Babes in the Asian Woods (2009+)


CPDS Home Contact East Asia  China's Development: Assessing the Implications China as the Future of the World Are East Asian Economic Models Sustainable?  Moving Australia Beyond Traditional Multiculturalism  Some Thoughts on the 'China Era'  Looking for the Invisible Elephant  Comments on Australia's Strategic Edge in 2030 Lifting Australia's Standards in Response to 'Asia'   Piggy-backing off China: A Very Risky Strategy  Autocratic Asian States and Australia's Economic Options  Friction between China and Japan: The End of the Asian 'Century'?   Competing Thought Cultures Debating the Chinese State  'Art of War' Speculations about North Korea's Threats Beyond Strategic Navel Gazing   What a China / US 'Partnership of Equals' Means  Parting the Bamboo Curtain ... A Bit  The 'game is rigged' for geo-political rather than 'commercial' reasons   The Resurgence of Ancient Authoritarianism in China Are Analysts Making a Big Mistake about China and Japan?    The Problem is Financial, Not Currency, Manipulation The Limits of Mr Turnbull's History Lessons Scepticism about Japan  China's Strategic Approach to its Economic and Political Problems: A Speculation  The US's Preference for Australia to Buy Japan's Submarines Needs Asia Literate Assessment  Is Singapore 'Family'?  Good Question - But Decades Late  Chinese Influence in Australia   If You Are Right Australia is in Deep Trouble   China's Impending Crisis Needs to be Considered   Where to Start Changing Philosophy  Can President Trump Contain China's Hierarchical Authoritarianism?   Take a Closer Look at China  Can China Create an Open, Transparent and Safe Financial System? And What will Happen if it Can't   China's Government is Not 'Communist' Any More than Its Companies are 'Private'   Will Donald Trump Unofficially Accept China as the 'Middle Kingdom'?   Cultural Intelligence is Needed to Frame Successful Strategy
Introduction ('Examples of What Won't be Understood without Reasonable Asia-literacy)+

Addenda

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 that 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 recognise that from an 'Asian' perspective 'understanding' is always inadequate; (b) those who do have real experience of 'Asia' seem unable to explain clearly how it works; and (c) practitioners accept that it is different without trying to understand it. These difficulties in understanding follow partly from the way in which information is used in East Asia (see Why Understanding is Difficult) and also from differences in Western and East Asian perceptions. Western observers tend to concentrate on specific 'things' whereas in dealing with East Asia looking at the whole of a situation may provide better understanding (see Look at the Forest not Just at the Trees).

However engagement without understanding (ie 'just-doing-it') is foolish (eg see examples and The Infantile US vs China Debate below).

Examples: There is a need to be aware of:

  • the fact that information provided to others will be unreliable because the goal will be to influence others' actions rather than than to enable them to understand (see Why Understanding is Difficult). For example:
    •  academics whose approach to 'education' reflects East Asian traditions are likely to be seeking to influence others' behaviour to benefit an ethnic group rather than to enable others (eg students or foreign policy analysts) to 'understand';
    • foreign policy idealists might be encouraged to live in their preferred dream world by being told: 'history is over, and you won' when the cultural complexities that made this uncertain would have been glaringly obvious;
    • describing East Asian economies in terms of Western concepts may be highly misleading / deceptive (eg consider Comments on the 'Holy Grail of Macroeconomics');
    • outsiders who seek explanations may merely be told 'consider this' or 'consider that' - where the 'this' or 'that' reflects what the insider wants the outsider to believe though it may have nothing to do with the issue that information was being sought about;
  • the fact that such societies:
    •  operate as virtual 'whole-of-society' bureaucracies (ie use hierarchical consensus-building methods that enable bureaucracies, including those in the West, to be effective in dealing with complex issues for everything - not just for functions subject to market failure);
    • perceive their people as presumably-loyal subordinates within such social hierarchies; and
    • expect people to work for limited reward (and make their financial and other assets available to the 'bureaucratic' elites atop those social hierarchies) out of a sense of ethnic nationalism without meaningful oversight of the 'bureaucracy' by what would be regarded as the 'public' in a Western context;
    • practice a form of state corporatism (whereby the supposedly 'private' sector is regarded as an extension of the state) - an arrangement that characterized fascist regimes in the 1930s;
  • the way in which highly-educated bureaucratic elites exert influence by: (a) facilitating the development of a consensus (in society, the economy, in government) amongst those with most social and economic power; (b) using state power (including so-called 'law') to enforce the consensus reached by social elites; and(c)  gaining access to strategically significant information while doing so which is then used to influence others' behaviour. In post WW11 Japan, the actual bureaucracy played this role on behalf of Emperor Hirohito in relation to financial and economic affairs, then in China from the late 1970s, a variation of the traditional role of a Confucian bureaucracy was played by the (so called) 'Communist' Party itself;
  • the fact that:
    •  government is by 'man' (ie those at the top of an ethnic social hierarchy) rather than by 'law' (see notes on China's 'rule of law' reform agenda). There are no 'rules' that can't be broken - and breaking rules that advantage an ethic community can be admired by those who benefit. Being found out when harming others (ie not conforming to others expectations) matters more than the fact that harm was done;
    • 'law / regulation' thus does not provide a set of rules that can be used as a basis for independent initiative (as it does in Western societies), but rather is a means for disciplining those who don't do what the social elite believe is desirable on the basis of their subordinates' consensus (see note on the unreliability of law / contracts as a foundation for rational decisions);
  • the behind-the-scenes role that ethnic social networks (perhaps ultimately connected to state-linked neo-Confucian bureaucratic elites) may play in coordinating responses to any external engagement - and thus that:
    • outsiders need to consider 'what' (rather than 'who') they are developing a relationship with. The 'what' may be good or bad, but which it is can't necessarily be determined simply from meeting the 'who'. In Japan the ultimate 'what' is likely to be its bureaucracy which operates under a mandate from the emperor, while in China the ultimate 'what' is likely to be the 'princelings' who dominate the so-called Communist Party; and
    • political components are likely to exist in apparently 'commercial' deals. Those outsiders engage with in business dealings (or connect with as employers, as employees or as friends) may be discretely playing a 'Game of Thrones' rather than simply engaged in profit-seeking commerce;
    • goals may be broken down into many small elements (a process that has been referred to as 'slicing the salami' - or 'slicing the cabbage' by the PLA) so that affected parties accept the initial innocuous elements of a new arrangement even though they would have rejected the proposal if it had been presented as a whole - and then are reluctantly pressured to accept all of the other components [1];
  • the mercantilist (ie seeking to boost the power of an ethnic community) rather than capitalistic (ie independent profit-focused) financial system that may support apparently 'commercial' deals. In Japan it has realistically been argued that a mercantilist agenda was adopted at the time of the Meiji restoration as the Samurai who thereby gained power placed themselves (in business and the bureaucracy) in control of Japan's economic activities (see Why Does the Emperor need Yakuza?). And in the post-WWII era enhanced methods of orchestrating Japan's economic production capacities were put in place through business / bureaucracy networks (see The Use of Finance as a Weapon and Establishing Japan's Post-WWII Economic and Political Systems). And in the 1970s China's so-called 'Communist Party adopted a similar approach - a fact that was made much more obvious in 2014 - see The Resurgence of Ancient Authoritarianism in China;
  • the potential involvement of organised criminal gangs in activities that have official / governmental endorsement (see also Views of the Role and Power of Japan's Yakuza);
  • the frequent use of bribery - because of: (a) an expectation that gifts should be given to social superiors who facilitate favourable outcomes; and (b) the lack of any basis for believing that it is wrong in any fundamental sense to use any methods whatsoever providing the results are seen to benefit the ethnic community;
  • an apparent willingness to believe 'grand conspiracy' theories in relation to Western countries and groups because: (a) behind-the-scenes group 'conspiracies' with deliberate deception of outsiders are the way things have tended to be done in East Asia; and (b) an inability to understand why such behaviour is much less likely in individualistic societies;
  • the powerful role that the offshore Chinese play in China and elsewhere, and the role that organized crime (ie Triads / Yakuza ) plays as the 'private armies' of the offshore commercial groups.

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 its Asia-illiteracy 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'?).

Detailed Comments

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 including Japan and the Chinese Diaspora which tends to be economically significant in much of SE Asia) operate on the basis of traditions that are radically different to the Western traditions with which Australians are familiar (see East Asia: The Realm of the Autocratic and Intuitive Ethnic Hierarchy?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 the triumph of 'Asian values' and thus that intuitive, hierarchical, ritualistic and autocratic ethnic groups (in effect 'whole of society' bureaucracies) would prove better able to deal with ongoing social, economic, environmental and political challenges than rational / responsible individuals operating within the framework of individual liberty, a rule of law, universalist values, freedom of speech, democratic governance and profit seeking enterprises that Western societies have adopted.

Western societies use information as the basis for gaining abstract understanding, and this the foundation of the rationality that is useful in problem solving where problems are fairly simple (see Cultural Foundations of Western Strength). However rationality fails in dealing, for example, with situations:
  • where complex feedback relationships exist; or
  • where necessary information is intrinsically not available.

East Asian societies with an ancient Chinese cultural heritage have a quite different approach to epistemology (ie to what is seen as the nature and appropriate use of knowledge) and:

  • information is used primarily to influence others' behaviour as a form of ongoing ritual, rather than to gain abstract understanding as a basis for situational decision making;
  • there is little reliance on the institutions that Western societies have created to provide individuals with scope to make effective rational decisions as citizens, politicians, business leaders or employees (eg democratic governance, a rule of law and capitalistic / profit-focused resource allocation).

Such arrangements can perhaps best be conceived of as 'whole of society' bureaucracies - where the methods that allow Western bureaucracies to be effective in dealing with complex issues (ie collegiality and consensus) are the basis for social, economic and political organisation generally.

It would arguably amount to the long-delayed achievement (using traditional Art of War methods) of the goal that Japan sought to achieve militarily in the 1930s (ie gaining Western respect for 'Asian' culture and mobilizing China's support for making this the basis an 'Asian Co-prosperity Sphere').  It is perhaps behind what China's president Xi Jinping referred to in 2013 as the 'China Dream'.  It has been plausibly suggested that Xi's reforms in 2013 had little to do with economic and political liberalization but rather constituted a re-creation of something like China's traditional system of elite-guided governance (see The Resurgence of Ancient Authoritarianism in China).

An article which probably presents something close to the rationale for this was presented by Henry Liu in The Abduction of Modernity (2003). Order within the society as a whole (built on the ritualistic order that exists with families / communities) is emphasised rather than the welfare and capabilities of individuals.  Western societies were described as 'barbarians' because weapons were invented and used from the late 15th century which enabled common folk to challenge their aristocratic superiors and thus disrupt the all-important social order.

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 that has been established 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 favourable international financial imbalances with countries such as the 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?).

Understanding of 'Asia' (while difficult) is a precondition for successful and beneficial engagement in 'Asia' by Westernised societies - yet is precisely the reverse of the implied just-do-it advice to Australia's federal parliament by China's President Hu in 2003. Understanding is the strength of Western societies while engagement without understanding (a goal of traditional 'Art of War' strategies) would play to China's relative strengths and disadvantage Australians.

Understand 'Asia' before Engaging - email sent 13/7/12

Scott Murdock
The Australian

Re: Tony told it's time to engage with Asia, The Australian, 13/7/12

Your article points to business calls on the federal Opposition leader to ‘think big for the country’ in relation to Australia’s engagement with Asia.

My interpretation of your article: A former liberal member (Michael Jackson) has accused Opposition leader (Tony Abbott) of leading an ‘Asia-illiterate’ alternative government, which puts Australia’s economic future at risk.. The shadow cabinet was seen to lack political and business experience in the region. Mr Abbott hass not been to China because there are no votes in it. But alternative prime ministers need to think big for the country. Trade minister (Craig Emerson) said that China was vital to Australia’s economic future. Nationals leader (Barnaby Joyce) has opposed agricultural investment from China. Dr Emerson said that Australia needed to look through the current volatility of China growth patterns.

Taking a ‘big picture’ view would certainly be a refreshing change, as it seems that most political and business leaders have been content to ‘engage’ with the Westernised face that ‘Asia’ adopts and have not bothered to look at the big picture. And this puts more than Australia’s economy at risk.

The lack of real Asia-literacy that characterises Australia’s current political and commercial dealings in ‘Asia’ is suggested in Babes in the Asian Woods. This includes comments about: (a) what an ‘Asia century’ actually implies; and (b) the strategic approach to ‘Asia-literacy’ that Australia’s political and business leaders probably need if they are to take a less unsophisticated approach to engagement with countries such as China.

John Craig

Similar calls by a senior Chinese diplomat for closer and broader engagement between Australia and China in July 2012 also highlighted the need for widespread understanding of the 'Asian' dimension of such engagement as did assurances by the chairman of Australia's foreign Investment Review Board that investment would have to involve purely commercial considerations.

An Opportunity to Boost Asia-literacy - email sent 31/7/12

Greg Earl

Re: ‘China calls for deeper ties’, Australian Financial Review, 31/7/12

Your article recorded calls by China’s deputy ambassador for a closer relationship between Australia and China (ie one that goes beyond resources to include finance, insurance, clean energy, infrastructure development and agriculture). This was apparently in response to concerns expressed by Australia’s opposition leader about investment in Australia by foreign state-owned entities (eg as recorded in Callick R., ‘Tony Abbott’s China challenge’, The Australian, 26/7/12).

Other observers have expressed reservations about both:

My version (a few weeks ago) of the issues involved was Autocratic Asian States and Australia's Economic Options – and this stressed the need to take into account the ‘Asian’ dimension (ie the differences from what might be involved in developing relationships with Western nations). This is significant because (for example) some observers perceive Australia to have a need for Chinese investment, whereas China arguably has funds for investment largely as a consequence of a distorted financial system that contributed to, and may not survive, the global financial crisis.

Some suggestions about why understanding the ‘Asian’ dimension is both necessary and difficult are in ‘Comments on Australia's Strategic Edge in 2030’. And speculations about the types of economic and geopolitical mistakes that can be made without informed consideration of the ‘Asian’ dimension are in Babes in the Asian Woods.

The issue raised in your article thus demands serious efforts to boost the Asia-literacy of Australian leaders in business, universities, the media and governments who are likely to consider it.

John Craig


In East Asia Deals Can Always Involve Politics - email sent 7/8/12

Brian Wilson,
Foreign Investment Review Board

Re: Curran E. and Sainsbury M., Don't mix politics and deals: FIRB in warning to state-owned investors, The Australian, 7/8/12

You were quoted in this article as suggesting that investment in Australia by foreign entities should always be simply on a commercial basis.

Extract from the above article: “State-owned companies and sovereign wealth funds must not be driven by a political agenda when buying into Australia, the new chairman of the Foreign Investment Review Board has warned in a strong signal to overseas investors. Brian Wilson, an investment banker who became chairman of the foreign investment watchdog in April, said yesterday: "Investment decisions should be made by investors on a purely standalone commercial basis. "Australian businesses, however they are owned, should be run on a purely commercial basis and not as an extension of the policy, political or economic agenda of a foreign government," he told Dow Jones Newswires.

This highlights the very significant difficulties that the FIRB now faces because major East Asian economies (eg those of Japan and China) do not operate on a ‘commercial’ basis (ie where investment decisions are made by independent enterprises on the basis of expected profits). Even where economies involve market-focused economic activities, major investments tend to be made by state-linked enterprises (which may or may not be formally state-owned) drawing on national savings mobilized through state-linked banks, and to have nationalistic (mercantilist?) economic motivations – rather than ‘commercial’ motivations (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009). Profitability, for example, seems to be considered relatively unimportant (see Profitability?).

Notes added later: While ownership is the primary means of exerting influence over enterprises in a Western context, this is not so in East Asia where neo-Confucian social relationships seem to be the primary basis of such influence. In Japan, for example, there was a preference for debt funding of companies so that ownership (by outsiders) could not become an effective means for exerting influence. Shareholdings were small and merely symbolic of social relationships. In East Asia financial institutions and business would be 'state-linked' and aligned with nationalistic goals on the basis of social relationships with elites, whether or not the associated enterprises were formally owned by the state.

Heavy reliance on social relationships in economic organisation is paralleled by: (a) limited reliance on a rule of law; and (b) the obligations of subordinates to superiors within enterprises. Thus countries such as Japan and China must experience difficulties with foreign investment where different practices prevail. For example:

  • before its 1989 financial crisis, Japan created huge amounts of credit by monetising real estate. Some was used in an extensive program of price-no-object foreign investment, and this often resulted in failures, presumably because of the unfamiliar institutional and social context;
  • the problems plaguing Citic Pacific's Sino Iron project in Western Australia in 2012 may indicate similar obstacles to foreign investment;
  • Chinese companies that are seeking a role in the US financial system are clearly experiencing difficulties in 2012 (see Profitability?).

The lack of Western-style ‘commercial’ motivations in East Asia not only causes problems for Australia’s Foreign Investment Review Board. It has arguably played a major role in much recent world history (see An Unrecognised Clash of Financial Systems, 2007) and in the genesis of the global financial crisis in particular (eg see Impacting the Global Economy, 2009 and GFC Causes).

The lack of Asia-literacy that prevails amongst Western political and business leaders and amongst economists has also been a major factor in giving rise to these problems. Questions now being raised about investment by state-owned companies in Australia clearly require a much greater effort to understand what is going on (eg as suggested in An Opportunity to Boost Asia-literacy). However, as implied above, this is not only necessary because of the need now to make difficult decisions about foreign investment.

John Craig


Where 'Businesses' Can Be Agents of an Authoritarian State - email sent 14/11/15

Rick Wallace,
The Australian

Re: $30bn ‘China education city’ to tap into student boom, The Australian, 19/9/15

'Military Ties to Darwin Port's Chinese Owner Landbridge Group' and The Dark Side of Japan in Australia? might be of interest. A clear distinction between business and the state in East Asia is essential before ‘commercial’ proposals can reasonably be considered without having to take account of the possibility (which currently exists) that they might have not-immediately-obvious ‘political’ implications.

Another point that might be worth considering is Are Service Exports to Asia Australia's Best Economic Options?.

John Craig

Failure to understand what is involved is increasingly hazardous in terms of both economic policies and international relations (see Addendum A: Economic and Geo-political Risks from Asia-illiterate Policy Making). For example 'Asian' economic traditions played a significant role in the global financial crisis and increase the risk of continuing financial crises (see Addendum B: Measuring China's Economic Performance below).

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 if individual rationality is to be facilitated) 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 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; (b) the need to educate those who provide policy advice to governments and business leaders (rather than school children) in the first instance; and (c) how Asia-literacy might allow events and trends in East Asia to be understood.

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 consequent difficulties in gaining real understanding. For example: power is exercised by providing information; the purpose of providing information is to influence others' behaviour, rather than to enable them to understand; and systematic efforts are reportedly made by China's PLA to influence / deceive foreign leaders;
  • 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:
  • History so as to be aware of whose descendents might be seeking to achieve ultimate victory in apparently ancient conflicts;
  • 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


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


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


Reading China's Mind? - email sent 10/10/12

Dr Margaret Simons,
Centre for Advanced Journalism,
University of Melbourne

Re: Chinese activate ‘zoushuangai’ media: will it free the press?, Crikey, 9/10/12

I should like to suggest the possibility of ‘reading China’s mind’ by looking through the lens of China’s Confucian traditions at the question raised in your article (ie whether a free press might emerge in China).

My interpretation of your article: Dr Deng Jianguo (former copy editor of the Shanghai Daily) recently drew attention to the new policy of “zoushuangai” which government has introduced in China, and which is causing excitement / confusion amongst journalists. This change of direction for China’s state-controlled media could be either a real opening (a move towards Western ideas of a liberal press) or more sophisticated propaganda. ‘Zoushuangai’ stands for three core ideas: go to the grassroots; transform your work style and transform your journalistic prose style. Outsiders can see China’s media as monolithic – subject to frequent government directions about what can’t be reported. But there is more to it than this, and changes have been under way for a decade. ‘Zoushuangai’ is part of, and a response to, this. China tends to see the Western media as monolithic – as also subject to government controls. ‘Zoushuangai’ (a serious government change) shows that what is happening is not simple. Dr Deng has been seeking to discover what ‘Zoushuangai’ means to journalism in China. Until 1979 government had a monopoly on information, and media were government mouthpieces with crude propaganda. Many major newspapers still lacks, ads – showing government ownership. But since the 1990s news media have been encouraged to commercialize. Party newspapers used to be regarded as the ‘mainstream’, but are now marginalized. And Weibo (a Twitter equivalent through which citizen journalists expose propaganda) was causing the party to lose its ability to control the agenda via the media. In depth journalism has not been possible in commercial media (because of employment conditions). High calibre journalists tended to work of state media – and were thus constrained. ‘Zoushuangai’ urges a return to "real news"; that is, news of concern to the public – with journalists in official media encouraged to pursue investigative reporting, and to boldly pursue the truth. Weibo is a part of this mix.

The most likely conclusion, I suspect, is that China’s current / incoming regime hopes that ‘zoushuangai’ will facilitate a more sophisticated form of propaganda (ie that China’s press would seem to be more open though China (and the press) would remain under authoritarian thought control by ‘Communist’ Party elites). Similar conclusions would arguably apply to outsiders’ hopes and expectations that Western-style democracy might emerge.

By way of background I note that:

  • China’s traditional Confucian form of government involved highly-educated elites exerting control by acting as teacher and guide to China’s people on behalf of emperors (see A Simple View of Confucianism);
  • There is a significant difference between East Asia and Western societies in relation to the attitude taken to knowledge (eg to the notion of truth which a free Western-style media might be expected to seek). This difference is explored in Epistemology: The Core Issue (in Competing Civilizations) and also in a recent article by Reg Little (a former DFAT Asia specialist and arguably the first Western analyst to anticipate China’s rapid economic advancement) which was outlined and reviewed in Competing Thought Cultures;
  • This difference in approach to knowledge is also reflected in East Asian / Confucian approaches to education. ‘Education’ is apparently regarded as the absorption of desired behaviours, rather than as the learning of abstract concepts that in a Western environment would be used as the basis for rational analysis by individuals. This Confucian approach seems to be embodied in China’s education system (and to be the reason that Western observers perceive problems with that system). Neo-Confucian methods of stimulating desired real-world behaviours (which are similar to Confucian-style ‘education’ and to which people have been conditioned to respond through the education systems) have arguably also been the basis of East Asian economic miracles (see Industry policy) and of the Communist Party’s exercise of political power (see China’s Bigger Secret). However the way in which those neo-Confucian methods have been implemented by China’s so-called ‘Communist’ Party have created not only an educated elite to whom China's people have been responsive but also a gross imbalance in wealth which is inconsistent with the social-equality aspirations of China’s nominal ‘communism’ – and this has now led to a risk of serious political instability in China.

In this context it seems likely that ‘Zoushuangai’ (whose component ideas your article described) is a Confucian-style exhortation to (conditioned) journalists to adopt desired behaviours / work styles on the basis of getting close to the grass-roots community – in the hope that this will increase political stability. If so, though journalism in China would then seem more like that in a ‘free press’, the reality would be that that impression would have been created by (and thus exist at the whim of, and be subject to ongoing ‘guidance’ to influence their behaviour by) China’s neo-Confucian social elites (ie its so-called ‘Communist’ Party).

My interpretation above is undoubtedly inadequate. However I submit that ‘reading China’s mind’ to try to see what is actually happening requires understanding of the ‘Asian’ context, rather than attempting to understand in terms of Western analogies. The latter point is explored more fully in Babes in the Asian Woods. Moreover it is unwise to rely on the advice provided by ‘insiders’ to that system, because in the absence of a Western-style notion of ‘truth’, the goal of providing information is to induce desired behaviours, rather than understanding, in one’s audience.

I would be interested in your response to my speculations.

John Craig

In late 2012 some commentators identified Australia's need to try to understand Asia on its own terms, and to get its own house in order.

Domestic reform to Deal Better with Asia - email sent 13/10/12

Peter Cai and Philip Wen

Re: Domestic reform holds the key to the Asian century, Business Day, 13/10/12

Your suggestions about the need to understand ‘Asia’ in its own terms and to get Australia’s own house in order are spot on.

However I respectfully suggest that it would be desirable to not only exhort people to ‘understand Asia’ – but to be specific about what understanding ‘Asia’ means. Some undoubtedly inadequate attempts to suggest what seems to be required in relation to East Asia are referenced in the email reproduced below.

Also some speculations about what might be needed to ‘get Australia’s house on order’ are in A Nation Building Agenda which (as noted in Comments on Australia's Strategic Edge in 2030):

“… was written with another purpose … (but) … probably constitutes a reasonable first draft of the broad range of changes and capabilities that Australia needs for security in 2030. This refers, for example, to: better internal and external support to the political system; stronger efforts to access external intelligence; improved Asia-literacy; and much better methods for economic development. “

John Craig


RE: Has the Boom Made You Wealthy? - email sent 11/10/12

Greg Canavan

Might I suggest that the issues involved in relation to Asia’s rise and the resources boom are a lot more complex than both Ross Gittins and your comments below suggest (see those comments in Has the China Boom Made You Wealthy?, Daily Reckoning, 11/10/12).

It is arguably not sufficient to make forecasts on the basis of: (a) trends; or (b) conventional economic considerations – because East Asian systems of socio-political-economy are built on intellectual foundations that are nothing like those in Western societies. They thus will not behave in the same way, and will have strengths and weaknesses that can’t be anticipated by analogy with Western precedents.

The nature of the issues that probably need to be considered are suggested in:

  • Reading China's Mind? – which is an attempt to suggest the issues involved (in the context of considering the future of journalism in China);
  • Competing Thought Cultures – which suggest that recent claims about the likely superiority of East Asia’s Confucian thought tradition are overly simplistic;
  • Friction between China and Japan: The End of the Asian 'Century'? – which includes suggestions that the global economy faces structural problems (ie a deficiency in demand), because of: (a) the non-capitalistic character of the financial systems that have been part of East Asia’s neo-Confucian systems of socio-political-economy; and (b) the dependence of emerging economies elsewhere on maintaining current account surpluses because their financial institutions are also usually poorly developed;
  • China: Heading for a Crash or a Meltdown? – which considers both the economic and political obstacles that China faces;
  • Do Blind Spots Cloud the RBA's 'Lucky Country' Vision? (2011) – which suggested why there are problems with a stronger-for-longer resources boom hypothesis.

John Craig

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)

 

Addendum A: Economic and Geopolitical Risks from Asia-illiterate Policy Making

Misunderstandings

Problems in Economic Policies

Problems in International Relations

Economic and Geopolitical Risks from Asia-illiterate Policy Making

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

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;


    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


    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 suppressing 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)
  • and yet another former Australian prime minister criticised those who were concerned about the choice that Australia seemed to have between economic engagement with China and the US without any apparent appreciation that the cultural issues involved were far more significant than that.

The Infantile US vs China Debate - email sent 17/5/13

Geoff Elliott and Clive Mathieson
The Australian

Re: US v China debate 'infantile', says John Howard, The Australian, 16/5/13

There is no doubt that Mr Howard is correct in arguing that it is ‘infantile’ to suggest that Australia has to choose between the US and China in relation to its economic future.

The issues involved are much more fundamental than that – as Australia rather needs to be focused on the implications of what amounts to a clash of civilizations between liberal Western traditions (which are not confined to the US) and neo-Confucian intellectual authoritarianism (which is not confined to China).

My interpretation of your article: Business leaders need to see beyond having to choose between China and the US when mapping Australia’s economic future. Australia’s US ambassador points to broadening Australian investment in the US due to the shale gas boom which is rejuvenating manufacturing there. Mr Howard suggests that is wrong to suggest that Australia has to make choices between China (which dominates Australia’s trade) and the US. Australia’s investment relationship with US is 20 times bigger than with China. It is important not to be mesmerized by China – despite its size. On a per-capita income basis China is well behind many other countries. The US ambassador to Australia, Jeff Bleich, notes that US (like Australia) is betting on China’s economic rise and is engaged in its market. However Australia does not need to choose between economic partners, as it can have all. The natural gas boom has been a game-changer for US. Recent data has indicated stronger growth in the US.

While it is wise not to be mesmerized by China, it is also wise to recognize that its economic rise (like that of Japan and the Asian tigers before it) has been based on quite different cultural traditions to those which have been the basis for economic success in Australia and the US.

A former DFAT China specialist, Reg Little (who in Beijing in 1976 was arguably the first Western analyst to anticipate China’s rise) has recently suggested that this reflects an intellectual revolution (see outline of Ignorance in the Asian Century). The latter focuses on an adaptation of traditional Confucian approaches to education which (in schools, in society and in the workforce) involve learning to ‘do’ without seeking to ‘understand’. This approach to education and government effectively negates the Western intellectual revolutions (ie the Renaissance and Enlightenment) that permitted rapid progress in those societies in recent centuries through economic and political arrangement that relied on citizens' ability to ‘understand’ (eg arrangements such as democracy, a rule of law and accounting principles).

The present writer’s earlier attempt to outline that intellectual contest was in Competing Civilizations (2001+) – see sections on Cultural Foundations of Western Strength and East Asia in particular. And Competing Thought Cultures (2012) is an attempt to consider whether the neo-Confucian ‘intellectual revolution’ is as significant as Reg Little argues that it is.

I would not place too much confidence in US engagement in terms of balancing Australia’s choices – as it seems very likely that the US has been misled since 1945 in relation to the methods that were the basis of Japan’s pre-1990s economic ‘miracles’ and which later contributed to global financial instabilities (see Broader Resistance to Western Influence?). It is not hard to make such mistakes when the purpose of providing information is not to enable others to understand (see Why Understanding is Difficult).

As Mr Howard suggested there is little to be gained from an infantile debate about Australia’s economic choice between the US and China. However engaging with China on East Asian terms (ie 'just doing it' without understanding), as China's President Hu Jintao apparently advised Australia to do in 2003, would be foolish (for reasons suggested in Babes in the Asian Woods).

Both Australia and the US would be smart to engage with East Asia in Western terms (ie on the basis of 'understanding' of, for example, the intellectual foundations of East Asia’s neo-Confucian systems of Socio-political-economy). What such engagement might mean was speculated in Comments on Australia's Strategic Edge in 2030 (2011+).

John Craig


Response to The Infantile US vs China Debate from Reginald Little - Sent 17 May 2013
To: Clive Mathieson (The Australian) and Geoff Elliott (The Australian)
Cc: John Craig

As always, John is less than 50% right in his remarks about Confucian tradition, its distinctive thought culture and Asian successes over the past half century.


More on: The Infantile US vs China Debate - email to Reg Little sent 20/5/13

In response to my email (The Infantile US vs China Debate) you suggested to writers for The Australian that:

As always, John is less than 50% right in his remarks about Confucian tradition, its distinctive thought culture and Asian successes over the past half century.

Undoubtedly there is a lot I don’t know about the Confucian religion. I have no formal qualifications in the area – and got into this by a most circuitous process (Background Note). It amazes me is that the humanities and social sciences faculties at Western universities seem to have been so unconcerned with the practical consequences of cultural assumptions that there was anything at all for an (originally) civil engineer to uncover.

However your non-explanatory response (ie John is ignorant though I won’t explain why) has again mimicked the non-transparent character of neo-Confucian traditions.

Elaboration: Confucian intellectual elites seem to assume that explanations that might allow others to understand are neither possible nor necessary (as I noted previously in relation to your article ‘Ignorance in the Asian Century’). In response to that earlier comment you further illustrated my point about aversion to facilitating understanding by suggesting study of the “Lunyu, Daodejing and Yijing”, without indicating why anything they said might be relevant to (say) ‘Asian successes over the past half century’.

My understanding is that those Chinese classics denigrate the notion of individual / abstract understanding – and that this is understandable in a Chinese context because of:

  • The limits to rationality that are identified in Western management, economic and public administration literature; combined with
  • the absence in China of social, economic and political arrangements like those that Western societies have put into place because of the West’s Judeo-Christian and classical Greek heritage (which respectively valued individuals and abstract concepts) and which simplify the decision environments that individuals face (and thus reduce the limits to the use of rationality / abstract concepts).

While I certainly do not know everything about Confucianism, I am aware of: its particularist (rather than universal) ethics; its expectations about the particular and hierarchical interpersonal relationships that Confucius defined; its ethnic nationalism; its lack of concern for individuals – because of the primacy given to the community as a whole (and to maintaining the power of its of its intellectual elites in particular); and the intellectual elites' claim that the 'mantel of heaven' (ie their motivation to seek what is good for the community as a whole) justifies their special position. I am also aware of: the potentially powerful effects of manipulating behaviours across social, political and economic systems as a whole that this traditional allows; and the virtual invisibility of those effects to Western mindsets accustomed to analysing ‘trees’ rather than looking at ‘forests’ as a whole.

I suspect that I know enough to understand how neo-Confucian systems of socio-political-economy work, and have a pretty fair idea of their weaknesses. The Confucian tradition started when China’s approach to education (which involves inculcating behaviours rather than promoting understanding) was applied to government administration. I had many years’ involvement in senior level central government activities in Queensland where techniques very similar to the Confucian methods (ie consensus within a hierarchy) were used. I saw those methods being used (without being fully understood by those using them) for fairly successful change management – and did post-graduate studies in that area. I applied similar methods in stimulating initiative on real-world market opportunities that could have led to economically useful outcomes if politics had not gotten into the way. I studied a lot of material about Japan as part of the MFP project, and can explain to my own satisfaction how power is exerted fairly invisibly by neo-Confucian elites by manipulating access to strategic intelligence.

However I am anything but convinced that the neo-Confucian traditions are on a path to taking over the world (eg see Japan's Predicament and China: Heading for a Crash or a Meltdown .

Obstacles to neo-Confucian Success: As the latter noted there seems to be:

  • an incompatibility between the social equality aspirations of China’s nominal Communism and the social hierarchy that is required by the neo-Confucian methods for rapid economic modernisation that China adapted from Japan. The latter also notes that: (a) Mao’s cultural revolution seemed to have been aimed at eliminating the oppression that he believed that Confucian intellectual elites had imposed on Chinese people (and anything that Mao saw as oppressive must have been really something); and (b) current political instabilities in China seem to have a similar origin;
  • an incompatibility between the favourable international financial imbalances that countries such as Japan and China need to avoid financial crises (because consensual rather than capitalistic methods are used to assess investments), and the balance between supply and demand that is needed for continued global economic growth. And as a consequence of that incompatibility, there seems to have been and continues to be an undeclared ‘Cold / Financial War’ between international and East Asian financial systems - where the likely outcome seems to be economically debilitating financial crises in East Asia (though the result is not yet certain as the ‘war’ is still being fought); and
  • an incompatibility between the sort of international order that might emerge under neo-Confucian traditions and the expectations now being placed on China to play a constructive international role.

Because of these obstacles to success through neo-Confucian methods the risk of a hot war in Asia has arguably been rising (noting the nationalistic / militaristic rhetoric that is increasingly emerging from the region).

If we could create a situation in which the humanities and social sciences faculties in Australian and American universities got off their collective backsides and looked at the practical implications of the cultural assumptions that have come to dominated in East Asia, I suspect that it would be possible to help neo-Confucian countries like China, Japan and North Korea to create systems that would: (a) value individuals; (b) be more transparent; and (b) pose fewer risks to rest of the world.

John Craig

  • 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


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 clearly 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 negotiations 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:

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

John Craig


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 / responsible 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


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 / responsible 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


Building Strong Bridges Requires Understanding the Building Materials - email sent 6/8/12

Michael Sainsbury,
The Australian

Re: Business building bridges to China to repair ties, The Australian, 6/8/12

It is rather sad to see Australian business leaders revealing their lack of Asia-literacy.

Your article referred to promoting business to business dialogue with China, as a means to strengthen the foundations for a better political relationship and to identify potential bilateral projects. The most obvious problem with that is that, on the Chinese side, any significant ‘business’ seems unlikely to be actually independent of government and the political process.

My interpretation of your article: Australian business leaders (eg Tony Shepherd, BCA / Transfield; Andrew Forrest, Fortescue Minerals; Michael Chaney, NAB / Woodside Petroleum and Mike Smith, ANZ) have promoted a dialogue with China – because of their perception that government has mishandled that bilateral relationship. They argue that the relationship needs to be political and cultural as well as business to business. The Sino-Australian Business Leaders Partnership Initiative was established as a second track to ad-hoc political meetings, and to remedy the fact that Australia has fallen behind. The bilateral relationship is important, and if businesses can work together then the political processes also can. Australia’s economy depends on resources exports, and China’s economy depends on access to them. Australia also wants better access to Chinese markets for services. The idea of a formal commercial dialogue has previously been advocated by Simon Crean and Geoff Raby. However it has not happened because of the lack of a clear whole-of-government strategy in Canberra towards China. Discussions were held with the heads of some of China’s largest financial corporations. Participants were careful not to openly criticize either Australia’s government or opposition. Dr Raby and Wang Boming (president of Stock Exchange Executive Council) have been commissioned to identify possible bilateral projects. This will build on, and go beyond, the work of Australia China Business Council.

There is no doubt that, as these business leaders have suggested, Australia’s relationship with China needs to be political and cultural, as well as business-to-business. However, if this is to happen, the first step must be for Australian business and political leaders to make a serious effort to understand how China currently works politically and economically as a reflection of its neo-Confucian cultural traditions – an effort that was also suggested in An Opportunity to Boost Asia-literacy.

The delegation that participated in establishing the Sino-Australian Business Leaders Partnership clearly have a long way to go in this respect, as your article implied that their business-to-business discussions emphasised contact with China’s largest financial corporations (ie those at the core of what appears to be China’s Ponzi-like financial system - a system that unfortunately seems increasingly at risk of imploding).

John Craig


Preparing for the 'Asian Century': Talk is Cheap but Not Sufficient - email sent 24/10/12

Charis Palmer,
Foresight Publishing

Re: In this Asian century, who in business is talking the talk, Crikey, 23/10/12

While it is encouraging to see your emphasis on boosting Asia literacy in Australia, I find it discouraging that the sources that you are citing as advocating this do not seem to understand what ‘literacy’ means in relation to the currently most economically important elements of ‘Asia’.

For example, the CPA Australia report (Australia’s lack of integration with Asia impacting on competitiveness) refers to: (a) the need for language skills and overcoming cultural differences; and (b) factors in Australia’s competitiveness (eg governance / transparency / ethics; staff skills and business capability; tax; cost of doing business; industrial relations).

The problem with this is that there is no indication of any understanding of what the cultural differences actually are. Moreover in East Asia, which has become most economically significant, those differences include completely different ways of thinking – and this translates into ways of doing things that can’t be realistically understood in terms of Western analogies. Some speculations about what is involved are in:

This matters, for example, because:

  • Learning languages and cultural studies from a Western perspective are:
    • All that has really been attempted in the past, or seems now to be proposed, in relation to boosting Asia literacy (eg see Asia literacy for Beginners is not Good Enough);
    • Probably an inefficient / inadequate way of understanding cultures that are based on radically different ways of thinking and using information. For example East Asian ‘education’ apparently seeks to inculcate particular behaviours in students, rather than to boost their understanding. For Australians to operate effectively within a neo-Confucian social environment they would also need to be ‘educated’ to behave in that alternative manner, rather than simply knowing about those behaviours which is all that could be gained by conventional approaches to ‘Asian studies’. Moreover:
      • the adopted behaviours would include racism (because priority is expected to be given to the success of one's ethnic group) and a willingness to deceive outsiders or even to 'do evil' (see Chu C., 'Thick Face, Black Heart); and
      • there may be little to be gained by doing so, as it may be possible to gain a strategically-useful understanding of the strengths and weaknesses of those behaviours without adopting them (eg as suggested in A Strategic Approach to Asia-Literacy);
  • Assessing competitiveness in terms of criteria which make sense within Western-style democratic capitalist environment is of no use in terms of assessing whether Australian firms can operate effectively under neo-Confucian systems of socio-political-economy. For example, transparency and a lack of corruption are considered to be competitive advantages in the Australia’s Competitiveness Survey that Professor Michael J. Enright prepared for the CPA. However:
    • a lack of transparency is an intrinsic characteristic of ‘thought cultures’ that are not reliant on, or geared to boosting, understanding, and
    • where commercial dealings are based on social relationships (rather than on a rule of law and independent profit-focused investment), ‘corruption’ (while not advantageous) needs to be viewed in a different light because providing benefits up and down the social hierarchy is part of the way things are done;
  • The systems of socio-political-economy that have been developed in East Asia on the basis of neo-Confucian traditions are anything but problem-free or necessarily sustainable (eg see Are East Asian Economic Models Sustainable? and Friction between China and Japan: The End of the Asian 'Century'?).

Likewise the paper by John Menadue that your article quoted (Why did we go on smoko from Asia?, Crikey, 16/7/12), while highly critical of the failure of Australia’s businesses to work out how to engage effectively with ‘Asia’, seemed devoid of anything but quite superficial proposals as to what would be required to do so.

My impression is that similar constraints apply to the white paper on the ‘Asian Century’ that the federal government is preparing (eg see An Asia-illiterate Approach to ‘Asia’). Your article implied that there are women in business who could potentially be in leadership positions and who could do better. I would be interested in any references to their work and proposals in this area that you are able to provide.

Regards

John Craig


In this Asian century, who in business is talking the talk?

CHARIS PALMER

How do you teach an old white man new tricks? That's the question facing corporate Australia as it wanders into the Asian Century woefully unprepared.

Today's CPA Australia report on competitiveness finds Australia rates poorly in its knowledge of Asia and Asian languages, and is just another in a long line of warning bells that ring in the face of the rhetoric suggesting Asia will save Australia from any major economic downturn.

CPA Australia wants study of the Chinese language to be compulsory for all primary and secondary students, but what of the directors and CEOs managing Australia's leading companies now, many of which are dependent on Asia for growth? A change of mindset is required, says CPA Australia, to ensure Australia can be more than a peripheral player in the Asian Century.

That's going to be a major challenge according to John Menadue, founding chair and board member of the think tank Centre for Policy Development. In July, Menadue said Australia had gone "on smoko" from Asia, with Australia probably less Asia-ready today than it was 25 years ago.

In a speech to the Asian Studies Association of Australia at the University of Western Sydney, Menadue left his harshest criticism for the business sector, which he said was failing to get its own house in order while talking up Australia’s potential in the region:

"I don't think there is a chair, director or CEO of any of our top 150 companies who can fluently speak any of the languages of Asia."

Menadue said it was "obviously too late" for leaders to acquire Asian language skills but, worse than that, he argued the cosy directors' club wasn't even recruiting executives for the future with the necessary skills for Asia.

The CPA Australia report adds support to Menadue's argument, revealing the perceptions of some 6000 business decision-makers from Australia and internationally. The respondents placed a relatively low level of importance on access to, and knowledge of, Asian markets and bilingual staff, while at the same time overestimating Australia’s integration with Asia.

CPA Australia is urging business leaders to attach greater value to Asian experience and knowledge when recruiting staff. That's difficult when the cosy directors’ club seems only interested in promoting from within.

Take Pacific Brands, which today faced a second strike vote and potential board spill over executive pay. The Bonds, KingGee and Stubbies brand owner couldn't be a more iconic Australian company, but even it had to face up to the new reality, sending manufacturing to China in 2009.

When Pacific Brands chief Sue Morphet resigned after the company posted a $450 million loss in August, who did the board choose to replace her? Not an executive known for their Asian experience, but a formal naval officer with strong leadership skills that chairman Peter Bush instantly hit it off with.

We've known for decades the impact the boys' club has had on the representation of women in board and leadership positions. Pacific Brands is one of the few listed Australian companies that has a gender balance on its board.

But now we see the dominance of white men on Australia’s boards and executive committees has impacts beyond gender, and unless there's change soon, Australia will miss out on the next growth wave.


Meeting the Challenge of China's Rise - email sent 11/11/14

Donald Emmerson
Stanford University

Re: Meeting the challenge of China’s rise in Asia, The Conversation, 10 Nov 2014

I should like to try to add value to your useful account of current developments that reflect China’s increasing international influence. This is based on an attempt to ‘reverse engineer’ the intellectual basis of post WWII East Asian economic miracles and compare this with the intellectual foundations of Western progress (eg see East Asia in Competing Civilizations, 2001+).

It is necessary to fully understand those hard-to-understand differences because it is otherwise impossible to see what is really going on (eg see Babes in the Asian Woods).

Some suggestions about how China’s efforts to expand its international influence might be viewed from this perspective are in Creating a New International 'Confucian' Financial and Political Order (which suggests that what is happening needs to be viewed as an attempt to create a new international trade / tribute regime like that by which Asia was governed prior to Western expansion – a system that can be viewed as a ‘soft’ form of fascism). Parallel suggestions, from an Australian perspective, about the need for a broader-than-conventional approach to national security issues are in Comments on Australia's Strategic Edge in 2030.

I would be interested in your response to my speculations

John Craig


China's 'Command Economy' - email sent 13/6/13

Stephen Grenville,
Lowy Institute

Re: China’s economic coming of age, China Spectator, 12/6/13

Your enthusiastic endorsement of China’s ‘command economy’ (which refereed to its economic stimulus and reduced international imbalances in recent years) included relevant references to other requirements for global economic recovery (eg reducing the international imbalances associated with other economies especially Germany, and the need for domestic reforms in many countries).

However it did not adequately deal with the adverse domestic and international implications of China’s ‘command economy’.

My interpretation of your article: The meeting between Presidents Obama and Xi could have been an opportunity to berate China for its international economic imbalances – yet the two presidents found more fruitful things to talk about. It is getting harder to fault China’s interactions with global economy. China has been accused of export promoting strategy to foster growth at others expense. Its current account surplus has declined significantly (to 2% of GDP). Germany’s is greater (6% of GDP). China’s net exports have been declining as a share of growth for years. Some (Fred Bergsten) still see China’s reserve increases as the main cause of the US’s slow recovery – because currency manipulation has cost the US jobs. His concern is with control of renminbi exchange rate. However new estimates show that renminbi is only slight undervalued. China is moving cautiously to open its capital markets in a world where abnormal monetary policy is distorting exchange rates. China still has many economic challenges – but there are mainly domestic (ie changing the balance between investment and consumption). China’s international economic contribution over the past 5 years invites praise. It accounted for 40% of total global growth. Its command economy was able to deliver a large economic stimulus in 2009 – which benefited others. China’s exchange rate management has been widely criticised, yet in lead up to 2008 the mess that advanced economies got themselves into can’t be blamed on China. The fatal external imbalance was not between the US and China, but between Germany and peripheral euro states. The G20 should look elsewhere in seeking to identify countries that are not good international citizens (eg towards Singapore, Switzerland and Germany). The US and UK could help by easing up on austerity. Japan needs to do more with its ‘third arrow’ (structural reform) with less flailing around with monetary policy. The main issue in correcting the slow international recovery lies with domestic policies, rather than with correcting perceived international imbalances.

