China's difficulty in taking a global leadership role. However a big-picture / civilizational view is needed to understand why this is so.

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

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Outline of Article and Detailed Comments

My interpretation of your article: China has a long way to go before its world role matches its economic power. Australia's opinion makers (eg Robert Gottleibsen) believe that China is already top dog - and that the US would lose by taking economic measures against China. But it is easy to misread China's power and intentions. China is now recognising that its power requires a leadership role - as it is increasing regarded as globally important. But China will be cautious - because this is how it has always viewed international relations. Key global institutions were established without China's involvement - yet China is now being expected to quickly become the leading insider. Conventional diplomatic negotiations fit the way China's ruling party works (long processes to build consensus). Hu is the ultimate committee man - expert as summarising such discussions. Such people come from the party's bureaucratic structure, not from public electoral politics as in the West. China's leaders can't move from pre-determined positions during negotiations. This leads to lowest-common-denominator (slow) progress. State-owned corporations have benefited from China's growth, while wages languished. China's economy is large, but poor. It is a party state with institutions quite different to others that have taken a leading role in the modern world. China wishes always to postpone decisions until consensus emerges - but, given its increasing importance, China is facing pressures that can't be hidden in committees. China faces pressure from US because of its trade policies - but these are also adversely affecting poorer regions in the world. China's development is a work in progress, and its legitimacy is fragile - so it can't be a model for others. Its development model can't be exported. China wants its model to be admired not only economically / militarily but also as a quality civilization. But establishing Confucian institutes elsewhere won't win respect until it ceases locking up dissidents. This is what Confucius himself would have advised.

Your description of how the Chinese state functions and its consequent incompatibility with current Western-style global institutions seems realistic.

Another view of the Chinese state (added later ): 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', AFR, 16/7/10)

Comments on the above article appear in China's bigger secret - and its relevance to Australia?

However to understand why China's institutions operate this way, outsiders must take a big-picture / civilizational view (eg as speculated in East Asia in Competing Civilizations, 2001; China's Development: Assessing the Implications, 2003; and Babes in the Asian Woods, 2009). Such a perspective (and the reverse view of Western societies from East Asia) is essential to see the constraints on China's political and economic power, and on the way in which it can use power.

The issues involved are complex and not easily understood. They require moving outside familiar intellectual frameworks (eg the notions of rationality that Western societies inherited from classical Greece, but which East Asian societies with an ancient Chinese heritage did not emphasise). Rationality is widely recognised (by students of management, public administration and economics) to fail in dealing with complex systems, but works adequately in Western societies where decentralised decision making is facilitated by artificially simplifying the situation individuals face - eg via: (a) a rule of law; and (b) coordinating economic transactions through reliance on money are a measure of economic value (see Cultural Foundations of Western Strengths in Competing Civilizations). However, as those features of Western societies are not 'Asian' traditions (noting the Simplistic View of Confucianism outlined below), rationality fails in 'Asia' more frequently and more seriously.

A Simple View of Confucianism: Confucius' primary contribution was to establish traditions for particular (eg father-son) social relationships that did not involve any 'abstract' concept of universal law or values. Those particularist social relationships included a tradition of government by bureaucratic elites. The latter comprised those selected by the then Emperor as having excelled in an education system that studied China's particular history as the source of wisdom. Government was not exercised by creating laws allowing individuals to make decisions independently, but rather by those elites (whose modern equivalent seems to be the Communist Party) teaching subordinates (by suggesting traditional wisdom in relation to their activities or otherwise controlling their thinking), while nominally giving deference to the Emperor (whose modern equivalent is arguably the PLA).  'Abstract' economic concepts, such as 'profit' in the use of capital, were not developed. Rather wealth was sought by increasing 'real' production and saving. Confucianism was the basis of feudalistic social and political order in China for centuries - but left China struggling for a century following contact with Western societies (whose strengths derived from the creation of simplified social environments in which rationality worked and concepts of law which enabled scientific understanding of the natural world and individual initiative to be deployed in building industrial economies). Following Mao's damaging attempt to destroy the vestiges of Confucian culture (through the Cultural Revolution), a new version of Confucianism (neo-Confucianism), which had been promoted throughout East Asia by Japan, was adopted. This appeared to incorporate Taoism which supplemented the traditional notion of learning wisdom from a study of history with learning from the modern world. The essence of Taoism seems to involve a 'balance of opposites' and the lack of preference for any particular ideas or values (eg good and evil are viewed as the other half of the other - see Sydney's 2001 New year's Eve Celebrations: Awakening which Spirit?).