The international financial imbalances that have been associated with major East Asian economies such as Japan and China have not had their origin (as widely assumed) in currency manipulation. Rather they have their origin in the mercantilist financial systems that have been associated with their neo-Confucian systems of socio-political-economy. This point is developed further in International Financial Imbalances (which was part of a comment on the issues that needed, but did not seem to gain, attention at the recent US / China summit). The latter referred to: (a) the quasi-bureaucratic (rather than capitalistic profit-oriented) process for allocating national savings; (b) the consequent need for current account surpluses to protect financial institutions with poor balance sheets; (c) the resulting distortion of the global economy, and the contribution to the global financial crisis that resulted as others had to compensate for those distortions; and (d) the severe challenges that countries such as Japan and China now face because the favourable financial imbalances that their ‘economic miracles’ have depended on will be impossible in future. External focus on currency manipulation by China has been misleading as currency manipulation was mainly a corollary of its mercantilist financial system. Similar quasi-bureaucratic methods for resource allocation have apparently existed in Japan without any need for extreme currency manipulation (see Why Japan can't deregulate its financial system).

However the neo-Confucian system of socio-political-economy that has allowed China to have what has seemed to be a successful ‘command economy’ does not only have economic implications (see Other Issues). The latter refers, for example, to geo-political considerations such as: (a) the problem of getting countries (such as China) to ‘play by the international rules’ when neo-Confucian traditions do not endorse a ‘rule of law’; (b) the potential for political instability in China because of the incompatibility between the social inequality that its neo-Confucian ‘command economy’ requires and the social equality aspirations of its nominal Communism; and (c) the exposure to intellectual authoritarianism by quasi-bureaucratic elites that would be the fate of those caught up in any prospective neo-Confucian ‘sphere of influence’.

Certainly the other issues that your article highlighted need attention, but those connected with neo-Confucian authoritarianism in East Asia do have to be on the agenda somewhere.

I would be interested in your response to my speculations.

John Craig


RE: McKinsey Quarterly special issue on China - email sent 2/8/13

Allen P Webb
Editor in Chief
McKinsey Quarterly

Might I respectfully suggest that the McKinsey Quarterly special edition, China’s Next Chapter, is likely to be misleading in terms of providing a realistic understanding of China’s future, because it is limited to dealing with specific ‘economic’ activities and pays no attention to the implications of the neo-Confucian system of socio-political-economy that both accelerated China’s early stage development and constrains its future prospects?

My reasons for suggesting this are indicated in:

  • China can't be properly understood in terms of Western economics – which refers, for example, to the need that East Asia’s neo-Confucian systems have for current account surpluses (and trading partners who are willing and able to sustain perpetually rising debts) because significant investments are not made on the basis of calculations of expected profitability by independent enterprises;
  • China: Heading for a Crash or a Meltdown – which refers, for example, to the risks to political stability implicit in the incompatibility between the social hierarchy that is needed by the neo-Confucian methods that have stimulated China’s rapid economic development and the social equality aspirations of China’s nominal ‘communism’;
  • Financial and Educational Reform in China: Headed in Opposite Directions? – which suggests that espoused moves towards financial and economic liberalization in China (which would shift China in the direction of, say, South Korea) seem to be incompatible with simultaneous changes to educational systems that would have the effect of creating a population which unquestioningly complies with guidance by neo-Confucian social elites (ie a shift more in the direction of North Korea); and
  • The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems (1998).

There is nothing unusual about the inability of Western economists (and other analysts) to understand what is actually happening in East Asia (eg see Babes in the Asian Woods). However, if the McKinsey Quarterly (or anyone else) wants to provide a realistic insight into China’s future, this weakness needs to be overcome.

John Craig


Aussies Outsiders to What? - email sent 28/5/14

Andrew Burrell
The Australian

Re: Aussies outsiders in Asia ‘by choice’, The Australian, 10/5/14

Your article suggested that business leaders are concerned that Australians are content to be outsiders to ‘Asia’. But those leaders said nothing useful about what ‘Asia’ implies.

My interpretation of your article: Corporate leaders and top academics have derided Australia’s insularity, self-satisfaction and staid culture as the reason for failing to build long term business-links that will be needed to capitalize on the Asian century. A survey was taken at the recent In the Zone conference in Perth. ANZ bank chief (Mike Smith) has spoken of the need to develop more sophisticated knowledge of Asia and be more proficient in Asian languages. The former Labor Government’s Australia in the Asian Century white paper said that local companies needed to learn new business models and mindsets. Mark Barnaba (Macquarie Bank) spoke of Australians becoming ‘insiders’ – and of the huge opportunities available. Michael Chaney (Woodside Petroleum and NAB) spoke of rigid labour rules as a major obstacle, and of a general ignorance of opportunities in the ASEAN bloc. Tim Shanahan (Energy Minerals Institute) spoke of the need to avoid both hubris and complacency. Scott Vivian (Rio Tinto) referred to the differences across Asian communities. Others suggested that Asia needed to be viewed as more than a place to make money (and one referred to building relationships before looking for a return). Madeline King (Perth USAsia Centre) spoke of investing in education so children could learn Asia languages and culture. Another participant spoke of Australia’s lack of linguistic and cultural compatibility – and self-satisfaction. Another labelled Australia insular and arrogant. A representative of the Consulate General of Vietnam said Australia’s attitude to foreign investors was poor and that there was a need to engage with regional organisations. Samina Yasmeen (UWA) said that Australia was held back by its inability to identify with the region and excessive identification with the West. Thus Australia remains outsiders ‘by choice’.

Many of the observers at the conference you referred to offered useful advice – eg about the need to: (a) understand ‘Asia’; (b) recognise Asia’s diversity; and (c) avoid both hubris and complacency. However none of those who advocated understanding showed any real evidence that they themselves had any depth of understanding of how the dominant societies in ‘Asia’ (eg Japan and China) work and thus what becoming ‘insiders’ would currently imply.

Anyone who engages in East Asia without understanding the different way its people tend to think and what this means in practice is a fool and deserves what they get.

Your article referred to the former federal government’s White Paper on Australia in the Asian Century – but did not give any indication of its naivety (ie it’s presumption that Asia would rise within something like a Western-style social, political and economic framework and thus create opportunities that suit Australia’s public and private institutions (see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century, 2012). Some suggestions about a quite different possible reality are outlined briefly in What does an 'Asian Century' Imply?

Asia’s dominant societies appear to operate on the basis of disguised neo-Confucian systems of socio-political-economy. The latter are modified forms of methods for whole-of-society influence through which the region was governed by bureaucratic elites for centuries prior to Western expansion (see A Simple View of Confucianism). Similar consensus-forming methods are normal in Western bureaucracies - and I had a great deal of experience of these while working for various Queensland Coordinator Generals, and studied the issue for a master’s thesis. And, providing interest-group politics is kept at arms’ length, those methods can work in a whole-of-society context – and I have had some preliminary and reasonably successful experience of using such methods in a ‘market’ context to accelerate economic development (eg see methods suggested in Developing a Regional Industry Cluster, 2000) .

The neo-Confucian methods that Japan’s bureaucracy refined after WW2 as the basis for achieving economic ‘miracles’ behind a US-friendly democratic capitalist ‘face’ were said (with unknown validity) by an experienced Japan-watcher to have been: (a) developed by the Japanese military in Manchuria in the 1930s; and (b) ultimately transmitted to China by Japan in the late 1970s. In China those neo-Confucian methods were labeled as ‘socialism with Chinese characteristics’ and used by the so-called Communist Party rather than the bureaucracy. This had to be done with great care as eliminating Confucianism had then been the recent goal of Mao’s Cultural Revolution because Confucian bureaucracies had been seen by those Chinese who aspired to social equality to be the source of oppression in China for centuries. The ultimate outcome was massive wealth inequalities in China as those with ‘Communist’ Party connections exploited their position and thus a requirement to dramatically change China’s political and economic systems (see Political Change and Potential Instabilities and Proposals for Reform in 2012 / Financial Obstacles / Increasing Aggressiveness).

Now quasi-bureaucratic neo-Confucian methods of exerting influence (ie by developing and then enforcing a consensus amongst social elites) seem to be being expanded into the international arena presumably to try to create a new China-centered tributary system like that which existed in Asia prior to Western expansion (see Creating a New International 'Confucian' Financial and Political Order).

Those systems reject the universalist values, rationality and the emphasis on the welfare and capabilities of individuals that have been the foundations of liberal Western institutions. It is extremely foolish to speak of becoming ‘insiders’ to such systems or just to build relationships without real understanding of what doing so implies – yet this seems to be what is usually done (see Babes in the Asian Woods, 2009). It is equally foolish to emphasise educating children about Asian cultures and languages – when Australia’s political and business leaders are apparently the ones in most urgent need of understanding (see Focusing Education on the Under Fifteens Would be Fatal, 2011).

There is no doubt about Australia’s lack of linguistic and cultural compatibility – but this raises questions rather than pointing to a particular answer. There are, for example, good reasons to: (a) doubt the durability of the non-capitalistic financial systems that have been core components of East Asian economic ‘miracles’ (ie those that pay little heed to return on, or return of, capital); and (b) question the desirability of the authoritarian elitist international economic and political order that seems to be being sought in an attempt to circumvent the economic / financial crises that are otherwise approaching (eg see Are East Asian Economic Models Sustainable?, 2009+). And there are equally good reasons to doubt the durability of the associated political systems (eg see Heading for a Crash or a Meltdown? and Or Maybe there IS a Real Problem). There are also security issues that need careful consideration (see Comments on Australia's Strategic Edge in 2030).

Australian businesses should not blindly try to participate in an ‘Asian Century’ (or a ‘China Century’) without mobilizing the humanities and social science faculties of Australian universities to help them fully understand what is involved and whether such ‘Centuries’ are even likely.

I would be interested in your response to my speculations.

John Craig


Asia's Challenge to Individuals - email sent 24/8/14

Stirling Larkin
Larkin Group

Re: Adapting to Asia’s advantage makes sense for individuals, too, The Australian, 23/814

Your article drew attention to suggestions (by John Micklethwait and Adrian Wooldridge in The Fourth Revolution) that “the global race to reinvent the state and posit that a rapidly modernizing Asian authoritarian model — seen most prominently in Singapore and China — is seriously challenging our liberal democratic ways”.

I should like to draw attention to some speculations about: (a) the nature of that challenge (in The Resurgence of Ancient Authoritarianism in China; (b) the process whereby it is being internationalized (see Creating a New International 'Confucian' Financial and Political Order); and (c) that Japan may well be (or have been) a key driver of this process (see Are Analysts Making a Big Mistake about China and Japan?).

Individuals (eg investors) would be wise to understand the implications of the anti-liberal systems that have apparently been being put in place before seeking options to benefit themselves.

John Craig

  • A West Australian premier suggested that his state should break relationships with the rest of Australia and seek to integrate even further into Asia - an option that seemed to have implications that he might not have considered.

Good Business Deals for those with 'Connections' is Not All that Comes From Asia's 'Tigers' - email sent 14/4/15

Hon Mr Colin Barnett MEc MLA
Premier of Western Australia

Re: Burrell A. and Martin S., ‘Colin Barnett’s ‘tea party’ revolt over GST’, The Australian,

The above article suggested that Western Australia might ‘disengage’ from the rest of Australia in favour of stronger links in Asia.

“West Australian Premier Colin Barnett is threatening an unprecedented revolt over his state’s dwindling share of the GST, claiming he is preparing a policy of “disengagement” with the rest of the nation that would threaten federal programs and east-west trade links. In his strongest comments yet on the issue, Mr Barnett said yesterday that his resource-rich state was facing its “Boston tea party ­moment” by being forced to give $3.7 billion in GST revenues to other states and territories this year. “If the GST is not resolved, Western Australia’s future is not with the rest of Australia in a fin­ancial or economic sense,” he told The Australian in Singapore, where he is holding trade and ­investment talks. “Our future then shifts to Asia even more strongly than it is now.” “

Might I respectfully suggest that there is a need to consider the full implications for Western Australians of what you were reported as suggesting.

East Asia’s ruling elites do not just deliver good economic opportunities to those with the right connections. Many also deliver state-imposed constraints on the prospects of those that lack those connections. There is a need for a deeper consideration of the nature of the ‘tigers’ that have emerged in East Asia (eg consider Babes in the Asian Woods (2009); Proposed ASX Takeover: Lifting the Level of Debate (2010); and Hong Kong, Democracy and Money, 2015) and of the international expansion of those influences that is currently being attempted (see Creating a New International 'Confucian' Financial and Political Order, 2009+).

John Craig

  • Australia's Race Discrimination Commissioner suggested that racism by Australians might explain an apparent 'bamboo ceiling' revealed by the fact that few Asian Australians reached senior executive positions. Whether or not this is true, the possibility that non-transparent racially-biased agendas could accompany some Asia Australians implies that caution is wise, until Australians fully understand 'what' they are dealing with in East Asia.

Removing the 'Bamboo Ceiling' Requires Transparency - email sent 14/6/14

Peter Cai
Business Spectator

Re: Is there a bamboo ceiling in Australia?, Business Spectator, 13/6/14

Your article posed questions about the existence of a ‘bamboo curtain’ in Australia because of the relatively small number of Australians with Asian backgrounds in leadership positions. In other words, does racial stereotyping prevent career advancement by Asian Australians – as Australia’s Race Discrimination Commissioner (Dr Tim Soutphommasane) suspects?

However there is a need to put this question in a broader context. You suggested (for example) that hard-working, law abiding and studious East Asians are being excluded from leadership positions because their deference to elders is simply seen as unwillingness to challenge authority and a lack of leadership potential. However the issue is much more complex.

A fundamental cultural difference between Australia and major East Asian communities (such as Japan and China) is that the former emphasises the value and contribution of individuals, while the latter traditionally conditions its children to emphasise the welfare and strength of the ethnic / racial community that an individual belongs to. While racism is regarded as reprehensible in Australia, in East Asia (where ethical obligations are traditionally particularist rather than universal - so obligations only exist towards those with whom one has a relationship) racism seems to be regarded as natural. Individuals with a recent East Asian background may well come to a position with an agenda that reflects the interests of their ethnic community – an agenda which is being orchestrated by the ‘elders’ they are deferential to and is neither transparent nor necessarily compatible with the interests of the organisation in which they might potentially play a role.

It is understood that in SE Asia there is massive resentment of the way in which the Chinese Diaspora gain commercial dominance (and behind the scenes political influence) through networks which put increasing the power of their ethnic community first. A brief synopsis of Stirling Seagraves’ Lords of the Rim indicates the existence of those concerns, while the possibility that similar issues are emerging in Australia should not be neglected. And, while the US may not have considered that Asian Americans may be influenced by their perceived ethnic / racial obligations, they have perhaps risked being misled as a consequence.

Singapore is arguably the easiest country with an East Asian heritage for Australia to deal with. However even there Australian business leaders seem concerned that there is an influence from the state and ethnic elites which complicates dealings (see Competing and Collaborating Economically in South and East Asia). A couple of years ago it was suggested that racism in Australia was the reason that proposals for a Singaporean takeover of the ASX was being resisted. However the priority given to building the strength of ethnic / racial groups under East Asia cultural traditions was a significantly more important issue (see Proposed ASX Takeover: Lifting the Level of Debate, 2010).

Australia’s business and government leaders urgently need far greater ability to understand ‘what’ they are dealing with in East Asia – for reasons suggested in Aussies Outsiders to What? Until this understanding exists, it would seem wisest to maintain a ‘bamboo curtain’ in relation to those Asian Australians who may bring non-transparent agendas to a senior position because they have not yet gained mainstream Australians’ sense of individualism.

I would be interested in your response to my speculations.

John Craig

  • the adoption of an elected head of state and the definition of an Australian identity was suggested as the most effective way to boost Australia's relationships with Asia without recognition of the difference between Australia's and East Asian approaches to the 'nation' as a corporate entity

Strengthening Relations with Asia Through a New Head of State and a National Identity? - email sent 28/2/13

Jieh-Yung Lo

Re: An Aussie head of state matters globally, Online Opinion, 28/2/13

Your article implied that the best options to improve Australia’s relationships with dynamic Asia might be to: (a) have an elected head of state who could present Australia properly on the international stage; and (b) identify a ‘national identity’ that can be projected abroad.

I should like to submit that these would be anything but easy ways to improve Australia’s relationships in Asia, and that boosting Australia’s real Asia-literacy might be a better option.

Firstly an elected head of state would be incompatible with Australia’s current constitutional and institutional arrangements – for reasons suggested in Politicization of the ‘Crown’.

In brief: Australia’s system of government works because the head of state (currently a vice regal representative) holds all executive power under the constitution but does not use it to pursue their own political agenda. Rather executive power is used only on the advice of the elected government drawn from the legislature. Direct election of the head of state would politicise the position (ie require the head of state to have a political agenda and encourage them to use executive powers to achieve it) and this would then conflict with (rather than complement) the role of elected governments. Australia could have an elected head of state – but only with a complete re-organisation of its constitution and machinery of government (a need that advocates of a directly elected head of state would need to have thought through fully). Alternately there could be an Australian head of state who was not elected but rather appointed – ie through a process like that rejected in the 1999 referendum on a possible Australian head of state.

Secondly, as far as Australia’s ‘national identity’ is concerned, there is no doubt that (as your article suggested) values such as ‘liberty, freedom of speech and equality’ are important to Australians. However those values are linked to the view that Australia as a nation / community is no more important than the people / individuals who comprise the nation [and also built on a foundation of widespread Christian adhence in the community]. Australia inherited a British legal system under which the state (representing the nation / community as a whole) has no legal precedence over individuals – an arrangement that is compatible with the values that you identified. This contrasts markedly with the Roman Law traditions that prevail in much of Europe, under which the state (which is expected to represent the culture / identity of the nation / community as a whole) does have legal precedence over individuals.

Thus any attempt to firm up on Australia’s ‘national identity’ would be hampered by the need to recognise that the ideas and ambitions of Australians as individuals could not be subjected to being over-ridden by the requirements of any presumed ‘identify’ associated with the nation / community as a whole. It is my understanding that this is quite different to traditions in much of Asia.

For these reasons I submit that the best way to boost Australia’s relations with Asia might be to replace the naïve perceptions of the region that have been the basis of (say) the Australia in the Asia Century White Paper with a more realistic understanding. Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century provides some suggestions on what this might involve.

I noted also that you are involved with the production of a documentary (ie New Gold Mountain - Your Chinese Australia). I hope that it will help in raising Australians’ real understanding of China.

I would be interested in your response to my speculations.

John Craig

  • a national Australian newspaper suggested that all that was needed for effective engagement in Asia involved openness to investment and migration, and that it was xenophobic to raise questions about this (see Autocratic Asian States and Australia's Economic Options). It also showed no understanding of the impact that China's financial system has had on the world's financial system in recent years;

The Australian must get to grips with 'Asia' - email sent 6/7/12 [<]

Glenda Korporaal,
The Australian,

Re: Swan must get to grips with the yuan world order, The Australian, 6/7/12

Your article was a bit out of date. It suggested that the effect of China on the world’s financial system will only become apparent over the next 20 years.

“If the great economic story of the past 20 years has been the rise of China as a trading partner for the world, the next 20 years might well be about its impact on the world financial system.”

The reality is that China’s distorted financial system (like that of Japan) has already had a major impact on the world’s financial system through its contribution to the global financial crisis (GFC).

Financial systems that mobilize national savings through state-linked financial institutions and make them selectively available to state-linked producers so as to capture market share with little regard to the profitable use of capital need to suppress domestic demand to avoid having to borrow in international markets – and thereby contribute significantly to the international financial imbalances that played a central role in generating the GFC (see Profitability?; Structural Incompatibility Puts Global Growth at Risk, 2003; Financial Imbalances, 2007; GFC Causes; Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009; and Impacting the Global Economy, 2009).

Shifting to a convertible currency, as China seems likely to follow Japan’s example in doing, will not eliminate the damaging effect that its state-manipulated financial system has on the world’s financial system and on the global economy (eg as suggested in relation to Japan by Mikuni’s Why Japan can't deregulate its financial system, 2000).

With respect I submit that Australia’s Treasurer should not be pressed to consider the ‘yuan world order’, but rather to recognise that sustainable global economic growth is only likely to be possible if countries such as Japan and China are persuaded (or pressured) to significantly change their financial systems (eg as suggested in Beyond Eurocentric Pessimism). Other outcomes that would be much less appealing include:

John Craig

  • a lawyer participating in the production of a government white paper on the 'Asian Century' suggested that Australia have closer law-regime ties with Asia (eg in terms of financial rules and corporate governance) without apparently recognising the radically different basis of those regimes in Australia and in 'Asia's' dominant economies (see comments in Developing Game-changing Economic Options);

  • a journalist implied that developing relationships in China would be relatively straight-forward, as Chinese people are 'highly individualistic' (like Australians);

Chinese individualism - email sent 9/6/12 [<]

Rowan Callick

Re: After 40 years the China-Australia relationship is underachieving, The Australian, 9/6/12

Your article offered what seems to be a somewhat dubious comment about China.

“Australians do relate to Chinese people -- who are highly individualistic, and whose humour is remarkably akin to ours -- at many levels. But we are constrained from developing as truly open and spontaneous a relationship as with people from most other countries, and as we would clearly relish with China, too.”

While it is useful to encourage the development of relationships between individuals, it is misleading and potentially risky to suggest that Chinese people are highly individualistic, given that:

  • The notion of individualism in China appears to bear no relationship with that in Western societies (eg consider Individualism in Classical Chinese Thought);
  • ‘Individualism’ was described as something of a swear word in China in personal communication from a China specialist, formerly with DFAT;
  • While China is more individualistic than Japan (being likened to a ‘tray of sand’ rather than a ‘block of granite’), the fact that the ‘grains’ are smaller (involving relationships within families and communities, rather than comprising the whole nation as a single ‘block’ as in Japan) does not mean that outsiders are simply dealing with individuals. I was recently made aware of a case where a Japanese man had developed strong friendship with an Australian, but chose to break that relationship because it interfered with his ability to play his proper role in Japanese society;
  • In China / East Asia business outcomes depend entirely on good connections (in on linkages with groups rather than with individuals);
  • Traditional East Asian approaches to education do not generate individualism (see Does China's Education System Provide a Model for the West?).

This makes a significant difference to the development of relationships across the West / East divide – eg for reasons suggested in Autocratic Asian States and Australia's Economic Options. Australians (whether individuals, business leaders, or politicians) would be poorly advised to believe that they are dealing with non-Westernised Chinese people as ‘individuals’ (rather than as part of social networks that operate in ways quite different to those bound by Western-style sets of laws and values that presume individual liberty).

John Craig

  • Australia's federal government seemed to be producing a white paper on the 'Asian Century' in 2012 through an Asia-illiterate process - presumably because the process is being led by economists and Western-style economics is a quite inadequate basis for understanding East Asia

Learning from Rising Asia? - email sent 11/5/12 [<]

Professor Simon Margerison,
University of Melbourne

Re: Australia must overcome superiority complex to learn from rising Asia, The Conversation, 11/5/12

Your article suggested that “There will be no more important piece of policy making this year than the White Paper on “Australia in the Asian Century” led by Ken Henry. It is a rare case of long-term thinking in government, of policy having the question before the answer.”

I remain unconvinced because I see few signs of any genuinely Asia-literate inputs into the White Paper process.

By way of background I note that I had the opportunity in the 1980s to ‘reverse engineer’ the intellectual basis of Japan’s pre-1990s economic miracles. A section on East Asia in Competing Civilizations outlines both the circumstances and the conclusions of this effort.

On this basis some speculations about the challenge of coping with the ‘Asian Century’ (and the possibility that it might turn out to be little more than an ‘Asian Decade’) are outlined in Babes in the Asian Woods .

I would be interested in your response to my speculations.

John Craig


Surely Serious Research about 'Asia' is Necessary First - email sent 11/7/12

Clancey Yeates

Re: Closer Asia research ties urged, Business Day, 11/7/12

Your article referred to calls by the federal Treasurer to strengthen links between researchers in Australia and Asia (presumably based on recommendations in the forthcoming Asian Century white paper).

While this is undoubtedly desirable, the lack of real Asia-literacy that prevails in Australia (and in the Asian Century white paper process in particular) implies that research needs to focus on building an realistic understanding of ‘Asia’, rather than encouraging research collaboration whose implications cannot be properly understood (eg see Babes in the Asian Woods, 2009+ and Why Understanding 'Asia' is Difficult).

A core problem with the Asia Century white paper process seems to be that its production is being led by economists, and Western economics is a quite inappropriate framework for trying to understand ‘Asia’ (see China can't be properly understood in terms of Western economics, 2010). The need to reframe economics in order to amongst other things provide a basis for understanding both Western-style systems of political economy and East Asian systems of socio-political-economy is suggested in Fixing Economics. Information being leaked in relation to the Asia Century white paper process provides no hint that such changes may be necessary.

John Craig

  • The Australia in the Asian Century White Paper that was released in October 2012 seemed to be little but wishful thinking, because of its authors' apparent lack of strategic Asia literacy.

Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century - email sent 30/10/12
[with apologies to 'Claytons: The Drink you have when you're not having a drink']

Editor [Not for publication]
Australian Financial Review

Re: ‘White paper likely to be just wishful thinking’, editorial, Australian Financial Review, 27-28/10/12

Your editorial correctly suggested that the Australia in the Asia Century White Paper was likely to be little but wishful thinking. This was based on the view that domestic public policy has become a shambles and there thus remain many obstacles to developing Australia’s economic capabilities.

An extract: ‘Julia Gillard’s “Asian Century” white paper, to be released on the weekend, will provide a blueprint for how Australia should go about integrating with Asia. There is no doubt that we need to set a broad framework for making the most of our Asian opportunities. But to do this, we also need to focus on fixing domestic economic policy, which is becoming more of a shambles.’

There is now nothing unusual about Australia’s public policies being a shambles (eg see Recognising the Need for Nation Building, 2010).

Unfortunately the White Paper seems to be an example of this, rather than a remedy. The White Paper reflects wishful thinking, not only because the task of developing Australia’s domestic economic capabilities is daunting, but also because it presumes that Asia will rise economically within a Western-style social, political and economic framework and thus create opportunities that suit Australia’s public and private institutions (rather than under a framework that suits East Asia’s radically-different and unfamiliar traditions). The White Paper canvassed issues that need to be addressed to strengthen Australia’s economy on the assumption that Asia will operate on Western-style democratic capitalist principles. But (for reasons suggested below in An Asia-illiterate White Paper) the White Paper reflected little or no understanding of:

  • the neo-Confucian cultural features that have under-pinned the economic gains that have been achieved in the largest and economically strongest parts of Asia (ie in East Asia and much of SE Asia);
  • the lack of relevance of some Western-style ‘strengths’ to what would be required if there were to be a real Asian century; and
  • the potential for dangerous financial, economic and political instabilities that Australia will now be less protected from by remoteness.

There is thus a significant risk that the White Paper will be seen as simply irrelevant in a year or two because the wheels have fallen off the supposed Asian Century, or to have foolishly committed Australia to arrangements that are highly disadvantageous because a real Asian century emerges (eg one dominated by neo-Confucian practices and institutions whose implications the White Paper simply ignored).

A third scenario is that Asia will enjoy future economic success that genuinely creates major opportunities for Australia. However there are serious obstacles to be overcome before this could occur and the White Paper makes little or no progress towards achieving this. The problem is arguably that it has been written by economists and others who lack knowledge of the cultural foundations of East Asian economic miracles and thus of the probable character a real Asian century would be likely to have if it emerged simply as the result of past trends (eg see Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics, 2011).

Thus the White Paper (which did not consider anything but the most naively optimistic scenario) reinforces the downward trend towards the shambles that your editorial identified in Australia’s public policies.

An alternative strategy to consider might be along the lines suggested in Comments on Australia's Strategic Edge in 2030 (2011+). The latter referred to:

  • Promoting a more strategic approach to Asia-literacy – a step that would be vital as a precondition to:
  • Helping China in its desperate efforts to re-develop its currently-failing system of political economy (eg perhaps to create one that would be compatible with the aspirations of the White Paper);
  • Demonstrating that liberal institutions do not have to suffer widespread moral failings;
  • Reducing the economic role of financial services, because of the instabilities that can be generated by complex financial systems; and
  • Nation building in Australia (eg involving: stronger support to the political system; better access to external intelligence; and a more serious approach to economic development).

John Craig


Attachment: An Asia-illiterate White Paper

The assumptions about Asia that underpin the White Paper are arguably wishful thinking because:

  • The White Paper suggests that: “Asia’s ability to capitalise on open global markets for goods and services has been crucial to its economic transformation.” While this is correct, what is not stated is that countries such as Japan and China have ‘capitalised’ on open global markets, not by themselves adopting open markets, but rather by using mercantilist economic systems that seek to build national geo-political power rather than to serve the interests of their people as consumers or investors – eg see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009) . Moreover:
    • financial distortions have been built into those systems (because of the East Asia’s lack of a Western cultural heritage) and these have required suppressing domestic demand (and thus generating what some have called ‘savings gluts’) that have played a major role in creating a growing risk that global economic growth will not be sustainable (eg see Impacting the Global Economy). East Asian economic ‘miracles’ have been critically dependent on the willingness and ability of their trading partners, most notably the US, to continue running current account deficits and accumulating ever larger public and private debts;
    • While the White Paper is correct in suggesting that “Over the past decade, Asia’s demand for Australia’s natural resources has created a once-in-a-lifetime surge in our terms of trade and an extraordinary boom in minerals and energy investment”, it is not clear where future demand will come from given:
    • It is naïve for the White Paper to suggest that “Within only a few years, Asia will not only be the world’s largest producer of goods and services, it will also be the world’s largest consumer of them.” The obstacles to expanding domestic demand to the point that current account deficits arise has long been apparent to anyone who considered the neo-Confucian cultural foundations of the methods used to achieve economic ‘miracles’ in East Asia (eg see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems , 1998). Moreover suppression of domestic demand in order to provide net material benefits to tributary states was a feature of the international order that existed prior to Western expansion when the region was dominated by China (eg see Creating a New International 'Confucian' Political and Economic Order);
  • The White Paper suggests that Australia’s capabilities to succeed in Asia can be assured by measures which include: widespread study of Asian languages by children; and Asia-capable leaders in business, parliament, national institutions and advisory forums. While creating leaders who have a strategic understanding of Asia (especially East Asia) would be a useful step, there is little prospect of this in an environment in which the authors of the White Paper appear to lack that understanding. It is noted for example, that there is no reference to the nature of the cultural difference that need to be understood, and that:
    • Those differences (in relation to East Asia) involve different and fairly-hard-to-understand ways of thinking, which translate into different and not-easily-perceived ways of doing things (eg see Preparing for the 'Asian Century': Talk is Cheap but Not Sufficient );
    • A real Asian century would arguably involve intuitive, hierarchical and autocratic ethnic groups proving better able to deal with ongoing economic and political challenges than rational / responsible individuals operating within Western-style frameworks that feature individual liberty, a rule of law, freedom of speech, democratic governance and profit seeking enterprises (see What does an Asian Century imply?);
    • Australia’s lack of language skills and Asia-capable leaders is a symptom, rather than the cause, of difficulties of doing much beyond selling bulk commodities into the region. It is intrinsically difficult to achieve the commercial goals of independent enterprises in an environment dominated by the mercantilist goals of ethnic networks, and thus not wise to invest heavily in doing so;
    • While there is real concern in Europe and the US that rising Asian powers might not respect the rules of trade and international relations established after WWII (eg see Desker B., ‘Can Europe prevent Asia’s rise?’, Asia Times, 25/10/12), this question does not seem to have been considered in the White Paper;

Note added later: 'Breaking rules' can be regarded as a virtue, and Mao's failure to 'break rules' has apparently become a basis for criticism of his regime (see Communism Versus Confucianism: The Continuing Contest in China). Statements in late 2012 by China's retiring president that China's would not adopt a Western-style democratic style of government further show that post WWII international 'rules' would not be respected [1].

  • The White Paper makes only passing reference to the real prospect that instabilities in Asia over the next few years will exceed those of recent generations. It can be noted that:
    • China, which the White Paper suggests will soon have the world’s largest economy as the core of the ‘Asian Century’, appears to face very severe financial, economic and political difficulties (eg see Heading for a Crash or a Meltdown?). China’s domestic political difficulties, for example, seem anything but trivial, as:
      • community support for autocratic Communist Party control appears to have been based on nationalistic aspirations to obtain vengeance for past Western / Japanese oppression;
      • the neo-Confucian methods used to accelerate China’s rapid economic advancement were reportedly discretely introduced to China by Japan (presumably as part of a peaceful post WWII program to achieve Japan’s 1930s’ militaristic aspirations of establishing an ‘East Asian Co-prosperity Sphere’, this time through the spread of the neo-Confucian methods that allowed economic ‘miracles’); and
      • those methods both: (a) created a new generation of Confucian social elites (which is incompatible with China’s nominal communism, and which Mao’s cultural revolution had sought to purge from China); and (b) led to the world’s most extreme income and wealth inequalities;
    • Overcoming the international financial imbalances that risk making global growth unsustainable may soon require steps by more developed economies that further expose the distorted financial systems associated with East Asia’s neo-Confucian systems of socio-political-economy to crises (eg see China may not have the solution, but it seems to have a problem);
    • The mercantilist goals of East Asian ethnic networks contribute to tensions across Asia. It is not only in Australia that geopolitical considerations will usually need to be considered in assessing investment proposals and ethnic networks’ influence on domestic politics (eg see In East Asia Deals Always Involve Politics and recognise that power is traditionally exerted in East Asia by providing information that influences subordinate’s decisions and actions – a possibility that needs to be kept in mind in relation to the whole White Paper process); and
    • Rising nationalism seems to be a source of rapidly increasing security concerns across East Asia [1, 2, 3], while in SE Asia rising wealth and concerns about China have led to large expenditures on military capabilities [1]. Some have seen this to be like the situation in Europe prior to WWI (Yan G., ‘Shadow of war hasn’t disappeared from East Asia’, Global Times, 29/10/12), though others have pointed to differences (Acharya A., ‘China’s rise and security in the Asian century’, East Asia Forum, 6/5/12). Australia’s Lowy Institute has seen it as desirable to establish a program to explore ways to prevent the region's growing strategic rivalries from deepening and escalating into war.
  • Observers noted the failure of the Australia in the Asian Century White Paper to say anything at all about the entanglement of Asian organised crime groups in state supported economic and political affairs

The Dark Side - email sent 26/11/12

Jacob Townsend and Anthony Bergin

Re: Asian connection has a dark underbelly, Financial Review, 26/11/12

Your article noted that Australia’s Asian Century white paper failed to say anything about the entanglement of Asian organised crime in economic and political affairs (eg the activities of triads, yakuza etc).

In this respect I should like to suggest that the Asian Century white paper not only failed to mention the economic and political role of organised crime in East Asia (eg that triads have been described as being like the ‘private armies’ of Chinese business groups), it failed to demonstrate any significant Asia-literacy at all (see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century).

Also I should like to draw your attention to an apparent example in Australia of the political and economic influence of those groups that I was personally exposed to some years ago (in Comments on Australia's Strategic Edge in 2030, 2011).

John Craig

  • in comments on the effect that China's crackdown on corruption had on encouraging those who had become wealthy from corruption to get out of China, it was presumed that those seeking premium investment visas to live in Australia would be making legitimate long term investments rather than seeking a safe haven after accumulating wealth through corruptly exploiting insider roles in the so-called 'Communist' Party.

Overcoming Australia's Corruption Shortage - email sent 30/8/14

Fergus Ryan
China Spectator

Re: How Australia is cashing in on China's corruption crackdown, China Spectator, 29/8/14

Your article pointed to the enthusiastic efforts of the NSW Deputy Premier (Andrew Stoner) to attract likely-criminals to move from China to Australia. This is indeed good news

My Interpretation of your article: NSW Deputy Premier (Andrew Stoner) recently visited Hong Kong to secure a $10m beef deal. He also visited a southern Chinese city to sell visas. NSW has eased requirements for Significant Investment Visa. This arrangement is bringing a great deal of money into Australia. There is a strong demand for, and a very tight supply of, premium investment visas for countries such as Canada, US and Australia. 64% of Chinese people with over $1.6m assets want to get out of the country. The sweeping crackdown on corruption in China since 2012 is undoubtedly behind this. Many corrupt business people and officials are finding less stringent requirements in cash-strapped European countries. Chinese investors who go into these schemes tend to be looking for a quick fix rather than long term opportunities. Australia can benefit from wealthy Chinese who are seeking good investments rather than just a safe haven.

It is worth considering why China’s crackdown on corruption has been needed. Its rapid economic advancement has apparently been based on a variation of the neo-Confucian systems of socio-political-economy that have been the basis of economic ‘miracles’ across East Asia. National savings were mobilized through state-linked banks and made available to state-linked enterprises that it was presumed would pursue nationalistic economic goals. In China many of those in key positions in the ‘Communist’ Party’s banks and businesses took advantage of the opportunity this provided to enrich themselves and their families. China thus developed the most extreme wealth imbalance in the world and its system was seen (for this and other reasons) to be unsustainable. Reforms were thus recently put in place which, amongst other things, sought to ensure that those in key positions exhibited the virtues that were traditionally expected of elite Confucian bureaucrats (see The Resurgence of Ancient Authoritarianism in China). Those with a history of corruption have tended to be find life harder and many want to leave.

Australia is now benefiting enormously from China’s efforts to expel corruption, as there has been a serious shortage of domestic corruption (especially in NSW). Encouraging wealthy potential-criminals to migrate from China is clearly desirable.

John Craig

Notes added later: It was suggested in May 2015 that anti money-laundering legislation would take the heat out of property booms / bubbles in Australia. Chinese investors can only bring $US50,000 out of China and yet are paying $1.5m cash for homes in Sydney and Melbourne. Most of the money must therefore be 'black'. Something like $28bn of Chinese money has been invested in Australian property over the past 6 years. Those who are simply looking for a place to park their money are distorting the market - because they are not interested in yield [1]

In May 2016 it was pointed out that banks were tightening up on lending to Chinese investors in Australian apartments because they were often told 'half truths' about how the money had been acquired

In September 2016 it was reported that Australian authorities were concerned about the flood of money coming from southern China - including illegal funds linked to organised crime and wealthy people with secret offshore accounts. Washing money through drugs, counterfeit goods, illegal migration and capital flight were also of concern. Hong Kong operates the second most secretive financial system in the world (after Switzerland) [1]

  •  a business commentator expressed concern about the economic effect of government actions that might disrupt Chinese / Asian property investment in Australia without apparent recognition of the complexities involved;

"Mum and Dad" Chinese Investors - You Must Be Joking - email sent 12/5/15

Robert Gottliebsen
Business Spectator

Re: A Chinese exodus will decimate our property market, The Australian, 5/5/15

Your article (which is outlined on my web-site) expressed concerns about government actions (ie law enforcement and new taxes) that might disrupt Chinese / Asian property investment in Sydney / Melbourne. It noted that Australia’s post-resource-investment-boom economic recovery was becoming dependent on property investment and that the balance sheets of Australia’s banks also depended on real estate. You further suggested that property developers were becoming alarmed about what seems to be happening in those markets.

However the issues involved are more complex than you mentioned. For example:

  • There have possibly been criminal and political drivers behind those capital flows – not just the Chinese ‘mums and dads’ looking for ways to invest their savings;
  • Australian leaders’ need real Asia literacy as engagement with China ceases to mainly involve arm’s length commodity sales. Engagement without understanding is encouraged, but is foolish;
  • Australia has a pressing need to develop new high value-added economic functions that can attract investment – and directing capital into real estate does not meet that need; and
  • Irrespective of what governments and the RBA do, global factors are likely to make it impossible for Australia’s post-boom economic recovery to be primarily based on high-rise property development.

The above points are developed further on my website (see Detailed Comments).

John Craig


Detailed Comments


Outline of article: Apartment developers are nervous about falls in the value of Sydney / Melbourne apartments and suburban housing. Inner-city Sydney apartment prices have started falling. New forces are emerging that are more important than anything the RBA does, and this could be economically significant because apartment building has been Australia’s main economic driver in the post mining boom era. And falling dwelling prices will adversely affect bank profits. Current dangers are triggered by politicians in Canberra and Victoria who have decided (for purely political reasons) that Chinese / Asian buyers should be attacked – even though they are the major buyers in parts of Sydney / Melbourne residential markets. This is dangerous because in Sydney over 80% of inner city apartment buyers are Chinese / Asia n – a figure that is even higher in Melbourne’s CBD. Chinese buyers are not big institutions but mums and dads who made some money in home country and see Australia as a good place to invest. Often there is a herd mentality involved – where buyers inspire others to invest. The danger is that the ‘herd’ could get frightened. Now in Sydney apartment rents are rising (because more people are living in each) but prices are falling. There is no big vacancy problem as the Chinese families who bought apartments rent them. In Melbourne the situation is different, as investors tend to be Chinese institutions (with bank support). About 20,000 apartments have been approved in the CBD – and this roughly equates with Chinese buying activity. This is underpinning Victoria’s economy. Chinese / Asian investors often pay 10% deposit for ‘off the plan’ developments. In Melbourne (unlike Sydney) many completed developments have not been leased. Thus Victoria’s market is extremely vulnerable. Chinese residents are legally entitled to make such investments. But they can’t legally invest in existing residences. But those laws were never enforced – and thousands of Chinese families have bought existing residences. Many ‘mum and dad’ investors were told that they need to link with local contacts through whom to buy properties. Thus local Chinese businesses have become fronts for overseas Chinese residents. This has been a lucrative trade for Australian families of Asian origin – and many have bought too many properties thus making it obvious what has been going on. In chasing votes, the federal government has blundered into dangerous waters by imposing new penalties. Many Chinese families are thus likely to sell before penalties start to be applied to those who are ‘fronts’ for offshore investors. This was only enforcing an existing law. However the Victorian Government is now imposing a levy on apartment developments sold after 1 July and then a ½% levy on annual returns. On its own this Victorian action could be managed – but when combined with federal action the result could be lethal. There is a need to understand why Australia attracts ‘mum and dad’ Chinese investment in the first place. They like the environment, and Australia encouraged slick sales people who sold investment properties in the same way as encyclopedias, electricity and investment scams are marketed. Now two governments are saying they are no longer welcome. And if the message gets out, they will sell and there will be big losses. In Melbourne there is a big difference between ‘off the plan’ prices and the sale prices of completed units. If Chinese buying turned to selling, Sydney apartment prices would collapse (and affect many types of Sydney residential property). The herd mentality that drove buying, could lead to selling. Australia’s banks have over-leveraged their loans on residential property – and David Murray’s warnings about this are important given dangerous government actions. People in real estate are very nervous about the situation.

Chinese investors / immigrants purchased $8bn real estate over 12 months and are expected to invest $60bn more over next 6 years (double that of past 6 years). This represents 15% of national housing supply. Changes to foreign investment rules are not expected to make any significant difference. Growth will be supported by 2% pa rise in new settlers from China and 5%pa rise in investment flows. 1.2m Chinese have over $1m in assets - and can afford to buy offshore real estate. This number is rising 14% pa [1]

What is Driving Chinese Investment?

It is simply unrealistic to suggest (as the above article did) that Chinese investors in Australian real estate should be viewed as ‘mums and dads’. The neo-Confucian methods for achieving an economic ‘miracle’ that China adapted from Japan involve elite leadership of ‘learning’ within hierarchical business networks. And in China the top level role was apparently played by members of the so-called ‘Communist’ Party itself (rather than by the bureaucracy as had been the case in Japan). And in China many of those with such roles took the opportunity to corruptly enrich themselves as their families / friends. One result was that China wound up with one of the most extreme wealth imbalances in the world. Another was that the disgust that China’s ordinary ‘mums and dads’ (many of whom fondly remember the social equality to which China had aspired in an earlier era) had about the re-emergence of Confucian social hierarchies was one of the factors that was seen a couple of years ago to make China’s growth model unsustainable – leading to a corruption crackdown and to capital flight by those who had corruptly-acquired wealth. And some of this was apparently directed towards Australia (see Overcoming Australia's Corruption Shortage, 2014).

It was suggested in May 2015 that anti money-laundering legislation would take the heat out of property booms / bubbles in Australia. Chinese investors can only bring $US50,000 out of China and yet are paying $1.5m cash for homes in Sydney and Melbourne. Most of the money must therefore be 'black'. Something like $28bn of Chinese money has been invested in Australian property over the past 6 years. Those who are simply looking for a place to park their money are distorting the market - because they are not interested in yield [1]

In June 2015 it was suggested that the 'wall' of Chinese capital hitting Sydney and Melbourne property markets would not cease until government introduced anti money laundering legislation. Capital flight from China is accelerating because of government's anti-corruption drive. Because of concerns about social dislocation in Canada related to high house prices, Canada shut down its investor visa program. About $32bn of potential investment was blocked - and this money is now hitting Sydney [1]

The situation has, of course, changed to some degree as a result of China’s reform initiatives. However this makes it more necessary than ever to question the extent to which Chinese investment has political implications. That possibility always needs consideration (for reasons suggested in In East Asia Deals Always involve Politics). But even greater attention to this is needed now. Success in China (and thus the capacity to invest offshore) still depends on ‘connections’ to what is still an unrepresentative elite (ie the so-called ‘Communist’ Party) and the latter has clearly been pursuing a mercantilist (ie power seeking) economic agenda since the late 1970s.