Another View of Confucianism: In a communist country obsessed with capitalism and devoid of religion, the once reviled Confucianism is admired again. Confucius is making a comeback after Mao tried to purge him. President Hu Jintao has mentioned harmony (a key Confucian concept) in all major speeches. While wealth and nationalism have driven China after the Cultural Revolution, there is also a search for deeper values.  While Christianity and Buddhism have grown, the Communist Party remains suspicious of religion. Confucianism is safer - as it matches their emphasis on quality of life, balanced development (recognising the environment) and reducing inequalities - rather than simple rapid growth.  China has launched Confucian Institutes to promote China's culture. Ordinary Chinese know at least a pop version of Confucianism, and it has been promoted widely by academics. It has more impact than Marxism, liberalism or Taoism (China's traditional religion). In the past China belonged to one imperial dynasty, now it belongs to one Party. Confucianism is not contrary to free market economy that Deng introduced, and China needs. The Communist Party's formal embrace of Confucianism is proceeding slowly.  One advocate suggests that getting rich is not enough - one must also have courtesy, knowledge and culture and government which is kind, with low taxes, high education and less punishment.  Confucius would focus on morality in modern China, as it is lower than before. Confucius tolerated diversity and thus laid the basis for harmonious society. China can't be a world power on the basis of its economy alone. It must also be culturally strong (Callick C. 'Seeking out the sage', Australian, 1/10/07)

Conflicting Values in China: The desire by China's elite to re-emphasise Confucian 'values' arguably reflects a reaction to the absence of any authoritative base for values implicit in Taoism.

For two centuries after contact with expanding Western societies, China remained backward under traditional Confucian leadership (which emphasised learning wisdom from a study of history). Then, after decades of internal dissent and revolution (including Mao's attempt to eliminate the vestiges of Confucian culture), neo-Confucianism appeared to gain elite support. This incorporates Taoism and had been the basis of the economic 'miracles' that East Asian societies (initially Japan) had experienced for decades (because it devalued traditional wisdom / values, and emphasised learning from a society's environment) - see East Asia in Competing Civilizations. However serious social and political problems (such as a perceived collapse in public morality) have resulted from the absence of values implicit in Taoism, and this is now presumably resulting in the renewed emphasis on Confucian values.

There is potential in this for serious problems within China, because the Taoist component in neo-Confucianism is both vital for economic success and the source of social and political problems.

It can be noted that China's history seems to involve repeated conflicts between the commercial and materialistic cultures of South China and the rural and spiritual cultures of North China which have seen the merchants driven out of China in many waves, to become the offshore Chinese Diaspora in SE Asia / Taiwan and elsewhere.

Pierre Ryckmans (Canberra based sinologist) suggests that Confucius was not a 'Confucianist'. Imperial Confucianism only accepted statements that prescribed submission to established authorities - and essential notion (eg ideas of justice / political dissent / moral duty of intellectuals to criticise rulers) are ignored. Confucius was man of action who created a link between education and political power. It affirmed a humanist ethic and the universal brotherhood of man; and the analects inspired all nations of eastern Asia to provide cornerstone of a civilization. Two of China's leaders (Shi Huangdi, 2200 years ago, and Mao) have failed in attempts to destroy it. (Callick R. 'The philosopher whose teachings couldn't be silenced by tyrants', Australian, 1/10/07)

The consequences of civilizational differences between Western and East Asian societies also seem to be complex. For example:

• because of its limited regard for for 'profit' in the use of capital, China's economic power (like that of Japan and the Asian 'tigers' before it) has arguably been critically dependent on the strength of US financial systems, as the latter allowed the US's market demand to drive strong global growth and rapid development - and thus to generate the large international financial imbalances which; (a) protected financial institutions with suspect balance sheets: and (b)  played a significant role in the global financial crisis (GFC). And, as the US economy ceases to play this role in the post GFC environment, massive adjustments (ie reliance on domestic demand) will be needed for sustainable development in 'Asian' economies (see Are East Asian Economic Models Sustainable?, May 2009). Enterprises with a 'capitalistic' profit motive are essential in balancing economic supply and demand, and such a balance is impossible internally in mercantilist economies in which capital from state-controlled institutions is allocated by neo-Confucian social networks to boost supply capacities;
• China has no tradition of (or capabilities to provide) leadership appropriate to anything like the current Western-style international institutions. Global leadership involves the notion that an 'answer' can be found that has general relevance. Western-style public policy debates are about seeking to discover such answers. But, for China (like Japan), there are no answers of general relevance - only locally relevant answers, which can be integrated by consensus within a social hierarchy. This has some advantages (and disadvantages) but it can only work properly in states that have a neo-Confucian social order. This is the reason that China's development model can't be exported worldwide - and that Japan, which was the first to implement a form of the 'Asian' development model, could only export that model to a limited range of countries (eg China in the late 1970s, if Fingleton's observations about this are reliable). Thus;
• any international leadership by China can only create a power bloc which prevents the emergence of a viable global order. It can not take a central role in any new global system. China's approach to international relationships is only likely to involve some variation of its traditional 'tributary' system involving China and subordinates who concede superior status to China's social elites (see Creating a New International 'Confucian' Economic and Political Order?).