Moreover East Asian economic ‘miracles’ have involved distorted financial systems that have resulted in significant international financial imbalances (eg see overview of this very complex issue in The Use of Finance as a Weapon) and those financial imbalances (which reflect a structural demand deficit associated with repressing ‘mums and dads’ to focus national income on production) pose a threat to global growth. For decades Japan and China disposed of the excess capital that resulted from their consequent current account surpluses mainly by buying US Treasury bonds. However this is no longer an attractive option. Interest rates are now likely to rise, and thus steadily erode bond values. China seems instead to be seeking to both: (a) boost domestic demand – a very difficult challenge; and (b) recycle the current account surpluses that result from its distorted financial system into capital outflow to infrastructure and other investments in Asia (and elsewhere) as part of a process to gain control through a modified form of the trade-tribute system by which Asia was administered from China prior to Western expansion (see Creating a New International 'Confucian' Financial and Political Order, 2009+ ). The present writer has no way to know whether or not this may be a factor behind part of Chinese capital inflows to Australian real estate. However this possibility should not simply be ignored.

The Need for Understanding

And in assessing that possibility, it would be extremely unwise to assume (as was recently suggested - see below) that it would not be necessary to actually understand China / Asia to benefit from engagement.

Australian politicians often say relations with China are crucial to Australia’s development and prosperity. And many hope the China-Australia FTA will help Australia’s economy. But there are few who know how to take advantage of this. Australia needs more Asia-capable people. The Australia-China Young Professionals Initiative suggested that many young professionals have highly evolved Asia skillsets. But their leaders still suffer Asia-apprehension (eg which starts as an inability to talk clearly / thoughtfully about Asia – and can lead to parochial / risk averse organizational culture). Organisation leaders need to leverage their Asia talent. The 2012 Asian Century White Paper helped change the rhetoric of China-engagement – but had little impact. Government and business must be proactive in China engagement. China-literacy is not necessary – but confidence in engaging is essential. There is also a need for bottom-up action (eg related to education). There is a need for parental demand related to Asian languages for their children. The Australia-China FTA is not a panacea. People are needed with the skills to market Australian products to growing Asian middle class. There is low hanging fruit that companies can access to support Asian literacy amongst their staff. (Kus E., ‘Australia should cure its Asian Apprehension’, China Spectator, 8/5/15)

As Australia’s engagement with China and East Asia generally no longer simply involves arm’s length commodity sales, political and business leaders’ now (very belatedly) have no sensible alternative to getting serious about understanding what they are dealing with (for reasons suggested in Babes in the Asian Woods, 2009+). The latter referred to:

  • many features that are likely to be unexpected and need to be recognized (see ‘Just-doing-it’ is Foolish). The article noted that Chinese investors have tended to ignore Australia’s laws that restricted the purchase of established properties by those without resident status. In this regard it needs to be recognized that in East Asia ‘law’ does not exist primarily as a guide to independent decisions, but rather as a means for disciplining those who might deviate from what the most powerful in an ethic community believe to be appropriate (see notes on contradictions in China's 'rule of law' reform agenda). So long as one conforms with the elite’s consensus, law would not be expected to be a constraint. This is dramatically different from the concept of law in Australia;
  • the blunders that can arise (and have arisen) from a lack of real Asia literacy;
  • what the core of ‘Asia literacy’ might involve.

Other Issues

Other issues need consideration in relation to the dependence of Australia’s post-boom economic recovery on China / Asia funded apartment development. For example:

  • The move towards enforcement of anti-money-laundering legislation might well also reduce the flow of Chinese money into Australian real estate (see West M., Property’s ‘dirty money’ cycle set to end, Business Day, 11/5/15);
  • Australia needs to diversify its economy in a post resource-investment boom environment, and large-scale investment in apartments (ie an area that Chinese investors are familiar with) is unlikely to be the best way to do this. Australia needs to create industries that enable ‘mums and dads’ to afford to live well in Australia. How this might be achieved was speculated in A Broader Approach to Tax Reform. There is a need to create an economy in which large investments can be justified in knowledge and skill based economic activities that are internationally competitive (which will tend to generate high value added, high wage rates and a strong tax base). Chinese / Asian real estate investment has accounted for effectively all of the increasing non-resource post-boom investment (and has thus made Australia’s current levels of economic activity dependent on those flows). However it has done nothing to ‘develop’ the economy in ways that would genuinely benefit ‘mums and dads’ in the long term. In fact it has probably made it more difficult to do so – eg through creating lobby groups who might resist a more serious economic development agenda.

And in relation to diversifying Australia's economy it needs to be noted that it is likely that the long term and as-yet-undisrupted property boom (and the profitability of banking which with mining has been the core of Australia's stock market) has been largely a by-product of easy money policies by reserve banks. Moreover the latter is unlikely to be sustained irrespective of what governments and the RBA do. While normalizing monetary policy globally (ie bringing an end to ultra-easy money policy) is likely be economically disruptive, it is arguably vital to avoid simply increasing indefinitely the adverse effects and risks that are outlined below. The net effect must be to discourage purely speculative investment;

Elaboration: Monetary policy has been regarded as the primary mechanism for macroeconomic management since the late 1980s, and has involved increasingly easy money policies (ultimately involving quantitative easing in the US from 2008 and now in Europe and Japan). Ultra-easy monetary policy has:

  •  arguably been needed to maintain global economic growth in the face of the large demand deficits in countries (such as Japan and China) that manipulated their financial systems to achieve ‘savings gluts’ and maintain current account surpluses (see Impacting the Global Economy, 2009+ and The Use of Finance as a Weapon, 2015);
  • had many adverse consequences including:
    • boosting asset values (including real estate values) much more than real economies – because the flow-through to asset values has been immediate while the flow-through to real economies has depended on market demand which has been constrained by: (a) large demand deficits in countries that maintained ‘savings gluts’; and (b) increasing household and government debts as a result of easy money policies;
    • rising inequality because asset inflation has made the rich richer, while others’ position has been tied to ‘real economy’ performance which was relatively stagnant. The worldwide concern that has emerged about rising inequality needs to be considered in this context (eg see Who Is Failing the Lower and Middle Classes? 2014);
    • problems in housing affordability as easy money boosted the value of such assets much more than household incomes. There is no doubt that Australian ‘mums and dads’ face a housing affordability problem (eg see Struggling Harry and the Costs of Living in Australia, Morning Money, 9/5/15)
    • the risk of financial instability and crises (as asset bubbles are created and burst);
  •  Probably reached its ‘use-by’ date – noting:
    •  current market-driven falls in government bond values (ie rising yields);
    • the US Federal Reserve’s emphasis on normalizing monetary policy; and
    • warnings from international institutions such as the IMF and the BIS.

These points are developed further in An Approaching Crisis?

 

  • in a presentation to an Australia in China's Century Conference in September 2012, the federal treasurer expressed the view that 'sophisticated dialogue' would provide a basis for developing Australia's relationships in Asia, without apparent recognition of cultural limitations on what can be achieved through 'dialogue' in East Asia

Realism about East Asia - email sent 14/9/12

Professor Ross Buckley,
University of NSW

Re: East Asia’s lost opportunity, Inside Story, 6/9/12

Your article was very useful in introducing a sense of realism about how China and East Asia generally work in relation to the region’s failure to make an effective contribution to global governance (eg you noted China’s traditional ‘moral guardianship’, in Confucian terms, of Chinese people – including those in Greater China).

However I should like to submit for your consideration that a role in ‘global’ governance is an opportunity that countries such as China and Japan probably do not want. Rather, as Japan has apparently been doing for decades, they would prefer to create an international order (in effect an ‘Asian Co-Prosperity Sphere’) that operates on neo-Confucian traditions within one corner of the world for the benefit of particular ethnic communities and that would be an obstacle to the continued operation of an effective ‘global’ order (ie one that sought to benefit all, rather than particular, people). My reasons for suggesting this are outlined in Eurocentric Aspirations in a World of Rising 'Asian' Influence (2011).

Introducing realism about how China and East Asia work into the public debate about Australia’s future economic options and international relations would also be highly desirable, as at present the ‘lemmings’ seems to be rushing towards the ‘engagement’ cliff without any apparent recognition of what they are doing (because, while acknowledging cultural differences, the 'lemmings' show no realistic understanding of what those differences are or imply). For example, in a video extract from the Australia in China’s Century Conference (see Curran E. and Maher S. ‘Wayne Swan condemns attacks on China investment’, The Australian, 14/9/12), the federal Treasurer endorsed developing Australia’s relationship in East Asia through a ‘sophisticated dialogue’ without any apparent recognition of the difference between Australians’ high Western-style expectations about the role of ‘dialogue’ and the very low expectations about this that exist under East Asia’s radically different epistemologies (which would mean that 'dialogue' would be more likely to result in deception and manipulation than in exchange of factual information - see also Understanding 'Asia').

I would be interested in your response to my speculations.

John Craig

  • an Australian Prime Minister, with no diplomatic experience, was said to have achieved a diplomatic coup through committing Australia's political leadership to annual consultations with China's Communist Party in Beijing and claimed (in the face of some indications to the contrary) that diplomatic arrangements had been put in place that would prevent serious conflicts in Asia;

A Diplomatic Coup in Beijing: By Who? - email sent 13/4/13

Laurie Pearcey,
Director – China Strategy and Development,
Confucius Institute,
University of NSW

Re: Gillard’s China visit: a silver platter for Abbott?, The Conversation, 12/4/13

Your article suggested that the Prime Minister’s recent visit to China was a diplomatic triumph and that it will enable a future Prime Minister to deliver a free trade agreement with China on a ‘silver platter’. However I should like to submit that her visit: (a) illustrates the dangers of trying to engage in an ‘Asian Century’ without understanding what that implies; and (b) may have delivered a poisoned chalice to the Leader of the Opposition.

My interpretation of your article: Julia Gillard has set the China policy direction and institutional framework for a future Coalition Government. Her heavy lifting in Beijing guarantees Tony Abbott a regular audience with China’s Communist Party (a privilege that only Russia, Japan and Britain enjoy). This is a political coup – the most significant breakthrough in Australia’s foreign policy since the formation of the ANZUS alliance. It was achieved by a Prime Minister with little interest in foreign policy, who had inherited a Sino-Australian relationship on the point of crisis from her Mandarin-speaking former diplomat predecessor. China had had high hopes for our Sinophile PM – who had welcomed China’s President to a Sydney APEC summit in Mandarin. Yet Rudd presided over the darkest years in the bilateral relationship. He famously: told journalists that those ‘Chinese rat-fuckers are trying to rat-fuck us’; told US Secretary of State to prepare for war with China; and criticized China’s human rights record. These self-inflicted wounds were not helped by unrelated problems (eg Stern Hu’s arrest). Gillard has been able to bring relations with Beijing back from these historic lows, and announce a major coup which will bring advantages to Australian companies. The visit did not however make a breakthrough on a bilateral free-trade agreement. It will be interesting to see whether FTA negotiations can be elevated to into the new bilateral architecture or confined to tedious negotiations between DFAT and Ministry of Commerce officials. Modeling suggests that a FTA could deliver a 0.7% boost to Australia’s GDP. Julia Gillard has given Tony Abbott the ideal platform to deliver a FTA on a silver platter.

As you noted, the Prime Minister has had little interest in, or experience of, foreign policy. Moreover her government endorsed a view of Asia’s future that that was quite naive (see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century). There are complex cultural and institutional differences, and presuming (as the Australia in the Asian Century White Paper did) that they don’t exist is risky.

To oversimplify, it is likely that some implications of those differences are:

  • A free trade agreement with China has been difficult to bring to fruition (and has been bogged down in bureaucratic wrangling) because there is nothing ‘free’ about trade in China. Doing business depends on ‘connections’ (ultimately to an authoritarian ‘family-state’ via either state owned enterprises or associates of the (so-called) Communist Party). This problem is not going to be eased by putting the issue into the hands of politicians who may be unaware of the complexities involved, and banqueted to the point that they will agree to anything;
  • The expectation that China is liberalizing economically is incompatible with apparent trends in its approach to education (see Competing Thought Cultures, 2012). Starting education with rote learning of the Chinese classics will reinforce East Asia’s traditional approach to education – which conditions people to comply with suggestions by their superiors rather than thinking independently. This shift (in effect in the direction of North Korea) is anything but the foundation for a liberal political and economic regime;
  • While China has a significant reliance on Australia’s mineral resources (particularly coal and iron ore) and China is an increasingly significant investor in those areas, investment in and by China is always part of a broader nationalistic political agenda – rather than being simply based on the commercial considerations affecting independent enterprises (see In East Asia Deals Always Involve Politics);
  • Economic ‘miracles’ in East Asia (including China) have arguably been based on neo-Confucian systems of socio-political-economy that:
    • are anything but familiar to most Western observers. Moreover Western concepts such as democracy, capitalism or socialism provide no help in understanding systems built on (supposed) ‘Asian values’ that can perhaps best be regarded as ‘authoritarian family-states’ (ie a whole community is equated with a ‘family’ that is expected to be guided by its ‘parents’, rather than involving independent elements whose interactions are controlled by such ‘abstracts’ as laws and accounting principles);
    • are variations of the way in which power was traditionally exerted in East Asia by Confucian bureaucracies. It involves highly educated elites inducing / manipulating others (both their internal social subordinates and external enemies / tributaries) to do things that are perceived to be in the interests of the elites’ ethnic community – but may have negative consequences for others that may not be understand because of: (a) the complexity of the issues involved; and (b) conditioning towards not thinking too deeply that is the product of traditional approaches to ‘education’;
    • have given rise to serious political tensions in China because of their incompatibility with the social equality aspirations of China’s nominal communism (see Communism Versus Confucianism: The Continuing Contest in China, 2010);
  • while the economic growth that resulted from this has benefited Australia for decades (and recently provided protection from the worst effects of the GFC), those systems involve distorted financial systems that mobilize national savings to achieve political / mercantilist goals (rather than commercial / profit-focused goals of independent enterprises) and this can be expected to lead to financial, economic and perhaps political crises because of their incompatibility with, and disruptive effects on, the international financial system – eg see China: Heading for a Crash or a Meltdown? and Japan's Predicament;
  • The deal that Australia has entered into to allow direct conversion of $A and Chinese Renminbi / Yuan is arguably motivated by China’s need to obtain hard currencies to cope with the emerging prospect of current account deficits that would result from shifting to domestic demand to drive growth. Without this alternative method of obtaining hard currencies China would be forced to borrow in international profit-focused financial markets – and doing so would expose China’s financial ‘house of cards’. The Renminbi is a ‘political’ rather than a ‘commercial’ currency. Under the recent deal Australian companies could wind up with large quantities of Renminbi / Yuan (in payment for minerals and energy exports or as the result of investment in resource projects). However it is not at all clear what one would do with large quantities of that currency (see also comments on the growing risk of financial crises in East Asia);
  • There is a possibility of a new Korean war (and perhaps nuclear strikes against the US) that would clearly distract the US from trying the get China to ‘play by the rules’ (such as law and accounting principles), and presumably result in US requests to Australia to join it in marching into what proved to be an ambush on the Korean peninsula. The issues involved in North Korea’s threats are complex (and they are widely seen as mere bluster). However there may actually be a real threat that is both: (a) broader than North Korea; and (b) motivated by the crises facing the ‘authoritarian family-states’ that have been emerging in East Asia as an ‘Asian values’ alternative to the West’s rational / responsible individualism (see 'Art of War' Speculations about North Korea's Threats). The latter suggests looking at the whole ‘forest’, not just at the ‘tree’ that is shouting threats.

It may be that Rudd was right (about China) and that the present prime minister has been manipulated into positioning Australia as a potential tributary state in what might be hoped to become a New International ‘Confucian’ Political and Economic Order.

If so it was China that recently achieved a diplomatic coup in Beijing - not Australia’s Prime Minister. Australia’s political ‘babes in the Asian woods’ need informed advice rather than uncritical applause if they are to have a sound foundation for their diplomatic forays into ‘Asia’

John Craig


Fasten Seat Belts: Rough Weather Ahead - email sent 27/4/13

Robert Gottleibsen,
Business Spectator

RE: Gillard’s Chinese game changer, Business Spectator, 23/4/13

As your article suggested, Australia is facing increased economic risks if potential instabilities in Asia cannot be contained by diplomatic dialogue.

My interpretation of your article: Prime Minister Julia Gillard took Australia a step closer to China. If there is a serious dispute between the US and China, as China replaces US influence in the region, Australia would suffer economic consequences unless it sided with China. The PM suggested that China and the US are working together and that there was regular and widespread dialogue between them. Thus she believes that a serious dispute is highly unlikely – so Australia could maintain a strategic relationship with both. Previously many speakers had expressed doubts about whether the US would accommodate China’s rise, as President Obama’s address to Australia’s parliament was about containing China – though a subsequent address by Hillary Clinton was about accommodating China’s rise. The PM discounted the possibility of a serious dispute between China and the US. Australia is already dependent on China’s demand for resources, and new projects will increase that dependence. The PM explained that resource trade could be expanded into other areas (eg food), without pointing to the fact that potential developments in those areas had been rendered uneconomic by deals with unions. There was also debate about whether China’s demand for Australia’s resources would be maintained – and one Chinese entrepreneur suggested that this would be ensured by continued urbanisation, while admitting that China faces economic and political problems.

In relation to this I should like to submit for your consideration that:

  • The prime minister’s optimism about preventing serious disputes in Asia flies in the face of various indications to the contrary;
  • International relationships in East Asia are increasingly being conducted in a bureaucratic neo-Confucian style, and under those traditions diplomatic ‘dialogue’ is unlikely to prevent disputes / conflict;
  • By signing up to regular ‘dialogue’ with China’s so-called Communist Party, the prime minister has rendered Australia more liable to economic coercion;
  • While Australia’s economy and government budgets are dependent on the success of East Asia’s neo-Confucian ‘family states’, the latter are under extreme stress and arguably rely on financial systems that are incompatible with continued global economic growth;
  • The emerging global environment is unlikely to favour either political stability or the growth of Australia’s economy and tax revenues.

These points are developed further in Rough Weather Details.

The diplomatic skills of Australian prime ministers will continue to be put to the test. Hopefully they will be guided by Asia-literate advisers in future.

John Craig


Rough Weather Details

There are many clear signs of disputes and conflicts in East Asia.

For example: Tensions are high in East Asia and the South China Sea. Every defence white paper needs to frankly discuss the security risks - and the situation is currently deteriorating. North Korea has tested nuclear weapons and ballistic missiles and has threatened to attack the US. China's heavy military expansion is continuing - with an average 14% pa spending growth for 15 years. China claims most of South China Sea in contravention of UN Convention on Law of Sea. Fillipino and Vietnamese vessels have been harassed in their own exclusive national economic zones. Japanese and Chinese forces have come close to fighting over Senkaku-Diaoyu Islands. These are on Australia's doorstep - unlike Cold War situation. (Babbage R., ‘Smith’s Defence must be Frank’, The Australian, 26/4/13)

China is likely to feel vulnerable because it is no longer self-sufficient but depends on imports through waters that are controoled by not-necessarily-friendly interests [1]

However there are also many more subtle (political and economic) indicators of potential disputes and conflicts (eg as outlined in Art of War Speculations about North Korea's Threats). The latter refers, for example, to: a clash over several centuries between Western and East Asia civilizations that may be coming to a head; the use of neo-Confucian methods to achieve East Asia's economic 'miracles'; China's apparent efforts to create a new international Neo-Confucian order; the US 'pivot to Asia' to promote universalist / liberal values that can be seen as incompatible with the aspirations of neo-Confucian 'family states'; Japan's resurgent (ultra?) nationalism; South Korea's possibly perceived 'treason'; the risk of global financial crises and / or financial failure of  Neo-Confucian economic 'miracles'; and the inadequacy of Western methods such as 'dialogue' in reducing tensions in a Confucian context.

Changing the Nature of International Relations in Asia?

Western approaches to international relations (eg those based on individual rationality through a rule of law, democracy and capitalist (ie profit focused) investment) are now being openly challenged by those based on bureaucratic neo-Confucian methods (ie those involving what have been portrayed as ‘Asian values’ such as hierarchical social relationships, group consensus and non-capitalistic (ie mercantilist) investment).

The stress points that are emerging in many places with no apparent coherent explanation strongly suggest the use of Confucian methods (see Look at the Forest not Just at the Trees). China’s efforts to re-assert its role as the ‘Middle Kingdom’ through those traditions are the most obvious manifestation of this, as perhaps illustrated by:

However a potential shift from a Western-style international order is not what is happening according to the Federal Government’s idealised White Paper on Australia in the Asian Century (see Australia and the Claytons’ Century) - presumably because it is not easy to see the effect of ways of exerting power that are radically different to Western traditions (see East Asia in Competing Civilizations and Look at the Forest not Just at the Trees).

The ‘dialogue’ that the prime minister believes will contain emerging tensions is virtually useless in the emerging East Asian environment (see Why Understanding is Difficult and Realism about East Asia). Under Confucian traditions the head of a ‘family state’ merely enforces the consensus emerging from his government, business, military and even criminal connections. He is not at liberty to make decisions as the result of ‘dialogue’, and contributes to ‘dialogue’ by presenting a ‘face’ to the world corresponding to what the ‘family state’ believes would induce the most favourable reactions from others.

The Limits to 'Dialogue': ‘Dialogue’ is not the basis for establishing good relationships in East Asia. Dialogue involves an exchange of ideas, and the notion of ideas (ie abstract concepts) is a product of Western societies’ classical Greek heritage, and is foreign (ie is not the way in which information is used) in societies with an ancient Chinese heritage (eg see: comments on Competing Thought Cultures which includes an account of the different ways of using information by a former DFAT China specialist; and the present writer's version Epistemology: The Core Issue in Competing Civilizations).

Information is used to inculcate / encourage desired behaviours in others – not to provide a basis for mutual understanding. This is a consequence of traditional Chinese approaches to education and the tradition of government by bureaucracies who act as teaches and guides to the community (rather than as enforcers of law).

Internally decisions are reached by consensus amongst the subordinate connections of national elites - and the role of elites is to enforce (rather than to think about) those outcomes. To outsiders such a system can appear to be 'autistic'.

 If one goes to China (or Japan) for top-level ‘dialogue’ one will not be treated to an exchange of reliable ideas – but rather to something that can best be thought of as propaganda. The propaganda will be sophisticated (because it will draw upon well connected and well informed associates), but it will be nothing like ‘dialogue’ might be with (say) the US.

And 'dialogue' at medium to lower levels will have some of the same characteristics but will also be distorted by the behind-the-scenes role that social networks (that are perhaps ultimately connected to state-linked neo-Confucian intellectual elites) may play in coordinated responses to anything that may be discussed between 'individuals'.

By signing up to regular ‘dialogue’ with China (see A Diplomatic Coup in Beijing: By Who?), the prime minister has increased the risk that Australia will be subject to being 'conned' and to economic coercion if it does not comply with the wishes of the connections of China’s so-called Communist Party.

An Example - Buying Chinese 'War Bonds'?:  Following a decision to to allow direct trading between $A and Chinese renminbi, it was decided that Australia's central bank is to hold 5% of its foreign currency reserves in China [1]. The problem is that these arrangements involve investing in what can be seen as Chinese 'war bonds'. China's financial systems (eg the renminbi and China's banks) are part of a mercantilist economic agenda (ie one intended to boost political power rather than meet the needs of a community as consumers or investors) - see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy. National savings are mobilized through what has been labelled 'financial repression' into state-linked institutions where it is made available to state-linked enterprises that are expected to gain market power with limited regard to profitability. This parallels the way community savings are mobilized to meet nationalistic goals in Western societies in times of war through sale of war bonds. The legitimacy of China's Communist Party in the eyes of China's people has been seen to be based on portraying itself as the instrument of vengeance for China's historical humiliation.  Now China faces a crisis if it has to rely on domestic demand to drive growth - as this would generate current account deficits and a need to borrow in international 'profit focused' financial markets. A way of delaying this crisis has apparently been sought by persuading outsiders (eg Australia) to provide China with hard currencies without considering the solvency of China's financial systems as a whole.   

Pressure to reduce constraints on Chinese investment soon after ‘signing up’ to ongoing dialogue can also be noted (Wen P., ‘Too much red tape, Chinese investors say’, Business Day, 23/4/13) – as can the inevitably political character of significant investments (see In East Asia Deals always involves Politics).

Can China Maintain Australia's Economic Prosperity?

Despite the incompatibility between Australia’s (liberal and egalitarian) heritage and the neo-Confucian / family-state traditions that China has been encouraged to try to make the basis of ‘Asian-style’ prosperity, Australia is under economic pressure to accept a client state relationship with China for as long as China can keep Australia’s economy afloat by buying resources. And this economic pressure is increased by the  budgetary constraints that governments are facing (eg see Creighton A. ‘Hard cuts needed to save budget’ and Uren D. ‘National credit rating under threat without pledge to cut deficit’, The Australian, 22/4/13 and 24/3/13 respectively) - constraints that were both predictable and potentially fixable.

However China is unlikely to be the ‘solution’ to Australia’s economic and budgetary problems for much longer given both:

Structural Incompatibilities in the Global Financial System

The global problems seem largely (though not solely) to be a consequence of the structural incompatibility between the Western-style financial systems that the US has championed globally (ie systems that rely on profitability calculations by independent enterprises) and East Asia’s non-capitalistic / mercantilist financial systems (see Structural Incompatibility Puts Global Growth at Risk, 2003+). As noted above, the latter are mercantilist in the sense that they involved so-called ‘financial repression’ to mobilize national resources to boost national economic power with little regard to commercial criteria (and can thus be likened to selling war bonds to citizens to finance a war).

That incompatibility has apparently been a major factor in (though it has not been solely responsible for):

  • the global financial crisis (see GFC Causes and International Financial Imbalances). The large demand deficits in East Asia that result from ‘financial repression’ were required to prevent the need to borrow in international profit-oriented financial markets as banks did not take profitability seriously. This macroeconomic imbalance required trading partners to be willing and able to maintain large current account deficits and increasing debts if global growth was not to stagnate. The US primarily took this responsibility as part of its ambition to encourage the spread of democratic capitalism by acting as the world’s ‘consumer of last resort’. This was possible for about 20 years because boosting asset values with easy money policies created a wealth effect amongst those with significant existing assets and high levels of household consumption, until the bubble burst in 2008;
  • the subsequent escalation of US government debts – because of: the transfer to government of losses associated with the bursting of the asset bubble that was needed to prevent collapse of the global financial system altogether; and the subsequent escalation of government debts (financed by quantitative easing) in a futile attempt to create a sustainable basis for growth;
  • the risk of sovereign defaults in Europe (see Sovereign Defaults: Stage 2 of the GFC?);
  • the currently increasing risk of economically-disruptive global financial instabilities because of unsustainably-increasing government debts (which in some significant cases are likely to result in sovereign defaults when QE is phased out and interest rates rise to more normal levels) and the fact that counter-cyclical fiscal and monetary policies can’t restore global growth in the face of structural financial imbalances (see Counter-cyclical Policy can’t Solve Structural Problems; Debt Denial: Stage 3 of the GFC; and Interpreting the Canary in the Gold Mine).

While structural problems in the global financial system have been put in the ‘too hard’ basket (because of the cultural complexities), it is unlikely that globally-workable solutions will be compatible with the neo-Confucian international order that China’s current leadership and others have been aspiring to create (eg see China may not have the solution, but it seems to have a problem and Asian Millennium or Asian Decade?).

Implications

Thus the emerging global environment is unlikely to favour either political stability or the growth of Australia’s economy and tax revenues.

And these financial and economic stresses may merely be the manifestations of attempts to use soft-power tactics to achieve geo-political goals that military methods failed to achieve many decades ago (see Broader Resistance to Western Influences?). Even the latter extreme possibility deserves consideration because quite nasty things can be done behind the face of polite ‘dialogue’.

  • another Australian prime minister (who had studied China) was seen (by China) to be harder to deal with than his successor who had no such understanding.

Kevin Rudd's 'Friendship' with China - email sent 25/5/15

Jason Tin
Courier Mail

Re: Comrade Kevin’s Wrong March’, Courier Mail, 25/5/15

Your article suggested that Chinese academics are criticizing the claims to expertise in dealing with Asia that a former Australian Prime Minister (Kevin Rudd) has referred to in relation to his efforts to promote himself as a candidate for the role of secretary-general of the United Nations. It was suggested that speaking Mandarin (as Mr Rudd does) does not guarantee that someone is an authority of China, and that another former prime minister (Julia Gillard) had done much better. Her visit to China was viewed as more relaxed because she did not present as someone who knew China.

There is no doubt that China’s ‘princelings’ prefer dealing with outsiders who have no real understanding of China – and that prominent Chinese academics are likely to reflect this.

Mr Rudd’s 2008 speech to Peking University was seen by one observer to have been viewed with alarm by China’s ruling dynasty because it was believed that they were dealing with someone who had studied and had some knowledge of China – and who was trying to offer advice as a ‘true friend’ of China (see Dobell G., ‘Great Foreign Policy Speeches: Rudd at Peking University’, the Interpreter, 18/8/14). Mr Rudd had publicly drawn attention to China’s problems with poverty, uneven development, pollution and human rights and suggested that China needed to support a rules based international system and enhance the prevailing international order.

Mr Rudd’s openness was not only incompatible with China’s culture. It could also be ‘dangerous’ because he had some understanding of China – and seemed to be advocating that China move in a direction that is the complete opposite of its actual intent (ie to change its region and the world in directions that are the opposite of the liberal social, economic and political practices that Western societies had promoted as the basis of the post-WWII international order). Rather than a ‘rule of law’, under which independent initiative is encouraged, East Asian systems tend to involve a ‘rule of man’ (eg of China’s ‘princelings’ or Japan’s bureaucracy) under which conformity with the ruling elite is expected (and enforced by the state or by thugs acting on its behalf if necessary).

There are many hazards in engaging with East Asia for those who don’t understand it. Deception is a central part of strategy and information is provided to influence others’ behaviour rather than to help them to understand. Social, economic, criminal, military and political goals will be sought simultaneously through the same elite-connected networks. The need to understand such complexities was outlined in Babes in the Asian Woods (2009+).

Ms Gillard’s visit to China in 2013 illustrated the sort of fiasco that the Asia-illiterate can be expected to bring upon themselves (see A Diplomatic Coup in Beijing: By Who?, 2013). A regular consultative arrangement under which Australia’s government would set itself up to being guided by China’s ‘princelings’ was not very smart – and anyone familiar with how power is exerted in East Asia would have immediately seen through it. China's 'princelings' would be economically up-to-date (courtesy of advice from their business subordinates) and well positioned to make 'suggestions' that would benefit their associates that Australian politicians (who would invariably be economically-out-of-date and subjected to interest group pressure) would be poorly equipped to assess. More suggestions about the need for understanding of the sort of international order that China is apparently seeking to create are outlined in Creating a New International 'Confucian' Financial and Political Order (2009+).

Whether or not Mr Rudd would do a useful job as secretary-general of the United Nations should probably not be dependent on the level of his understanding of China. However such understanding certainly should be a key requirement for those Australians with top-level responsibility for economic, political, business and security dealings in East Asia.

I would be interested in your response to my speculations

John Craig

  • another Australian prime minister with no international experience committed Australia to entering into a 'free trade' agreement with China in 12 months without any apparent understanding of the issues involved

'Free' Trade with China: Not Likely under a Neo-Confucian Regime - email sent 10/10/13

Paul Kelly
The Australian

Re: On the Right Free Trade Track, The Australian, 9/10/13

Your article suggested that Australia’s Prime Minister seems to be taking a sensible line in pushing for a ‘free trade’ agreement with China by next year, even if this requires making concessions related to investment by state-linked enterprises. However the Prime Minister’s proposal (and your analysis of the situation) have fundamental defects in that they don’t seem to take account of the significant cultural issues involved.

My interpretation of your article: Tony Abbott has redefined his message in office. Now (after meeting China’s President Xi Jinping) he has expressed a positive view on Chinese investment and set a 12 month goal for a free-trade deal and an Australia Incorporated strategy with the Middle Kingdom. Abbots’ foreign policy is based on bilateral engagement and economic policy – to establish his credentials and signal a determination to get results. Dealings with Indonesia and China touch upon sensitive domestic issues (eg National Party’s semi-xenophobia about Chinese investment) in order to get more investment on a non-discriminatory basis. Just 15 months ago Abbott provoked furious headlines by suggesting that his government would prejudice investment – especially by state-owned enterprises. He suggested that an Australian government should not allow a foreign government or its agencies to control an Australian business. Now Abbott has committed to a rapid finalization of a free trade deal. This goes to the heart of trade / investment issue and Liberal / National relationships. Abbott must win this struggle of ideas – as, after 8 years of inconclusive talks, China won’t otherwise agree to a free-trade deal. Abbott will pursue a less purist free trade agreement with China than Labor sought. This is the correct approach. A former Australian ambassador to China advocates seeking a free trade agreement related to the particular industries that would benefit Australia. Others have done better than Australia in this respect in the past. The Nationals need to get their brains together and embrace the trade-off between a free trade agreement and acceptance of Chinese investment in agricultural land and more Chinese access to agricultural exports. Abbott also needs to recall that the original notion behind APEC involved a free trade agreement across the Pacific (including Asia and the US). This is more constructive than Obama’s flawed Trans Pacific Partnerships – that would currently exclude China, India and Indonesia. Integrated free trade should be sought – rather than divisions.

East Asia is not Europe and traditionally operates in a quite different way. Modified versions of the traditional / autocratic / oppressive Confucian methods for control of a society have been the basis of East Asia’s disruptive economic ‘miracles’ – but are unlikely to be sustainable (see Are East Asian Economic Models Sustainable?).

One can’t have a genuine ‘free trade’ agreement with China because significant economic activities are never ‘free’. Even where not formally state-owned, such activities are undertaken by groups with nationalistic / mercantilist goals and strong social linkages to the (so called ‘Communist’ but actually neo-Confucian) state (eg see In East Asia Deals Always Involve Politics). Current proposals for economic and political reform in China would reinforce (while putting a smiling face on) those arrangements.

Making economic and foreign policy decisions whose implications are not understood because of a lack of appreciation of cultural differences is stupid. Priority needs to be given to providing Australia’s political, business, academic and media leaders with what might be called ‘strategic Asia literacy’. The latter refers (for example) to raising awareness of: (a) radically different approaches to: knowledge; power; governance; and economic goals; (b) the difficulties of understanding where the goal of providing information is to influence other’s behaviour rather than to facilitate understanding; and (c) the PLA’s alleged systematic efforts to influence / deceive foreign leaders.

Anything resembling real Asia literacy has been conspicuously absent from debates about developing Australia’s relationships with the region in recent years. For example:

  •  The former government’s Australia in the Asian Century White Paper was written on the naïve assumption that Western-style institutional arrangements and methods that Australians are familiar with would be the foundations of an ‘Asian century’ (see Australia in the Clayton’s Century: The ‘Asian’ Century you have when you are not having an Asian Century);
  •  A former Australian Prime Minister was seen to have achieved a diplomatic triumph earlier this year when she reached an agreement to consult annually at head of government level in China – an agreement that seemed likely to make it possible for a future Coalition Government to reach a ‘free trade’ agreement with China. However this arrangement seemed more a reflection of the prevailing lack of understanding of how ‘Asia’ works than a ‘diplomatic coup’ (see A Diplomatic Coup in Beijing: by Who?);
  •  The implications of the rushed ‘free trade’ agreement (and less purist investment rules) that Australia’s current prime minister hopes to put in place can perhaps been glimpsed by recognising that the ‘Maritime Silk Road’ concept that China’s leaders have proposed as the basis of a ‘partnership of equals’ with ASEAN countries would probably result in tributary relationships with the Middle Kingdom like those that existed in Asia prior to Western expansion (see Xi’s Maritime Silk Road).

Given a serious attempt to boost their ‘strategic Asia literacy’, Australia’s political, business and other leaders should soon be able to see the weakness and vulnerability that lie behind China’s leaders’ brash ‘face’ (eg see Heading for a crash of a Meltdown). They might then perhaps be able to provide help to China to developing a more sustainable / less-oppressive future path than that its regime currently seems to favour – and one which would be more compatible with Australia’s values and institutions (see Suggested Strategic Response in Comments on Australia's Strategic Edge in 2030).

John Craig


'Rules' that favour state-linked businesses are not the only behind-the-border problem in economic dealings with China - email sent 13/10/13

Jessica Irvine
News Ltd

Re: Australia could be friends with both China and US, Sunday Mail, 12/10/13

Your article made a useful contribution by pointing to the geo-political and ‘behind-the-border’ issues that need to be considered in establishing international trade relationships. In particular it drew attention to proposals under the US’s Trans Pacific Partnership scheme for providing a defence against regimes (such as China’s) that deliberately make rules to disadvantage foreign businesses.

This problem arises because in countries such as China government is by ‘man’ (ie by neo-Confucian social elites whose associates control the major enterprises) rather than by a rule of law (ie universal rules that apply to both the state and the major businesses). ‘Law’ in countries such as China is not about creating a framework within which independent enterprises can make decisions with confidence because they ‘know the rules’. Rather it is a method of disciplining those who seek to take initiatives that are not in conformity with the wishes of the ruling elites’ friends and relatives. It is Chinese people themselves who are the main victims of those practices.

My interpretation of your article: This may be the Asian century but it is important not to overlook America’s influence. China is Australia’s biggest trading partners but in terms of trade plus investment, the US is more important. The post-election focus on promoting free trade is welcome change from earlier xenophobia about foreign investment. But free trade agreements are now more about symbolism and geopolitics than economics – because tariffs have largely been dismantled. Trade agreements are now more about ‘behind-the-border issues such as intellectual property rights. A free trade agreement with China would boost what is already a strong trading relationship. But PM should not neglect another trade agreement between 12 Asia Pacific nations (which do not include China) that US President made a key plank of his ‘pivot to Asia’. A former US trade official suggested that US would be keen for Australia to have a closer trade relationship with China because: (a) US does not believe that there is an inevitable problem between US and China; (b) Australia could help by being a mutual friend of both; and (c) though US suffers domestic distractions boosting trade with Asia is an important priority. Prime Minister needs to ensure that trade agreements are not Trojan horses for rule that would impact Australia’s sovereignty. The Trans Pacific Partnership deal contains rules that would allow foreign companies to sue Australia for new laws that adversely affected their business interests. Prime Minister has made a good start in difficult task of maintain good relations with both China and America.

As you are undoubtedly aware the geo-political contest between Western liberal traditions and East Asia’s authoritarian alternatives that has been developing for decades has been the reason for the US’s recently announced and still-immature ‘pivot to Asia’. That contest certainly has economic implications such as the issue your article mentioned (ie making laws to disadvantage foreign businesses which the US Trans Pacific Partnership proposals would try to prevent). However its implications are much broader – for reasons suggested in The Infantile US vs China Debate (2013) and Beyond 'The China Choice' (2012).

Moreover, even in terms of economic dealings, the geo-political and ‘behind-the-border’ risks are not limited to neo-Confucian elites making laws to advantage their friends’ businesses. Other factors that need to be considered include: (a) behind the scenes state-orchestrated negotiations amongst local enterprises that might be affected by a significant foreign business proposal in order to develop a united front; (b) the availability of subsidised finance for state-linked enterprises from state-linked banks; and (c) the potential involvement of organised crime in state-orchestrated activities (see Babes in the Asian Woods, 2009+).

Might I respectfully suggest that uncritical endorsement of the prime minister’s proposal to enter into free-trade and liberalised investment agreement with China without considering such aspects is not appropriate for serious journalists. His proposal simply reflects desperation, a failure to consider alternatives and the near-total ignorance by Australia’s senior business and political leadership about what they are really dealing with in East Asia (see 'Free' Trade with China: Not Likely under a Neo-Confucian Regime, 2013). While it might seem necessary to knuckle-under to Asian authoritarian, that perception may be quite false (see Asian Millennium or Asian Decade?, 2012). It is certainly a good idea to be ‘friends’ with Australia’s neighbours (including China), but that friendship should be based on understanding (see also Embracing Asia Requires Understanding, 2012).

John Craig

  • in March 2014 there seemed to be a view that a 'free trade' agreement could be negotiated with China

'Free' Trade with China Remains Highly Unlikely - email sent 7/3/14

Philip Wen
The Age

Re: Strongest signs yet that China is ready for free trade deal with Australia , Brisbane Times, 7/3/14

Your article suggested that China and Australia might sign a ‘free trade’ deal in 2014. However this would not imply that trade with China would be ‘free’, as major economic dealings in China appear likely to remain under tight control of those with links to China’s authoritarian governing faction (ie to the so-called ‘Communist Party’). Reasons for this were previously suggested in 'Free' Trade with China: Not Likely under a Neo-Confucian Regime (October 2013)

While much has since been made of the possibility of economic liberalization in China, this probably does not mean what it would in Australia. China’s economic development has apparently been based on a non-capitalistic system of socio-political-economy similar to that in Japan – which involved state-linked financial institutions mobilizing national savings and providing this to state-linked entities (sometimes state-owned and sometimes controlled by those with high-level ‘Communist’ Party affiliations) with little regard to profitability (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy). Those systems relied on internal imbalances (ie financial repression and domestic demand deficits) which had the potential to severely disrupt the global economy if they were not counter-balanced by tolerant trading partners (see Impacting the Global Economy). Because of these imbalances, China’s economic methods have been recognised as unsustainable – and widespread reforms were proposed by the Third plenum of the Communist Party in late 2013.

However there are reasons to doubt that the independence from the state needed for real ‘free trade’ was envisaged even for supposedly ‘privately’ owned economic functions in China. For example:

  • There were reasons to suspect that the reform agenda announced at the time of the Third Plenum might be misleading (eg an experienced China-watcher’s perception was that a Shanghai free-trade zone was not serious; and under Neo-Confucian traditions it is not the role of top officials to develop plans for implementation. Rather this would be expected to be done at lower levels in the hierarchy, implemented discretely and only become obvious to outsiders once the plan was fully implemented. The traditional role of top officials is to provide information which encourages others to take action that is likely to advantage the officials’ ethnic community. Such information need not be ‘true’ (see Why Understanding is Difficult and A Diplomatic Coup in Beijing: By Who?);
  • Massive cultural changes would be required in East Asia to create systems of political economy that involved independent profit-oriented economic activities, rather than those built on social relationships ultimately linked to authoritarian states;
  • Political ‘reform’ in China seems to have involved purging those ‘redder’ factions (as typified by the now-imprisoned Bo Xilia) who favoured a return to something like the state-owned economy of the Mao era (on the ground that all Chinese people had then been seen as equal) and reinforcing the merely ‘red’ neo-Confucian factions that favoured a more commercially-oriented intellectual-elite-dominated economic system (see Communism Versus Confucianism: The Continuing Contest in China). Both factions were authoritarian – but in different ways;
  • It has been suggested that there has been a great deal of talk about economic reform in China, but little practical action [1];
  • There seems to be more emphasis in China on maintaining a high growth rate (without which political instability could be a risk) and on rapid growth in defence spending than in dealing with the imbalances that impede longer term growth and render sustainable global economic growth unlikely (eg reliance on high rates of domestic investment and on artificially-cheap exports that generate current account deficits and high debt levels for trading partners). When constraints on the unprecedented levels of credit creation that had underpinned China’s property / infrastructure investment boom seemed likely to lead to a real economic slowdown, that reform (a necessary part of any long term liberalization agenda) was reversed. [An aside: the first G20 meeting of 2014 resulted in agreement by all participants to explore options to increase growth by 2% - including options to deal with imbalances. However if China, one of the world’s main offenders in this area, does not (probably cannot) implement such reforms then the prospects for sustainable global growth will remain weak];
  • China’s education system seems to be seeking to develop a compliant society rather than one that supports independent initiative (eg see Competing Thought Cultures, 2012); and
  • There are examples of ‘market’ economies in East Asia where economic activities are controlled by those with strong government links – such as Japan and Singapore. Japan’s economy was described by senior Japanese officials as a non-capitalist market economy – which implies that it was not driven by independent profit-oriented investment. Concerns about a similar lack of true independence from government arose in relation to a proposed Singaporean purchase of the Australian stock exchange (see Proposed ASX Takeover: Lifting the Level of Debate).

As the latter noted Australia’s ability to appreciate what was actually involved was constrained by the virtual absence of real Asia literacy (eg see also Babes in the Asian Woods). Australia’s official capability in this respect has clearly not yet significantly improved if it is believed that a real ‘free trade’ agreement could be negotiated with China.

John Craig

  • an observer argued that for Australia to trust China required real 'China knowledge' - though perhaps a move towards transparency by China about its cultural foundations would be vital to such understanding

China's Need for Trust - email sent 31/10/13

Dr Ken Shao
Murdock University

Re: Australia’s biggest ‘China threat’ is not Huawei, but itself, The Conversation, 31/10/13

Your article, which highlighted the need for better ‘China knowledge’ in Australia (eg in relation to business culture, politics and the role of a rule of law in the past), is a useful start to improving such knowledge.

However to build genuine trust in countries such as Australia, ‘China knowledge’ needs to be based on transparency by China about its cultural foundations. And this raises problems because (on the basis of attempts over 3 decades to understand these issues) it seems to me that transparency is not a feature of East Asian cultures (and that dialogue with others is not a path to transparency and that maintaining ‘face’ and the deception that is central to Art of War strategies inhibit transparency). China’s next stage of reform may indeed be ‘culturally backboned and aim to gain genuine trust’ but without transparency trust will be absent. On the other hand, with real transparency China’s own domestic systems could not work as they currently do.

China arguable has a desperate needs to build other’s trust because of the massive economic and political risks it is facing domestically (eg as indicated in Preparing for a 'Con'? and Structural Problems). However China currently has major problems in building trust (in Australia and elsewhere) for reasons like those indicated in 'Free' Trade with China: Not Likely under a Neo-Confucian Regime, 'Rules' that favour state-linked businesses are not the only behind-the-border problem in economic dealings with China and Is China Heading in the Direction of North Korea?.

Correspondingly my perception of the cultural ignorance that prevents Australia (and other Western societies) building the real ‘China knowledge’ needed to start providing the help China needs is suggested in Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century (2012). Transparency about China’s current cultural foundations is necessary to overcome that problem also – even though such transparency would start to transform those foundations.

I would be interested in your response to my speculations.

John Craig

  • proposals by some senior foreign policy advisers for developing Australia's relationships in Asia showed no sign of understanding what this would really involve or that such understanding would be a desirable starting point.