Your article suggested that China won't gain international respect until such time as it ceases locking up dissidents - and that Confucius would have advised such a change. However the issue is not that simple.

External respect will be hard to acquire in the absence of any concept of public truth about which agreement can be sought, as without this leaders can not claim any justification for ideas other than their superior social status. It is thus essential under Neo-Confucian traditions to: (a) suppress internal dissent to maintain order (eg by controlling information flows so that most people think much the same way; or by locking up dissidents); and (b) limit any leadership role to those who accept the superiority of particular social elites. External respect is also likely to be constrained where the welfare of a community as a whole (as judged by its social elites on the basis of advice from their subordinates) is seen to justify: (a) disregard for the rights of individuals; (b) the selective enforcement of laws simply to punish any who deviate from what their social superiors expect; or (c) doing manifest evil to some in the hope of thereby promoting the communal good (eg the Tiananmen Square massacre) or (d) enabling those with strong state linkages (eg the 'princelings' in well-connected families) to accumulate huge wealth from their connections.

And in the medium term, severe economic constraints are likely to emerge from the lack of the notion of economic transparency (ie public truth in the economic domain). The US seems to be (and really has no choice about) moving away from its post-WWII willingness to allow its markets to be used to drive global growth and development (see A US Response to the GFC : Backing Away from Bretton Woods?) and a financial-services-led economy (see Restricting the Economic Role of Financial Services?). When the protection that large current account surpluses provide is removed, China is likely to be in serious trouble if its financial institutions continue to allocate capital in accordance with social consensus rather than a capitalistic search for transparent profitability (see China's Economic Performance).

China might do better by making it possible for its citizens to think for themselves, rather than relying on what Confucius advised.

Assertions have been made that 'Asia' is likely to dominate world affairs for the next millennium simply on the basis of past civilizational shifts in world history, without any consideration of what would really be involved in, and required for, that outcome.

Asian Millennium or Asian Decade? (email sent 2/4/12)

Tania Cleary

Re: Asian Century or Asian Millennium?, Online Opinion, 30/3/12

Might I suggest that, in presenting an argument for an ‘Asian millennium’, it is not sufficient to simply give a general outline of past civilizational shifts in world history? The fact that such millennial-length shifts occur could just as easily be a basis for suggesting that ‘Asia’s’ strength over the past couple of millennia is unlikely to be recovered.

In order to make a case for an ‘Asian Century’ (or Millennium) it would seem desirable to consider what this would actually mean, because this determines whether such an outcome is likely.

Some speculations about this are on my web-site in What does an Asian Century Imply, Some Thoughts on the China Era and China as the Future of the World?. In simplest terms, an ‘Asian century / millennium’ seems to me to imply that intuitive, hierarchical and autocratic groups would be shown by history to be superior in managing political and economic affairs to the rational individuals who have been the foundation of the strength of Western-style political and economic institutions in recent centuries (see East Asia in Competing Civilizations).

However this is not necessarily what will actually happen, because:

• Decade long trends are not necessarily reliable indicators of century / millennium long shifts. In the 1950s the rapid economic growth in the USSR led some to conclude that Communism would triumph. But this was not the actual outcome in history;
• Though most Western political and economic leaders continue to stumble around in the dark (eg see Babes in the Asia Woods) because of the failure of students of the humanities and social sciences to study such issues, awareness that a civilizational contest has been under way for decades (and of its implications) is growing; and
• Autocratic political hierarchies and non-capitalistic economic systems built on Confucian traditions face very real political and economic constraints (eg see Communism Versus Confucianism: The Continuing Contest in China and Are East Asian Economic Models Sustainable), just as the Communist variety did.

I would be interested in your reasons for suggesting that what has been viewed as a potential Asian century is likely to become an Asian millennium rather than prove to be merely an Asian decade.

John Craig

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.

• China may not have the solution, but it seems to have a problem (Comment on the European Sovereign Debt Crisis + Addressing Imbalances)

Addendum B: 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

The following email exchange suggests some of the apparent complexities in understanding East Asia in terms of Western economics. This arose from one observer's response to receiving a copy of a CPDS suggestion that the economic constraints on global growth implicit in the high debt levels of developed economies have their origin partly in the unbalanced financial systems that characterise East Asian systems of socio-political-economy.