Basing Asia relations on understanding would be a useful start - email sent 25/8/12

Hamish McDonald
Sydney Morning Herald

Re: Call for new approach to Asia relations, Brisbane Times, 25/8/12

It was somewhat disconcerting to see the lack of Asia-literacy reflected in the comments by Australia’s ‘senior’ foreign policy advisers that your article recorded.

My interpretation of your article: Australia’s political leaders have been criticised by senior foreign policy advisers for clumsy relations with Asia and slavish devotion to the US. An AIIA conference at NSW parliament house heard calls for a more balanced approach. National president (John McCarthy) suggested there is no need to choose between China and US. ANZUS treaty is important and will remain, but Australia does not always have to please US. Proposals to station US marines in Australia could have been better handled. Richard Woolcott (former DFAT head) suggested that ANZUS treaty is a ‘sacred cow’, and attacked political emphasis on relations with English-speaking allies. Australia’s future will be determined by geography, not by history. Richard Smith (former defence Department head and China ambassador) said Australia needed to be more consistent. The military side is being over-emphasised in Australia’s foreign policy – because Defence carries too much weight relative to traditional foreign policy establishment. Simon Tay (Singapore’s Institute of International Affairs) said countries needed to beware of monogamous international relations. Yoshiji Nogami (Japan’s Institute of International Affairs) was one of three countries still offered extended deterrence by US – and has to live within this alliance even if they don’t like parts of it. Ruan Zongze (China Institute for International Studies) said Australia’s sign-up to US military pivot to Asia caused China concern. John McCarthy said political response to forthcoming ‘Asian century’ paper by Ken Henry’s committee would be a key test. Peter Drysdale (ANU), who co-led that inquiry, said that there would be no magic solution – as resources would have to come from a re-allocation within the Australian government.

The currently dominant societies in Asia (ie Japan and China) operate on the basis of intellectual, social, economic and political traditions that are quite different to those with which Australians are familiar, and those differences have very significant implications (eg perhaps as suggested in Beyond 'The China Choice'). Yet the ‘experts’ quoted did not reveal any understanding of those differences, or of thinking that it might be desirable to do so in re-assessing Australia’s relations with Asia.

Possible implications of doing so in relation to issues raised at the AIIA conference that your article reported on include:

  • It would surely be useful to have started with an informed assessment of the prospects of an ‘Asian Century’, as this outcome seems anything but certain (eg see Asian Millennium or Asian Decade?);
  • There is no doubt that the military side of Australia’s defence is being over-emphasised, as in an ‘Asian’ context a much broader approach to defence is vital (see Comments on Australia's Strategic Edge in 2030, 2011). The latter also suggests that what happens outside government is important, so that re-allocation of emphasis internally (eg from Defence to Foreign Affairs) would in itself achieve little;
  • Rather than focusing on bilateral relationships (eg between Australia and China / US), it would seem highly desirable for Australia to promote better relationships within the entire global community (again see Beyond 'The China Choice'). A global breakthrough is vital if the whole world is not to be a political and economic mess, and would have beneficial spin-offs in the Asia Pacific.

John Craig

  • an analyst suggested that Asia might have adopted a better approach to capitalism - without apparently recognising that capitalism (ie resource allocation on the basis of independent profit-focused investment) is not a significant features of East Asian systems of socio-political-economy.

Does Asia have Capitalism? - email sent 3/1/13

Phillip Lawrence
c/- Marie Robertson
Department of Government and International Relations
University of Sydney

Re: Does Asia have capitalism right?, The Conversation, 3/1/13

I should like to provide some feedback about various issues raised in your recent article on the basis of several decades study of the hard-to-understand intellectual foundations of East Asia’s economic ‘miracles’.

Your article validly points to the differences between business models that have been developed in East Asia, and those in Western societies (eg you noted that “Asian economic enterprises are in many cases owned by multi-generation family groups or owned wholly or partly by government”.)

However what is significant about such business models is not only that they are ‘communitarian’ but also that they are not ‘capitalistic’ (in the sense that ‘capitalism’ involves independent investment decisions with a view to profitability). Rather the East Asian business models are arguably mercantilist (ie oriented towards building the economic power of ethnic communities, and of their social elites in particular). This point is developed further in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009).

Moreover those non-capitalistic business models require significant macroeconomic distortions if domestic financial crises are to be avoided (ie because profitability is not a significant goal they require domestic demand deficits / ‘savings gluts’ to avoid the need to borrow in international markets, and those distortions must lead to global recession unless their trading partners remain willing and able to incur significant current account deficits and increasing debt levels). This has had severe consequences both:

I would be interested in your response to my speculations.

John Craig

  • an analyst suggested that China had a system of 'state-capitalism' - whereas it seems likely that China's system (like Japan's) is 'non-capitalistic'

Your View of 'The real reason the Chinese want Aussie real estate' Needs to be Published - email sent 5/9/14

Editor
Daily Reckoning

I noted that the second item listed at the top of yesterday’s newsletter (ie ‘The real reason the Chinese want Aussie real estate’) was not actually circulated.

Perhaps it was incompatible with Bill Bonner’s version of China’s supposed ‘state capitalism’ in Why American capitalism is failing’.

In the mid 1990s, Eisuke Sakakibara (‘Mr Yen’) wrote about Japan as having a ‘non-capitalist’ market economy (see Beyond Capitalism: The Japanese Model of Market Economics). This was certainly true in the sense that capitalism involves the creation of industrial capacity through independent profit-driven initiative. Japan’s system involved the mobilization of national savings through state-linked banks from which it was directed to nationalistic state-linked enterprises with a view to maximizing market share with limited regard to profitability (see Evidence, The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998 and Mikuni’s Why Japan Can’t Deregulate its Financial System, 2000).

This anything-but-capitalistic model derives from ways of thinking that are radically different to Western thought in societies, such as Japan, that have an ancient Chinese cultural heritage. It was only sustainable so long as current account surpluses protected Japan’s state-linked banks from any need to borrow in international profit-focused financial markets (as borrowing would have led to external scrutiny of their balance sheets). It also depended on the existence of a strong sense of ethnic nationalism to motivate people to work hard for limited personal benefit. The result was:

  •  intense concern from the US (which had taken the role of the world’s ‘consumer of last resort’ in order to promote the spread of democratic capitalism) about large ongoing trade deficits with Japan in the 1980s. These were seen to be the result of exchange-rate rigging - but actually resulted from ‘financial repression’ (ie from state-direction of national savings into production and determined efforts to suppress consumption by constraining credit to households);
  •  a structurally-unsustainable international financial system (see Structural Incompatibility Puts Global Growth at Risk, 2003) that ultimately depended on easy monetary policies that eventually gave rise to severe problems (see Impacting the Global Economy);
  •  the bubble that Japan experienced in the 1980s (as unconstrained credit creation without capitalistic concern for profitability led to massive over-investment both domestically and internationally); and then to
  •  the financial crisis that Japan experienced in around 1990 and from which it has never properly recovered (eg see Japan's Predicament and A Generally Unrecognised ‘Financial War?) . The latter referred to Japan’s efforts over several decades to spread the methods that had been the basis of its economic ‘miracles’ to other countries in East Asia with a Chinese cultural heritage.

The ‘socialism with Chinese characteristics’ that China adopted in the late 1970s involves the same basic non-capitalistic model (see Evidence) – though behind a different face. The rationale for both these non-capitalist financial systems was probably something like that outlined in Outline of 'Rise of the Ferro Dollar' (ie that over-investment in one area would not prove to be a problem providing bureaucratically-orchestrated linkages between that and other sectors were well established). In Japan the bureaucratic-coordination role in organising an economic ‘miracle’ was taken by the actual bureaucracy (ie by the Ministry of Finance and the Ministry of International Trade and Industry). This seems likely to have been a continuation by economic means of Japan’s unsuccessful-militarist efforts in the 1930s-40s to create an Asia Co-Prosperity Sphere – and in pursuing this goal after WWII it seems very likely that Japan’s bureaucracy had some sort of mandate from Emperor Hirohito like that under which Asia was ruled by Confucian bureaucracies for centuries prior to Western expansion. Japan’s prime minister seems to have given the game away recently (eg by endorsing Japan’s 1930s war criminals are having laid the foundation of modern Japan).

However things were a little different in China where, from the late 1970s, the so-called ‘Communist’ Party played the role of the neo-Confucian bureaucracy – a fact that has now become much more obvious (see The Resurgence of Ancient Authoritarianism in China). However for decades those with key ‘Communist’ Party connections took the opportunity their access to state-linked banks and businesses provided to corruptly enrich themselves and their families – thereby creating: (a) the world’s most extreme imbalance of wealth; (b) major threats of civil unrest; and (c) a recent crackdown on corruption to protect the regime against challenges to the ruling elite (eg that which was threatened by the Bo Xilia affair). The crackdown has seen a large scale export of corrupt wealth from China to places such as Australia. The obvious benefits of this to Australia are outlined in Overcoming Australia's Corruption Shortage.

However there are several possible ways of viewing the benefits from a Chinese viewpoint. Firstly this could be just capital flight – by corrupt elements who are being targeted by a reformist administration. If so this will presumably weaken China’s economy because those corrupt elements were presumably key insiders with knowledge of what is needed to keep China’s economy working. Secondly this could be the result of regime insiders taking precautions against the very real risk (see Heading for a Crash or a Meltdown?) that the ‘wheels could come off’ China’s autocratic non-capitalistic system. Finally this could be a part of a process of seeking to gain Chinese influence (with ethnic-nationalistic rather than ‘capitalistic’ / profit-oriented goals) within Australia political and economic systems. In relation to this possibility it is noted that: (a) the role that China’s Diaspora has had in controlling economic activity and political corruption for the benefit of that ethic community and the role that Triads have had in this have caused considerable friction across SE Asia (see Stirling Seagrave, The Lords of the Rim); (b) China appears to be seeking to internationalise a trade / tribute regime like that by which Asia was administered from China prior to European expansion (see Creating a New International 'Confucian' Financial and Political Order); (c) elimination of the ‘bamboo ceiling’ (ie constraints on senior roles for those with Chinese connections) is being vigorously promoted (see Removing the 'Bamboo Ceiling' Requires Transparency); and (d) in the 1980s the present writer directly confronted ultranationalist Japanese criminal groups with top level and very powerful government connections who were clearly: (a) still trying to win WWII; and (b) promoting the development of what constituted a virtual Japanese colony in SE Queensland (see The Dark Side of Japan in Australia).

Note added later: In later September 2014 it was suggested that "Almost half of China's wealthy are considering relocating to a developed market within the next five years to find better education and job opportunities for their children, according to a report by Barclays." [1]

In November 2014 it was suggested that anything up to $4tr (almost half China's annual GDP) may have been corruptly shifted off-shore by Chinese officials since 2000.

In the 1930’s the reason that Japan wanted Aussie real estate was that it held a lot of strategically significant mineral and energy resources. I will be very interested to read the Daily Reckoning’s conclusions about why Chinese want Aussie real estate. For my money those reasons are likely to reflect either desperation or ethnic nationalism. ‘Capitalism’ (ie an individual desire for profit) is unlikely to be a factor.

A great deal of caution is needed in seeking information in China about what is going on – as information is conventionally provided in East Asia to influence others decisions in ways that are likely to be favourable. Enabling outsiders to understand, is not part of the process (see Why Understanding is Difficult). The East is not seen to be ‘mysterious’ for nothing.

John Craig

  • another observer contended that China did not have a 'state capitalist' system because China's economic miracle had been associated with unshackling it's innate entrepreneurship - a contention that seemed simplistic because of the likely state-linkages, reliance on funding from state-linked banks and heavily nationalistic (rather than purely capitalistic) goals of 'private' businesses

Beyond State Capitalism in China - email sent 26/9/14

Peter Cai,
China Spectator

Re: There's more to China's rise than state capitalism, China Spectator, 26/9/14

Your article suggested that it is wrong to believe that China’s economic rise has simply been associated with state capitalism (ie the widely-held view that the state sector dominates China’s economy). That claim, you further suggested, gives too much credit to the ruling Communist Party – as China’s economic miracle has mainly been associated with unshackling China’s innate entrepreneurial energy.

However this suggestion is overly simplistic because ‘private’ has had a different meaning in China. Though many economically-strong Chinese businesses (like their Japanese counterparts) are not state owned, they have to date apparently mainly been state-linked (in the sense of reliance on social connections to the governing bureaucratic elites and on financing by state-linked banks) and presumed to pursue nationalistic rather than ‘capitalistic’ goals (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009; In East Asia Deals Always Involve Politics, 2012), and Does Asia have Capitalism?, 2013).

Recent changes to China’s government made the (so-called) Communist Party’s post-Mao transformation to become the head of a neo-Confucian bureaucratic state more obvious (The Resurgence of Ancient Authoritarianism in China, 2014). However at the same time it seemed increasingly likely that China would experience something like the problems that Japan did when its neo-Confucian methods for arranging economic ‘miracles’ ran out of steam (see China: Heading for a Crash or a Meltdown, 2010+).

China could probably achieve a great deal if it genuinely moved away from (both direct and indirect) state capitalism. However this is a massive challenge - for reasons first suggested in The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998. It is also one that China would probably be well advised to seek outside help in achieving.

John Craig

  • various observers suggested that the listing of the Chinese e-commerce company Alibaba on the New York stock exchange illustrated the 'capitalistic' character of such enterprises. However what did not seem to receive attention was the fact that its governance arrangements were set up to keep insiders in control [1]. Alibaba seems to be be an example of China's elite-orchestrated, rather than a 'free market', economic model;

  • a conference in Australia concerning the Chinese economy highlighted the fact that there are aspects of it that commentators do not usually perceive.

China's economy: What commentators seldom see - email sent 17/7/12

James Laurensen,
University of Queensland

Re: Four critical truths about the Chinese economy, Business Spectator, 17/7/12

Your article on the recent conference of the Chinese Economics Society of Australia was useful in highlighting the fact that there are aspects of the Chinese economy that most commentators don’t perceive (eg the effect of culture). Some further suggestions along that line are in China can't be properly understood in terms of Western economics (2010), Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics (2011) and China: Sustaining Growth by Neglecting Profitability? (2012).

Your article pointed to the importance in China’s economy of industrial clusters. However I would suggest that these are not the result of a ‘decision’ by a local official, but rather of the Confucian-style catalytic role of such an official in enabling a regional community to reach consensus about this.

Some suggestions about how Australia’s economic performance might be enhanced by developing industrial clusters in ways that are compatible with Australia’s egalitarian, democratic capitalistic practices are suggested in Lifting Productivity: Considering the Bigger Picture (2010).

I would be interested in your response to my speculations.

John Craig

  • an explanation of Australia's economic and geopolitical environment by a senior member of the federal Opposition needed to include reference to cultural complexities in order to present a solid basis for developing policy

Complexities in Australia's Economic and Geopolitical Environment - email sent 22/7/12

Malcolm Turnbull MHR,
Member for Wentworth

Re: China tips the balance, The Australian, 21/7/12

Your article is very useful in raising public awareness of some of the economic and geopolitical challenges that Australia faces. However it would be strengthened by considering the cultural factors that: (a) have played a role in the ‘asymmetric’ character of China’s economy development; and (b) complicate the development of relationships.

My interpretation of your article: Australia’s complacency about China is being shaken (ie assuming that there would be no tension in having China as Australia’s major market and the US as the most important ally; and that the China boom would run forever). Australia’s iron ore and coal exports are sustained by China’s rapid urbanisation and infrastructure development (mostly undertaken by government). China’s growth has been heavily dependent on investment, while consumption (though increasing) has been a falling percentage of GDP. This is a result of asymmetric way China has liberalised its economy. Product markets have been freed up (ie production is determined by demand). However factor markets (ie inputs to production) have remained distorted – with distortions: (a) aiding government owned companies at the expense of households and private sector; and (b) promoting investment rather than consumption. Households are big savers (as there is little social welfare), however savers receive poor returns. Cheap deposits have enabled state-owned banks to lend at uncommercially low rates to mostly-government-owned businesses that would not pass a rigorous cost-benefit test. As well as distorting finance, labour costs have been suppressed, land has been made available at uncommercially-low prices and energy has been subsidised (particularly for industry). These distortions have been bad for Chinese consumer and for the global economy (because of resulting trade imbalance) – though good for Australia. China has been aware of these distortions (eg Premier Wen Jaiabao in 2006 described economy as ‘unbalanced, unstable and unsustainable’ because of over-investment, under-consumption and inefficient resource use). But little has been done, because reducing financial repression to put more money into households the investment rate will fall, and consumption make take time to rise. Thus rebalancing will slow growth and risk political instability. But despite those risks this change seems to be happening – with GDP growth down, industrial growth down, electricity consumption flat and inflation down. Michael Pettis argues that inflation is down because of financial repression. If inflation falls faster than nominal interest rates, deflation causes real deposit rates to rise – which advantages consumers and disadvantages borrowers (mostly government-owned companies). Pettis argues that this will cause lower growth. It could be the beginning of China’s rebalancing. Rebalancing will hurt economies (eg Australia and Brazil) that have relied on China’s over-investment – though in the long term consumption demand will be beneficial. David Uren’s new book (The Kingdom and the Quarry) concerns Australia’s relationship with China in terms of commodity exports, as well as submarines, spies, reefs and aircraft carriers. He agrees with Hugh White that US President’s speech in 2011 revealed a hardening US attitude to China, and dismissed China’s achievement in raising 500m people out of poverty in 2 decades by suggesting that poverty without freedom is still poverty – which challenges legitimacy of Communist Party rule in China. Since Nixon went to China, Australia’s US alliance has not (until now) been seen as against China. Julia Gillard was not alone in changing this, as Kevin Rudd rejected Office of Naval Assessments and Defence Intelligence Organisation advice that China’s naval build-up does not threaten Australia. Rudd’s provocative speech about human rights in Tibet compounded this problem. It is hard to see why Rudd and Gillard have taken an anti-China stance as Obama’s position simply reflects coming presidential election – where Republicans accuse Democrats of being soft on China. There are close military operational connections between Australia and China. This is ahead of the Americans – whose relationship with the PLA is complicated by great-power rivalry and Taiwan issue. It is in Australia’s interest to view China’s rise as an opportunity rather than a threat – and to use Australia’s independent voice in both capitals constructively. Being seen as an unquestioning subsidiary of US is not beneficial.

The asymmetry of China’s economic development that your article describes is quite similar to that in Japan (see Mikuni’s Why Japan can't deregulate its financial system, 2000) and this arguably arises in both cases because balanced development faces very serious cultural obstacles. An emphasis on production and suppression of consumption (which causes serious imbalances in the global economy generally as your article noted) have been needed, not because of financial repression of households as only product markets have been freed, but rather because market-oriented economic and business activities that are funded by state-controlled banks are coordinated through neo-Confucian social relationships rather than on the basis of calculations of profitability by independent enterprises.

A Judeo-Christian and classical Greek heritage made the West into the ‘realm of the rational / responsible individual’ through the creation of institutional arrangements (via a rule of law, profit focused enterprise, and democracy) which enabled individual rationality to be reasonably effective in problem solving (see Cultural Foundations of Western Strength).

However East Asian societies with an ancient Chinese cultural heritage do not rely on these arrangements (see East Asia in Competing Civilizations). The latter referred to different approaches to using information, and a rejection of the West’s expectation that abstract understanding is the appropriate basis for problem solving (eg via rationality, law, calculations of profitability). Economic coordination is based on social relationships, the obligation of subordinates to their social superiors and intuitive consensus (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy). Profitability is relatively unimportant in resource allocation (see Profitability). Thus it is vital to avoid the need to borrow in international profit-focused markets through financial institutions whose investments often do ‘not pass a rigorous cost-benefit analysis’. A balanced economy (in China or Japan) would face risks of financial crises like those experienced in parts of ‘Asia’ in 1997 where cronyist financial systems were not protected by asymmetric economic development (and thus by current account surpluses and an ability to export, rather than a need to import, capital).

One observer recently suggested that China’s lack of concern for profitability in the use of savings could be an advantage – because all resources (not just capital) can then be used effectively. However this view seems a bit simplistic (see China: Sustaining Growth by Neglecting Profitability?).

Moreover, as the latter suggested, it is most unlikely that China will want, or be able, to rebalance its economy towards increased household consumption. This would, for example, create the risk of financial crisis unless financial systems were transformed in ways that seem culturally implausible (see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998). It would also transfer economic power from neo-Confucian elites to their subordinates – and this is no more likely that would be a similar transfer in the political domain. China’s ‘Communist’ Party is no longer appropriately named (see Communism Versus Confucianism: The Continuing Contest in China).

Your suggestion that Australia faces difficulties because of an apparent hardening of US attitudes towards China is very relevant. However the situation cannot be adequately understood without considering the practical consequences of cultural differences for reasons outlined in Comments on Australia's Strategic Edge in 2030. While the defence establishments in Australia and the US may have different perceptions of the implications of China’s military build-up, security cannot now be evaluated meaningfully mainly in terms of military factors any more than economic policy can now be determined simply in terms of conventional economic considerations (eg see Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics). Despite this, quite naïve assumptions seem to be being made in the context of the federal government’s current Asian Century white paper process about what is needed in developing relationships in ‘Asia’ (eg An Asia-literate Approach to 'Asia').

Thus while the thrust of your article is to be applauded, the issues involved are likely to be far more complex than it indicated.

I would be interested in your response to my speculations.

John Craig

  • an Australian educator  and writer strongly endorsed China's education system as a model for the West without solid understanding of what was involved

Does China's Education System Provide a Model for the West?

Christopher Bantick (in 'Chinese school system offers the West a lesson in educational achievement', Australian, 3/11/12) suggested that:

  • English was taught as a subject, not as an experience - leading to deeper understanding than Australian students gain;
  • teaching is first class, and preparation is extensive;
  • superior outcomes are the result of quality teaching and a culture of success related to hard work.

What appeared to be not understood is that:

  • information is used in radically different ways in East Asia to the way it has been used in Western societies (eg see Epistemology: The Core Issue and Competing Thought Cultures);
  • in East Asia the purpose of providing information is not to boost understanding, but (like propaganda) seeks primarily to generate a desired response (see Why Understanding is Difficult). For example, a demonstration of pin-sharp excellence in teaching the use of apostrophes (to which the writer of the above article was treated) might impress an academic expert in English, but is unlikely to reflect system-wide competencies across China's education system because apostrophes are of limited real-world relevance;
  • the traditional purpose of education is precisely the reverse of that ascribed to it - ie it is intended to produce a behavioural conditioning in students rather than understanding. This induces a manipulable group-think, which can be perhaps likened to a mild version of the group-mind ascribed to the Borg in Star Trek;
  • grass roots Western observers who have experience of their children's involvement in China's education system are not necessarily impressed (eg see comments). 

  • in 2014 claims that East Asian education systems offered useful models for Australia were criticized - a criticism that could be strengthened further by taking account of what is different about ways of thinking in the East Asian context;

Can Australia Learn from East Asian Education Systems? - email sent 11/12/14

Professor Ian Morgan
Australian National University

Re: Claims of East Asia’s ‘chalk and talk’ teaching success are wrong, and short-sighted too, The Conversation, 11/12/14

I should like to try to add value to your observations about the limited relevance of perceived East Asian educational practices for Australia. This is based on an opportunity that I had some years ago to reverse-engineer the apparent intellectual basis of East Asian economic ‘miracles’. There seem to be significant differences in ways of thinking that are relevant to education, and to many other aspects of societies with an ancient Chinese cultural heritage. There is undoubtedly scope to improve Australia’s education system. However, as your article implied, East Asian practices can’t reliably be copied as the basis of reform in Australia.

My Interpretation of your article: There have been calls for Australia to learn from East Asian countries’ education systems. For example Kevin Donnelly advocated study of 'chalk and talk' methods like those reportedly used in Shanghai (ie where a teacher directs instruction from in front of a class) so as to revive such practices in Australian schools. This assumes that the success of East Asian countries are due to their education systems. However education systems are diverse - and don't just involve 'chalk and talk'. East Asian students' success may be due to commitment to educational success through hard work. Children of East Asian ethnicity do well in Australian schools. And in the UK such students outperform those of Australian-born parents in mathematics. Cultural background seems to matter more than the educational system. There are reasons to suggest that Australia should not seek to emulate that East Asian cultural commitment to education - even if it was feasible. While Australia looks to Asia for lessons, most East Asian countries are dissatisfied with their educational outcomes - because they don't produce flexible and creative thinkers. They look to western education systems for leadership. And there are adverse health and attitudinal consequences of high educational pressures (eg widespread myopia). Western education systems combine reasonable educational outcomes with more rounded / balanced student development.

There are difficult-to-understand cultural issues underpinning East Asian approaches to education - just as those same cultural features underpin the regions' past economic 'miracles' and current potential financial and political crises.

A primary difference between countries with an ancient Chinese cultural heritage and Western societies is that the former do not rely on abstract concepts (and thus on individual ‘rationality’) as a basis for problem solving to anything like the same extent as in societies with a classical Greek heritage (see Epistemology in East Asia: The Core Issue and Cultural Foundations of Western Progress: The Realm of the Rational / Responsible Individual, 2001+).

'Education' in East Asia appears to involve inculcating behaviours (ie enabling students to be able to do things) rather than promoting understanding. And this parallels the traditional approach to government by Confucian bureaucracies (see A Simple View of Confucianism). The role of the bureaucracies (as agents of emperors in the past) was to inculcate behaviours in whole social and economic systems - rather than to (say) create a rule of law that would allow individuals to understand the limits to what they were allowed to do. And those who dominated in Confucian society were those who had been most successful in the education system - because ‘educating’ subordinates (ie inculcating behaviours in whole social and economic systems) was the key to exerting influence in the post-educational world. Asia was long viewed as the ‘mysterious East’ – and this undoubtedly arose from the fact that information was not provided to outsiders to enable them to ‘understand’ but rather to induce them to do things that were believed to be likely to advantage an ethnic community (see Why Understanding is Difficult).

East Asian economic 'miracles' have apparently been based on the adoption of a variation of Confucian methods (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009). And this is likely to be the reason that success in fairly rigid 'education' systems is still considered as important as it always has been to a child's prospects in life (and thus to a child’s prospects of supporting their parents as they age).

'Education' systems (and systems of government administration) that emphasize inculcating socially / communally desired behaviours rather than promoting individual understanding have advantages. However there also have disadvantages. Some were noted in your article (eg related to creativity). However an even more significant difficulty arises from an epistemology that does not emphasize abstract understanding (and thus does not facilitate ‘rational’ analysis). 'Profitability' in investment is an abstract concept and East Asian cultures do not make it easy to deal with this (see The Cultural Revolution Needed in East Asia to Adapt to Western Financial Systems, 1998). The inability of major East Asian economies to deal with 'profitability' (and thus to have banks and businesses with sound balance sheets despite their success in gaining market share) has been the source of major problems for the international financial system (see Structural Incompatibility Puts Global Growth at Risk, 2003) - and now seems likely to generate financial, economic and perhaps political crises (see Will China's Presidency in 2016 End the G20's Chronic Failure?, 2014).

Your article suggested (realistically) that it would take a very long time to generate cultural features in Australia that produced East Asian levels of commitment to education.

It appears that similar conclusions have been reached in China (ie that it would take an enormous amount of time, if it was even possible, to adapt to Western epistemologies and financial practices). It has been fairly reliably suggested that China’s education system is being changed to emphasize the rote learning of the Chinese classics (see Competing Thought Cultures, 2012) . The major 'message' of those classics is the limited reliability of understanding. If this is actually being instituted as the foundation of China’s future education system, it implies a desire to create a population that is conditioned to conform to guidance by their superiors rather than taking initiatives on the basis of individual understanding. Doing so would be compatible with: (a) the system of government in China that has been the product of recent reforms (see The Resurgence of Ancient Authoritarianism in China, 2014); and (b) attempts to create an international order (ie an ‘Asian’ world within the world) like that by which Asia was administered by China prior to Western expansion (see Creating a New International 'Confucian' Financial and Political Order, 2009+).

Some earlier thoughts on the relevance of East Asian education in an Australian context were in Does China's Education System Provide a Model for the West? (2012). The latter included reference to the reaction of Australian-born parents to their children’s educational experiences in China.

I am not in a position to offer suggestions about whether or how Australia’s school system should be reformed. However perceived East Asian practices are unlikely to provide easily-useable precedents for doing so.

John Craig

  • In 2015 it was noted that China’s education system seems to be intended to stifle, rather than encourage, the initiative required for (say) entrepreneurship - a fact that could be more easily understood by taking account of what is different about thinking in East Asia.

Chinese Education - email sent 23/4/15

Kerry Brown
Director, China Research Centre

University of Sydney

Re: Pleasing the Emperor, Inside Story, 8/4/15

Your article highlighted the fact that China’s education system seems to be intended to stifle, rather than encourage, the initiative required for (say) entrepreneurship.

Some suggestions that doing so is seen from a Chinese viewpoint to be necessary and desirable (as well as my comments on that view) are outlined in Competing Thought Cultures (2012). Some further observations about differences in Western and East Asian assumptions about the value of ‘ideas’ and individual ‘initiative’ are outlined in a Background Note to comments on the pre-modern social systems that various factions now seem to be seeking to re-establish.

Failure to consider those differences makes it very difficult to understand East Asia (see Why Understanding is Difficult, 2011 and Babes in the Asian Woods, 2009+). This difficulty is significant as it seems that China is moving in the direction of encouraging individual compliance within a social hierarchy (rather than individual initiative) not only by changes to its education system that were referenced in Competing Thought Cultures, but also by changes in in the way it is governed internally (eg see The Resurgence of Ancient Authoritarianism in China, 2014) and by promoting complementary changes in the whole international system (see Creating a New International 'Confucian' Financial and Political Order, 2009+).

The really intriguing question is who exactly is the ‘emperor’ that China’s people are now being expected to please – because (as noted in Resurgence of Ancient Authoritarianism in China) the traditional system that China’s rulers are apparently attempting to re-create does require that there be an ‘emperor’ somewhere.

I would be interested in your response to my speculations

John Craig

  • In 2016, the UK was widely adopting China's rote learning practices for maths' education - and there was debate about whether this would be beneficial.

Don't Confuse Rote Learning with Education - email sent 26/7/16

Abby Jackson,
Business Insider

Re: Top-performing Asian countries use the 'mastery approach' to teach maths in schools -- and now it's spreading, Business Insider, 25/7/16

I should like to suggest that there would be value in another article that addresses the cultural foundations and implications of East Asian rote learning. In fact the implications of using that approach to ‘learning’ beyond the earliest years of primary school needed to be considered in depth before Western schools started copying Chinese practices.

In an East Asian context, ‘learning’ involves inculcating desired behaviours – not ‘education’ (ie enabling understanding). And that approach to ‘learning’ extends into social, economic and political domains – where it has the intended effect of promoting conformity with group consensus rather than understanding as a basis for independent decision making and initiative by individuals or organisations. And the real-world application of that approach to ‘learning’ is arguably responsible not only for ‘real economy miracles’ in East Asia (especially in Japan and China) but also for many of the world’s current financial, economic and political problems. It could also soon lead China to a crisis similar to that Japan experienced in the 1980s.

My Interpretation of your article: The predominantly Asia approach to teaching maths in schools (the ‘mastery’ approach) is spreading because countries that use it perform well on international tests. 50% of UK primary schools will use that method – where (as in the US) a ‘minset approach’ had been being used. The ‘mastery approach’ is mainly used in Singapore and China. Alexei Vernitski (University of Essex) saw it as a rigid linear progress of learning a specific concept before moving on to more complex ideas. Students are not broken into separate groups on the basis of their perceived intellectual abilities – but all do the same thing before all advancing to the next concept. The ‘mindset’ approach by contrasts teaches students to have a more intuitive approach to understanding maths concepts – and starts with a broader concept before breaking it down into the specific steps needed for solving. In 2015 the UK Department of Education flew 30 teachers from Shanghai to teach the ‘mastery’ approach. The Guardian described the process. It involved a lot of chanting and recitation which seemed formulaic to English ears – but Ben McMullen (Fox School) saw it as a way of embedding understanding. A 2015 study (by UCL Institute of Education, Cambridge University) found that ‘mastery’ approach improved the speed at which students learned maths skills. Other UK education experts have endorsed the ‘mastery’ approach (eg Charlie Stripp, National Centre for Excellence in Teaching Mathematics). However Ruth Merttens (University of St Mark and John) suggests that factors other than the ‘mastery’ method (eg the time devoted to teacher education) may account for better test results. Others suggest that success in standardised test results do not mean that Chinese students are more successful than those in other countries. Yong Zhao arues that there are critical flaws in China’s education system. Excellent test results can result from rote memorisation and hard work – while China does not produce citizens with diverse, creative and innovative talent. China’s education system merely transmits a narrow amount of content and prescribed skills that students must master. None-the-less with a need to improve educational performance in the US and UK, there is a need to consider whether the ‘mastery’ approach would be of benefit.

Your article highlighted to need to consider whether the ‘mastery’ approach to maths education would be of benefit. What could also usefully be highlighted in a future article is very broad context in which this needs to be considered.

East Asian societies with an ancient Chinese cultural heritage have not had the classical Greek heritage that has been the basis of Western societies’ approach to knowledge (ie the view that abstract concepts, as models of reality, can be useful for problem solving through reason and analysis). And they also have not had the Judeo-Christian heritage that has been the basis the individual ethical responsibility that permitted the creation of liberal social economic and political institutions in which the limitations of rationality and analysis that apply in very complex situations can be minimized. These points are developed further in Cultural Foundations of Western Progress: The Realm of the Rational / Responsible Individual (2001) and East Asia: The Realm of the Autocratic and Intuitive Ethnic Hierarchy? ( 2001).

In East Asian contexts abstract concepts are not traditionally seen as a reliable basis for rational / analytical decision making (see Epistemology: The Core Issue). And East Asian ‘education’ involves the inculcation of desired student behaviours rather than the absorption of ideas as the basis for abstract understanding and independent decision making (see here). Your article quoted Yong Zhao’s critical observations about Chinese education, and these seemed very realistic.

Moreover the traditional basis for government in East Asia was Confucianism. This involved bureaucratic social elites exerting control on behalf of emperors through a ‘teaching’ process like that used in schools (ie desired behaviours were inculcated in subordinates through hierarchical social networks and ‘law’ was used to punish non-compliance with the communal consensus rather that to create a framework for independent decisions). After WWII variations of those real-world ‘learning’ methods were used to orchestrate economic ‘miracles’ first by a bureaucratic elite in Japan and later by other social elites in countries such as Singapore and China (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009). As your article noted in relation to education in mathematics, rote learning can achieve certain results very quickly. And one Asia expert has argued the superiority of an emphasis on rote learning quite generally (see Competing Thought Cultures, 2012).

However a lack of emphasis on abstract understanding has significant side effects. For example, in an economic context the limited reliance on the (abstract) notion that drives investment in a Western context (ie return on capital) has been globally disruptive because of the macroeconomic distortions (ie the financial repression and savings gluts) that were thus needed to avoid financial crises (see Structural Incompatibility Puts Global Growth at Risk, 2003 and Impacting the Global Economy, 2009). Also there is a need for a more-or-less authoritarian state and a social hierarchy through which the society can ‘learn’. And in China this has apparently become a source of political tension as many Chinese fondly remember the social-equality aspirations of the Communist era (see Communism Versus Confucianism: The Continuing Contest in China, 2011) .

China seems at present to be heading for very serious difficulties largely as a consequence of the methods that have been used to exert social, economic and political power since the late 1970s (see China's Problem is Neo-Confucianism not Hypothetical 'State Capitalism'). And those methods are a corollary of China’s approach to ‘teaching’, because power in East Asia has traditionally been exerted mainly by influencing what subordinates (students?) ‘learn’ to do through hierarchical social networks.

However, even though China seems to be headed for a domestic crisis as a consequence of its use of those methods:

Anyone who receives ‘suggestions’ from East Asian sources would be well advised to consider both: (a) how power is traditionally exerted in East Asia (see observations about this in Babes in the Asian Woods, 2009+); and (b) the long-term implications of whatever is ‘suggested’. Educators in the UK, for example, might consider this in relation to whether it is wise to enable China to change the UK’s education system – as the intent and effect of China’s traditional approach to ‘learning’ in is to condition subordinates to comply with what they are ‘taught’ by social elites without trying to understand. As Yong Zhao reportedly argues, this does not produce citizens with diverse, creative and innovative talent – so the effect on the UK’s future economic performance could potentially be very serious if China does not actually succeed in creating a new international Confucian order to displace liberal Western-style international institutions.

John Craig

Decision makers or followers? - email response from Professor Ruth Merttens (University of St Mark and John)  - 28/7/16

‘In an East Asian context, ‘learning’ involves inculcating desired behaviours – not ‘education’ (ie enabling understanding). And that approach to ‘learning’ extends into social, economic and political domains – where it has the intended effect of promoting conformity with group consensus rather than understanding as a basis for independent decision making and initiative by individuals or organisations.’  - John Craig, email to Abby Jackson

The ‘Shanghai Maths Policy’ espoused by the DfE and currently being implemented by Charlie Stripp and his colleagues at NCETM has, as both Charlie and the article in ‘Business Insider’ suggest, implications which go far beyond a debate about ‘rote learning’. They are of genuine national importance. These include fears about the future competitiveness of Britain in a global economy as well as concerns about the erosion of democracy.

Charlie is correct to argue, as he often does, that Shanghai primary mathematics does not consist purely of rote learning and drill. Indeed, many of the pedagogical imperatives that the minister wishes teachers in England to emulate are not contentious, and some were already on the agenda. Teachers in England have espoused whole class teaching since the Numeracy Strategy in 1996, and we are all agreed that limiting the curriculum for certain sets of children should not be a viable option. If the debate is not so much between ‘teaching for understanding’ versus ‘rote-learning’, what then is the real argument? It concerns precisely what ‘teaching for understanding’ means in the context of primary maths education.

No country, and certainly no business community in that country, can afford to ignore pedagogy. Pedagogy is key to education, and education is inextricably political. It concerns what sort of citizens we want to produce, and hence what sort of country we want to live in. Thus the title of this article: Decision makers or decision followers? Putting it another way, creativity or conformity, critique or compliance?

This is a matter of economic survival. We do not know what maths or even what numeracy, our children currently aged 5 will need when they are 30 (although it is unlikely to be long-division!). But we do know that they will need to be flexible thinkers; to be able to make decisions about which bits of mathematics – or numeracy – to use in wholly new situations, and how to adapt their existing knowledge and strategies to suit.

Shanghai maths does ‘teach for understanding’ in a certain way. But to do so, it constrains the decisions which children have to make. English maths education, currently, maximises those decisions – it treats children as decision makers from the word go and requires that they make choices. To elucidate this, we can draw an example from the primary maths curriculum:

We want to teach children to subtract. By the time they are 11 years old, we need them to be able to provide quick and correct answers to calculations such as:

2003 – 875; change from £100 when spending £64.25; 45,376 – 2,998; and 13.2 – 6.78

It is clear that most of us (and 100% of secondary school maths teachers) would prefer that children did not necessarily require paper and pencil for any of these and that they use the most efficient – i.e. fastest and error-proof – strategy for each one. Thus we would expect a child who got the age-related expectations in this year’s test for 11 year olds to do the first and second by ‘shopkeepers’ addition’; counting up 125 plus 1003 to get the answer of 128, and 75p plus £35 to get £35.75. The third is most helpfully solved by adjustment, i.e. taking 3000 off 45,376 and adjusting by adding 2 to get 42,378. The final calculation may be done using a conventional column subtraction, although this will likely require paper and pencil, or it may be solved by mental addition: 6.78 + 0.22 to get to 7, then + 6.2, making the answer 6.42.

The point here is that, up until the imposition of Shanghai maths, those of us charged with helping primary teachers to teach maths would be encouraging the development of decision-making in mathematics. Children need to look at the calculation and think, “What is the best way of doing this?” Then they need to make a choice of strategy. In a similar vein, children need to look at a context, and decide, “What calculation do I think is needed here?“ and then make a decision about which method to use to perform the calculation. So the problem, “Franz has ridden 145km in a race of 200km. How many more km must he ride?” requires subtraction (despite the potentially confusing ‘How many more…’) and the best way to do that subtraction is probably counting up (145 + 55 = 200).

However, it is indisputably the case that, before children can make a sensible decision as to which what calculation to do and which way to do it, they must possess the necessary arithmetic competencies. They must know how to subtract by counting up, or how to adjust when subtracting near multiples of 1000 (like 2998), or how to do column subtraction.

This is where pedagogy is important. Maths is an abstract subject. To help children understand what is going on we enable them to visualise it through the use of images and models. For example, we use a number line image to show counting up and a place value image (cubes, rods of 10, squares of 100, etc.) to show column addition and subtraction. Over the years, pedagogues have developed many excellent images and models – many of these made of materials that children can handle and manipulate. When I first entered the profession, nearly 40 years ago, the Nuffield Maths Project used the slogan, ‘I hear and I forget, I see and I remember, I do and I understand’ to emphasise the need to teach maths by helping children to move from concrete manipulation to visual images and so to more abstract thinking. The use of good models and images, and their consistent development throughout children’s years at primary school, is agreed by all, whether in Shanghai, Singapore or the UK, to be central to success in producing confident and numerically fluent ‘mathematicians’ aged 11.

However, this is where the Minister and I part company. And where, I argue, the danger that we will produce an uncompetitive workforce, slips in. Shanghai maths simplifies the process of ‘teaching for understanding’. I need to teach subtraction, the justification goes, so instead of ‘confusing’ children with several different strategies, I should teach one method using one model. The model helps children understand, and they now have a way of subtracting. Then I secure this method by repetition, spending a long time on it so that it is really hammered home. This is precisely what gives the impression of ‘rote-and-drill’ that people often use when describing Shanghai maths.

This contrasts sharply with English pedagogy, which advocates providing a variety of different models and images, and teaching a number of strategies. Rather than using a given method, children are expected to choose the method most appropriate for the context. In order to make these decisions, they not only need skills (counting up, counting back, etc.) but meta-skills. Meta-skills consist in knowing when to use the skill and which skill is appropriate; knowing, for example, that it is more sensible to count up to find change but to count back if subtracting a small number from a large one. They require that the child understands the nature of the problem underpinning the calculation. Children in Shanghai may have been taught to do long division, but English children will understand that it is smarter, quicker and more efficient, to divide 8 into 1,000,000 by halving three times than by using a written calculation method.

Teaching using a variety of models and strategies for each operation, instead of just nailing down one method is harder and more ‘messy.’ It requires, amongst other things, that we use a spiral curriculum to allow children to revisit these decisions repeatedly in different contexts, rather than teaching in longer blocks as they do in Shanghai. But it has many advantages, especially in the UK context. We do not have homogenous classrooms; we have classrooms full of diversity. There is probably no one single way of doing things, from shopping to cooking to bedtime rituals, that would be familiar and accepted by 100% of the children in any classroom in England. There may be many languages; there will certainly be many registers within the one language of English. So it is very likely, if not certain, that providing a variety of models and images, to match the variety of strategies, will enable all children to find one that they find intuitive and useful, and that helps them to understand the mathematics.

Most importantly, teaching in this way, not just by providing a model which helps children ‘understand’ a method, but by providing a variety of strategies and insisting that, from the start, children make their own decisions in mathematics, develops that deeper understanding which incorporates the all-important meta-skills. These meta-skills are vital for developing a labour force that will be competent and competitive in the future economy. This very English style is part of a general pedagogy which nurtures creativity rather than conformity, critique rather than compliance. This is where we return to the point made by John Craig quoted above. Education, even maths education, is not just about teaching maths; it is about producing citizens fit for the UK we want to see in 20 or 30 years time. We will need flexible thinkers, rather than compliant followers of algorithms, even if they ‘understand’ those algorithms. We need people who can think outside the box, not operate only within it. And, crucially, we need, as recent events show only too clearly, citizens that are capable of critical reasoning. It should be a matter for National debate whether we want to impose Shanghai methods wholesale in the education of our children.

  • 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:

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 Davos 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


Detailed Comments

Capitalism

Capitalism can be said (overly-simplistically) to involve independent enterprises 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 / responsible 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’. And profitability does not seem to be the primary driver of investment decisions (see Profitability?)

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 Unrecognised 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.


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.


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.

In October 2012 it was suggested by an Australian participant in a joint venture with a Chinese SOE (Jonathan Clancey, Qenos) that the Chinese participants had for two years been keen to learn what was required to achieve profits (rather than merely increase revenue) [Keen L., 'Chinese love profits too', AFR, 4/10/12]

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 responsible 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 Unrecognised 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 responsible 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 / responsible 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 presumably because under Mao the Confucian bureaucracy had been portrayed as oppressing the masses). 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 12th 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

  • it was argued that 'private' enterprise was largely responsible for China's economic progress without apparent recognition that state ownership is not the only way in which independent 'private' (ie independent) enterprise can be constrained. It was later argued by another observer that the role of state ownership in China was greater than was being claimed whilst also not considering that point.

Debunking One Myth about the Chinese Economy - email sent 5/12/14

Nicholas R. Lardy
Peterson Institute for International Economics

Re: Debunking four myths about the Chinese economy, China Spectator, 4/12/14

I should like to suggest for your consideration that the idea that there is any significant ‘private’ enterprise at all in China is a myth. State ownership is not the only way in which independent (ie private) enterprise can be constrained.

My Interpretation of your article: China’s economic success over the past three decades can be attributed to the rise of markets and private business. These are increasingly replacing state-owned firms – and the latter now only dominate in natural monopolies. China has not developed a successful alternative growth model. ‘State capitalism’ has reduced, not enhanced, its economy. A coming book (Markets over Mao: The Rise of Private Business in China) corrects four myths - ie that: (a) China’s economy is dominated by state firms; (b) China has a powerful bureaucracy in terms of employment; (c) though China’s SOEs are few in number, they are very powerful; and (d) private firms get little access to credit. This is fundamentally optimist for China’s growth prospects – especially if Third Plenum’s reforms are carried out.

A serious rule of law is an essential foundation for truly ‘private’ (ie independent) enterprise. China does not have this. Everything depends on relationships – ultimately back through a quasi-bureaucratic social hierarchy to China’s so-called ‘Communist’ Party. An attempt to suggest why this is so and how it works is in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009+). A characteristic of private enterprise in a Western context is profit-oriented investment – but this is not a feature of East Asia’s major ‘bureaucratic non-capitalist’ systems (see evidence).

East Asia’s political and economic systems can’t be properly understood in terms of Western analogies because of profound differences in ways of thinking and problem solving (see Competing Civilizations, 2001; Babes in the Asian Woods, 2009; and China can't be properly understood in terms of Western economics, 2010). Because of profound cultural difficulties in dealing with the profit-focused investment that is required for true ‘private’ enterprise, China seems to be seeking to create a new international order within which such constraints on authoritarian elites would not apply (see Creating a New International 'Confucian' Financial and Political Order, 2009+). In China the ‘bureaucracy’ has asserted its power much more forcefully as a result of recent political reforms – though, as a neo-Confucian bureaucracy, it does not look like a Western-style bureaucracy (see The Resurgence of Ancient Authoritarianism in China, 2014). And, while China has moved away from Mao, many Chinese still seem to remember fondly the social equality that that was sought in that era (see Communism Versus Confucianism: The Continuing Contest in China, 2011).

I would be interested in your response to my speculations

John Craig


Follow-up Comments

Note: A response to the above was received, but permission to reproduce it here was denied. The following further comments in reply were forwarded on 8/12/14

"The reasons that I suspect that the vast majority of economic activity in China is driven by ‘communal’ (ie quasi-bureaucratic non-capitalist) considerations rather than by independent private enterprise are:

  • The notion of ‘individualism’ is something of a swear word in China (according to advice from a serious Asia specialist). Thus the pursuit of individual / private benefits (as compared with communal benefits) is poorly regarded. The social, economic and political institutions that Western societies have developed are geared to empowering individual’s to use rationality (ie the manipulation of abstract concepts) as a basis for decision making (as citizens, employees, employers, politicians etc). This is arguably a by-product of the West’s Judeo-Christian and classical Greek heritage. Rationality fails in dealing with complex systems (eg central economic planning fails) – and it is only the West’s Judeo-Christian heritage that has provided a basis for the ‘liberal’ institutions built on individuals in which de-centralised rationality can be reasonably effective. Social, political and economic institutions in which rationality might be effective have not been a feature of East Asia (or of tribal societies generally). Rather East Asian institutions tend to be communal / tribal with individuals viewed as merely component of the family / ethnic community (ie family names are given before individual names – the reverse of the Western practice). The US arguably lost the war in Vietnam because it was seeking to introduce ‘liberal’ institutions into a ‘communal’ society in which the notion of individualism that ‘liberal’ institutions require was foreign – and viewed as dysfunctional. That difference was also, arguably, the basis of Japan’s effort to establish an ‘Asian Co-prosperity Sphere’ in the 1930s-40s;
  • Traditional ways of thinking in societies with an ancient Chinese heritage do not place any emphasis on abstract concepts (including the notion of ‘profitability’ - ie financial return on investment). Confucius advocated becoming rich through saving (ie by not spending one’s income rather than by maximizing revenue relative to costs). It is understood that there is no Chinese word for ‘profitable’ – and boosting ‘real production’ / market share (rather than ‘profit’) seems to be the primary criteria for success in Japanese and Chinese economic / financial systems. This has a mercantilist effect (ie it boosts national power) but does not benefit those whose savings have been consumed in the process;
  • China’s education system is apparently being reformed to give more emphasis to the Chinese classics (see Competing Thought Cultures). The primary ‘message’ of those classics is the reality is too complex to be usefully understood. The effect of this will be to create a community that will conform with leaders’ guidance – rather than think for themselves as ‘private’ entrepreneurs. The creation of a new version of something like the trade-tribute regime by which Asia was ruled prior to Western expansion requires the compliant (rather than enterprising) population that can be expected to from such an ‘education’ process. Historically that system depended on China’s people’s willingness to work hard for limited reward out of a sense of ethnic nationalism – so that the outsiders gained significant material advantages from accepting regional leadership by China’s bureaucratic elites;
  • Chinese Diaspora across SE Asia have been economically dominant and politically influential for centuries (a fact that has led to local frictions). This seems to be associated with cohesive collaboration within that ethnic community (as well as using Triads as a form of ‘private army’, and often corrupt influence on the local political system) – see ‘Lords of the Rim’, Seagrave.
  • It was arguably China’s Diaspora (perhaps in collaboration with Japanese ultranationalists) who provided the impetus for China’s post-Mao reforms. Singapore provides the Diaspora’s most successful economic model combined with semi-democracy. However, as in China, it seems that success depends more on ‘connections’ than it does on independent initiative (see Singaporean Investment has Led to Controversy). The ‘state’ under such systems has tentacles everywhere (based on social relationships). The ‘state’ is not just confined to the obvious arms of government machinery. In China the ‘private entrepreneurs’ who have been successful (and become embarrassingly rich) have been those with roles in or strong connections to the so-called Communist Party (just as in Japan the ‘private’ companies that have been most successful have had strong social connections to the ruling bureaucracy);
  • One of the features of ‘private enterprise’ is contestability in ownership (ie takeovers are possible. The recent major ‘private enterprise’ that emerged from China (Alibaba) is characterized by an inability to challenge insiders’ control;
  • While I have no information about the effectiveness of contract law in China, ‘law’ generally seems to be used as a means for disciplining those who deviate from the consensus view of the social hierarchy. It is not a means for creating an environment in which independent actors can make decisions without having to second-guess the reactions of the powerful – as it is in a Western context. Moreover it seems that state-intervention can be a serious risk in doing business in China."

State-linked but not State-owned Enterprises in East Asia - email sent 12/12/14

Dr John Lee

Re: 'The Real Picture on China's State-owned Enterprises', Business Spectator, 12/12/14

I was interested in your observations in relation to Nicholas Lardy’s recent article (Debunking Four Myths about the Chinese Economy). In the latter he had suggested that a quite limited role is now being played by state owned enterprises (SOEs) in China’s economy. You seemed to be suggesting by contrast that, while the data he cited is valid, a bigger picture view shows that SOEs still play the dominant role in China’s economy.

My Interpretation of your article: Nicholas Lardy wrote recently to debunk four myths about China's economy. While his facts were valid, these need to be interpreted differently. Lardy pointed out that SOE's are now not significant in China's manufacturing - and this is quite different to pre-reform position. But manufacturing is export oriented, and dominated by foreign owned / invested firms. There are many sectors (including emerging industries) where SOEs do dominate. Private firms are involved in majority of output in terms of final economic activity - but in sectors associated with modern / industrializing economy, SOEs dominate. Lardy also argued that bureaucracy's role in terms of employment is not large. However China also does not provide the same level of public services as many others. China's bureaucracy is very high by Asian standards. Lardy argues that SOEs are of declining economic significance. Leading SOEs have huge profits - but this involves only a few SOEs. Most have falling profits. Also return on capital for central SOEs have been negative. However this only deals with centrally managed SOEs and there are 140,000 provincial / local SOEs. The top three SOEs generate more revenue / profits than largest 500 private firms in China - which demonstrates SOE dominance. And the fact that central SOEs produce returns less than cost of capital indicates inappropriate provision of capital. China's state-dominated political economy is the problem. The fact that China's SOE system is inefficient is not proof that the economy is not SOE dominated. Lardy also argues that private firms are not credit starved - as they receive 52% of all credit. Yet SOEs receive 3/4 of all formal finance (eg bank loans) which are the cheapest forms of finance. Private firms generally need to rely on secondary markets. The shadow-banking system emerged because private firms are starved of funds. No one in China would agree that the role of Communist Party and SOEs in China's economy is being overstated.

I had previously commented on Nicholas Lardy’s article (see Debunking One Myth about the Chinese Economy). The latter primarily suggested that, in an East Asian context, the fact that an enterprise is not state-owned does not make it ‘private’ as this would be understood in a Western context. Enterprises can be state-linked (through social connections) and collaborate within state-centred-networks in economic activities that have a nationalistic (rather than simply commercial) purpose. Moreover the ‘inefficient’ use of national savings that your article noted was associated with SOEs (because they seek nationalistic rather than purely commercial ends) does not seem to be limited to enterprises that are actually state owned (see Evidence).

My suspicion is that: (a) your observations about the still-significant role of SOEs are valid; and (b) China’s current regime is determined to reduce state ownership significantly, and to do so by encouraging the emergence of enterprises that are state-linked in the manner suggested above, rather than those that are truely ‘private’. This might create a situation something like Singapore where significant apparently ‘private’ enterprise seems anything but independent of the state. This possibility has to be considered in any analysis of the role of a ‘private’ sector in East Asia.

Regards

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:

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 (outlined here)

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 90th 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) presumably because under Mao the Confucian bureaucracy had been portrayed as oppressing the masses; (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 bureaucratic 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). Mao believed that Confucian-style rule had oppressed Chinese people - though his dictatorial alternative to elite consensus was hardly an improvement.

"Efforts to repudiate the old ideas continued and intensified with the official backing of the anti-Confucian campaign by the Gang of Four in 1974, two years before the end of the Cultural Revolution. At that time the Red Flag began publishing articles denouncing Confucius and Confucian concepts. The assault on Confucianism in the pages of the Red Flag was unprecedented .... Confucius and Mencius, once held as the great sages of ancient China, were demoted to the status of hypocrites and murderers, their philosophy equated with poison and deception.  ... In the early stages of the Cultural Revolution the Red Guards smashed Confucius's tomb and his status ... in his hometown. Such slogans oversimplified and effectively demonised Confucian ideology and traditional culture. Confucianism, once the standard for judging the merits of one's conduct in Chinese society had come under attack by Marxist revolutionaries as representing the epitome of class oppression.  The slogan "Destroy the four olds and establish the four news" called for radical transformation of Chinese culture and endeavoured to eradicate the traditional ways of thinking and doing things." (Rhetoric of the Chinese Cultural Revolution, 2004)

"Maoism disbelieved in the bureaucracy because it gave elites status and suppressed the people" [1]

US perceptions of Mao are based on current Chinese elite perceptions of him. The latter support Mao’s revolution only so far as it provided a basis for ejecting foreign influences and allowing China’s elite to make China strong – so its elite can have international influence while the majority of Chinese people eke out a marginal existence. Mao called such people the ‘capitalist roaders’ (in that they wanted China to take a capitalist road to national greatness) rather than a socialist road that would distribute wealth more evenly – thus frustrating the emergence of a stratified Chinese elite who could enjoy a concentration of resources sufficient to wield some power on the international stage (J. P. Franks in Customer reviews of Mabo Gao, ‘The Battle for China’s Past: Mao and the Cultural Revolution’, 2008)

  • 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 'redder' factions at middle and lower levels in the PLA makes this uncertain.

Don't Accuse China of Maoism or Capitalism: Neo-Confucianism is the Go - email sent 13/9/16

Jennifer Oriel

Re: Managing Chinese soft power without killing trade is key, The Australian, 12/9/16

Might I suggest that there is a need for a closer look at China’s ‘soft power’?

Your article (which I have outlined here) suggested that China’s propaganda (which is undertaken in Western Universities through Confucius Institutes) espouses Maoism. However the primary goal of Mao’s Cultural Revolution was to purge Confucian influences from China because rule by Confucian bureaucratic elites was seen to have been the primary source of the oppression of Chinese people. And tension between those who look back favourably on the social equality that Mao advocated and the Confucian social hierarchy that the ‘Communist’ Party now embodies remains a major source of political stress.

It also suggested that that China’s liberalization reforms were advantageous because they involved the adoption of capitalism. However capitalism (investment with a view to making a profit) has nothing to do with China’s current economy (see China's Problem is Neo-Confucianism not Hypothetical 'State Capitalism'). China currently faces huge risks because of the absence of capitalism (see Importing Risks from China ).

Some suggestions about the nature of ‘soft power’ in East Asia are in What is Soft Power? This includes comments on the role that ‘soft power’ has played in East Asian history (including the regions’ ‘real economy’ miracles and financial crisis in recent decades) and also in undermining the position of Western societies (eg by misleading them about what is going on and encouraging them to make mistakes).

John Craig

  • there seemed to be no official understanding of the meaning of the symbol associated with China's traditional religion that was incorporated into 2010 New Year displays on Sydney's Harbour Bridge (see Sydney's 2010 New Year's Eve Celebrations: Awakening Which 'Spirit'?, January 2010)
  • a journalist who advocated improving Australian's understanding of Asia seemed to have a long way to go before they would be positioned to provide reliable advice about what they meant.

Misunderstanding the 'Asian' Century - email sent 21/9/15

Matt Wade
Sydney Morning Herald

Re: Thriving in the Asian Century, Brisbane Times, 21/9/15

There is no doubt about the theme of your article (ie that most Australians know very little about the economies on which they are increasingly reliant).

This point was developed on my web-site in Babes in the Asian Woods (2009+) and Comments on Australia's Strategic Edge in 2030 (2011+).

Unfortunately the federal government’s Australia in the Asian Century white paper suffered severely from the community’s pervasive lack of real Asia literacy (see Australia in the Clayton's Century: The 'Asian' Century you have when you are not having an Asian Century, 2012). It was assumed that an ‘Asian century’ would not be dramatically different to the liberal international order that was sustained under Western influences.

Because of the radically-different cultures that can be involved where societies lack the West’s classical Greek heritage, significant parts of ‘Asia’ (ie those with an ancient Chinese cultural heritage) are anything but easy for Australians to deal with. Practical reasons for this were briefly outlined in Structural Incompatibility Puts Global Growth at Risk (2003), Understanding East Asia's Neo-Confucian Systems of Socio-political Economy (2009) and Yes, The System is Broke (2015).

I wish you well in your efforts to boost real understanding of the complexity of ‘Asia’.

John Craig

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.

Notes 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]

A Chinese company experienced major cost blow outs when attempting to undertake a major mining project independently in an unfamiliar environment [1] [where everyone is not largely motivated by nationalism]  s

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


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.
  • 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 / responsibles, 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


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 Unrecognised 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


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?)
  • easy money policies that had been put in place to counter the risk of deflation were seen as the source of large potential future economic risks without apparently recognizing the role that 'financial repression' in East Asia played as a source of deflationary pressure.

Putting the Economic Risk of Deflation in Context - email sent 10/1/15

Miranda Maxwell
Business Spectator

Re: ‘On no, things are getting cheaper’, Business Spectator, 9/1/15

Your article suggested that easy money policies (which have undesirable side effects) have been needed worldwide in recent years to counter the risk of deflation like that which Japan faced after its 1990 financial crisis. While this is true in one respect, it is misleading to equate the global situation now with that in Japan in the 1990s. ‘Financial repression’ has been part of the methods used to achieve ‘economic miracles’ in Japan (and in other ‘bureaucratic non-capitalist’ East Asian economies such as China). Where state-linked financial systems maximize national savings and direct savings and credit to production by state-linked companies while constraining consumption, the inevitable result is a deflationary / recessionary demand deficit both domestically and globally.

My Interpretation of your article: While paying lip service to concerns about escalating property prices and the risk of bubbles, policymakers have knowingly been inflating asset values for years to prevent Japan-style deflation which would be worse. The 2014 oil shock has pulled Europe into deflation and this led to expectations of more stimulus. The choice is between rising asset values and deflation. Japan’s experience shows why bubbles must be risked. Led by Fed central bankers have been providing cheap credit for 6 years to maintain econoic momentum. The resulting wealth effect has kept world economy expanding, while austerity measures have been ineffectual. But there have been side effects (eg increases in living costs and social inequality). And now oil prices have dropped 55% in 6 months. This has both put more money in consumers’ hands and entrenched deflation in Europe – potentially leading to debt defaults. And deflation is being passed (via currency wars) to Asia / China (which is also seen as the key deflation-exporter). China’s factor gate prices have been falling for years. Oil-exporters are now likelyto start repatriating (rather than exporting) capital. Letting the US asset price bubble ‘pop’ in 2000 would have been the best course of action (according to Ciovacco Capital Management). The system would have purged itself of debt and eventually recovered.

Suggestions that the post-2008 problems facing Western economies are like the problem facing Japan through its post-1990 recession are misleading because of structural features of Japan's financial system (eg see Mikuni’s Why Japan can't deregulate its financial system, 2000). Those features are not present in Western economies where independent capitalistic / profit-focused decisions are the main mechanism for resource allocation. And the radically different features of Japan’s financial system (which also exist in other ‘bureaucratic non-capitalist’ economies in East Asia) contributed to both: (a) Japan's post-1990 experience; and (b) to the financial imbalances that put global growth generally at risk (see Misleading Comparisons with Japan's Post-1990 Recession, 2011 and No! Western bond markets are nothing like Japan's, 2011).

Where the profitable allocation of capital is not the primary means for resource allocation (as seems to be the case in major East Asian economies presumably as a by-product of the region’s ancient Chinese cultural traditions), ‘financial repression’ is used to protect state-linked banks and companies with dubious balance sheets against the need to borrow in profit-focused international markets. And (as suggested in Structural Incompatibility Puts Global Growth at Risk, 2003+) these unbalanced economies:

  • created a very large structural demand deficit that put domestic / global economic growth at risk;
  • would soon have led to deflation / recession / depression unless trading partners (especially, but not only, the US) had been willing and able to compensate for those demand deficits by sustaining trade /current account deficits and ever-rising debts. And growth could only be sustained because the US Fed used easy-money policies to boost demand through: (a) the  wealth effect that resulted from rapidly rising asset values; and (b) making very high levels of government / private borrowing seem affordable; and
  • initiated efforts to establish a new international order (ie that would be compatible with ‘bureaucratic non-capitalist practices) that can be viewed as a new Cold War.

What has been going on has arguably taken the form of a ‘financial war’ (see This Could Be the Year We Acknowledge the 'Weaponization of Finance', 2015). As A Generally Unrecognised 'Financial War'? (2003+) suggested, major events in that contest have apparently included )but by no means been limited to):

  • a first ‘financial shot’ by Japan in 1987 when large scale repatriation of reserves (under a ‘Dump the US’ slogan) drove up US interest rates and led to a stock market crash whose effects were only contained when the Federal Reserve tried easing substantially increasing liquidity to prevent the financial systems’ problems affecting the real economy;
  • Japan’s ultra-easy monetary policies in the 1990s that inevitably mainly contributed to asset inflation elsewhere via carry trades (because after it’s financial crisis Japan’s state-linked major companies had no scope for using additional credit);
  • a US-Fed-led counter-offensive after the 2008 global financial crisis – which: (a) some have viewed as a ‘currency war’; and (b) generated huge $US carry trades that created risks for countries with poorly developed financial systems; and
  • China’s increasingly significant international role, including its current apparent attempt to create an ‘Asian sphere’ in which the constraints that democracy and capitalism impose on East Asia’s authoritarian ‘bureaucratic’ elites might be avoided.

While the risks that your article mentioned that have emerged from easy money policies are undoubtedly real (see also An Approaching Crisis), those monetary policies are arguably neither the only, nor the primary, source of those risks. Your article suggested that reserve banks could have eliminated the problem by tolerating a cleansing financial crisis some years ago (eg in 1990). However doing so would not have addressed the distorted financial systems in East Asia that made easy money policies essential to sustaining global growth in the first place. If the problem is to be solved it probably has to be through: (a) a serious approach to international financial imbalances by the G20 (see Reducing the Risk of Financial / Economic / Political Crises); and (b) getting the humanity and social science faculties in Western universities off their backsides to seriously consider the practical consequences of different cultural traditions (as suggested in Competing Civilizations, 2001+)

John Craig

  • a proposed conference on reform of international financial institutions appeared to require considerably more attention to the impact of cultural differences than seemed to be available;

World Economics Association - Rethinking the international financial architecture - email sent 31/3/15

World Economic Association

RE: Proposed WEA Conference on Rethinking International Financial Architecture

I should like to submit that the major problem that needs attention lies in cultural differences that give rise to incompatibilities amongst different domestic systems of financial architecture. Thus in any examination of international financial architecture, the ability of those involved to get to grips with hard-to-understand cultural differences is probably of the highest importance.

Reasons for this were suggested in Structural Incompatibility Puts Global Growth at Risk (2003). This refers to the international impact of the non capitalistic’ systems of socio-political-economy that have been the basis of rapid economic development in East Asia (eg in Japan and China). National savings have been mobilized through state-linked banks and provided to state-linked enterprises with limited regard for return on / return of capital. There has thus been a need for financial repression (ie directing income to production rather than consumption) to ensure current account surpluses and that there is no need for external capital for those state-linked banks / enterprises - because external scrutiny of the suspect bank / corporate balance sheets would trigger financial crises.

The international financial imbalances that the ‘non-capitalistic’ financial systems have required to avoid domestic financial crises have made global growth unsustainable unless their trading partners have been willing and able to sustain large current account deficits / increasing debts. The latter have been made possible in recent decades only because ever-easier monetary policies by their trading partners (especially the US) have boosted asset values (and thus allowed household consumption to exceed incomes) and the raised the apparent ‘affordability’ of ever-larger government debts. However the effect of financial imbalances, ever-rising debts and economic dependence on ultra-low interest rates has generated significant problems (eg see: Impacting the Global Economy, 2009; Resist Protectionism: Your Call is Decades Too Late, 2012;  Who Is Failing the Lower and Middle Classes?, 2014; and Putting the Economic Risk of Deflation in Context, 2015).

The need for international financial arrangements to be examined from an Asia-literate perspective has become increasingly urgent over the past couple of decades. Perhaps China’s presidency of the G20 in 2016 will finally allow some real progress to be made (see Will China's Presidency in 2016 End the G20's Chronic Failure?).

John Craig

  • debates in Australia about conditions associated with a proposed FTA with China were conducted without any understanding of the source or consequences of difficulties in China that might significantly alter the benefits of any such agreement.

Political Squabbles About Now-Uncertain Chinese Investment - email sent 4/9/15

Sid Maher
The Australian

Re: China FTA: Bill Shorten isolated as Labor leaders back trade agreement, The Australian, 3/9/19

Your article pointed to the political debate about whether or not there would be a need to adjust the China Free Trade Agreement proposal to ensure that first priority is given to Australian workers on major Chinese projects in Australia.

This brilliantly illustrates the naivety of Australia’s political establishment. Huge disruptions of international financial markets have been under way partly because of recognition that China has serious economic and political problems. Thus a key question that surely needs to be considered is whether the benefits that were expected to be available from the FTA are actually likely to be available. One of the features of China’s problems relate to the viability of its financial systems – and this affects the extent to which substantial outward-bound investment from China is even likely to be available (for reasons suggested in Context to China's Share Market Boom and Bust and China Won't Get Far Along Its New Silk Road If It Suffers a Political 'Flat Tire').

Surely SOMEONE in Australia’s top-level political establishment should have raised this, rather than just squabbling about what would happen if China’s emerging difficulties miraculously disappear.

John Craig

  • it was suggested (by an associate of the Foundation for Australian Studies in China) that the demand for study in Australia by overseas students would probably decline as China became the world's cultural epicenter [1].  However, while it is possible that Australia's international education industry might decline, this would seem to be more likely the result of supposed 'experts' inability to understand why China was unlikely to become the world's cultural epicentre (see Ongoing Uncertainty ; Are East Asian Economic Models Sustainable, 2009+; and A Case for Restoring Universities

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 Unrecognised 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


'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 / responsibles) - 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


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


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 / responsible) 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


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


Understand China's Economic Rise Before Endorsing It - email sent 25/2/13

Editor
The Australian (not for publication)

Re: Rudd K., ‘America and China need a new framework’, The Australian, 23-24/2/13

It would be useful to seek views on relations between the US and China that are more Asia-literate than the recent suggestions by Australia’s former prime minister, Mr Rudd.

My interpretation of the above article: Debate about future US-China relations is being driven by China’s more assertive stance, and the US’s ‘pivot to Asia'. Without the latter China’s realists would have concluded that the US was a spent force. Now there is a need to for them seek a common view of the future world. China’s rise has been unprecedented. Political and strategic power follow economic power. Thus much of 21st century history will be written in Asia. Post-war order in Asia was based on US power and military alliances. China’s rise and US fiscal difficulties call this into question. The US rebalance has stabilized the situation – but uncertainty and potential conflicts remain possible. China’s policies are primarily domestically-driven. Marxism has lost relevance. Political legitimacy depends on continued growth, political nationalism, corruption control and repudiation of past foreign humiliation. China has little history of invading others, and none of maritime colonialism. Others are likely to benefit from China’s rise (eg because of its economy). Others see China as a threat, requiring US containment. However this may be mere uncertainty, as it is not certain that China has a long term grand strategy. Beijing’s statements (eg about seeking a ‘peaceful rise’ / ‘win-win’ outcome and ‘Hide your strength, bide your time’) have not clarified matters. For outsiders the core question is whether China will continue to work cooperatively with current rules-based international system, or seek to reshape the order more in its own image. US rebalancing is not just a military statement – as it has diplomatic and economic dimensions. Rebalancing has been welcomed across Asia as governments are uncertain what a China-dominated region would mean. US must now decide what to do next in China relationship. One option is increased strategic competition, which China could not keep up with, but would be financially unsustainable and thus lack credibility. A second option would be to maintain the status quo as rebalancing takes effect. This would be risky. A third alternative would involve a new framework for cooperation with China that: (a) recognises strategic competition; (b) defines key areas of shared interest; and (c) thus reduces mistrust. Crucial to this would be a commitment to regular summits. The numerous US-China discussions can achieve little without leader-to-leader engagement. In Beijing as in Washington the president is the critical decision maker. The Chinese system will gradualist at best without direct engagement with Xi Jinping. Both the US and China also need authoritative ‘point people’ to manage the agenda between summits (like Kissinger in the past). One or more bogged-down international issues need to be selected for resolution (eg trade negotiations, climate change, nuclear non-proliferation, G20 issues). They need also to use East Asia Summit and ASEAN to build confidence / security amongst regional militaries. At bilateral level US and China need to upgrade their regular military-to-military dialogues. US-China relationships need to be placed on a better course. This requires sustained top-level leadership, a common conceptual framework / institutional framework to guide respective bureaucracies. The rise of new great powers can trigger conflict, but this is not necessarily so.

While Mr Rudd’s suggestions might ‘tick the right boxes’ if one were dealing with a rising European power, there seems to be no recognition of what is different about East Asia. This can be illustrated by Mr Rudd’s claim that “In Beijing, as in Washington, the president is the critical decision-maker.” Under East Asian traditions nothing could be further from the truth (see brief quote from ‘Asian Power and Politics’). China appears to have achieved rapid economic advancement by adopting a variation of the neo-Confucian system of socio-political-economy that Japan pioneered. Under this system the role of China’s political leaders is to enforce the ‘bureaucratic-style’ consensus developed through their subordinates in China’s Communist Party. Unlike political leaders in Western democracies, they do not themselves make decisions. China’s president, it is understood, is noted for never allowing others to know what he himself is thinking. Likewise, while Western societies have high expectations about what can be achieved through dialogue, this is not what is expected in much of Asia (see Realism about East Asia and Michihiro Matsumoto’s ‘The Unspoken Way which suggests that in Japan silence can be seen to be a more effective way of communicating than speaking).

These may seems only small / incomprehensible idiosyncrasies – because a head of state agreement could still be reached that seems superficially sufficient to enable others to establish relationships to address various practical issues. However these points are significant because they illustrate the sorts of differences that need to be understood (at all levels) in order to avoid further blunders in developing relationships between Western and ‘Asian’ communities. The potentially-serious economic and geopolitical consequences of naively ignoring such apparently-irrelevant differences are suggested in Babes in the Asian Woods.

East Asian societies are difficult to understand by analogy with the ways of doing things that Western societies have adopted because of their Judeo-Christian and classical Greek heritage. However such understanding is both: (a) necessary if mistakes are to be avoided; and (b) possible if the social, political, economic and intellectual differences that derive from an ancient Chinese heritage are recognized.

The need for much more sophisticated understanding of Asia can also be illustrated by a recent analysis of China’s strategic prospects (see ‘You can’t have it all’, The Economist, 20/12/12 which reviewed Luttwak E. ‘The Rise of China vs The Logic of Strategy’). In brief, it was suggested that: (a) China’s military has adopted traditional Art of War tactics; and (b) the ‘logic of strategy’ means that China’s push towards military aggrandizement would push other countries towards anti-China coalitions. Though it is useful to recognize that China’s traditional methods need to be considered, the challenge of doing so is more complex because:

  • The essence of traditional Art of War tactics involves deception (eg disarming suspicion by ‘holding up a mirror so that when enemies look at you they see a reflection of themselves’) and the use of ‘soft power’ tactics to ‘win beforehand’. The military dimension is only a minor part of the game;
  • China's method for maintaining regional hegemony prior to European expansion had little to do with military power (see Creating a New International 'Confucian' Economic and Political Order?). Rather it was based on incorporating others into a system that materially benefitted elites in the tributary states in return for conceding status to China's elites;
  • Thus military posturing in Asia is likely to be a mere diversion (which history suggests that the US could fall for because of the strength of its military lobbies) to distract attention from behind the scenes efforts to encourage elites in various countries to join a coalition that would displace liberal democratic capitalist systems across the region / world with arrangements based on relationships with China’s elites;
  • East Asian societies are not governed by a rule of law, and requirements of presumed laws / logic are considered to be able to be defeated by re-arranging society. China current elites criticise Mao’s era because he was unable to ‘break any rules’ (see Communism Versus Confucianism: The Continuing Contest in China );
  • Traditional Art of War tactics seem to have affected international affairs for decades without any military component (eg see Coalitions of Interests and Unrecognised Clash of Financial Systems).

President Obama’s recent State of the Union address seemed to focus on: getting the US’s house in order (especially resolving its economic difficulties); and building relationships outside Asia (especially with Europe). Virtually nothing was said about China. This strategy corresponds (for better or worse) with the first option that Mr Rudd suggested (and rejected as financially unsustainable) – namely strategic competition, because getting the US’s house in order would seem to be a key requirement for ‘soft power’ style competition with East Asia’s autocratic / mercantilist states (for reasons suggested in China may not have the solution, but it seems to have a problem). And, contrary to Mr Rudd’s suggestion, this would (though only if it is successful) restore the US’s financial position, rather than exacerbate it with large military outlays.

Furthermore the economic success that China would need to maintain if ‘political and strategic power is to follow’ (as Mr Rudd suggested) is anything but assured (eg see Heading for a Crash or a Meltdown?). While China faces many challenges, its most fundamental problem (like Japan’s) involves a distorted financial system which: (a) create risks of financial crises unless trading partners are willing and able to sustain large current account deficits; (b) played a significant role in the global financial crisis because of (a); and (c) leaves affected countries with bad balance sheets and a dependence on accumulated financial reserves to avoid recognition of their sovereign risk in an environment in which trading-partners’ debt levels make it necessary to run down those reserves to sustain growth. Japan’s predicament illustrates where China could be headed in that respect.

I respectfully suggest that seeking out Asia-literate assessments of international relationships would be a useful future goal for The Australian.

John Craig


Will the US / China Summit be a Western or an East Asian Meeting? - email sent 7/6/13

Gideon Rachman and Geoff Raby

I should like to comment on two articles that you have separately written about the forthcoming summit between the presidents of China and the US. Those articles (which are outlined on my web-site) point respectively to the geopolitical and economic implications of their meeting (ie to questions about the world's political and economic future and also about China / US collaboration to improve the world economy in the short term).

One critical question is whether the summit turns out to be a Western-style or an East-Asian-style meeting (ie whether the US president seeks to understand what is going on or is content with ‘just doing it’ - ie dealing with practical matters without seeking to understand the implications). General reasons for suggesting that this matters are outlined in The Infantile US vs China Debate.

More specifically, a serious effort to take a Western-style approach is vital in relation to the currently most critical economic and geopolitical issue – ie structural international financial imbalances. The latter involve the suppression of demand in, and a build-up of large foreign exchange reserves by, some major economies (eg Japan and China) and escalating debts elsewhere (eg in the US).

Though your articles paid them little attention, those imbalances:

  • Are partly a by-product of the quasi-bureaucratic neo-Confucian methods that have been used as the basis for economic ‘miracles’ in Japan, and other East Asian economies such as China;
  • Have played a significant role in current global financial and economic instabilities;
  • Have not been dealt with by the G20 (which was mainly set up to deal with the global financial crisis) because the cultural issues were not understood by Western participants; and
  • Are on the point of reversing – and creating essentially insoluble difficulties for neo-Confucian systems if they remain subject to the prevailing liberal democratic capitalist international order.

The latter point is particularly significant in relation to the current summit because it seems that, though China has indicated an intention to reform its economic and financial systems to enable growth to be driven in future by domestic demand (ie to adapt to a reversal of the financial imbalances), it also seems to be making other arrangements (ie by changes to its education system) which would move it over time more in the direction of (say) North Korea than (say) South Korea.

The latter point is developed further on my web-site – together with:

  • suggestions that, if the US president participates in this summit without deep understanding of the quasi-bureaucratic way in which power has been exerted in East Asia by Confucian intellectual elites he would, in effect, commit the US to a client-state role under a new China-centred international order; and
  • comments on other issues mentioned in your articles.

John Craig


Detailed Comments

Strategic Perspective

The most important question in relation to the proposed US / China summit is whether the US president will be willing to ‘just do it’ (ie deal with practical matters) without seeking to understand the autocratic quasi-bureaucratic methods for exerting political and economic power that he is dealing with. Will he be content to look at some of the 'trees' without considering the nature of the 'forest'?

If so this would arguably represent his capitulation to a client state role for the US under a neo-Confucian international order. Enabling subordinates to reach consensus about practical concerns is both a standard practice for top-level bureaucrats everywhere and the core of the quasi-bureaucratic / Confucian methods that were used to exert power for centuries in Chinese society as a whole and in China's tributary states.

Western-style democratic politics by contrast involves participants in public debates seeking to understand the principles underpinning policies.

It has rightly been said that 'knowledge is power'. But there are quite different ways of using knowledge, eg

  • the Western way in which knowledge is used as the basis for rational independent decisions by hopefully-responsible citizens, relatives, employers, employees, investors and politicians (see Cultural Foundations of Western Strength); and
  • the traditional Confucian way in which strategically-informed elites use knowledge gained from their social networks to manipulate social, economic and political relationships within a community as a whole (see East Asia in Competing Civilizations). Those methods seem to be being used by the so-called Communist Party in China (see China's Bigger Secret) and need to be considered in relation to China's alleged cyber-espionage activities (said to be through the PLA and companies such as Huawei) which would involve stealing strategic information; and the PLA's alleged involvement in systematic programs to influence / deceive foreign leaders.

Some observers have apparently suggested that China’s efforts to promote the notion of a G2 as a ‘partnership of equals’ could reflect a desire to recreate something like a China-centred trade-tribute system in the past (see What a China / US 'Partnership of Equals' Means). As the latter suggests, there is a lot to understand about the nature of the relationship, quite apart from the practical issues that need to be resolved.

The question is: Will President Obama and his advisers be up to the challenge?

Articles Outlining Some Summit Issues

The need for understanding can be further illustrated by comments on articles (about geo-political and economic aspects respectively) of the proposed summit of which an interpretation follows:

If Barak Obama and Xi Jinping establish a friendly relationship at coming US / China summit, this will challenge the notion that confrontation is inevitable. By 2016 when Obama leaves office, China’s economy is likely to be larger than that of US – though the average US citizen will be richer. This implies that the US’s reign as sole super-power is coming to a close. The central geopolitical question is how these countries deal with the shift. Both sides are aware that war could result if things go badly –noting the tendency of clashes between rising and ruling powers, and the potential clash between China and Japan that could trigger the US’s security guarantee of Japan. China’s assertive approach to disputes suggests that the military influence in Beijing is strong. Chinese cyber- attacks have also caused concern. The US’s ‘pivot to Asia’ has caused concerns in China – because it has been interpreted as a US desire to contain China’s rise, rather than merely remain a central power in Asia. However there is a real difference of vision involved, not just misunderstanding. The US wants China to be responsible stakeholder in the current global system (ie to ‘play by the rules’). However China suggests that those rules were established during a period of US hegemony – and the system needs to be changed to acknowledge the rise of China. The US is happy to give China a greater role in institutions such as the IMF. However China seems to want to carve out a sphere of influence – and argues that this is similar to what the US does in Western hemisphere. Yet with East Asia set to become the core of the global economy, the US is unwilling to concede a dominant regional role to China. This struggle is behind the US desire for more effective communication between the militaries of the two countries, to avoid potential clashes. But China has resisted this, fearing that it might require agreeing to US patrols close to Chinese coast. China wants US to back off, yet US believes that this would send a disastrous signal to its Asian allies about the US’s willingness to remain the dominant military power in the region. The Chinese navy has started making patrols in US territorial waters (eg off Guam). The question is whether such tensions can be defused. (Rachman G., ‘Obama and Xi must halt the rise of risky rivalry’, Business Spectator, 4/6/13).

China’s president Xi Jinping will make his first official visit to the US. It will be informal and business-like. This will seek to convince sceptics at home that he is serious about the Party’s internal austerity and anti-corruption campaigns. Officials have been busy for months on: bilateral relations issues (economic frictions / cyber crime); China’s military modernisation; Obama’s ‘pivot to Asia’; regional security (eg North Korea and territorial disputes); Syria / middle East; nuclear non-proliferation; global economic outlook and how to promote growth; climate change; and energy security. Other forums (eg G7, G8, G20) have sought to deal with such issues, but they are too big. The G2 (ie the US and China) offers prospects of global leadership. Deep and regular dialogue between the US and China is vital to Australia’s interests. Xi will have encouraging messages to provide about China’s contribution to global recovery. Also China’s current account surplus has largely disappeared and its exchange rate has been steadily increasing. The US is more accepting of Chinese DFI. These were the dominant issues in recent US / China summits. (Raby G., ‘What Xi ditches his tie for hard US labor’, Business Spectator, 5/6/13)

International Financial Imbalances

The most important issue that needs resolution from both a geo-political and an economic receives almost no attention in the above articles.

Structural international financial imbalances:

  • Have played a major role in current global financial and economic instabilities. Favourable imbalances, achieved through so-called ‘financial-repression’, have been vital to protect against financial crises in major East Asian economies that (like China) the have adopted variations of the neo-Confucian methods that were the basis of Japan’s pre-1990s economic miracles. This is because the cultural traditions involved do not allow investment to be directed on the basis of calculations of profitability (but rather allocate national savings through a quasi-bureaucratic consensus process). Maintaining global growth in spite of this has required their trading partners (especially the US) to accept unfavourable imbalances – and this has limited the latter's growth (as domestic demand has been diverted off-shore) and required that they tolerate escalating debt levels. These imbalances also played a major role in the emergence of global financial instabilities (see Impacting the Global Economy);
  • Have been recognised as a serious problem by many analysts, but not addressed by the G20 group that was set up to deal with the consequences of the global financial crisis – arguably because the cultural origin of those imbalances can’t be dealt with in terms of conventional economic analysis (eg see G20 in Washington: Waiting for Hell to Freeze Over and China can't be properly understood in terms of Western economics);
  • Make it impossible to achieve global economic recovery through counter-cyclical fiscal and monetary policies (see Counter-cyclical policies can't solve structural problems)
  • Are on the point of reversing – ie both Japan and China have found that their current account surpluses are declining or turning into deficits because past imbalances have made it impossible for global growth to continue to be driven by demand from currently deficit economies. This reversal will expose neo-Confucian financial systems that do not take profitability seriously (see references) to the need to borrow in international financial markets.

China (for example) has publicly acknowledged that its past methods have been unbalanced and unsustainable. Thus it has espoused reforms so that its growth (and growth by its trading partners) could be driven increasingly by China's domestic demand.

However, it is arguably culturally impossible for East’s Asia’s neo-Confucian systems to adapt to unfavourable international financial imbalances - a situation that must arise when trading partners are no longer willing or able to maintain global economic growth by continuing to increase their debt levels.

Moreover this obstacle can't be understood without also understanding how the quasi-bureaucratic neo-Confucian systems work - and this is anything but an easy intellectual challenge (see Why Understanding is Difficult). Thus, though many economists have identified the obstacle to continued growth that international imbalances represent, the G20 has consistently been unable to get to grips with it.

The need to be able to drive growth through domestic demand (which China has officially endorsed as its economic reform agenda) does not seem to be leading China towards preparing its citizens to work creatively in a liberal international economic environment. Quite the reverse, as reported changes to its education system imply a desire to create an unquestionally-compliant future citizenry - more like that of North Korea than South Korea (see Financial and Educational Reform in China: Headed in Opposite Directions?).

Other Issues

Firstly, the US security guarantee of Japan (which could potentially bring the US into conflict with China) probably needs to be carefully considered, as Japan was the source (and then encouraged the East-Asia-wide spread) of the quasi-bureaucratic neo-Confucian systems of socio-political-economy that have led to the current potential US / China confrontation (see also Broader Resistance to Western Influence).

Second, the challenge is not simply to get China to ‘play by the rules’ that Western societies believe appropriate or to change the rules to accommodate the rise of China. Rather the problem is that neo-Confucian methods do not acknowledge that there are, or should be, any rules. East Asia does not involve a rule of law, but rather a ‘rule of man’ (hopefully men who operate under a 'mantle of heaven'). ‘Breaking rules’ is considered admirable (eg see Communism Versus Confucianism: The Continuing Contest in China).

This lack of commitment to rules (including 'rules' such as Western-style laws of economics) as well as the particularist rather than universalist value systems that prevail in East Asia are incompatible with the existence of any effective ‘global’ political and economic order.

The aspiration of major East Asian states (which can be likened to whole-of-society bureaucracies) would not be to create a new global order which takes account of (say) China’s 'principles', but rather to create a ‘world within the world’ within which a lack of ‘principles’ (ie abstracts / universal values / truths / conventional accounting principles) would be able to be sustained (see Creating a New International 'Confucian' Economic and Political Order). This could perhaps be viewed as an ‘Asian Co-prosperity Sphere’.

Third, while deep and regular dialogue between the US and China (and their militaries in particular) might be in of great value, this cannot actually be effective.

The problem is that dialogue is a waste of time with a culture where the purpose of providing information is not to boost understanding as a basis for decision making. All that can be forthcoming from the Chinese side of the proposed summit is a pre-determined internal consensus that effectively amount to propaganda (even though it is sophisticated) – see The Limits to Dialogue. Any adjustments / concessions in response to supposed ‘dialogue’ can only come from the US side. If the US wants more effective communication there is a need to understand these obstacles - and perhaps thus focus on Chinese citizens, rather than on ‘top level dialogue’ with the elite intellectual / quasi-bureaucratic networks that claim to represent the interests of China as a whole (as in Suggested Strategic Response). The latter also refers to:

  • the considerable Asia-literate support that would need to be provided to overcome the adverse consequences that countries as Japan and China must face under a Western-style liberal democratic capitalist international order (eg see also Japan's Predicament and China: Heading for a Crash or  Meltdown); and
  • the need for considerable adjustment in Western societies to maintain such an order. 

Fourth, a deep understanding of Confucian methods of exerting power is  essential to avoid being manipulated into giving power to China's quasi-bureaucratic elite in order to merely achieve a few immediate goals.

There is a classic story about an invading army approaching a Chinese city - which is met on the road by a senior official who offers to allow the general commanding the invading army to become the city's ruler. The general likes this and is installed as the city's ruler. He then gives instructions and finds that the administrators know a lot more about the issue than he does and suggest another option that suits their contacts. Eventually the general decides that it is better to just spend time with his 200 concubines and leave government to the unrepresentative bureaucratic fixers who have the connections to know what the cities' elites want to do and can make things happen.

If a US president was met by an apparently cooperative Chinese administration which then arranged everything he wanted through their connections, the real long term power would reside with China's administration through methods that have no relationship to the liberal Western-style international order that is built on independent individual initiative within a rule of law. A G2 might emerge - but the question would be 'who's who in the G2'? - see also Creating a New International 'Confucian' Financial and Political Order .

Finally there is a lot at stake for those potentially subject to a Chinese ‘sphere of influence’. Mao’s ‘cultural revolution’ was apparently aimed at eliminating Confucian influence from China because he saw it as oppressing the people. And the social hierarchy that neo-Confucian systems of socio-political-economy continue to require is incompatible with the social equality implicit in China's nominal Communism - and thus a source of major potential political instabilities in China today (see Communism Versus Confucianism: The Continuing Contest in China). 

Is this something that the people in a possible neo-Confucian ‘sphere of influence’ should be subjected to without a Western-style right to make an informed choice?

Will US President Obama understand such issues? Or will he be happy just to tick some boxes? That is the question that matters.

  • in November 2012 US Secretary of State argued that US and Australia should not seek to 'contain' China providing it 'played by the rules', without recognising that from a Confucian viewpoint 'breaking rules' can be seen as an admirable virtue (see Communism Versus Confucianism: The Continuing Contest in China).

Playing by Whose Rules? - email sent 15/11/12

Cameron Stewart
The Australian

Re: Hillary Clinton soothes China on alliance, The Australian, 15/11/12

Your article noted out that the US is quite happy to accommodate China’s rise providing its ‘plays by the rules’.

When asked at the conclusion of the Australia-United States Ministerial consultations about China's reaction to growing military links between Australia and the US, Mrs Clinton said it should be understood that the alliance was decades old and among the strongest in the world.

"It is up to the US and Australia to lead the way in demonstrating that the strong relationship between us can also help foster strong, healthy relations with China," she said.

"The entire region will benefit from a peaceful rise of China.

"We welcome a strong and prosperous China that plans a constructive and greater role in world affairs, but we also want to see China act in very transparent ways that respect international norms and standards (that) follows international law, protects the fundamental freedoms and human rights of its people, of all people.

"The Pacific is big enough for all of us."

She said closer co-operation with China would benefit the entire region, "so long as there is a level playing field, everybody knows what the rules are and everybody is held to the same standards".

The problem is that from the neo-Confucian point of view (which seems to have ‘broken the rules’ by displacing China’s communism) breaking rules can be an admirable thing to do – see Communism Versus Confucianism: The Continuing Contest in China .

John Craig

  • a former senior DFAT official and Australian ambassador suggested that Australia should support China's system of 'authoritarian capitalism', though that non-capitalistic system seems unlikely to be sustainable whether or not Australia does so for reasons that can't be understood by those who are oblivious to the 'Asian' dimension

Changing Rather than Supporting China's 'Authoritarian Capitalism' - email sent 5/11/12 [<]

Mark Schliebs and Rowan Callick.
The Australian

Re: Vision 'clouded on China and US', says Richard Woolcott, The Australian,

Your article quoted Richard Woolcott (who served as Australia’s ambassador to several Asian nations and led DFTA during the creation of APEC) as expressing disappointment that the Australia in the Asian Century White Paper did not “explicitly oppose the ‘containment’ of China or support China's ‘system of authoritarian capitalism’ “.

While there is no doubt that the White Paper reflected a very ‘clouded vision’ (see Australia in the Claytons Century), China’s authoritarian system is not a form of ‘capitalism’ and seems unlikely to be sustainable irrespective of whether Australia supports it. My reasons for suggesting this, and reference to alternatives that seem likely to be better, are outlined below.

Regards

John Craig


China’s Authoritarian System is Not ‘Capitalism’, and is Probably Unsustainable

China (like Japan) does not have a ‘capitalistic’ economy (ie one that is driven by the profit motives of independent enterprises) – see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy). Moreover such ‘non-capitalistic’ market economies have a highly disruptive impact on the international economic environment, because they require domestic demand deficits that are macroeconomically unsustainable unless their trading partners are willing to continue making the financial sacrifices needed to support them (see Impacting the Global Economy).

Non-capitalistic market economies result from the adoption of neo-Confucian methods that have not been understood in Europe or the US, and certainly not by economists or political scientists who view the world in terms of Western analogies (eg see Babes in the Asian Woods). There is a need to recognise the implications of radically different ways of thinking (eg see Epistemology: The Core Issue and Competing Thought Cultures). This would normally be the domain of those in the humanities faculties of Western universities. However the latter have been off in a post-modern dream world (in which there are no real consequences of cultural differences).

Questions about whether Australia should support China’s authoritarian non-capitalism are not likely to be relevant for long for reasons that are suggested in Heading for a Crash or a Meltdown?

The latter suggests that, while the issues involved are complex (for reasons outlined in Understanding is difficult), China faces structural difficulties that could precipitate financial, economic and political crises. For example:

  • East Asia’s non-capitalistic financial systems depend on the willingness and ability of developed economies (most notably the US) to continue tolerating current account deficits and ever-increasing debts. If their trading partners decided that they wanted to resist the mercantilism implicit in the East Asian systems, the latter would be in trouble (see China may not have the solution, but it seems to have a problem);
  • Revolution has become possible perhaps because of recognition of the neo-Confucian character of China’s economic miracle, noting that: (a) China’s ‘real’ communists favour social equality, and this is not a feature of the current system; (b) a Confucian approach was apparently favoured by the Nationalists that Mao’s Communist Party drove out of China in 1949 – but was secretly reintroduced in the late 1970s as a neo-Confucian component of the market-opening agenda introduced under Deng; and (c) China’s people have been (but may no longer be) willing to sacrifice themselves to support the authoritarian state because of a belief that this would enable China to gain vengeance against those who harmed China in the past (ie Western societies and Japan). The situation will be more complicated if, as Fingleton’s suggested: (a) it was Japan that sponsored the introduction into China of a variation of the neo-Confucian methods that had been the basis of its post-WWII economic miracles; and (b) those methods were developed by the Japanese military in Manchuria during Japan’s invasion in the 1930s. Current friction between China and Japan may need to be considered in that context (see Friction between China and Japan: The End of the Asian 'Century'?).

Moreover a real ‘Asian Century’ would have profound implications for the notion of individual liberty that drove Western resistance to authoritarians during the 20th century. And those features would not be easily changed (eg see ‘Chinese individualism’ and Does China's Education System Provide a Model for the West?).

China has been urgently trying to deal with the structural problems that now limit the political and economic methods it has used for the past three decades, because it has been encountering very real domestic political obstacles at a time when its external difficulties are likely to escalate. China appears to be responding to its political difficulties by seeking to make domestic consultation (which is limited to the members of the Communist Party) a less unreliable guide to the broader community (consider parallels with what is being done to China’s state controlled media – see Reading China's Mind?).However centrally coordinated efforts to define / control strategy are limited. Very large complex organisms do not exist in nature because the coordination / control systems can’t be effective.

There is a lot that could be done to improve the situation (eg as in Suggested Strategic Response). However a strategic approach to Asia literacy is first needed to see through the ‘clouds’, and this would also seem likely to: (a) deprive authoritarian neo-Confucian systems of their main current competitive advantage; and (b) reduce the risk that Western responses would be diverted by poorly informed economists or defence analysts.

  • 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:

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 18th 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


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:

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


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 empowered by the so-called 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 Communist Party and 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?). Under neo-Confucianism the traditional focus on inculcating moral behaviours based on study of history was replaced by an emphasis on behaviours based on study of world-best economic practices

Other Views 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)

China has a long record of practical innovation. This included inventing a social philosophy - a way of living together. Individuals' were expected to control their own behaviour (down to the smallest detail) leading to a respect for themselves that others could share. This approach to self knowledge and how it could be applied to create an harmonious society came down to the doctrine of Confucius. Confucius was born in 551BC into a declining aristocratic family and spent his early years in poverty. He did not start lecturing until middle age. His ideas on political reform made it necessary for him to leave his home province. His ideas have affected China ever since. Confucius believed that if people were were comfortable society would be comfortable - and enjoy long term peace and stability. His mix of personal and social responsibility suggested a practical way of ordering society - one that required: (a) suspending part of one's individuality for the good of the group; (b) the educated to lead the uneducated; (c) rulers to have the loyalty of their subjects and help / protect them. Confucius advocated: universal education and that education be the basis of selecting public officials. The bureaucracy administered China under successive emperors on Confucian principles. The power of China's bureaucracy waxed and waned. It eventually became rigid and stifled Chinese people's spirit of innovation. Confucian bureaucracies provided the continuity that held China together for over 2000 years .  (Thorpe A and Raymond R., 'Man on the Rim', Angus and Robertson, 1989)

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 / responsibles 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

Similarly the 'end of the Asian century' was viewed as a political phenomena in Australia (ie a reflection of apathy and isolationism) without considering whether it might be a geo-political reality

The End of the 'Asian Century' Seems to be Coming into View - email sent 5/11/13

Professor Mark Beeson
Murdock University

Re: Is this the end of the ‘Asian century’?, The Conversation, 29/10/13

Your article speculated about whether the notion of engagement in an ‘Asian Century’ might be over as a theme in Australia’s domestic politics. However there is a broader question that also needs consideration, ie whether the idea of an ‘Asian Century’ as a geopolitical reality might also be over fairly soon.

There are reasons to suspect that the ‘non-capitalistic’ (ie don’t worry about profitability) financial systems that have been foundational to the economic ‘miracles’ achieved in countries such as Japan and China (see explanation below) seem to be leading to debt levels that may cause financial crises and economic breakdown (not to mention political instability). Needless to say the end of the ‘Asian Century’ as a potential geopolitical reality has significant implications for Australia.

Extreme ‘credit binges’ have characterised various countries’ efforts to recover from the global financial crisis (see Debt Denial: Stage 3 of the GFC?). A great deal of public attention has been paid to risks associated with high levels of sovereign debt exposure in developed Western economies (eg in Europe and the US). However the legacy of the sovereign ‘credit binges’ in ‘non-capitalistic’ economies such as Japan and China seem far more serious - even though it is harder to get reliable information about problems in those countries than under political and economic systems that emphasise financial transparency and allow democratic debate about debt levels (eg see Preparing for a 'Con'? in relation to China and Japan’s Predicament ). However the quality of debt (ie whether or not it has been used with financial discipline) is more important in determining the potential for financial crises than the overall level of debt (eg the debt / GDP ratio). Moreover ‘Asia’s’ non-transparent financial and autocratic / nationalistic political systems seem:

  • poorly equipped to rectify their problems (see Other Structural Problems in relation to China’s predicament and Why Japan can't deregulate its financial system); and
  • less likely to provide potential external investors with confidence in their commitment to meet their debt obligations . Extending credit to neo-Confucian states (such as those in Japan and China) will enable one to participate in the communities they control (an environment in which success depends on one's relationship with authorities rather than on one's capabilities and initiative). But it will not provide any more assurance than their ethnic communities have that one's financial contributions will be repaid.

Suggestions about this fundamental weakness in East Asian systems of socio-political-economy were outlined in Are East Asian Economic Models Sustainable? (2009). And the potential for this to make rhetoric about an ‘Asian Century’ suspect was speculated in World facing 'Crisis of non-Capitalism': Non-economist (2011) and Asian Millennium or Asian Decade? (2012).

Your article pointed to the limitations of the previous federal government’s Australia in the Asian Century White Paper. The lack of attention to the implications of radically different cultural traditions seemed to be the primary problem (eg see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century). And, though the present federal government has taken down that White Paper, it seems equally oblivious in relation to such issues (eg see 'Free' Trade with China: Not Likely under a Neo-Confucian Regime).

The ‘Asian Century’ could well be over as a potential geopolitical reality before Australia’s political establishment even starts to suspect that it is at risk.

I would be interested in your response to my speculations.

John Craig

Similarly it was argued that, despite the federal government's removal of its predecessors Australia in the Asian Century White Paper that it was still an 'Asian century' and that there was likely to be value in studying Asian 'public service' traditions - without apparent recognition that the 'Asian Century' was not inevitable and the concept of a 'public' that the bureaucracy might serve was only a Western notion.

Is it Still the 'Asian Century'? - email sent 9/11/13

Sara Bice and Helen Sullivan
University of Melbourne

Re: Abbott government may have new rhetoric, but it’s still the ‘Asian century’, The Conversation, 8/11/13

Your article suggests that, though the federal government has taken the Australia in the Asian Century White Paper off the Internet, Australia still has to deal with the realities of an ‘Asian Century’.

However this is by no means certain for reasons suggested in The End of the 'Asia Century' Seems to be Coming into View and Changing Australia's Security Approach.

There is no doubt that the federal government has no real idea what it is dealing with in East Asia (eg see 'Free' Trade with China: Not Likely under a Neo-Confucian Regime). However it is not alone in this. The previous government’s Australia in the Asia Century White Paper was grossly overly-simplistic (see The 'Asian' Century you have when you are not having an Asian Century). And the significance of an ‘Asian Century’ does not seem to have penetrated into the consciences of most of those who proclaim it (see Babes in the Asian Woods). The latter suggests that:

“In simplest terms an 'Asian century' arguably implies the triumph of 'Asian values' and thus that intuitive, hierarchical and autocratic ethnic groups would prove better able to deal with ongoing economic and political challenges than rational / responsibles operating within the framework of individual liberty, a rule of law, universalist values, freedom of speech, democratic governance and profit seeking enterprises that Western societies have adopted. “ (see What Does and Asian Century Imply?)

Your article makes a useful contribution by referring (for example) to Asian ‘public service’ traditions – and to efforts now in various places to study these. However there are more fundamental issues that need to be considered first (eg epistemological issues as suggested in East Asia in Competing Civilizations and strategic issues as suggested in A Strategic Approach to Asia-Literacy). A serious attempt to understand the intellectual foundations of such systems is essential to understanding: (a) East Asian ‘public service’ traditions (which have nothing to do with serving a ‘public’ – a Western notion); and (b) the very real likelihood that the wheels will fall off the supposed ‘Asian Century’.

I would be interested in your response to my speculations. 

John Craig

China's proposed reform agenda at the time of the Third Plenum in November 2013 was potentially misleading, yet a fair degree of Asia literacy was required to understand why this might be so.

Not everyone is convinced that the Shanghai free-trade zone is serious - email sent 18/11/13

Scott Murdock

Re: Shanghai free-trade zone seen as a step toward yuan liberalisation, The Australian, 1/11/13

Your article pointed to the proposal that the Shanghai free trade zone allow full currency convertibility as an indication that China wants the yuan to become an international currency.

However a China watcher who seems to be attuned to reading between the lines of what China announces has suggested that the Shanghai free-trade zone itself may not be what it seems to be (see article outlined at the start of Is China Heading in the Direction of North Korea?). Other indications that China may not actually be heading in the direction that has been announced include:

  • China has been heading for a financial crisis, and there are indications that misleading information has been provided about its prospects (see Preparing for a 'Con'? );
  • The cultural impossibility of working with a liberalized financial system (see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems). Major economic activities are orchestrated through hierarchical social relationships (which in China’s case are centred on the so-called Communist Party) with limited regard to return on capital (see evidence). It is culturally impossible to convert to a system involving decentralised decisions by independent enterprises on the basis of expected profitability – ie to capitalism (see also Does Asia have Capitalism?);
  • The fact that purpose of providing information in East Asia is to induce favourable responses from one’s subordinates / enemies – not to enable them to understand (see Why Understanding is Difficult). ‘Deception’ is the core of the ‘Art of War’

John Craig


China's Reform Map Unclear - email sent 20/11/13

Bob Davis

Re: Map Done, China Faces Reform Roadblocks, WSJ, 18/11/13

Your article suggests that China’s leaders have put forward a clear reform agenda, but will have trouble getting this through China’s bureaucracies.

I would like to submit for your consideration that China’s actual reform agenda may well not be that which has been publicly stated. A preliminary version of my rather complex reasons for suggesting this is outlined in Not everyone is convinced that the Shanghai free-trade zone is serious . The latter includes reference (for example) to deception being the core of traditional ‘Art of War’ strategies.

I would also like to suggest that the so-called ‘Communist’ Party is not in the business of developing plans that then have to be implemented. Rather (like Japan’s government) it probably aspires to be the mouthpiece of a quasi-bureaucratic society through which plans are both developed and implemented. Systems like those in China (and also in Japan) can usefully be considered as ‘whole of society’ bureaucracies whereby a variation of the Confucian methods whereby East Asian societies were traditionally governed by intellectual elites has been implemented in a modern context. Reasons for this suggestion are in East Asia in Competing Civilizations.

In China the ‘Communist’ Party is arguably a gigantic neo-Confucian consulting / implementation apparatus that aspires to be the central nervous system of ‘China’ (as an ethnic community – presumably including the Diaspora). That apparatus has apparently been presented to China’s people as the means whereby China can gain vengeance for the historical sufferings that their ancestors endured as a consequence of Western expansion and Japanese invasions. This is not an arrangement that has universal support (eg see Communism Versus Confucianism: The Continuing Contest in China)

In a well-functioning bureaucracy decisions are reached by promoting collegiality and consensus through a hierarchy to take account of the diverse and complex considerations involved in the many different functions that a government has to deal with and coordinate. Those methods (in Japan and China) are used for the whole of the society – being centrally and hierarchically orchestrated in Japan through the bureaucracy and in China through the so-called ‘Communist Party’. Reliance is not placed on a rule of law – which would facilitate rational independent decision making by private citizens / businesses. Rather law (along with other means) is used as a means to discipline those who deviate from the communal consensus. Success (in economic terms or any other) will reflect one’s relationship with the hierarchy and one’s compliance with the consensus that emerged through it.

Such society-wide bureaucratic methods have proven very effective in orchestrating economic ‘miracles’ in East Asia – though they involve have involved non-capitalistic (in non-profit-oriented) financial systems which are becoming increasingly vulnerable (see Are East Asian Economic Models Sustainable?). And that vulnerability requires radical change in China (eg see Preparing for a Con?). However the nature of that change is not necessarily that which has been publicly announced.

The possibility that an ‘Art of War’ lens might need to be used in studying China’s reform proposals is given further support by the indications that a coordinated international effort may be underway to constrain the strategic intelligence gathering operations that have been the basis of defence planning / international relations by the US and its allies (see Coordinated Efforts to Undermine Western Intelligence Gathering? ) . Support also comes from the fact that China's education system seems to be being reformed to generate a compliant population, which is quite the reverse of what would be needed for a more liberalized economy (see Financial and Educational Reform in China: Headed in Opposite Directions?) .

I would be interested in your response to my speculations.

John Craig

In March 2014 it was noted that while China was doing a great deal of talking about economic reforms, this did not seem to be resulting in much implementation [1]. Moreover it seemed that China's president (Xi Jinping) was wielding absolute and uncontested political power [1] - which hardly seemed compatible with a liberalising economic reform agenda.

In December 2014, Australia endorsed a proposal for the establishment by China of an international institution (ie the Asian Infrastructure Investment Bank) without apparent recognition of the geo-political implications of doing so.

Internationalising the Influence of China's Authoritarian 'Bureaucracy' - email sent 8/12/14

Rowan Callick
The Australian

Re: Australia will join Asian Infrastructure Investment Bank, The Australian, 8/12/14

Your article illustrated the nativity that Australian Governments have exhibited in dealings in East Asia. It noted that the Government is now enthusiastic about joining China’s AIIB, because Australia’s concerns about the AIIB’s governance arrangements have been resolved. However problems with the way the AIIB proposal was developed and approved (that were arguably more significant than how the AIIB itself would work) were entirely ignored.

The AIIB has implications that go well beyond questions of how it would work (see Looking at the AIIB in Context, 2014). Expressing enthusiasm for the AIIB has the effect of endorsing the international application of China’s autocratic / unaccountable quasi-bureaucratic system of government (see The Resurgence of Ancient Authoritarianism in China, 2014) even though that system is incompatible with prevailing ‘liberal’ international institutions.

China’s willingness to meet Australia’s request for the AIIB’s governance to be changed should not have impeded serious consideration of strategic context in which the AIIB proposal emerged. The AIIB is not particularly important in itself, but it’s creation establishes the precedent of using China’s domestic ‘quasi-bureaucratic’ methods of governance in the international arena. Those methods involve social elites (who are not subject to any sort of democratic accountability) developing a consensus amongst stakeholders, and then enforcing it. Those ‘quasi-bureaucratic’ elites do not care what the consensus is. All that matters is power. In relation to the AIIB China’s elites are naturally quite happy to incorporate amendments which lead Australia to enthusiastic endorsement of the AIIB. All that really matters is having it accepted that China can develop (and enforce) such a consensus ie that China’s authoritarian quasi-bureaucratic system can be effective in the international arena (see Acquiring Soft Power).

It is worth noting that the AIIB is only one amongst a large number of initiatives that seem to be being sought to create an alternative to the liberal post-WWII international order which had sought to contain the power of authoritarian elites (see Creating a New International 'Confucian' Financial and Political Order, 2009+). Elite authoritarianism (ie fascism) is making a come-back, and Australia has now given it enthusiastic support.

It is highly desirable in dealing with China / East Asia that Australia get serious about understanding what it is dealing with. However, as suggested in Babes in the Asian Woods (2009+), Australia has a well-established history of not doing so.

John Craig

In July 2015, the Australian Labour Party endorsed an international relations policy that gave increased emphasis to Australia's relationship with China [1] - without any apparent understanding of the issues involved in doing so (eg of China's apparent attempt to install itself at the centre of an international order within which its unaccountable leadership would be able to exert political and economic power in ('soft-fascist') ways that are quite incompatible with Australia's liberal institutions). At the same time assurances by China's  ambassador that China posed no threat to Australia were reported [1] clearly without any understanding of what the nature of the 'threat' might actually be (eg see above)

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.

 

Addendum B: Assessing China's Economic Performance +

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


China may not have the solution, but it seems to have a problem (Email sent 23/3/10)

Mr Shiu Sin-Por,
Central Policy Unit,
Government of HKSAR

Re: 'The problem is not China', New York Times, March 19, 2010

I should like to support suggestions in the above article that currency manipulation by China was not the primary cause of the US-centred financial crisis, but caution that, though China alone can't itself solve current problems, it will be at risk as the US now finds that economic growth requires reversing its current account deficits.

My interpretation of your article: US is desperate because having stabilized its economy after financial crisis, problems remain (eg poor job creation). Calls to get tough with China are increasing - though in the East the suggestion that China caused US-led financial crisis looks ridiculous. China allegedly caused US's cheap money which led to crisis. But there is a gap between cheap money and wild spending on one side, and irresponsible lending on the other. Why blame China because Americans chose not to repay mortgages, but to take out second mortgages and have extra vacations? Suggesting that China buys US currency to suppress currency value is a distortion. China earns foreign currencies by exporting - and the Central Bank is obliged to buy it. This is not playing currency market to lower renminbi. China wants a stable exchange rate - but this is different from manipulating currency. Renminbi is non-convertible - so it has no market. China's competitiveness comes from huge pool of cheap labour, not artificially suppressed currency. China is not the cause of cheap money. Can China solve West's problem? Some hope that more expensive renminbi would allow West to improve trade balance with China (thus creating jobs and filling in demand lag while economies deleverage). But history shows this doesn't happen (eg increasing renminbi since 2005 has been accompanied by increase in China's trade surplus). However China's economy remains small, and demand increases in China can't make much difference to West's shortage of domestic demand. China-bashing is easy - but China is rising and will stand up for its interests. Focusing on renminbi merely diverts attention from finding real solutions to US's employment problems. West must recognise its problem and that the solution must come from within. .

My understanding is that international financial imbalances (linked to high consumption rates mainly in the US, and export-oriented growth strategies in countries like China) played a significant role in causing the global financial crisis (GFC). However, they were by no means the only cause (see GFC Causes), and China's role in those imbalances (and the value of the renminbi in particular) is, as your article suggests, an inappropriate focus in seeking a solution.

The international financial imbalances between the US (in particular) and East Asia appear to have their origin in the state-driven export-oriented economic model that Japan adopted as the basis for its rapid pre-1990 economic 'miracles' - a model that was then copied across East Asia in various ways. This included China after 1979 as a relative latecomer - though ultimately a significant influence because of its size. This economic model required large current account surpluses - because capital was used to maximize market share rather than to achieve profitability, and thus any reliance on foreign capital to finance development would have led to to financial crises (like the Asian Financial Crisis of 1997 that affected countries not protected by current account surpluses) - see Understanding East Asia's Economic Models.

Following the development in 1987 of techniques to prevent financial crises from affecting the 'real' economy by boosting liquidity, the US Federal Reserve increased those imbalances through monetary policies (often involving cheap money which ultimately created the asset bubble that burst as the GFC) in order to maintain global economic growth despite the domestic demand deficits implicit in Japan's, and other East Asian, economic models. Without excess demand elsewhere (especially in the US), economic growth and rapid development in Japan, the Asian 'tigers' and China would have been macroeconomically impossible (see Impacting the Global Economy and Comments on the European Sovereign Debt Crisis)

As your article suggested, any attempt to blame the problem on the value of China's currency is inappropriate, because:

  • the imbalances, which were the seeds of the GFC, arise from non-capitalistic financial systems (initially Japan's) that direct capital into not-necessarily-profitable production and constrain credit for consumption, and these emerged decades before China's economic rise exacerbated the phenomenon; and
  • exchange rates seem less important in affecting trade balances than whether production / distributions systems are in place (eg see The Inadequacy of Currency Re-alignment). In the mid 1980s, the US achieved a significant devaluation of $US against Japanese Yen under the Plaza Accord - but this made essentially no difference to Japan's large trade surplus (just as your article noted that recent revaluation of the Chinese renminbi made little difference)..

Thus it seems likely that you are correct in arguing that any solution to imbalances (ie boosting US growth by improving its trade imbalance to counter the effect of deleveraging) should not be sought from China - but rather requires initiative mainly from 'deficit' countries like the US.

My suspicion is that what will be needed might be: 

  • recognising that, while attention needs to be given to the excesses of capitalistic institutions, these were not the only, or necessarily the major, factor in the global financial crisis (see An Alternative to Scapegoating Capitalism), and in particular;
  • highlighting in international forums (eg UN, G20) and with international institutions (eg WTO and IMF):
    • the adverse macroeconomic consequences of international financial imbalances (see Structural Incompatibility Puts Global Growth at Risk, 2003);
    • the contribution to those imbalances of distorted financial systems that appear to characterise neo-Confucian systems of socio-political economy (especially those in Japan and China) that seem to: (a) constitute a novel form of industrial protectionism through providing capital from state-linked banks to state-linked businesses with limited regard to its profitable use; (b) thus require domestic demand to be suppressed to protect protect the state-linked financial institutions (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy); and (c) thus create a demand deficit that puts global economic growth at risk unless others are willing and able to compensate (see Impacting the Global Economy); and
    • the contribution to those imbalances (in the form of defensive demand deficits) of poorly developed financial systems in various emerging economies (see Leadership by Emerging Economies? )
  • strengthening systems of government to better support democratic systems in dealing with complex problems (eg as suggested in Australia's Governance Crisis and the Need for Nation Building and in interchange in US Evaluation of Financial Crisis). In the absence of such support (eg a strategic approach to Asia-literacy), simplistic / populist policies can be adopted, which are quite inadequate;
  • a constraint on the availability of credit for consumption in US (and similar countries);
  • restricting the economic role of financial services to very little beyond support for 'real' economic activity, because of the instability, unpredictability and abuses that can be generated by complex financial systems (see Restricting the Economic Role of Financial Services) . The economic strength of Western societies arises from the ability of responsible individuals to make rational decisions, but complex financial systems render this much less effective and reliable. Financial services might be constrained to little beyond support for the 'real' economy by prohibition of either borrowing or lending for the explicit purchase of financial assets. Given the significant role that financial services have come to play in some countries, the latter will need simultaneously to make
  • serious efforts to accelerate development of the supply side of currently-'deficit' economies (eg using methods such as those outlined in A Case for Innovative Economic Leadership which suggests one possible application of a general methodology in an Australian context). This involves apolitical processes to use strategic information to speed market-oriented and economically-productive / profitable changes within whole industry clusters - a process that:
    • is intrinsically impossible through democratically accountable institutions (eg because the latter attract rent-seekers, and can't be on the leading edge of market / technological awareness), though democratic endorsement of the protocols used in stimulating such economic adjustments would seem highly desirable;
    • could be paralleled by:
    • should have similar economic effects and benefits to innovation within individual enterprises; and thereby
  • increase the incomes of 'deficit' countries (while consumption spending is constrained as noted above); more closely aligning welfare policies between Western and Asian societies; inhibiting manufacturing investment in countries that maintain mercantilist economic strategies; and something like Keynes' suggestions in the 1930s to encourage countries to run balanced trade accounts (see Options in Structural Incompatibility Puts Global Growth at Risk, 2003);
  • further constraining consumption relative to production by tighter welfare arrangements - eg  by lifting pension ages because of the cost otherwise of an aging population, and encouraging extended-family occupancy of houses / apartments, thereby reducing the need for real estate investment (much of which is ultimately a form of consumption);
  • reducing the need for current levels of military spending by discrediting the ideology of groups seen to pose security risks - eg by 'soft power' methods such as those suggested in relation to Islamist extremists in Discouraging Pointless Extremism, and in Comments on Australia's Strategic Edge in 2030 in relation to China's apparently increasing militarism;.
  • discouraging emerging economies from holding foreign exchange reserves to protect poorly developed financial systems. In relation to this initiatives by the US Federal Reserve that are mentioned in Currency War? seem interesting. For example, pressure for the development of reliable financial systems might be achieved by:
    • boosting the availability of credit for consumption in countries with current account surpluses - an outcome that might possibly be achieved by the US Federal Reserve's late 2010 quantitative easing, because increases in the money supply in the US (where the community generally is in a de-leveraging mode) is likely to create a $US carry trade into emerging economies. It is however noted that because the 'velocity of money' in the US seems to be recovering [1], that QE could be risky by resulting in a rapid increase in inflation and thus force a rapid reversal of QE which would burst any asset bubbles created by QE;
    • encouraging countries such as Japan and China, whose distorted domestic financial systems are primary causes of international imbalances, to make their reserves available to the IMF to counter the risk of financial crises in emerging economies (and thus expose them to losses if financial institutions remain underdeveloped) - see A Good Idea that probably Won't Work
  • developing more effective techniques for macroeconomic management, as traditional fiscal and monetary policy methods seem to contain serious defects (see Booms and Busts: Unsatisfactory Tools for Macroeconomic Management?). The use of fiscal policy is limited by the risk of inadvertent pro-cyclical intervention and also by the futility of thereby raising government debt levels when (as at present) the economic constraint is structural rather than cyclical. And monetary policy risks the creation of asset bubbles and subsequent financial crises.

The adoption of such solutions by the US (and other 'deficit' countries) would presumably eventually lead to financial and economic crises across East Asia, and in the various emerging economies that have also relied upon current account surpluses to protect their non-capitalistic financial systems. Thus, while revaluing the renminbi would not in itself eliminate current constraints on global economic growth, considerable adjustments to East Asian economic models (ie to reduce their dependence on current account surpluses and thus on the ability of the US financial system to perpetually absorb excess savings) would seem to be highly advantageous.

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

John Craig


More on: China may not have the solution, but it seems to have a problem (email comment of 24/3/10 on Shiu Sin Por's response of 23/3/10)

Mr Shiu Sin Por,
Central Policy Unit, Government of HKSAR

Thanks for your considered feedback. Further comments are inserted into your email below.

-----Original Message-----
From:
spshiu@cpu.gov.hk Sent: Tuesday, 23 March 2010 7:41 PM To: John Craig
Subject:
Re: China may not have the solution, but it seems to have a problem

Dear Mr. Craig, Thank you for your thoughtful response. We are in agreement on most of the key points. The following is my response to some of the points you made:

1. Export based economies required a large current account surpluses---This is not necessary true. There is no logical connection between the two. At lease for now, China does not need these surpluses. They don’t know what to do with it. Their effort to invest outside of China is not very successful. They know to have it mostly in US$ is a great risk. But they don’t see any alternative. (I happen to disagree with them on this.)

CPDS COMMENT: True - export-based economies do not need large current account surpluses. But countries whose financial systems make capital available to state-connected undertakings with limited regard to profitability (eg because emphasis is rather placed in market share / cash flow) do need current account surpluses. This is because, if they run current account deficits they will experience offseting capital inflows that will eventually result in financial crises if there is no true capitalistic emphasis by their financial institutions on profitability in making investments. [Any current account surplus / deficit, it may be noted, is always roughly balanced by a corresponding capital outflow / inflow - so that if a country runs a current account deficit it must have a corresponding capital inflow to finance this, and must have well developed financial systems if this capital inflow is not to turn into a crisis].

A critical deficiency certainly seems to exist in Japan's financial / economic system (see Why Japan cannot deregulate its financial system), and similar practices appear, in different way, to have found their way into China's financial / economic model. It can be noted that (according to Eammon Fingleton) Japanese officials had a significant background influence in 1979 in the emergence of the economic model that became the basis of China's modernisation (see Signs of an Emerging East Asian International Order).

China is reportedly headed for current account deficits because of the drop in global demand for its exports and the need for huge domestic economic stimulus. This is not a problem in the short term (given accumulated foreign exchange reserves) but in the medium to long term, I would expect serious consequences unless China's financial practices become more truly capitalistic (ie profit oriented)

2. US Fed’s cheap money is “to maintain global growth despite the domestic demand deficit in Japan’s and other East Asian, economic models.”---The result. Yes. But I doubt it is their intention. Their consideration is purely domestic. But it has an international consequence because of globalization. Asian imports=US excess demand? This is questionable. “Asian imports substitute domestic supply while little or no change in aggregate demand” is closer to the truth.

CPDS COMMENT:Alan Greenspan as Federal Reserve chairman frequently referred to the need for easy monetary policy because of the risk of deflation - though deflation was a risk that Japan faced because of its domestic demand deficit (but was not at that time a problem the US itself faced). Thus it is quite clear that US monetary policy was for years before the GFC being set with a view to keeping global economy going (Japan's in particular) not just that of US - presumably with advice from Japanese officials.

In fact, something like this was necessary anyway, because keeping US domestic growth going with the drag of a large trade deficit, required that significant demand be generated in some other way.

Certainly 'Asian' imports substituted for domestic supply - but, contrary to your suggestion, this does result in a fall in aggregate demand in the US (because the income associated with those imports would be earned in 'Asia', and there was no offsetting demand for exports to 'Asia' )

3. Your suggestion: a. Constraint on credit for US consumption—this is contrary to what is needed in the US, high spending to maintain growth. Can’t be done. Their problem now is that people are not spending even when money is still cheap. b. Attack supply side by reforming industry clusters---Fat chance! Political leadership is not there and even if there is, it will take a long time. (too long)

CPDS COMMENT: US faces the prospect of a serious demand deficiency - because deleveraging by households / private sector (perhaps 5% of GDP pa for the next 15 years) and a limited capacity to provide demand through increasing government debts or quantitative easing (ie printing money by Federal Reserve) will compound the chronic demand deficiency associated with the US's past trade deficits.

If its economy is not to stagnate, the US must focus on boosting exports to provide the demand now needed for growth - and, amongst other things, this requires constraining consumption to provide the needed capital. The fact that everyone in the world will now be seeking export-led growth, and that no one will now be wanting to take the role that the US did in the past as 'consumer of last resort' implies problems for the global economy. But still the US has no choice, and the 'world and his wife' are now likely to expect China (and other surplus countries like Japan and Germany) to become the 'consumers of last resort'.

In terms of developing industry clusters, I note that: (a) political leadership is the last thing one needs in trying to do this in a democratic political system; (b) the US established protocols which were fairly effective in doing this in the 1990s - eg Silicon Valley Joint Ventre Network Association and various other private-public partnership arrangements; (c) the theory of why such techniques are likely to be effective in developing competitiveness / productivity is now much stronger (as the reference I cited illustrates); and (d) my involvement in experimenting with such methods suggests that they can produce powerful results VERY quickly providing methods are used which navigate through the hazards.

I do not understand your logic that emerging economies need to relied upon current account surpluses to protect their non-capitalistic financial system. If their system is non-capitalistic (meaning non market), more or less forex reserve is not an issue. (May be your reason applies to convertible currency economy. But China is not one of them. ) If the US can balance their trade, it would not be a problem for China and China would not have a financial crisis because of it.

CPDS COMMENT: A Brazilian economist, André Lara Resende, drew attention to the shift in recent years by many emerging economies towards reliance on current account surpluses to guard against financial crises (see comments in A New World Order).

This was simply copying a similar shift that occurred in countries adversely affected by the Asian financial crisis of 1997. The latter crisis was the result of withdrawal of foreign capital when it was discovered that crony capitalist practices (ie making capital available to those with good state connections who were hoped to act in the national interest) did not necessarily produce profitability. This 'crony capitalist' practice was much the same as countries such as Japan and China had done - with the main difference being that the 'crisis' countries were reliant on foreign capital, and even less disciplined in the way capital was used. The IMF had recommended that 'crisis' countries not only reform their financial practices (which was only partly achieved) but that they seek current account surpluses. Clearly the IMF did not think through the global macroeconomic consequences.

It is possible to have market economies that are non-capitalistic. 'Capitalistic' implies that enterprises make decisions on the basis of expectations of profitability (ie adding value to capital employed). Japan has, for example, been claimed to be a non-capitalistic market economy (by Sasikibara, otherwise known as 'Mr Yen') - and this claim appears valid, as while it has a market economy, its enterprises have primarily gained capital from state-controlled banks in the expectation that they would pursue nationalistic goals of developing production capacity - with profitability not a serious goal.

If currently 'deficit' countries (such as the US) find that they now have no alternative to seeking export-driven growth, this will necessarily tend to reverse (or at least put enormous pressure on) the current account surpluses of what have to date been 'surplus' countries (such as China) - and, as noted above, this would tend to make countries such as China into capital importers rather than capital exporters, and thus at risk unless their financial institutions place much greater importance on capitalistic profitability.

Thank you again and best regards. Shiu Sin Por

John Craig


More on: China may not have the solution, but it seems to have a problem (email comment of 14/4/10 on Shiu Sin Por's response of 14/4/10)

From: spshiu@cpu.gov.hk [mailto:spshiu@cpu.gov.hk] Sent: Wednesday, 14 April 2010 7:03 PM To: John Craig

Dear Mr Craig, Sorry for the late response. One last point I want to make. Let's not forget China runs a link-rate system where there is no open market for currency exchange. Many of your arguments would not apply in such a system. Thanks.

Best regards,

Shiu Sin-por

Shiu Sin-por

True. Under present currency exchange arrangements, China would not seem to have the serious problem I described.

But under the circumstances that I envisage arising, China will no longer be accumulating foreign exchange reserves, and (after running down existing reserves) China will have to borrow heavily to fund the 8-10% pa rate of growth it apparently needs to maintain. It would not be able to borrow in international markets without an open market currency exchange (ie without scrapping the link-rate system) - or without simply borrowing in foreign currencies such as (say) $USs.

I am referring to the situation that will arise when countries with large accumulated foreign exchange reserves (eg China, Japan and Germany) find that they have no choice (ie they are to continue growing economically) but to also provide the demand to sustain global growth (ie take over the US's role as 'consumer of last resort', because the US backs away from its post WWII commitment to allowing its market to be used to sustain global growth and development). The US Government already seems to be heading towards such a change (see US Backing Away from Bretton Woods?) - and, as I argued, the US really has no choice but to do so.

Under those circumstances, it seems to me that, the concerns I have expressed about China's medium term future would not be invalidated by the currency exchange regime that exists at present.

John Craig


More on: China may not have the solution, but it seems to have a problem (email comment of 16/4/10 on Shiu Sin Por's response of 15/4/10)

From: spshiu@cpu.gov.hk [mailto:spshiu@cpu.gov.hk] Sent: Thursday, 15 April 2010  To: John Craig

John, That's why China is trying to change its mode of economic development by building up its domestic demand. Let's hope they are successful.

Regards, Shiu Sin-por

Shiu Sin-por

There is no doubt that China has to build up domestic demand - because the demand needed to support growth will be ever less available from elsewhere. But when this is done, unless there are huge changes in the way China's economy operates (mainly related to taking profitable use of capital seriously rather than directing it to state-determined uses) China will face huge financial problems.

Many analysts are expecting China to run into financial problems in 2010 (related to the emergence of asset bubbles through ill-disciplined creation of huge amounts of credit for investments to counteract the effect of GFC). But the type of financial crisis that I suspect could arise in the medium term (after domestic demand has become much stronger, and if the way in which China's economy works remains unchanged) would be much more serious - because it would be outside China's control.

John Craig


More on: China may not have the solution, but it seems to have a problem (second email comment of 16/4/10 on Shiu Sin Por's response of 16/4/10)

From: spshiu@cpu.gov.hk  Sent: Friday, 16 April 2010  To: John Craig

John, You are right on this. That's why China has been trying hard to change its economic structure since the 17th Party Congress (2007).

Regards, Shiu Sin-por

Shiu Sin-por

I hope they get it right. From where I sit I don't see viable changes being put in place.

John Craig

Addendum C: Complications in Assessing 'Asia' in Terms of Western Economics Addendum D: Complications in Assessing 'Asia' in Terms of Western Economics

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.


Email response from an individual ('Anonymous') to whom Economic Recovery is Constrained by Dead Weight Economies had been copied (dated 11/5/11)

Dear Mr. Craig,

.......

I agree with all your points.

The deadweight of debt and deficits is weighing on virtually all Western economies and Japan. China is different given its enormous foreign reserves and net debt situation. The Chinese are working rapidly to reduce their dependence on exports by developing domestic markets. Infrastructure is an issue here. However, over time, they will succeed.

The difficulty with the G20 is that is dominated by those economies which are soft. They see the remedy to ask other members (eg. China) to do the heavy lifting. China has obliged by raising the value of the RMB to the highest point in 17 years, but they will not jeopardise their own growth while they transition from an export to a domestic oriented economy.

As to Australia’s Asian literacy, I see this as an important and urgent issue which does not seem to be grasped by either of the major political parties. It needs to be, including compulsory Mandarin courses in all schools as well as a greater awareness of and sensitivity to, defence and other bi-lateral and regional issues.

.....

Anonymous


Reply to Anonymous (dated 11/5/11)

Dear Anonymous,

.........

Regarding the substantive issues raised ...., I should like to submit for your consideration that:

  • China is not materially different to Japan in that both have large foreign reserves, and very substantial public debts (through state owned banks and the government budget respectively) that have been incurred on capital investment (eg in property and infrastructure);
  • China can no more reduce its dependence on exports (ie on current account surpluses) than Japan was able to do (eg see China can’t fix the global currency crisis without economic disaster , 2010);
  • the real ‘heavy lifting’ is not developing domestic markets or revaluing the currency but rather creating a financial system that is capable of operating with current account deficits (ie without dependence on exports). Some reasons that reducing dependence on current account surpluses is virtually incompatible with East Asia’s systems of socio-political economy were suggested at the time of the Asia financial crisis – see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems (1998). Akio Mikuni’s, Why Japan can't deregulate its financial system (2000), was an account of the practical consequences of those cultural features. The G20 (and countries with ‘soft’ economies) focus on revaluation of the RMB because they lack the Asia-literacy to perceive the deeper problem (eg see The Asian Connection in the Public Debt Problems Facing Developed Economies);

It is possible to be far more specific about what is required to build Asia literacy in Australia – and compulsory study of Mandarin would not be part of such a process. A Strategic Approach to Asia-Literacy (in Babes in the Asian Woods) suggests features that would be of immediate relevance to Australian policy makers in relation to their dealings in East Asia. This starts with a reference to East Asia (in Competing Civilizations), which mentions what is commonly said about the way things are done in ‘Asia’ and suggests how this might make sense in societies that lack the universal values and notions of truth that Western societies derived from their Judeo-Christian and classical Greek cultural heritage. It is noted that this is derived from an attempt, while working for the Queensland Government in the 1980s, to ‘reverse engineer’ the intellectual basis of East Asian economic miracles. That effort resulted in a report that seemed to be regarded as significant by some Asia experts (eg Professor Chalmers Johnson, author of MITI and the Japanese Miracle, described this as ‘dealing with matters on the leading edge of the social sciences’) and Reg Little, a former DFAT China specialist and co-author of The Confucian Renaissance, had favourable comments on my 1993 attempt to explore options to accelerate economic development in Australia.

.......

John Craig


Email response from Anonymous (received 12/5/11)

Dear Mr. Craig,

I think China is fundamentally different to Japan in that its population is younger, its domestic market is much less developed and its debt to GDP is lower. Moreover, its manufacturing output on the whole is less elaborately transformed than Japan's and suitable for domestic consumption, and it is still, unlike Japan, in urgent need of infrastructure development. Japan's domestic market is mature and its infrastructure is world best.

That said, Chinese banks are not in good shape and growth will not be uninterrupted.

The interesting thing about international trade is that if you add up all the surpluses and subtract all the deficits, you don't find balance. Still, the trade and financial imbalances are now so huge that only an international settlement can fix them. The deficits are domestic and external and, unless the Chinese turn inwards they will be relying on declining export markets and receiving revenues in devaluing currencies. So they have limited choices. The RMB is already at a 17 year high to the US dollar.

The Japanese economy is overburdened with debt (227% to GDP) has a declining and aging population and stagnant growth. They have run out of domestic investors and must increasingly rely on foreign savings. I believe they are in danger of default.

Of course countries can run private sector deficits for a considerable time. Australia is a prime example. But when the indebtedness is sovereign driven, then their structural nature means that once a tipping point is reached, default will likely occur with significant international consequences.

I do agree on your broader definition of Asian literacy and the need for it. Mandarin teaching is at one level trivial, but at another it is an entree to the Chinese culture and may inspire students to explore.  ...........

I am more than happy for you to make my points, but would prefer no attribution.

Anomous


Email reply to Anonymous (sent 13/5/11)

Anonymous

Thanks for your further comments. I have added these to my web-site ...........

China is like Japan in some ways, and different in others.

Both have neo-Confucian state systems (ie where society is coordinated through social networks by elites on the basis of their ability to influence others’ thinking, rather than by law or financial calculation). In Japan’s case the central ‘orchestrating’ role is taken by the bureaucracy with major industry financed by state-controlled banks. In China’s case the central role is taken by the Communist Party ( presumably because under Mao the Confucian bureaucracy had been portrayed as oppressing the masses) - whose members / friends / families, rather than state controlled banks, own major businesses. Japan and China look much different despite this because Japan put on a democratic capitalist ‘face’.

Japan has been compared (I forget by whom) with a ‘block of granite’ (ie perceived as a cohesive single organism, or a ‘cult’ in the words of a US contact with a Japanese wife) while China by contrast was likened to a ‘tray of sand’ (ie to many small social blocks).

Japan’s economy is more developed than China’s – as you noted – but both continue to depend on the now-exhausted ability of trading partners to run large trade deficits, because of the incompatibility between their methods of economic organisation and the capitalistic (ie profit-oriented) financial practices that would apply if they had to rely on imported capital.

Your point about the intrinsic lack of balance in international trade is undoubtedly valid – and presumably reflects difficulties in getting reliable / consistent data.

Both Japan’s and China’s economies are overburdened with debts. In Japan’s case those debts are the responsibility of the state, and its ability to continue borrowing is at risk – though there is probably nothing to stop it proceeding with a Bernanke-style QE program. In China’s case the bad debts are mainly located in the banking system (because capital is deployed with limited regard to profitability) – and this implies that China’s ‘QE program’ is already in effect.

In both cases the debt problems are concealed by substantial foreign exchange reserves – which will necessarily run down as others (especially the US) can no longer afford current account deficits and accumulating debts (and the rate of run down will rapidly accelerate if the whole world starts to depend on demand from countries with current account reserves to prevent economic stagnation). High public sector debts are likely to force the US soon into austerity, but the ultimate victims of this will be countries (such as Japan and China, and many emerging economies) that rely on strong US demand to prevent domestic financial crises. Financial markets are starting to exhibit instability (related to sudden reversal of commodity booms) presumably because of concern about risks to: (a) US demand if frugality option is chose politically; or (b) $US if frugality is rejected. Those structurally reliant on strong US demand (eg China) have a choice between: (a) also slamming on the economic breaks; or (b) accelerating their efforts to create a new international Confucian order.

My 2009 suggestions about the likely future stages of the GFC still seem to me to be realistic (ie the emergence of fiscal drag due to high public debts and private de-leveraging, and ultimate failure of East Asian economic models). While efforts are being made to create new international currency regimes which would allow countries such as Japan and China to continue running large current account surpluses, this seems unlikely to be successful (see comments on ‘Beijing group of economists’ proposal in Should Fixing the International Monetary System Start in 'Asia'?)

Both Japan and China face fundamental problems in resource allocation if demand has to be driven by internal demand, because of the lack of the feedback from demand provided by capitalism’s profit motive (see Balancing Supply and Demand).

Japan’s populating is aging – as you noted – but China is soon to start on the fastest process of population aging that any country has experienced because of its one child policy.

In relation to the advantages or otherwise of studying Asian languages as a path to Asia literacy, I note that a friend’s son studied Japanese at school and at university in the expectation that this would lead to career prospects – but this assumption proved false. Another friend’s daughter married a Japanese man and lived for some years in Tokyo, but found it very difficult to fit in / gain acceptance. Both she and her husband now live in Australia.

My reasons for suspecting that a not-entirely-benevolent view should be taken of developing relations in East Asia are outlined Coalitions of Interest.

John Craig

 


Email response from Anonymous (received 14/5/11)

Dear John,

......................

There are only two ways to grow an economy. One is through the expansion of the work force, the other through improving productivity. Most Western economies including Japan, have neither. For the time being, China has both and, while central planning has resulted in over investment and waste, it has been more easily absorbed through obsolescence of old technology and infrastructure. The decline in export markets will over time be offset by domestic demand but there may well be some pain in the adjustment.

The West, including Japan has also been subject to central planning and concentration of ownership. In the UK for example, the state represents more than 50% of the economy and, in Scotland and Northern Ireland more than 70%. In the US, post the GFC, consolidations, particularly in the financial sector have led to extraordinary economic concentration. It could be argued that in practice, Chinese SOE's are more economically fragmented than America's.

In Europe and the UK, austerity is causing job shedding and a declining workforce as governments who have been the largest employers over the past decade go into reverse. In the US likewise, the reduction in public servants and, redundancies through giant mergers, have led to a sharp rise in unemployment. Even the brighter jobs figures out of the US don't hide the fact that these are mostly in low paid jobs. Work hours have not increased. Nor has pay. Mc.Donalds advertised last week for 50,000 employees and received 1,000,000 applications. China may have considerable under employment but the jobs outlook seems no more problematic. It is why the Chinese will not surrender their competitive advantage through an RMB revaluation without extracting their pound of flesh at the G20 and the IMF.

My point is, that notwithstanding its rigidities, China is in much better shape than most Western economies including Japan. This is not least because the free market capitalist system has been abandoned to varying degrees in the West while its people have become increasingly dependent on the state which does not have the productive capacity to support them.

As you point out, China's population is rapidly aging, but it is still young and productive enough to keep them on an upward trajectory for many decades yet.

I confess not to have considered whether Confucionism and capitalism are inimical. Certainly thrift and hard work are an asset to any society. Likewise I have not pondered whether zaibatsus and communism are manifestations of Confucionism. You may be right, but for the period ahead I don't think this will inhibit China's growth too much.

..........

Anonymous


Email reply to Anonymous (sent 14/5/11)

Anonymous

..........

Your point about productivity raises interesting and difficult issues. Western economies (not including Japan) seek growth in value added (and economists’ traditional idea of productivity is a measure of value added). However neo-Confucian economies (including Japan) seek growth in terms of turnover, without worrying too much about value added. Turnover indicates ‘real’ economic activity, whereas profitability is an abstract concept that requires analysis and is not consistent with the way in which decisions are made under neo-Confucian traditions. However they thus have to maintain current account surpluses (and have trading partners able to run deficits), because they could not easily satisfy external investors’ expectations about profitability. Fingleton’s close observations about these economies (including the role of cartels in giving the impression of profitability) can be noted.

During Japan’s period of rapid growth it was long perceived to have a ‘planned’ economy – and there was a massive debate about industry policy (ie about the potential for state orchestrated economic development) in Western societies (see The Industry Policy Debate, 1997). However it was wrong to see what was done in Japan as ‘planning’ (ie as central decision making). Rather what was involved was ‘bottom up’ decision-making as part of a centrally-controlled process to accelerate economic learning within the real economy by providing access to strategic intelligence, without trying to guess the outcome (ie MITI’s ‘vision’s development’ processes). This was paralleled by financing by MOF-controlled banks that mobilized the savings of Japanese people and invested them to maximize turnover, not to maximize profitability / productivity. The ‘industry policy’ debate in Western societies went nowhere, because it was realized that the political process would seek to dictate outcomes, and the latter would lead to rent-seeking rather than market-oriented outcomes. However this constraint did not exist in Japan, because the process was not democratically constrained.

Similarly it is wrong to view China’s methods of economic control as involving ‘central planning’. As in Japan, this rather involves centrally controlled processes (though by the Communist Party rather than the bureaucracy) to accelerate learning within the real economy – once again with a goal of maximizing turnover, rather than profitability / productivity. Some observations about the role of the Communist Party in controlling the way information is used in China are in China's Bigger Secret.

The size of the state sector is not significant. Rather what matters in terms of economic growth is whether it is market or politically driven. In Western societies, where the state sector is democratically driven, a large state sector naturally implies a loss of market focus. However merely cutting back the size of the state sector and the influence of democratic politics is not sufficient.

Some general thoughts on raising productivity in Australia (which would have parallels elsewhere in the Western world) are in Lifting Productivity: Considering the Bigger Picture. This mentions:

  • The limits of market liberalization – because competitiveness depends on whether the economic system as a whole is well developed and integrated, not just on the motivation of individuals / enterprises to compete;
  • Suggestions about a process to accelerate market-oriented system wide economic learning that would be compatible with democratic political institutions;
  • Comments on general principles of economic philosophy – including comments on the advantages and limitations of financial criteria as the basis for coordinating economic activities. The latter, it was noted above, do not have the same role in neo-Confucian economies that they do in Western systems.

Western societies have alternatives to austerity, eg by serious efforts to accelerate economic development through the methods suggested in the above document (and also in China may not have the solution, but it seems to have a problem). China is not going to be in good shape if Western societies go into austerity and it has to rely on domestic demand, unless it is able to arrange a shift in the international financial system away from the traditional Western emphasis on the ‘profitable’ use of capital.

The neo-Confucian styles of socio-political-economy that prevail in Japan and China are incompatible with ‘capitalism’ (ie with economic coordination through the search for profitable use of capital by separate enterprises) – see also Structural Incompatibility Puts Global Growth at Risk (2003) and note that Sakikabara (‘Mr Yen’) described Japan as a non-capitalist market economy (though he typically made this enigmatic claim without explaining what it meant). Zaibatsus and SOEs are manifestations of neo-Confucianism – but communism is not. Moreover there is nothing traditionally ‘communist’ now about China’s Communist Party.

My reference to learning Japanese and moving to Japan was to illustrate the fact that: (a) learning the language is not a necessary path to success; and (b) women who move to Japan seem to have a hard time in adjusting and gaining acceptance.

John Craig


Email Response from Anonymous (received 14/5/11)

Thank you John.

I suspect that any difference between us goes to timing.

I am a free marketeer and need no persuasion as to the superiority of markets as a wealth creating mechanism. Central planning and the absence of a profit motive lead to misallocation of resources and market distortions and, while Confucian economies may choose to ignore them, the West has forgotten these same precepts of wealth creation as conceited politicians have gone about selling the idea that everyone can live better at the expense of everyone else. Aided by reckless central bankers they gave us the circumstances for the GFC with massive structural imbalances as the legacy. As I pointed out in my FSC speech, the economic price is yet to be paid, but, I believe the day of reckoning is not far away.

There is no doubt the price of this adjustment when it comes will be high including for China. That said, I believe that the West and Japan will bear the greater burden. China and the other BRIC countries will, because of the state of their development emerge relatively stronger and recover faster. This does not negate the point you make about the longer run frictions which a Confucian society will visit on economic growth and development. However, we should not underestimate the precarious state of Western economies and what it will take to repair the damage inflicted by decades of failed economic policies. Nor, for all its defects, should we overlook the relative strength of China and its awareness of the need to reduce its reliance on exports.

Either way it will be a painful period.

And yes, the status of women in Confucian societies is constrained and it is understandable that Western women find it too limiting. .........

Anonymous


Email reply to Anonymous (sent 14/5/11)

Anonymous

I agree about the likelihood of a painful period ahead and the ineptitude of economic policy in recent years.

However the efforts of central bankers (eg Federal Reserve) can’t be interpreted as simply reckless – as I suspect that some of those involved have been very well aware of what has been going on. They just didn’t want to declare a Cold War on Japan, initially, and others later. In my view there has been an unspoken contest for control of the international financial system going on for decades – a ‘clash of civilizations’ that has been a Frozen War (rather than merely a Cold War) because it has not even been acknowledged by either side. The Fed under Greenspan ran ultra-easy monetary policy – because this was needed to maintain global growth in the face of demand deficit / savings gluts in East Asia. And he frequently expressed the expectation that market forces would eventually force adjustments. He was presumably very surprised when the result was a financial crisis in US when an asset bubble burst. However the Fed under Bernanke has been running ultra-easy monetary policy to generate asset inflation in Asia and emerging economies (ie doing unto others as Japan especially did to US – via its ultra-easy money policy and carry trades). Recently Greenspan came out with enigmatic suggestion that: ‘See - we didn’t have to do anything but rely on market forces’. This implies either that: (a) he is now a crazy old man; or (b) that he believes that it is Japan and China that will suffer defeat in the Frozen War (ie be the first to suffer financial crises that are economically crippling). He presumably still has contacts with a lot of people who know what is happening in global financial system, and might be right. I don’t know. Certainly there are weaknesses in Western economies and financial systems. But China (like Japan) has been running what amounts to a Ponzi scheme (ie running financial schemes that depend on a constant inflow of new capital, because capital is not used productively) and such schemes can implode (see A 'Super-Ponzi' economy)

In any event my expectation is that there will be a lot of other sources of stress in the world (eg the peak-oil event might generate a rapid rise in fuel prices in the next few years and disrupt whatever semblance of economic progress might otherwise have been possible – see General Notes on Peak Oil).

As far as I can see Australia’s institutions are completely unable to cope with likely instabilities over the next few years (eg federal government recently came out with a budget that presumes that China boom will be sustained indefinitely; the Opposition went for a purely populist response; and governments at all levels seem ineffectual), My attempt to identify what might be done to make governments more capable of coping with unfolding events is in Australia's Governance Crisis and the Need for Nation Building. In simple terms this suggests that ‘nation building’ should be about building the ‘nation’ (eg institutional capacity to support democratic politics in an increasingly complex environment) rather than merely building ‘things’ (eg infrastructure) for the nation.

John Craig


Email response from Anonymous (received 15/5/11)

You may be right John, but whatever motivates Bernanke and whatever inflation he has exported, he has succeeded in leveraging the Fed's balance sheet to the point of recklessness while all of Q1 and Q2 sits on bank balance sheets and housing prices continue to fall.

We have seen stock prices climb to overvalued levels, renewed carry trades and commodity price inflation. The US problem is no longer a liquidity crisis but a major structural problem which may be beyond repair. I believe history will judge Greenspan and Bernanke harshly. Their readings of the economic outlook have been seriously flawed and their legacy is there for all to see. Who can forget Bernanke's forecast in June 2008 that the US would return to trend growth in 2009. In any event central bankers have responsibilities which do not extend to matters of national security except in so far as maintaining domestic stability is important to economic strength.

Complacency is not confined to Australian institutions or policy makers and I remain of the view that China will emerge the stronger post the next economic crisis.

Anonymous


Email reply to Anonymous (sent 15/5/11)

There is no doubt that what Bernanke is doing is extremely risky. If the velocity of money accelerates in the US (ie if the hoped for economic recovery, that is not yet in evidence, actually happens) then all that excess liquidity would feed into inflation, and have to be rapidly withdrawn – and the results could be chaotic. However the excess creation of credit has been just as much a feature of China in recent years (and Japan in the past), so the whole situation (ie grossly overvalued assets that are distorting economic activities and likely to lead to another financial crisis) can’t be blamed on Bernanke. Bernanke’s expectation is probably that the next financial crisis will be centred elsewhere.

Your observation about the limited responsibilities of central bankers (ie domestic stability rather than national security) raises interesting questions.

Professor Ross Babbage recently developed proposals for a national security response to China’s increasing militarism, which he equated with Japan in the 1930s. He suggested that Australia needs to lift its national security (ie military) spending massively to respond to this. My comments on his proposals are in Comments on Australia's Strategic Edge in 2030. The core of the latter comments is that his emphasis on military efforts as the main way of promoting security is too narrow – because under traditional Asian ‘Art of War’ strategies there is no separation between military / security activities and everything else (eg economic strategy and even the activities of organised crime) – see Broadening the Scope of National Security. One saying is ‘Anything can be anything’ (ie things are not necessarily what they seem to be, so one must be alert to what is actually happening, not to just what seems to be happening). In particular ‘war’ can be conducted in terms of economic strategy.

There is no doubt that complacency about the dominance of Western-style democratic capitalism (and about economic welfare generally) has been widespread. There is also some possibility (though no certainty) that the ‘war against terror’ was engineered partly as a means to divert US administrations from an economic ‘war’ that had far greater potential repercussions. The practical effect of the 911 attacks was to ensure that the US government was dominated for a decade by those concerned with military / security activities, and that those with understanding of economic issues and ‘Asia’ (the source of a potentially bigger threat) were sidelined. That this might have been ‘engineered’ was speculated in Attacking the Global Financial System (from 2001) – noting in particular ‘context to a more than passive attack’ in Section 1 and ‘factors that might make a more than passive attack plausible’ in Section 2. The latter referred (for example) to: Osama bin Laden identifying a key agenda of Japan’s ultranationalists as part of the motivation for the 911 attacks; and the apparent shared interests of Islamists and Japan’s ultranationalists.

The fact that ‘national security’ was perceived to be simply a matter for military / security specialists left the US vulnerable to economic / financial ‘attack’. Moreover the fact that the ‘war against terror’ was controlled primarily by military / security specialists is arguably the main reason that it has not yet been won (see Hitting Osama, but Missing Islamist Extremism). As noted above, a very broad understanding of national security now seems to be needed.

John Craig


Email response from Anonymous (received 16/5/11)

Sorry John, I can't speculate on China's increasing military spending. It would be historically out of character for it to be militaristic. However they are no doubt spending more than they admit to.

The Bank of China has more options at its disposal than the Fed. It has a booming economy, an appreciating currency and room to move on monetary policy, which it is doing. The Fed is pushing on a piece of string. Likewise the Japanese have nowhere to go on fiscal or monetary policy.

President Obama recently observed that the weakness of the US economy was the greatest threat to US security and I share that view. However, they have recognized this late, in all probability, too late. Greenspan and Bernanke along with a soft Congress are to blame and, we should look there before blaming external forces.

As always the price of freedom is eternal vigilance. This applies as much to economic policy as it does to Defence.


Email reply to Anonymous (sent 16/5/11)

As I understand it, Professor Babbage is not concerned about China’s military spending so much as about the militaristic rhetoric that is emerging from the PLA. His proposal for Australia’s Strategic Edge in 2030 had a great deal to say about this.

The Bank of China has many options so long as the US economy remains strong enough to provide China with large current account surpluses. After that it would be in trouble unless the international financial system is adapted to one based on neo-Confucian principles (ie where resource allocation is guided by the consensus of social elites and their subordinates) rather than by capitalistic principles (ie a search for profit by individual enterprises).

The threats that the US faces, in terms of security and other factors, have their origin in both domestic and international sources. And the domestic excesses in the US were significantly (though not only) a consequence of trying to keep global growth going (ie act as the consumer of last resort in order to support the spread of democratic capitalism) in the face of the demand deficits associated with mercantilist systems of socio-political-economy in East Asia.

By the way, as one stage you suggested that hard work and thrift is always a virtue. This is not quite correct as Keynes first argued in the 1930s. If ‘thrift’ translates into excess savings and a lack of demand, then an economy will suffer a macroeconomic imbalance. And Confucius taught his followers to become rich by saving, not by making profits.

John Craig


Email response from Anonymous (received 16/5/11)

No profits, no savings.

Keynes only meant that in times of recession, hence his advocacy for government intervention.

Whatever America's motivation it has over reached and must pay the price along with most of Europe, the UK and Japan.

This is the worry, not China or India.


Email reply to Anonymous (sent 16/5/11)

Time will tell. I have enjoyed our exchange, as it has forced me to think about the challenging points you have raised (eg about whether unused savings are a macroeconomic problem at any time because they lead to recession, or only when a recession is established).

One final ‘left field’ inspiration (or perhaps delusion) that occurred to me today is that it may be that China currently has problems with its ‘Emperor’. Under Confucian traditions the bureaucracy loyally serves the ‘Emperor’ (the source of power) by controlling society in the Emperor’s name. In China in the post-Mao era the PLA has apparently been the ‘Emperor’, and the Communist Party has taken the traditional role of the bureaucracy as the real power behind the throne. Traditionally when an Emperor comes up with any proposals, the bureaucracy formally agrees, finds reasons to do something else, and sends the Emperor another hundred concubines to keep him amused. However when the ‘Emperor’ is the PLA, providing concubines is not enough. The ‘Emperor’ now apparently wants to do military things. And this could endanger China. So (noting recent speculation from China’s premier about a shift to democracy). Perhaps the ‘bureaucracy’ (ie the Communist Party) has decided that there is a need for a new ‘Emperor’ that they could loyally serve – and this new ‘Emperor’ could be ‘democracy’. However, if a serious effort were made to erode the ‘imperial’ status of the PLA over the next few years, China’s stability could be at serious risk.

John Craig


Email response from Anonymous (received 17/5/11)

Thanks John,

I have also enjoyed it.

You know better than I, but what I know about China is that historically it has not traditionally been militaristic.

That said, there is potential for miscalculations all round, particularly if the US continues to decline economically.

As you say, time will tell.

 

Addendum D: Learning From, Rather than About, Asia?

 

Learning From, Rather than About, Asia?

A long term student of East Asia's Confucian traditions, Reg Little, has argued that Australia needs to learn from, rather than about, Asia. However in suggesting it is significant his case is not accompanied by any explanation:

  • of what those traditions are (which may be as outlined in Epistemology the Core Difference which indicates that offering an explanation would be incompatible with those traditions because of: (a) the belief that understanding is futile; and (b) the way in which power is exercised by ethnic social elites without explanation); or
  • of their practical implications (which may be as suggested over-simplistically below).

The complexity of this issue is further explored in Competing Thought Cultures.

Outline of Australia alone! .... And illiterate (Little R., Online Opinion, 17/8/11)

Recent debt ceiling drama in US and subsequent credit downgrading raise the possibility that $US may lose its global reserve currency status, and the Pentagon its unlimited chequebook. Chinese state media suggested US needs to come to terms with the fact that it can't just borrow its way out of the messes it makes. We are probably approaching the end of 200 year Anglo-American era - which cover all of Australia's modern history (given US annual deficits). Australians have no 'end of empire' experience, having seen smooth transition from British to US imperial reach during its entire history.  Australia depends on US - despite dependence on China for economic prosperity. No one considers China becoming politically pre-eminent. Australia's recent Defence White Paper anticipated using US alliance to confront China militarily (without considering financial / budgetary disarray in US - and thus risks to US military spending). Military enthusiasts won't consider this. US military-industrial complex has contributed to US budget deficits and poor US image internationally. Australia's enthusiasm for this was shown in relation to Libya. Australia did not win favour in Beijing by cheering US bombing in Libya or alignment with ragtag rebels. The outcomes of this seem suspect. Nothing has been learned. The forces bankrupting western economies just want more. Australia is living in the past, as its economic, technological and political fortunes will depend on developing relationships in East and SE Asia where administrative and commercial elites have Confucian traditions - often in a grim / subtle / successful struggle to recapture cultural autonomy from imperial western powers. This is not recognised in Australia. The Confucian tradition has equipped those it shapes to recognise and manage the West's vulnerabilities and hypocrisies which are inherent in the 'universal values' institutionalised in UN. The West's heritage from Greece, Rome and Jerusalem does not equip the currently dominant races to match wits with an ascendant Confucian world - and obstructs recognition of the qualities of qualities of Confucian communities. The West can't understand that ideological labels such as Capitalism and Communism reflect the rigidities of Western thought - and are misleading in seeking to understand Asia. Australia's have misread their acceptance in Asia under US pre-eminence, As the region / world is increasingly shaped by re-energised / discrete Confucian values and pride, the benefits of alignment with declining imperial power will dissipate. Identification with bankrupt past centres of power (London and Washington) will actually create obstacles - particularly in education where Australia is far behind China and others in Asia. The problem is worse because Australia's leaders have not yet started to recognise the challenges of dealing with a reinvented Confucian civilization (which is likely to set market-place norms and overshadow Enlightenment certainties. Australia is almost alone in its region in this respect - and appears illiterate in terms of its region's most pervasive civilization, its sense of educational standards and its most formative languages. Claiming that Australia is ahead with a carbon tax while such other matters are ignored is laughable. The environmental and energy problems of modern economies are far from resolution - as economic development and small wars depend on increasing consumption of industrial energy. Coal is seen as a problem, but defects in alternatives are now becoming apparent. Confucian economies such as Japan and China are most likely to find ways to discipline energy indulgence. Following their example in avoiding small wars would be a good start. Both sides of politics are lost. Victoria's premier wants to prepare for the future outlined above, but a federal party colleague highlighted his illiteracy by warning about 'naive' backers of China's rise (because its political and economic model was seen as troubling - thus requiring careful management of the dark side of China's rise). Does he want the education system to fall in behind Defence Department's follies? It is poor form that dark and Communist China is better managed financially than free and capitalistic US. Modern Western democracy neglects long-term strategic issues while pandering to shallow fashions and hidden vested interests. The illiteracy of electorates in accepting such politicking adds to Australia's risks. Such concerns were first expressed in the Australian embassy in Beijing in 1976, included in several books, addressed in Online Opinion from 2006 (eg in American decline and the Australian predicament) and more recently. This has shown Australia's incapacity to address these issues. Only China shelters Australia from UK / US maladies. Power is moving to other cultures and political orientations, yet Australians simply rehearse the lessons of its failing imperial masters.

CPDS Comments: In relation to the above it is suggested that:

  • there is no doubt about the risks Australia faces as a result of its lack of Asia-literacy - and these are the subject of the present document. However :
  • there is probably a way to 'understand' how East Asian societies with an ancient Chinese cultural heritage function (eg as attempted in East Asia in Competing Civilizations). This is very significant because seeking 'understanding' is the basis of Western societies' past successes, but from an East Asian viewpoint such understanding is impossible because there are no general principles merely specific situations. The fact that understanding of general principles may be possible, even if they are unfamiliar and radically different, means that gaining practical Asia-literacy can potentially be an efficient / abstract process, rather than one requiring exhaustive immersion;
  • there is little doubt that Western societies (especially the US) have made very poor use of their influence in recent decades and ignored the need to maintain economic strength - arguably because of cultural 'navel gazing' (eg see Will ending the magic credit card bring the world economy to its knees?). For example trying to create successful democratic capitalist societies in the Middle East through liberating Iraq from a tyrannical regime overlooked the lack of the cultural and institutional preconditions for such a system that were not present in the Middle East (see Fatal Flaws). Security risks posed by Islamist extremists could arguably have been eliminated cheaply by enabling Muslim dominated societies to better understand the extremists' proposals would probably increase the cultural obstacles that have limited the potential of such societies in recent centuries (see Discouraging Pointless Extremism);
  • the expectation by Australia's defence establishment than military preparations are the key to coping with the risks associated with China's rise and increasing militarism is likely to be false - as 'soft power' techniques should be far more effective in that situation also (see Comments on Australia's Strategic Edge in 2030);
  • while Australia depends on China for its economic success, China (and Japan) as well as many other emerging economies have depended on the now-ebbing strength of the US's financial system for their economic success (again see Will ending the magic credit card bring the world economy to its knees?);
  • it is simply invalid to suggest that countries such as China and Japan are better managed financially than the US. Poor financial management (ie wasteful use of savings / capital) is central to the mercantilist economic strategies of such economies (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy) and a key source of their vulnerability if they were no longer supported by a strong US financial system (see Heading for a Crash?);
  • the major fiscal challenges to North Atlantic nations do not arise from military adventurism but rather from: (a) the high cost of welfare systems; and (b) the banking losses generated by the first stage of the global financial crisis that had to be transferred to the public sector to prevent economic meltdown;
  • while developed North Atlantic economies face serious economic risks and potential economic decline, they also have options that (while not yet recognised) could transform their prospects (see Ending Policy Paralysis and China may not have the solution but it seems to have a problem). Once the economic problem is recognised to be largely structural (ie the economic drag of dead-weight economies as reflected in international financial imbalances), rather than simply requiring counter-cyclical policy measures, it should be relatively easy to engineer a solution;
  • communities in Western societies have not yet even realised what the issues are (eg whether the future world will be governed by a rule of law or a rule of authoritarian elites), and when that recognition emerges a high level of commitment can be expected (with a decline in current partisan disputes). East Asian 'Art of war' strategies feature deception and 'winning beforehand', and there is no doubt that the challenge to liberal democratic capitalism (and ultimately to Western universal values) that has been under way for decades has not been detected by Western observers due to their lack of Asia literacy (eg see An Unrecognised Clash of Financial Systems?). But this myopia is unlikely to continue indefinitely.

Lifting Australia's Standards in Response to 'Asia' (email sent 2/12/11)

Reg Little

Re: For every ying there is a yang, On Line Opinion, 1/12/11

I should like to try to add value to your suggestion that Australia had better lift its educational, scientific, corporate, political and administrative standards to meet what you describe as the higher Asian standards of excellence and aspiration that will be dominant in future. I note that your case builds on the apparent conclusion by a former Liberal Party Leader (Malcolm Turnbull) that the global predominance enjoyed by Western societies over the past two centuries seems likely to prove transitory (because, for example, it was the result of being the first to exploit fossil fuels),

In the first place I submit that, in order to enable your readers to properly understand what you are suggesting, there is a need to be more specific about what the dominance of ‘Asian’ traditions over those of Western societies implies. The former seem, for example, to be based on the rejection of individualism, a rule of law, truth and universal values, rationality, egalitarianism and serious political debate. Such points should not be glossed over.

Furthermore it is by no means certain that the decline of the features of Western societies that have contributed to their strength is inevitable or desirable. For example, it seems to me that:

  • the neo-Confucian systems of socio-political-economy that have been the basis of economic miracles in East Asia have been dependent on the strength of financial systems in their Western trading partners, and on the latter’s willingness and ability to continually increase their overall debt levels;
  • those neo-Confucian systems arguably played a major role in generating the financial imbalances and debt crises that currently put global growth at risk – though this is a fact that it is difficult for Asia-illiterate observers to understand; and
  • the financial institutions that have been central elements of the neo-Confucian systems are intrinsically at risk of financial crises, and the changes that trading partners will ultimately need to make to achieve future growth (ie reversing their ongoing build-up of debts by structural reforms rather than mere counter-cyclical policies) are very likely to trigger those crises, and thus render the neo-Confucian systems unsustainable.

Moreover despite your suggestion about the superior approach to environmental issues in ‘Asia’, China long neglected its escalating environmental challenges and the latter remain more daunting than those confronting almost any other country. China also faces world class problems in terms of imbalances in wealth, potential political instabilities and population aging.

My reasons for making such suggestions (together with an outline of your comments) are presented in more detail on my web-site. The latter also includes suggestions that, while there is a need for Australia to lift its standards, this may be more appropriately thought of in terms of coping with (and helping to reduce) the problems that are generated by some ‘Asian’ traditions (eg a lack of universal values and the use of ‘Art of War’ efforts to undermine outsiders), rather than emulating those methods.

John Craig


Outline of Article and Comments

Outline of 'For every ying there is a yang', On Line Opinion, 1/12/11

Former Liberal Party Leader, Malcolm Turnbull, showed that some Australians are aware of the challenge ahead. At LSE, he suggested that: (a) until mid 19th century China and India were the world's two largest economies - based on Angus Maddison's work; (b) few countries have a sense of cultural continuity and exceptionalism like China; (c) Australia's education standards needed to be raised; and (d) after manufacturing, political and military influence will shift to Asia. This suggests that the renaissance of Asia economies should not be surprising; the West should have created Asian sense of rigor and excellence in education; and Australia is unprepared for a world in which Asia norms and standards demand more excellence / aspiration. Turnbull suggests that Western prominence over the past two centuries may follow from being first user of fossil fuels in transport / military areas, together with mobilization of poorly used human energies under corporate structures. Western dominance has led to both transformation and destruction - leaving unanswered environmental / health / medical / well-being / civilizational wisdom questions. Problems in fossil fuel supplies and corporate excesses suggest that first mover advantage no longer benefit the West. Economic confidence now focuses on China / India / Asia generally, and financial / political problems in America and Europe undermine confidence. Environmental confidence is best raised by the renaissance of people who maintained high production with less environmental destruction than the West. And China is investing more than anyone else in alternative energies and environmentally enhancing measures. Few apart from Turnbull in Australia seem to realize what is happening. Peter Lee suggested that the US could be the new 'sick man' of Asia. US efforts to promoted cooperation through APEC could be merely afflicting the region with imperial malaise. Australians need to recognise US's dire economic straits, and how this limits what it can do in the Pacific. Global economic and political developments are leading to the end of the world Australia has known for two centuries. An appropriate response would be: higher education standards; re-evaluation of the West's post-enlightenment materialism, scientific reductionism (which adversely affect food quality, water, energy and the environment); re-evaluation of the economic role of corporations - to optimize productivity and minimize greed; a political system that does not leave outcomes at the mercy of lobbyists (a nearly terminal situation in the US) ; and general community support for excellence in administration. Few such considerations are on Western agendas - because of threats of financial disintegration. Australia needs to do to participate in the best of Eastern times, and avoid the consequences of the end of Western times.

Detailed Comments

In essence the above article suggests that Australia had better lift its standards to meet the higher Asian standards of excellence and aspiration that will be dominant in future.

In advocating change the article is anything but clear about the basis of those 'Asian' standards or how this differs the Western institutions and methods that are seen to have now passed their 'use by' date.

An attempt to address this in Competing Civilizations - specifically in sections on Cultural Foundations of Western Strengths and East Asia.

In brief this suggests that Western societies have succeeded in recent centuries on the basis of initiative by rational / responsibles. This has been built particularly on the West's Judeo-Christian and classic Greek heritage, and has been supported by social, political and economic arrangements that reduce the limits to rationality that apply in dealing with complex systems (eg by concern for individuals, a rule of law, coordination of economic activities through a capitalistic search for profit and democracy). 

By contrast in East Asian societies with an ancient Chinese cultural heritage no emphasis on either rationality or individuals in East Asian societies that have an ancient Chinese cultural heritage. Rather individuals are expected to be compliant components in hierarchical social groups whose directions are determined by group intuition and consensus. 

'Asian' traditions involve the effective rejection of individualism, a rule of law, truth and universal values, rationality, egalitarianism and serious political debate.

Traditions that are so radically different to those of Western societies have other practical consequences, and speculations about these are also suggested in Competing Civilizations


Outline of 'Ignorance in the Asian Century' (Little R., Online Opinion, 14/5/13)

Australia's Gonski and Asian Century reports are memorials to the ineptitude of Australian governments. Both failed to enlighten about civilizational shifts that are reshaping education and Asia. Troubles in US and European economies and currencies could change Australia overnight. Chinese civilization is likely to emerge at the centre of global finance, technology and much else. China can quickly reinvent itself as a new Middle Kingdom to transform a failing Anglo-American global order. This will be inspire by a thought culture that the West has ignored. China's rise has been based on world-class educational excellence. Opinion leaders denigrate rote learning and discount the performance of Asians in many of the world's best universities. Educated Asians not only understand Western disciplines, but also have access to thought culture that is more practical, flexible, fluid, holistic and strategic. West's economists have promoted theories designed for an imperial order, and have thus rationalised off-shoring of the West's technology, manufacturing and investment - and now seem to be over-seeing off-shoring of West's gold and silver (which will hasten decline of $US as the world's reserve currency). The English speaking world tries to understand Asia's peaceful rise in terms of meaningless abstractions such as Communism and Capitalism - and can't mention administrative similarities in Japan, Korea and China. And ancient texts are not studied as a source of current wisdom. Australia's understanding of China is shallow. The latest trends in Chinese early education aren't understood. The first teaching of Chinese classics by rote emerged in a private schools. Now there are over 1000 similar schools. This is a response to demand outside the formal government education system. Coming civilizational changes will probably be felt first as global financial activity shifts from London and New York to Hong Kong and Shanghai. English speakers in these places will benefit temporarily until it is realised that the ruling though culture has changed. Few Australians even realize the extent to which their national strategic thought culture continues to be defined in declining North Atlantic capitals. Even the most aware are still trapped in wishful Anglo-American exceptionalism. They are trapped in the intellectual apartheid that once constructed the Anglo-American order but now obstructs the defence / preservation of what is left of it. The Australia China Council dedicates itself to educating Chinese about Australia. It does not attempt to correct the neglect of Chinese classical traditions in Australian learning institutions. It seems ignorant of the way in which administrative and commercial elites in East and SE Asia are shaped by Chinese classics. The threat to Australia is reflected in the way in which relationships in the region are being restructured. English language interpretations focus on easily understood surface issues - and neglect deeper and longer-term issues. The latter are often hidden by strategists mindful of the obstacles to achieving difficult goals (and as  consequence of Chinese strategic culture). Strategic skirmishes between Japan and China have already left America's Asian pivot floundering. Could the strategic thought culture of the region which has facilitated Asia's peaceful rise and a less peaceful decline by America and Europe now make Asia too hard for weakened US? Australia is unlikely to do better than its traditional allies. The Gonski and Asian Century reports to nothing to identify or address the limits in Asia of Australia's current thought culture. There is little time for Australians to be equipped for the different world emerging in Asia. Australia's policy is already characterised by misconception and exceptionalism.


Ignorance of the Asian Century: Email to Reg Little - sent 14/5/13

I have taken the liberty of adding an outline of your latest thoughts (Ignorance of the Asian Century, Online Opinion, 14/5/13) to my web-site (in Learning From, Rather than About, Asia?). In the latter I have suggested that the fact that your case for the strengths of Chinese traditions is not accompanied by any explanation of what those traditions are provides a useful insight into the nature of those traditions.


Response from Reg little - 14/5/13 (reproduced with permission)

I am afraid your remarks highlight the deficiencies of your, and Australian, education. The abstractions we have washed into our brains obstruct us from noticing how others rise peacefully at the expense of Anglo-American exceptionalists by using A-A truths (market mechanisms toyed with by bully corporations) to transfer productive capacity and wealth to them. If you had read with any care you might have noticed reference to the Lunyu, Daodejing and Yijing as starting references.

By the way, in my experience, no one will begin to understand the power of rote learning classics like those above without many years of effort, including language learning and rote recital. My earlier OLO piece help explain this. Tough, but life was not meant to be easy.

You are ahead of the other comments John. Each in their own way illustrate how much the Western intellect has been subject to the most insidious forms of false learning.

 

Comments on 'The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession'

 Comments on Koo R., 'The Holy Grail of Macro-Economics: Lessons from Japan's Great Recession', 2009 - working draft

Outline of Extract

Preface: The GFC and economic meltdown have raised fears of another Great Depression. Though economists have sought solutions, little has yet been achieved. And the Great Depression remains largely unexplained. Macroeconomics emerged from the Great Depression, and explaining the latter is its 'Holy Grail'. The Great Recession of past 13 years gives a clue on how post-bubble economy can plunge into prolonged recession and leave conventional policy responses inadequate. Similarities between the prolonged recessions in US and Japan, 70 years apart, will be considered. What happened in Japan will be the start. Understanding why Japan's economy slowed suddenly in the 1990s while having been strong in the 1980s is a major intellectual challenge. The 'balance sheet recession' concept will be used. This suggests that companies don't always seek to maximize profits - but may respond to balance sheet damage by minimizing debts. How this operated recently in Japan and 70 years ago in the US will be considered - before extending this to cover GFC and global economic crisis. Economists had advised Japanese authorities to fight recession with drastic monetary accommodation - because it was assumed that Great Depression resulted from inadequate monetary accommodation. This was unrealistic for Japan as demand for funds, even at zero interest rates, had dried up completely. Monetary policy would be powerless in dealing with the Great Depression and Japan's problems if they were balance-sheet recessions.  Data concerning demand for funds support that view. There was a lack of private sector demand for funds, not a lack of supply from authorities. The economy is seen to go through two phases: yang phase where profits are maximized; and yin phase where debt is minimized. The economic downturn following US subprime fiasco is type of balance sheet recession. Keynes responded to Great Depression by inventing the idea of aggregate demand - but was unaware that businesses don't always seek to maximize profit. Keynesian solutions only work when businesses strive to reduce debt. The balance sheet recession concept explains notions such as the liquidity trap. It also shows when monetary / fiscal policies are most effective / ineffective.

Japan's Recession: Japan is finally recovering from recession - though problems remain. Structural problems and banking-sector issues can't explain Japan's long recession. Some have seen structural problems or banking sector issues as responsible. others blame bad money policy (and thus high interest rates) or cultural features unique to Japan. Those in financial markets blame banking system problems. Alan Greenspan saw Japan's inability to weed out zombie companies as the core problem. Others saw Thatcherite-like structural reform as essential. Structural problems were also blamed for Germany's slow recovery from 2000 to 2005. Its slow response to moneatary stimulus (while others responded) was seen to be structural. Krugman argued for targeting deflation (eg via QE). Benanke argued for monetization of government debt. This resulted from research which suggested that prolonger downturn / liquidity trap could be overcome by adding to reserves more aggressively. It is necessary to identify core driver of recession. Japan suffers structural problems - but they can't have been the main cause of prolonged recession. And privatizations were not the source of recovery. Structural explanations of economic problems are recent inventions. The inadequacy of conventional macro-economic options was recognized in late 1970s. Structural problems (eg industrial relations, poor product quality) were significant. Stimulating the economy with aggressive monetary accommodation led to rapid inflation - and trade deficit expanded. This weakened $US and increased inflationary risk. However interest rates to curb inflation, discouraged business investment - and the US was trapped in a vicious cycle. Structural problems lead to trade deficit, high inflation and a weak currency - and thus high interest rates and weak investment. Many economists mocked supply side reforms - in Japan as in US. But supply-side reforms were needed. When Regan took office the US suffered double-digit inflation, high interest rates, many strikes, declining $US and poor product quality. Japan's economic situation was a mirror image. Interest rates were low. Industrial action was limited. Prices were falling. Japan had the world's largest trade surplus. The yen was so strong that government carried out monetary interventions to cap its rise. Japan had ample supply but weak demand. Corporate profits were high in export markets, but weak in meeting domestic demand. Thus companies emphasized export markets - which boosted trade surplus.  Thus while Japan had structural problems, they were not to blame for its long recession. Japan did not recover because banking system problems were fixed. Some argue that problems in banking sector and resulting credit crunch choked off flow of money to economy. But willing borrowers were not being turned away by Japanese banks and bond issuance has been falling. Foreign banks, who suffered no major bad-loan problem, had the same experience. Foreign banks find Japan difficult because choosing a banker is heavily influenced by corporate / personal relationships If Japanese banks were unwilling to lend, foreign banks should have done more business. But this did not happen - even though banking was deregulated to some extent in 1997. Also if there was strong demand for credit and limited supply, market forces would have driven up interest rates, but this did not happen.  In fact interest rates fell. Japan's experience was the opposite of US during 1990s credit crunch. US experienced severe credit crunch in early 1990s (which affected both leveraged-buy-outs and commercial real estate) combined with the collapse of many S&Ls in 1989. Regulators concluded that many institutions were under-capitalized and this created a nationwide credit squeeze from 1991-1993. Companies turned to the bond market and to foreign banks (eg in Japan). US Fed lowered federal funds rate to 3% in 1991 but banks could still not lend as they were undercapitalized. Thus prime lending rates rose to 6% or more. Tis allowed banks to make fat profits and overcome their capital shortage by 1994 when US economy commenced a brisk recovery. In Japan in 2005 before recovery started, conditions were the exact opposite. Bank lending rates fell, foreign banks market share fell, corporate bonds declined. This should not have happened if credit crunch was the source of Japan's malaise. Japan's problems were neither structural, nor centered in banks. Japan's banks have problems - with ratings of D or less (when B is considered lowest acceptable). Japan experienced a balance sheet recession in 1990s. Many academics think that Japan's problem was monetary policy mistakes. To check this one must consider peculiar monetary features of Japan's economy. Companies spent 12 years paying down debt when credit was essentially free - and no economics text book would predict this - because a company paying down debt with zero interest rates is one that can't find a good use for money and should not remain in business. Companies exist because they are good at making money. Individuals entrust them with savings to gain a return. This intellectual framework does not allow for enterprises that refuse to borrow. But Japan's companies were paying down debt soon after bubble burst in 1990 and was about Y30tr pa in 2002-03. This reflects a contraction in aggregate demand that leads to recession. The problem was that asset prices (eg commercial real estate / equities) collapsed disastrously for a decade destroying balance sheets - while debts entered into to buy them remained. Thus companies collectively moved to cut debt for a decade. A company with negative net assets is technically bankrupt - but this usually arises where its products are no longer strongly sought in market. But this was not the case in Japan in 1990s which had the world's largest trade surplus. Companies had strong cash flows and profits, yet they had a large black hole in their balance sheets due to falling asset values. This shifts corporate goal from profit maximization to paying down debt. Firms publicized their strong earnings - while not mentioning their balance sheets because if these problems were known outside the company credit ratings would worsen. The problem was worse in Japan because firms had higher leverage ratios than in US / Europe because of: (a) high growth rates; and (b) rapid appreciation of assets before bubble burst. What was done was responsible because there was nothing wrong with firms' actual business - and time can solve the problem. The bursting of Japan's bubble resulted in Y1500tr losses - equal to nation's entire stock of personal wealth / 3 years GDP. This had happened before in US during Great Depression when collapse in asset values led private sector to begin paying down debt en masse. This also triggered a decline in aggregate demand. However in US wealth loss was only 1 year's GDP. The absence of borrowers led to economic contraction. Normally saved household income passes through banking system to create expenditure elsewhere. If demand for credit is inadequate, interest rates will be lowered to increase demand. But Japan had no willing borrowers even at zero interest rates. The accumulation of savings in banking system sends economy into a deflationary spiral that further reduces asset values and increases the urgency of reducing debts.  .... Japan's economy still requires significant structural reform.

Global Imbalances and Liberalization of Capital Flows: Another significant globalization issue involves widening global trade imbalances brought on by opening of financial markets in all major countries. In 2006 G7, OECD and IMF all warned about global trade imbalances.  This mainly refers to US trade deficit - and implies a need to resolve this before it results in $US collapse. The IMF suggested that this required rebalancing of demand and realignment of exchange rates (with $US devaluation and appreciation in Asia and amongst oil exporters. US has driven global growth for decades, but can't continue to run large trade deficits. This changes the environment that Asia has taken for granted. Asia's growth formula (started by Japan in 1950s) was simple - make goods and sell then to US. This put aside difficult political / military and diplomatic issues and simply required devoting national resources to making high-quality products. US demand allowed income which could be reinvested in new technology / machinery to further expand growth. Japan started this in 1950s. Taiwan and Korea soon saw the need for catch-up with Japan. They were then followed by Hong Kong, Singapore, Thailand, Malaysia and ultimately China. This strategy resulted in rapid growth in Asia - and large / growing trade / current-account deficits for US.  The US is running a massive current account deficit - which peaked at 7% of GDP.  This is not related to US fiscal deficits as current account doubled from 1998-2001 when there was a fiscal surplus in US. The US trade deficit has been growing and needs long-term solution (not just a short-term slowdown). The fact that US has large trade deficit always elicits reference to US's dependence on capital from overseas - and that $US decline would cause Japanese and Chinese investors to sell - thus raising interest rates. This presumes that US needs to attract capital inflows because it has a trade deficit. This was valid before 1980 when capital flows followed trade, but since capital markets were opened from 1980 the causality has reversed. Now capital flows cause destabilizing trade flows. International capital flows also make it hard for individual countries to administer monetary policies. There is also no historical experience on how to deal with these flows. Monetary policy can't deal with a balance sheet recession. However Japan's monetary policy (by Bank of Japan) has had major impacts because much global investment activity is finance in yen - which has the lowest interest rates.  ............ High interest rates in Europe attract more overseas investment seeking higher returns, and this increases domestic investment despite attempts to tighten monetary policy. It also increases euro value and reduces competitiveness of European firms relative to Japan. Thus European monetary authorities criticise Japan. But Japan's central bank has a difficult problem. There is no inflation. Economy is not overheating. Thus bank is told to keep rates low. This encourages capital to leave Japan - thus weakening Yen, and reducing domestic demand. Japan's low interest policy help Japan by weakening Yen and exacerbating external imbalances. NZ by contrast has had high interest rates - and this encouraged an investment boom which Reserve Bank has tried to stifle with higher interest rates this was undermined by capital inflows. This strengthened NZ dollar and reduced industrial competitiveness, thus generating a large trade deficit.  ........ Capital flows have generated adverse exchange rate movements and caused alarming global imbalances. Capital markets of individual countries were drawn into a single international market - though governments and labour markets operate within individual countries because of barriers to immigration. Market forces will tend to equalize return on capital everywhere. This also tends to equalize prices for other things across borders. Countries that originally had high prices will experience deflation, while those with low prices will encounter inflation. If reserve banks respond to this, interest rate differentials and thus capital movements will increase. Opening to international capital movements is comparatively new phenomenon in history (eg from about 1980). External imbalances are an issue because they reflect income transfers from one area to another. Countries with current account deficits transfer income and jobs to their trading partners. The conflict between countries needing to have reasonably balanced trade and market-driven capital flows exacerbating trade imbalances stems from market forces trying to integrate economies while people and governments are unintegrated entities. If countries with surpluses and deficits were combined into one, regional transfers would still exist but be irrelevant. When factors of production are free to move between regions, it makes no sense for regions to have separate monetary policies. Now capital is moving between countries as if they were going to be one giant nation - which is why investors now pay little difference to large current account deficits and why monetary policy is ineffective at national level. However as integration is not likely to happen, trade imbalances are likely to be an important political issue. While there may be efficiency gains from international capital flows, this may not always be so (eg where different tax laws / accounting principles drive flow; or where losses result from changes in exchange rates). Monetary policy is a very complex process - because local policy requirements can have undesirable effects elsewhere - and attempting to take account of international implications can have undesirable local effects.  Financial globalization makes sense if the world will eventually become a single nation - but not otherwise. Thus there is a need to consider whether unrestricted capital market opening is desirable. Open trade in goods and services is desirable, but this is not yet proven for capital. Much depends on the nature of the investors - whether they are making portfolio or direct investments / whether or not they know what they are doing. An influx of ignorant cash-rich investors can do a lot of harm - as Asian currency crisis of 1997 showed. Governments and the IMF seek to reduce trade imbalances. But the IMF pulls in two directions- one part pushes for more capital account opening, while the other seeks to counter the trade imbalances that result from the free movement of capital. If imbalances become too much, market will respond (eg by collapsing $US and US asset prices). The US sub-prime fiasco illustrated this. However after a few years investors will think $US has fall enough, resume investing and thus set up another cycle of destabilizing capital flows. Something like the Plaza Accord might help prevent the next crash. The amount of deficit-country assets that institutional investors elsewhere might hold could also be limited. If nothing is done and trade imbalances expand unhindered, then protectionism is likely.

Correction of Global Imbalances Must be Gradual. Private capital flows can destabilize trade flows - but even capital flows in correct directions can be destabilizing if they move too quickly (especially if a major move of Japanese / Chinese money out of US is involved). US authorities now dismiss this risk - on the grounds that foreign buying of US Treasury bonds only reduces interest rates modestly. This was shocking as for 20 years officials were always concerned about the sale of T-bonds by Japanese and Chinese investors. In 1987 such a sell-off resulted in large variations in US interest rates - though it was believed in the US that this was purely the result of domestic factors. Eventually US authorities realized the cause of the problem and intervened to arrest the $US decline. The $US decline was a major shock to Japanese authorities - who introduced new and restrictive reporting arrangements to resuce currency transactions. Foreign banks in Japan had made money from currency dealing - and they objected. But US could do little - and Japanese government had merely been trying to eliminate the root cause of rising US interest rates. The process showed that departure of Japanese investors could raise US interest rates by 1.5% - which was far from modest.

 


CPDS Comments [Working Draft]:

There is little doubt, as Richard Koo argues,  that international capital flows distort the effects of monetary policy - and can lead the latter to have unintended consequences (ie easing monetary policy nominally to stimulate economy may reduce capital inflows and thus unintentionally suppress investment / growth).

However those distortions arise largely (though not only) because ultra-easy monetary policies have come to be needed because of international financial imbalances that (largely but not only) have their origin in the financially-distorted methods that have been used to achieve 'economic miracles' in East Asia (see Reducing the Risk of Financial / Economic / Political Crises). 

There is a fundamental weakness in Koo's analysis because Japan's whole financial and economic system is quite different to that in (say) the US and Europe. This is the result of profound and hard-to-understand cultural differences (see Understanding East Asian Neo-Confucian Systems of Socio-Political-Economy). Significant companies are neither 'private' nor profit driven - but exist in a subordinate relationship under the bureaucracy which involves the latter organizing collaboration and consensual direction setting. A 'strategic management' process can be effective in generating market-oriented production capacity providing interest groups politics has no influence and decisions are not made independently by companies based on their individual expectations of profit. Business financing is primarily through debt with little equity - to prevent the 'owners' of a company (ie an 'interest group') exerting influence over its activities.  This provides little equity buffer in the event of financial difficulties.  The state-linked / state-dominated banking system mobilizes national savings and makes this available to state-linking companies with limited regard for return on, or even return of, capital. Economic activities are pursued to maximize production and market share (ie economic power). Profitability is of little importance (see Evidence). This constitutes a novel form of industrial protectionism. Trade surpluses exist because: (a) credit / savings are directed towards production rather than towards consumption - an arrangements that can be called 'financial repression' (eg see Why Japan Can't Deregulate its Financial System); and (b) current account surpluses are essential to prevent banks / companies with unreliable balance sheets having to borrow in international ('profit-seeking') financial systems.

Arguing that international capital flows need to be constrained without discussing the reality of East Asian economic and financial systems is not sufficient.

Japan had a financial crisis in the early 1990s because there were no real constraints on the creation of credit in the 1980s (as Japanese real estate was monetized) and this was used to invest in industrial (over) capacity and undisciplined foreign investment.  Japan took an immense time to recover from its financial crisis because: (a) debt problems were probably vastly greater than indicated by nominal corporate / banks balance sheets; and (b) writing off debts would have displaced the nationalistic factions that controlled Japan's economy from their positions in (say) MITI and the MOF and their cronies in Japan's major companies.  Japan has not reformed its financial system because this would be incompatible with the bureaucratically-coordinated non-capitalistic way in which its post-WWII economic 'miracles' were orchestrated. Japan certainly had a balance sheet recession - and one that was perhaps an order of magnitude greater than anyone else is likely to experience (except perhaps China now). But being not-profit-oriented in the normal state for Japan's companies rather than something that simply applies after a credit crunch.

Observations:

  • Koo drew attention to the fact that cultural factors are seen by some as important to Japan's experience, but did not discuss those cultural features;
  • structural reforms in UK / US etc were of some value but
  • Japan had a structural problem - but this was mainly related to its financial system
  • Koo suggests that companies exist because they are good at making money - but this is not true of companies in East Asia's 'bureaucratic non-capitalist' economies
  • capital flows do produce unintended / adverse consequences

 

Understanding East Asia Requires More Than a Study of Confucian Values

Understanding East Asia Requires More Than a Study of Confucian Values - email sent 26/6/16

Luke Slattery,
The Australian

Re: Know Your Confucian Values and Be Less Confused About Values That Matter, The Australian, 24/6/16

Your article highlighted Australians’ need to know more about Asia than languages. It also suggested that understanding Asian philosophy would be a useful step. There is no doubt that Australia’s language-oriented Asian studies have been hopelessly inadequate (eg see Asia literacy for Beginners is not Good Enough, 2009). However study of the Asian philosophies / values that your article introduced is also inadequate for anything approaching real Asia literacy. The latter suggestion is based on an opportunity that I had some years ago to reverse engineer the intellectual basis of East Asian economic ‘miracles’.

My Interpretation of your article: Michael Puett (Harvard) and Christine Gross-Loh (writer) have a bestseller with The Path: What Chinese Philosophy Can teach us About the Good Life. It has revived Western interest in Confucius just as Confucianism is being revived in China – after China experienced the ‘wrecking balls’ of the Cultural Revolution and its market revolution. Australians should try to get to grips with The Path because of the importance of Asian engagement and Asia literacy. Policy makers have emphasised study of Asian languages but study of contemplative Asian philosophy (eg Confucianism, Buddhism and Taoism) offers an appealing key to cultures to Australia’s north. Knowledge of Asian philosophy is not all about Asia. It also challenges the assumptions that underpin Western assumptions about the self (particularly the notion of a ‘true self’ within us that we should seek to discover). Puett argued that pursuit of the true self sounds like the modern approach to life. The problem is that we can fall into ruts of behaviour – and it is foolish to embrace that. The goal should be to break these patterns and ruts – to train ourselves to interact better with those around us. The Path stresses looking outward not inward, and personal change rather than personal acceptance. Pre-Christian western philosophies (eg Aristotle and the Hellenistic schools) also stressed these ideas. Puett is well aware that China’s government is trying to foster an appreciation of Confucian values – and that its approach is conventional (ie emphasising social and self-control). Confucianism is again being read as being about keeping people in their place – which is now seen as a good thing. Sensing their moral authority weakening and social bonds fraying, China’s rulers are promoting older Confucian ideas as a form of social mortar. To explore this it is worth considering Ryckmans’ translation of The Analects of Confucius. He saw Confucius as being wrongly portrayed as a philosopher of moderation – though he was active / vital / driven by passion. He sees Confucius as believing that immoral / uneducated aristocrats are not gentlemen – whereas commoners who are morally qualified can be. Political authority should be based on moral achievement and intellectual competence – not on birth /wealth. This is seen as a potentially-subversive political message – related to equal opportunity elitism that is not limited to China. Confucius is worth studying because of his challenge to ideas about the self, ethics and politics. Rychmans also offers a guide to traditional Chinese / East Asian values. And as Confucian values are a contested topic in China the more we know about Confucian values the better we are able to understand contemporary China.

Study of Asian values and philosophies (such as Confucianism, Buddhism and Taoism) is unfortunately inadequate as a path to properly understanding China / East Asia because: (a) ways of thinking in East Asia (and thus what role ‘philosophy’ plays in society) are fundamentally different to those in Western societies; and (b) philosophies / values might be seen to primarily concern individual behaviour (as would be the case in a Western context). However in East Asia philosophies and values (and the ways of thinking in which they are embedded with which few Western observers will be familiar) have significant impacts on social, economic and political systems as a whole. Understanding the latter is essential – but this requires much more than a study of philosophies / values in a way that would be appropriate in the West. Some implications of those complexities are suggested in Babes in the Asian Woods (2009+) – especially in Examples and section on What does an 'Asian Century' Imply?.

Some Differences to Consider: Western societies (given their classical Greek heritage) tend to think in terms of abstract concepts as models of reality. And, given liberal institutions (ie those whose basic elements are individuals due to the West’s Christian heritage), issues can be simplified enough to make rational / analytical problem solving reasonably-reliable (ie for ‘breaking out of ruts’ / achieving social, economic and political progress) – see here. However abstract concepts (eg truth, law, universal values, profitability) are not emphasised in East Asia. Also the basic elements in East Asian institutions are social groups. Hierarchical social networks are emphasised for problem solving and these complicate issues so that rationality / analysis is unreliable. And, while Western societies emphasise the contributions and welfare of individuals, those in East Asia tend to emphasis the efforts and welfare of social groups / society as a whole. In a Western context ‘values’ are universal (ie moral people are expect to ‘do the right thing’ by everyone). In East Asian philosophies values tend to be ‘particularist’. Moral people have obligations to others with whom they have a direct relationship, but they would not have to ‘do the right thing’ by outsiders (a fact that feeds over into traditional Art of War strategy whose prime emphasis seems to be deceiving outsiders). In a Western context, appropriate behaviour (for those not simply looking inwards for their ‘true self’) is defined in terms of principles (eg ‘love God and others as yourself’). Thinking is needed to determine what is right in particular situations. Confucius by contrast, defined appropriate behaviour, not as general principles, but as specifically what should be done in relating to one’s aunt, wife, son etc, etc.

Confucianism is not a philosophy that just applies to individuals – in which respect it seems similar to Islamists’ view of their faith. The ‘particularist’ social relationships that Confucius proposed apparently included reference to how society should be governed. For centuries prior to Western expansion, Confucianism was the basis for hopefully moral / knowledgeable government on behalf of emperors by elite bureaucrats (eg see Introduction to Confucian Thought and A Simple View of Confucianism). And variations on those methods (best called ‘neo-Confucianism’) appear to have been covertly used in East Asia for social, economic and political administration since WWII.

Recent ‘Neo-Confucian’ Administration: In the post-WWII era a variation of traditional Confucian administration (eg by a bureaucratic elite acting as agents for the Emperor) orchaestrated an ‘economic miracle’ in Japan (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009). And, as the latter indicated:

  • economic ‘miracles’ could be achieved because: (a) a bureaucratic elite stimulated accelerated economic ‘learning’ (ie inculcation of market-oriented behaviours that were determined by social consensus) within hierarchical state-centered industry clusters in the same way that power was traditionally exerted by Confucian bureaucracies to achieve other goals; (b) industrial development was financed from national savings through state-linked banks with limited regard to return on / return of capital; and (c) ‘financial repression’ limited domestic consumption and thus maximized national savings to ensure that state-linked banks with poor balance sheets did not have to borrow in international financial markets;
  • the adoption of further variations of those Confucian methods was then encouraged in other Asian countries that had a compatible cultural heritage; and ultimately
  • China’s ‘Communist’ Party was convinced to adopt a role like that of Japan’s neo-Confucian bureaucracy in orchaestrating China’s market revolution / economic ‘miracle’ from the late 1970s.

In China the use of neo-Confucian methods to accelerate economic advancement would have been awkward to admit in the post-Mao era - because eliminating Confucianism (which Mao saw as oppressive because it involved unaccountable rule by a presumed moral / intellectual elite) had been the goal of the Cultural Revolution. And, as your article noted, Confucianism is now being re-emphasised in China as a means for keeping people in their place and achieving social control. It is also facing opposition by those who favour the social equality aspiractions of the Mao era (see Communism Versus Confucianism: The Continuing Contest in China, 2011). Also the core role that China’s ‘Communist’ Party played in the hiearchical social networks that orchaestrated China’s market revolution / economic ‘miracle’ allowed many of those involve to corruptly divert wealth to themselves and their families / associates. This created a wealthy elite (arguably even more so than in the USSR under Communism) and the world’s most extreme wealth imbalances. Confucianism has thus been promoted as an ethical philospohy by the Chinese state (in parellel with anti-corruption drives) to reduce grass-roots discontent. However state religions are seldom a basis for anything but authoritarian rule (see Merging Political Power and Religion Can Create Problems, 2015) – and this is incompatible with what China now requires for sustainable market-oriented economic growth.

In recent years methods for exerting international influence through Confucian-style methods for exerting power (like those by which Asia was administered from China prior to Western expansion) seemed to be again being put in place - see Creating a New International 'Confucian' Financial and Political Order? (2009). However, China could now be on the point of a financial /debt crisis similar to that which Japan encountered in the 1980s. China’s adoption of neo-Confucian methods for achieving its market revolution / economic ‘miracle’ is arguably responsible for this risk – because of the lack of financial discipline that those methods allow (see China's Problem is Neo-Confucianism not Hypothetical 'State Capitalism').

There is no harm in studying influential Asian philosophies (such as Confucianism). However, to be useful, close consideration of the context and political and economic consequences of such philosophies need to be part of any such study.

John Craig

Economic Babes in the Asian Woods

Economic Babes in the Asian Woods - email sent 18/8/16

Paul Kelly and Rowan Callick,
The Australian

I should like to comment on your recent articles (which I have outlined on my web-site) about the Partnership for Change: Australia-China Joint Economic Report that was prepared collaboratively and unofficially by prominent Australian and Chinese economic institutions.

As I understand it the Report suggested that Australia and China should build on their 2015 free trade agreement to create a broader future economic partnership. Amongst other things, this would: (a) eliminate assessment of individual investment proposals on the basis of ‘national security’ considerations by pre-defining sensitive ‘sectors’; and (b) be developed by a joint Australia-China Commission that would operate independently of both governments.

By way of background it is noted that I had an involvement in concept development for an earlier proposal for economic and cultural collaboration / interchange between Australia and a major East Asian power. This provided both an opportunity to ‘reverse engineer’ the quite-hard-to-understand intellectual basis of the post-WWII ‘economic miracles’ that had been achieved in East Asia, and recognition that the proposal I was dealing with at that time probably needed (and perhaps had) scrutiny from a national security viewpoint.

As your articles highlight, there are both economic opportunities and security risks in developing an Australia-China ‘Partnership for Change’. There are huge differences between the neo-Confucian cultural and institutional arrangements that have allowed rapid ‘real economy’ progress in recent decades in East Asia (including China) and the post-WWII Western-style liberal international order that is compatible with Australia’s freedoms and institutions. Those differences also give rise to international financial instabilities which threaten global economic growth while creating risks of financial crises in East Asia – and the latter in turn increase domestic political instabilities in many countries and thus the risk of external military conflicts (eg see Australia's Increasingly Dangerous Environment).

A ‘Partnership for Change’ relationship between China and Australia could potentially explore ways to defuse those risks. Unfortunately the lack of transparency that is implicit in neo-Confucian systems means that outsiders simply cannot trust China enough to participate in what would otherwise seem to be a highly-desirable process. China's Problem is Neo-Confucianism not Hypothetical 'State Capitalism' argues that China’s economic prospects are limited by the system of socio-political-economy that the ‘Communist’ Party has increasingly adopted from the late 1970s. The same may apply to China’s international political aspirations.

None-the-less it may be that a more broadly representative Commission could advance the desirable goals of the ‘Partnership For Change’ proposal (ie promote more effective governance of international investment and multi-lateral trade amongst countries with different cultural and institutional systems). A suggestion some years ago about the need to do this is in A New 'Manhattan' Project for Global Peace, Prosperity and Security (2001). And it may be that the G20 meeting in China later this year could provide a platform for launching such an endeavour – as suggested in Will China's Presidency in 2016 End the G20's Chronic Failure? and International Regulation of Lending Standards.

More detailed comments on the Partnership for Change: Australia-China Joint Economic Report are on my web-site. These refer to reasons to be cautious about the current proposal, ie:

  • Economics is inadequate as the framework for such a ‘Partnership for Change’ proposal (as mainstream economics provides no basis for understanding neo-Confucian systems and needs revolutionary reform);
  • China’s potential as the source of large future foreign investment is highly uncertain because of its risk of a financial crisis like that that ended Japan’s foreign investment splurge in the 1980s;
  • A lack of ‘Asia literacy’ plagues Australia’s dealings with East Asia – and thus limits the understandings of the Australian experts who were consulted in developing Australia’s input to the Report;
  • The proposal would make Australia more dependent on Chinese investment and economic ‘suggestions’ – and embroil it in the illiberal international order that China’s current regime is apparently trying to create; 
  • The ANU’s East Asian Bureau of Economic Research (EABER) which coordinated the Australian input to the 'Report, is exposed to significant non-Australian influences (and manipulative 'suggestions');
  • The proposed Joint Australia-China Commission would not be genuinely independent of the Chinese state; and
  • It is impractical to define ‘sectors’ in which investment should be always prevented or permitted on national security grounds.

John Craig


Comments on Problems with the 'Partnership for Change' Report.

Firstly there was a need to go well beyond economics in evaluating the benefits or otherwise of an Australia-China 'Partnership for Change'. In particular:

  • as Paul Kelly’s article noted, there are different viewpoints in Australia about whether the focus should be on the economic opportunities or the national security risks associated with China. The economics-oriented 'Partnership for Change' Report advocated limiting assessment of investment projects from a national security viewpoint. This is unsatisfactory because national security considerations are not trivial (eg see Australia's Increasingly Dangerous Environment) and assessing investment projects from this viewpoint is important (eg see Why Some Assets Can't Be Sold to Foreigners). Presumably a parallel report by those concerned with Australia’s national security (in collaboration with their international counter-parts) would be needed to complement the economics-oriented 'Partnership for Change' Report before Australia’s government could make a balanced assessment;
  • another problem with the Report about developing Australia-China relationships from a mainly economic viewpoint is that China can't be properly understood in terms of Western economics. Mainstream economics assumes that economic activities are best controlled through the initiative of independent profit-seeking enterprises. In China significant market-oriented economic activities (like everything else) now tend to require support from a consensus in ultimately-state-centered social networks. 'Real economy' performance (eg market share and cash flow) rather than profit' are emphasized in allocating national savings that are mobilized by state-controlled banks to state-owned or notionally ‘private’ enterprises (see evidence).

Consequences: The neo-Confucian methods involved allow ‘real economy’ miracles to be achieved through quasi-bureaucratic consensus-forming by complementary organisations about emerging opportunities and threats. However they also create domestic and international financial problems because bank / company balance sheets are poor (because maximizing 'real' production does not ensure return on / of capital) and domestic demand thus needs to be suppressed to finance investment without reliance on external profit-oriented investors.

The result is not only a subsidy for producers and systemic financial problems but also that no significant economic activities are truly ‘private’ (ie independent of state influence). The assertion that China’s SOE’s (or even supposedly ‘private’ enterprises) are becoming less likely to have agenda’s that are influenced by the Chinese state is unlikely. Creating a ‘rule of law’ under which this might be possible faces major cultural obstacles. 'Law' in East Asia has not been a Western-style statement of principles that guide independent initiative, but rather a way of disciplining those whose actions do not accord with the consensus of the ruling elite. And in fact, under President Xi Jinping, China seems to have been headed towards even greater authoritarianism despite initial rhetoric about liberalization (see The Resurgence of Ancient Authoritarianism in China).

  • Mainstream economics is also inadequate as a basis for considering a 'Partnership for Change' proposal because it requires revolutionary reform to take into account the possibility of boosting economic performance by changing economic systems as a whole, not just under authoritarian East Asian regimes but also in liberal political and economic environments (see Fixing Economics).

Secondly a major driver of the 'Partnerships for Change' Report appears to be China’s perceived scope for significant foreign investment because it is a major creditor power. However China is a ‘creditor power’ that is also on the point of a financial crisis – because (like Japan before it) China has wasted its resources because it it has not taken the accounting practices that are central to liberal systems of socio-political-economy seriously. Thus China’s future ability to act as a major source of foreign investment for anyone is uncertain – and would require that other countries agree not to let China's suspect balance sheet concern them. This would be one consequence of uncritically implementing the 'Partnership for Change' Report. However China’s apparent role in the boom and likely bust of  investment in Australian real estate suggests that investment by elite consensus rather than by calculation of return on capital is not always a great idea (see A Made-in-China Disaster Waiting to Happen).

Thirdly Australia’s policy establishment (both those concerned with economics and with national security) has shown little understanding of what Australia is dealing with in East Asia (see Babes in the Asian Woods). There is thus a need to do more than rely on those from the ‘heights of Australia’s policy establishment’ in evaluating proposals for the further development of Australia-China relationships. US strategic analysts, who Australia has usually relied upon for guidance in recent decades, are clearly just as devoid of understanding of what they are dealing with in East Asia as Australian analysts are (eg see The US's Most Significant Intelligence Failure?  and  Broader Resistance to Western Interests).

Fourthly the 'Partnerships for Change' proposal reflects a lack of understanding by Australian contributors about the way power is exerted under the neo-Confucian systems that have been the basis of ‘real economy’ miracles and potential financial crises in East Asia. Power is not associated with making decisions but rather with accessing superior strategic information and using this to make manipulative 'suggestions' to subordinates and enemies - preferably in a coordinated way by all elites in a particular ethnic community. China has apparently been attempting to create a new international order based such methods to pre-empt the failure it is likely to experience if the liberal post-WWII international order (ie one based on a rule of law, independent profit-focused investment and democracy) remains dominant (see Creating a New International 'Confucian' Financial and Political Order, 2009+). The latter would be similar to the methods used to administer Asia from China prior to Western expansion.

The proposed 'Partnership for Change' and an Australia-China Commission might (like the China-controlled Asia Infrastructure Investment Bank) embroil Australia in a subordinate role in the neo-Confucian international order that China seems to be trying to create - ie by increasing dependence on Chinese investment and economic 'suggestions' (see also An ‘Asian’ or a ‘European’ Future). Australia can be seen to be susceptible to such manipulation because: (a) its governing institutions are in disarray; (b) its leaders are clueless in relation to dealings with East Asia; and (c)  its people are politically disunited by disputes over the sharing of national wealth - as some have become rich while others have enjoyed generous welfare benefits on the basis of the rising national debt levels that have sustained its economy.

Finally the 'Partnerships for Change' Report seemed to have other defects in that:

  • It suggested that a joint Australia-China Commission could operate independently of both governments. While such independence is more-or-less possible in Australia, this is anything but the case under China’s current neo-Confucian regime where virtually everything (ie social, economic, political, academic, criminal and military actions) is influenced and coordinated through hierarchical ultimately-state-linked social relationships. Moreover under traditional Art of War strategies actions in those diverse areas may be primarily intended to mislead outsiders to encourage them to weaken their own positions;
  • The report may not equally reflect Australian and Chinese interests. The East Asian Bureau of Economic Research which was responsible for Australia’s contribution only partly reflects an Australian perspective. The Bureau is hosted by the Australian National University but primarily involves participants from outside Australia. Twenty seven institutions are involved – of which five are from China, four from Japan, three from Thailand, two from Australia (AJRC and Crawford) and two or less from other East Asian countries. The Bureau consulted with Australians with experience in relevant areas – but its institutional composition suggests that it will to some extent be influenced by (perhaps manipulative 'suggestions' from) non-Australian interests;
  • The Report suggested that rules should be set to predetermine the sectors in which foreign investment might be restricted on national security grounds. However such judgments can’t be based on ‘sectors’ as they rather depend on the strategic implications of a particular investment irrespective of its sector. The complexities in publicly identifying criteria for national security assessments was also identified in Sheridan G., National Security must come first in any China deals’, The Australian, 18/8/16.

Related Articles

Comments on the 'Partnerships for Change Joint Economic Report'

Australia’s ability to manage its biggest post-war strategic challenge is uncertain. In this context Australian and Chinese intellectual elites have proposed an agenda for deeper intimacy in the Partnerships for Change Joint Economic Report that seeks to shatter the ‘business as usual’ approach. This is needed as: China militarizes the South China Sea; Scott Morrison imposes national security veto on a major Chinese investment; and Australia’s foreign policy establishment does not know what to do. Australia is reactive in its approach to China – and divided into two schools of thought (ie those who see China as a regional security threat and those who focus on economic opportunities). Security problems must increase as China’s military power and economic strength increase simultaneously. This is compounded by xenophobic resistance to foreign (now Chinese) investment. The report (a work by elites at a time when politics is dumbed down) is illuminating. It is a joint blueprint on how Australia could maximize its economic gains from the China relationships – and the gap between this and Australia’s political stomach. The report seeks to take relationships to a new level through various initiatives and a formal treaty. The treaty would deal with markets, resource and energy security, agriculture, food security and investment. This would parallel the 1976 Australia-Japan Basic Treaty of Friendship and Co-operation. The idealism of the report’s goals is challenging – involving a model of how countries with different social systems and at different levels of development can collaborate. This would require a high level of trust between the two governments. The report is a joint effort of East Asian Bureau of Economic Research at ANU and the China Centre for International Economic Exchanges in Beijing. Professor Peter Drysdale has had the central role at ANU – and has ‘workshopped’ the report through most of Australia’s policy / bureaucratic elite (including former PM&C head Ian Watt, former Productivity Commission head Gary Banks, former Office of National Assessments chief Allan Gyngell, former PM&C official and Communications Department head Heather Smith and new central bank governor Phil Lowe). The report seeks to do away with the FIRB system – as this makes Chinese investment too hard and likely to go elsewhere. ‘National interest’ considerations would not be considered for individual projects. This is an issue because Australia needs to manage China as a creditor power – and Australia has been a major destination for Chinese investment (a fact that is now a problem because 45% of recent capital flows have been for real estate). A need is seen for a rapid shift to a new investment regime that gives China equal status with other nations and more generous treatment of  its SOEs. Australia should identify areas in which foreign investment should be open or restricted – and decisions should not be made by the Treasurer. As Chinese construction and utilities expand abroad there will be immense opportunities to finance infrastructure in Australia. China’s SOE’s are no longer instruments of the government, so their actions should be judged under normal law rather than discretionary assessments. The report is a watershed. It comes from the heights of Australia’s policy establishment – but outside the executive arm. It is based on two assumptions: (a) that immense adjustments are needed for Australia and China to realize the potential for their economic partnership; and (b) that differences in security, values and systems are not obstacles to this. A key question is whether this would make Australia more vulnerable to Chinese strategic leverage and whether this is an inevitable consequence of closer economic ties. (Kelly P.,  Friend or Foe? Our China dilemma is our biggest test, The Australian, 17/8/16)

Leading Australian and Chinese economists launched a report that runs counter to the federal government’s decision to bar Chinese investment in NSW power infrastructure. Amongst other goals it recommends comprehensive agreement on investment between the countries. Some sectors could be barred – while others would not be subject to special considerations. This would require Australia to reconsider its attitude towards state-owned investors and China to build respect for the rule of law. Investment flows, it says, are critical to the transition from trading to a future economic partnership. The report took a year to prepare . ANU’s East Asia Bureau of Economic Research (EABER) criticised the recent decision to block Chinese investment in NSW power infrastructure. The absence of clear principles for what is / is not permitted is a problem. Australian experts involved in producing the report included: Ian Watt, former head of the department of the prime minister and cabinet, Gary Banks, former chairman of the Productivity Commission, and Allan Gyngell, former head of the Office of ­National Assessments. The Chinese experts included Huang Yiping, adviser to the Chinese central bank’s monetary policy committee, Zhang Yunling, director of international studies at the Chinese Academy of Social Sciences, and He Fan, chief economics commentator at Caixin Media. They urged the establishment of a comprehensive strategic partnership for change to build on the China-Australia free trade agreement. To do this would require a well-resourced Australia-China Commission that operated independently of both governments. Both countries have a shared interest in the G20 and constructive global economic governance generally – and should thus focus on securing a safety net against financial crises and reforming the faltering multi-lateral trading system. EABER head (Peter Drysdale) says that China’s dependence on Australia is increasing – despite the end of the resources boom. Exchanges about this are needed between policy-makers and community leaders – not just academics (Callick R., Economists call for comprehensive bilateral investment rules, The Australian, 16/8/16)

Problems in Investing in China

It has become hard to invest in China. 20 years ago when China opened to foreign investment many companies invested in mining – but now there are few in which foreign players maintain a role. Attracting foreign investment allowed China to modernise its industry – and attracted capital, technology and management expertise. In 2009 there were 300 foreign-invested mining ventures in China – but now almost all have gone because their services have been dispensed with. Now Chinese firms push out into the world – and take Chinese suppliers, service providers, internet platforms, cultural connections and media with them. This is claimed to benefit others because Chinese technologies and strategies are said to be better. China is not the first to operate this way – as Britain and America also did so in different ways. While Chinese people are naturally individualist, the party-state favours promoting a pan-China approach to overseas investment – with new ventures expected to take with them a dominant world of Chinese companies, ways of operating and cultural platforms. The ‘going out’ by Chinese SOE and private companies was inevitable – given its accumulated capital increasingly dominant domestic companies – including national champions created by China’s government. However it is now hard for foreign companies to operate in China. To stand any chance there must be at east a joint-venture and a lot of due-diligence work. There have been no new Australian investments in China since the China Australia Free Trade Agreement came into effect in December 2015. It is just too hard (Callick R., Investment in China heads for ‘too hard’ basket, the Australian, 18/8/16) 

Deeper Engagement with Japan Requires Analysis Equally from National Security and Economic Viewpoints

Deeper Engagement with Japan Requires Analysis Equally from National Security and Economic Viewpoints - email sent 9/9/16

Manuel Panagiotopoulos,
Australian & Japanese Economic Intelligence

Re: Callick R., Report urges ‘total economic engagement’ with Japan, The Australian, 9/9/16.

The above article drew attention to your recent report for the Australia-Japan Foundation. It suggested that your report: (a) advocated ‘total economic engagement’ between Australia and Japan; and (b) argued that a deeper economic partnership could also deal with collaboration in addressing geo-political issues of joint concern. I would like to suggest that any such proposal should not be developed (as this one apparently was) primarily from an economic perspective but requires the equal involvement of national security experts.

My Interpretation of Rowan Callick’s article: A new report for the Australia-Japan Foundation (by Manuel Panagiotopoulos) suggests that Australia and Japan should take a step beyond their new free trade agreement into ‘total economic engagement’ – which would include trade, direct portfolio investment and strategic / institutional alignment. The countries’ complementarities extend into the more powerful sphere of geopolitics. New types of joint economic opportunities are emerging. Japanese investment into Australia and technology transfer are significant play a significant role in Australia’s industrial development. Japanese banks are playing a more important role in Australia as other overseas banks reduce their presence. There is a need to consider geopolitics, economics and value systems in developing international relationships – presumably an indirect reference by the report’s author to China. Australia and Japan can work together to enhance the US’s presence in our region. It is important that strategic interests align. Japan is a primary engine of growth in the region. Japan currently comes third in terms of total economic engagement with Australia – mainly being constrained by limited Australian investment in Japan.

My reasons for suggesting that there can be problems with a primarily economic focus are outlined in Economic Babes in the Asian Woods. This was developed in relation to a similar proposal for a strong Australia - China partnership that was also suggested could be extended to deal with geopolitical collaboration.

Even a proposal for broadening Australia’s long economic engagement with Japan as a framework for then jointly addressing geopolitical issues needs to be developed with as much input from national security experts as from economic experts such as yourself. My reasons for suggesting this are outlined in Scepticism about Japan.

John Craig

What is Soft Power?

What is Soft Power? Hint: It Might Include Suggesting Intriguing Policy Options to Sam Dastyari - email sent 11/9/16

Professor Damien Spry,
Hanyang University

Re: What is soft power? Hint: it’s not footing Sam Dastyari’s bills, The Conversation, 7/9/16

Your article provided a useful account of the nature and use of ‘soft power’ tactics in a Western context. However on the basis of my exposure to and study of what is different about East Asia, I should like to suggest that it can be misleading to look at the use of ‘soft power’ in East Asia from a Western perspective. Reasons for this are suggested in general terms in Babes in the Asian Woods (2009+).

My Interpretation of your article: Journalists have expressed concern about Chinese influence in Australia because Senator Sam Dastyari received payments from Chinese benefactors. This is being presented as the exercise of ‘soft power’. However ‘soft power’ is not actually involved. Soft power (a term coined by Joseph Nye) involves the power of attraction and co-option. It involves what people admire / desire. It is opposed to ‘hard power’ – ie coercion with military or economic threats. Soft power is not always neutral or benign in terms of international relations. Neither is it always ethical – as it can present bias and seek to manipulate sentiment. Soft power examples include: fashions, pop culture, prestigious universities, admired cultures / cuisines; tourist destinations; global standing; technological excellence; economic success. Measures of soft power rate US / UK highly and China poorly. Soft power does not apply in Sam Dastyari’s case because: (a) it is usually directed against foreign audiences, not at elite / influential individuals; and (b) it usually works best when it comes from societies rather than from governments (though governments can benefit from soft power when they engage in public diplomacy). Propaganda (eg the China Daily’s defense of China’s interests) is not soft power. Developing relationships with important individuals is standard diplomatic practice. Exchanges of gifts are not uncommon. The dark side of diplomacy can also involve bribes / blackmail. China exercises soft power in Australia by promoting its culture / history through Confucius Institutes as well as festivals / tours / exhibitions / performances.

As your article pointed out, ‘soft power’ is not about buying policy support. However in an East Asian context it is also not primarily about presenting an attractive image of (say) a particular culture to a foreign audience - an image that would be able to be analyzed and critiqued because it was publicly available.

Rather, it might involve establishing a ‘friendship’ with an enemy and then, behind closed doors, encouraging the new ‘friend’ to believe that XYZ is the ‘right thing to do’ for reason A, even if XYZ is likely to have mainly negative consequences for the ‘friend’ for reason B – a reason the person who made the suggestion had become aware of through their extremely broad social networks. Or it might involve enabling others to understand economic opportunities and gain the resources to action them through a process which brings them under the effective control of those who enable them to understand. 

Deception is the central component of traditional East Asian ‘Art of War’ strategy. Winning without fighting is considered best – eg by ‘getting close to enemies’ to be positioned to make suggestions that enemies might see to be constructive in achieving an immediate goal but which are likely to weaken their position systemically in the long term. ‘Soft power’ can be the weapon used by societies that are organised as well-informed hierarchical social networks and can involve creating ‘myths’ in the minds of others that motivate them to do things that may or may not actually in their real interests.

‘Soft power’ (ie using information to influence others behaviour) has been central to the exercise of power in East Asia. Because of a dramatically different approach to the nature and use of information and a social organisation which complements those different ways of thinking, ‘power’ is not traditionally associated with making decisions (as would be the case in a Western context) but rather with using information to influence other people’s decisions and behaviour (see examples in Soft Power Takes Many Forms).

In 2013 concern was expressed by an unidentified source that a department of the China's People's Liberation Army was conducting psychological warfare and covert influence operations to deceive foreign military and political leaders.

Western academic, business, community, media and political leaders who do not understand how and why power is exerted ‘softly’ (eg by manipulative suggestions / intriguing questions from within a culture that perceives learning in terms of inculcating behaviours rather than understanding) can be very vulnerable. Moreover it is likely that they will have no idea that they are being manipulated.

It is possible (though not certain) that such ‘soft power’ tactics may have been used against Australians’ interests through Senator Dastyari and many others (see Examples of Possible Soft Power Manipulation).

Earlier suggestions about the challenges that Australia faces in an environment where East Asian 'soft power' methods are involved were is Comments on Australia's Strategic Edge in 2030  (2011). This included a Suggested Strategic Response.

I would be interested in your response to my speculations

John Craig


Soft Power Takes Many Forms in East Asia

The exercise of power in East Asia is subtle. Real power is associated with having high status in a social hierarchy so that a man has subordinates who make decisions and act for them.

Creating an impression of power and status is apparently an important factor in gaining real power and status. This is, for example, presumably why 'feng shui' is considered important and 'statistics' tend to create an unrealistically positive impression.

Creating 'Positive 'Energy'

“Two thousand years ago, Chinese emperors consulted feng shui masters on everything from milit­ary strategy to palace architecture as part of the discipline that dictates how to build an empire. Today its modern masters are recreating the ancient tradition in local skyscrapers, as China’s bigges­t companies seek to expand their empire to Australia. It’s one of the major issues my clients talk about,” Colliers International director Steam Leung said. “It might sound simple to talk about how breeze and sunlight going through a premises is desirable, but the Chinese companies I deal with believe the feng shui of a space has serious ramifications on the prosperity of a business.” [1]

China's official economic statistics are notoriously unreliable. They are produced much earlier than is possible elsewhere and always produce an outcome in line with official targets even though other indicators suggest that are wrong.

And despite the huge risks of a financial crisis that China faces, a quite different impression is sought in others' minds by an emphasis on China's potential as a source of investment in other economies (eg see Preparing for a Financial 'Con'?  ).

Making decisions and directly determining / controlling what is done is not associated with the powerful.

Emperors, for example, traditionally exerted soft power through their status and subordinates. They picked which top students would gain administrative positions in government (and thus indirectly determined the state’s policy bias). They also exerted influence by ‘smiling on’ (ie showing a favourable attitude to) groups whose approach they favoured. Nothing would have ever had to have been directly said or required.

Education’ in East Asia traditionally involved inculcating desired behaviours in students (eg by rote learning at all levels) rather than enabling them to understand. 'Understanding’ as the basis for rational independent decision making was not emphasised - because it was not expected to be reliable. That assumption was valid (because rationality fails in dealing with complex organizational / economic / governance environments) in societies that did not emphasise the individuality or freedom (ie Western characteristics that can make rational independent decision making reasonably reliable) because they assumed that rational independent decision making could not be reliable.

Confucian methods of administration by elite bureaucrats were used which paralleled the above manipulate-what-others-do approach to  'education'. The bureaucratic elite provided information about the lessons of history that they believed might be relevant to their society's current challenges and opportunities and enabled their themselves-influential subordinates in hierarchical state-centred social networks to develop a consensus about what should be done. [This has parallels with the methods used internally in Western bureaucracies to coordinate responses to complex multi-function issues - and is why it is appropriate to regard neo-Confucian systems as virtual 'whole of society' bureaucracies]. The state then used 'hard power’ (including that associated with ‘law’) to enforce whatever consensus its connections reached.

The process outlined above constituted a ‘rule of man’ rather than a Western-style ‘rule of law’. A ‘rule of law’ involves defining rules to guide decision making by independent individuals / organisations. However ‘law’ in East Asia is not to be used to set limits to independent initiative but rather to punish those who do not comply with whatever consensus is reached through hierarchical state-centred ethnic social networks. Recent student protests (by the so-called Umbrella Movement) about proposed changes to Hong Kong’s government involved, amongst other things, a concern about shifting from a ‘rule of law’ to a ‘rule by law’.

Prior to the emergence of significant European influence, Asia as a whole had been administered from China through trade-tribute relationships whereby the Chinese state (which could directly promote its people’s compliance through hierarchical state-centered social networks) facilitated the development of regional trade by networking and enforcing others' compliance with whatever consensus was reached by those who acknowledged the superior status of the authoritarian Chinese state - as the 'middle / coordinating / organizing kingdom'. Soft power promoted the relative strength / competence of the Chinese state in fulfilling that role - see China's Challenge to Australia's Values and System of Government in relation to the apparent use of such methods to mislead, deceive and divide Australians to reduce their ability to do anything but rely in China.

'Soft' methods of exerting power have experienced a resurgence after Japan failed in its militaristic attempt in the 1930s and 1940s to create a sphere in which traditional East Asian methods would prevail.

The post-WWII ‘real economy' miracles that were achieved in East Asia (initially in Japan and later the 'Tigers' who also had an ancient Chinese cultural heritage) involved the use of ‘soft power’ neo-Confucian methods to speed applied ‘learning’ about economic options by enterprises and industry clusters in hierarchical social state-centred networks (see Understanding Neo-Confucian Systems of Socio-political-economy). Those methods also created risks of financial crises as national savings were mobilized through state-linked banks and allocated by consensus rather than by calculation of expected return on capital.

'Soft power' methods had also been used in Japan to create the institutions needed to achieve those 'real economy' miracles. Three ‘kuromaku’ (behind the scenes fixers) apparently facilitated the creation of Japan’s post WWII political, financial and administrative systems. Bringing together the diverse groups required to achieve this would have been impossible unless Japan's emperor ‘smiled upon’ them. He could presumably never have met them or given them instructions without a risk that the US occupation forces (whose main post-WWII goal was to prevent Emperor Hirohito having ongoing influence) would have become aware that Hirohito supported what was happening.

China was subject to a 'soft power' takeover in the late 1970s presumably by China's Diaspora (perhaps with Japan's involvement). China's Diaspora are: a result of past civil wars which drove out the 'commercial' factions from southern China; considered (and consider themselves) part of Greater China; and economically dominant across south Asia while also exerting significant locally-resented political influence. They continue to re-fight ancient battles within mainland China. China's Communist Party was encouraged to be the core of a variation of the neo-Confucianism that had been the foundation of 'real economy' miracles elsewhere in East Asia - and called 'socialism with Chinese characteristics'. Hierarchical networks to reach Confucian-style consensus that would receive top-level state support were established within and leading up to so-called 'Communist Party'. Without this: China would have been unable to make rapid economic gains (as central economic planning can't work); 'everything' would not have come to depend on 'connections'; and China would not have practised the same financially irresponsible 'crony capitalism' that led to Japan's 1990 financial crisis and the 1997 Asian Financial Crisis.

The 'soft power' neo-Confucian takeover of China's  'Communist' Party has never been acknowledged. The 'Communist' Party can't do so because Mao's Cultural Revolution had been directed against Confucianism - as Mao believed that the social hierarchies this requires was the main reason China's people had been oppressed (see Communism Versus Confucianism: The Continuing Contest in China).

China established an international Asian Infrastructure Investment Bank to facilitate the development of infrastructure in which China would have the coordinating / controlling role.

China seems to be seeking (again without making this transparent) to create a new international Confucian economic and political order to challenge the liberal Western-style international order. What seems to be re-emerging would very much rely on the use of ‘soft power’ (ie developing a consensus and facilitating its implementation amongst those (especially in Asia and emerging economies) who acknowledge China's re-emergence as a 'middle / coordinating / organizing kingdom'). Hard power would be kept in reserve to ensure compliance with whatever ‘soft power’ consensus was reached (and presumably be deployed along new Silk Roads and via fortified positions in the South China Sea) . The power of social elites under such a new international order would not be constrained by democratic accountability to citizens or perhaps even any need to provide citizens with a financial return on, or return of, their savings.  

Suggestions from Chinese connections about ways to substantially improve the Philippines’ real-economy prospects (without mention of the likely adverse effects on its financial position) are likely to be part of the reason for the 2016 decision by the Philippines’ new / authoritarian president to reject the post-WWII liberal / rule-of-law US system and align himself with China and Russia.

In this environment also:


Examples of Possible Soft Power Manipulation In Australia and Elsewhere

Senator Dastyari ’s prominent role in the campaign to establish a Royal Commission into Australia’s banks might be an example of the effect of 'soft power' influence.

Why? Senator Dastyari has reportedly played a prominent role since about April 2016 in advocating a Royal Commission into Australia’s banks (eg ‘Royal Commission into bank behaviour needed: Labor Senator, 3AY-693- NewsTalk, 21/4/16) even though he had reportedly rejected such a step in 2015 (Merhab B., Wacka lashes holier-than-though Labor, news.com.au, 31/8/16). Doing so was a quite reasonable option for public debate and was consistent with Senator Dastyari’s earlier reputation as a leader in trying to expose possible abuses (eg tax avoidance) by big businesses including banks (see Glasgow W., "Is Sam Dastyari the most anti-business person in Australia?". Australian Financial Review, 10/4/15 and Maher S., Sam Dastyari: Hunting without a Licence, The Australian, 21/8/15).

However by April 2016, when a banking Royal Commission campaign started, it would have been becoming obvious to anyone taking a broad view of the situation that such a Royal Commission could have adverse effects on Australia’s national interests. Thus suggestions (or thought-directing questions) about such a Commission could well have been malevolent. Australia’s economy had come to depend on rapid increases in national debt (from an already risky level). Capital (perhaps 40% of which is sourced overseas) has been obtained mainly through banks and had come to involve a high level of speculative real estate investment. There are reasons (eg unaffordable prices, huge apartment oversupply and obstacles to Chinese purchases which had accounted for large percentage of supposed apartment demand) that this is a bubble which will burst and adversely affect banks’ balance sheets – at a time when external capital sources are likely to be unreliable. Undertaking a royal commission into dubious business practices by some banks during a likely banking crisis could severely cripple Australia’s financial system (and economy) at a time of crisis.

Other possible examples of the systemic weakening of Australia’s institutions that could be the result of manipulative ‘soft power’ influences include:

  • Activities referenced in 2016 debates about Chinese influence in Australia (see Chinese Influence in Australia and Debating the Australia-China Relationship) – such as:
    •  indicators of the behind-the-scenes use of diverse methods to influence the ideas and understanding of Australian opinion leaders (eg business, politicians and the media);
    • the control that the Chinese state has apparently exerted over the work of sinologists (China experts) and other academics in Australian universities because of the nature of the research they provided funding for. This has ensured that realistic understanding of China has not been available and strategic responses have thus been ill-informed. Traditional Art-of-War strategy includes preventing others from understanding so that their actions are ill-advised. Many Australia’s sinologists have been said to prefer a Maoist interpretation of China’s history – yet Maoism clearly had almost nothing to do with what happened  in China after Mao's death. The ‘Communist’ face that China continued to present to the world in the post-Mao era is also not realistic. Providing research funding selectively to academics with no realistic understanding of China would make it very hard for Australia generally to understand modern China. Academics would not have been paid to take a particular policy position – but their pre-existing biases could have been observed and reinforced – while support for research by those who favoured realistic theories was minimized;
    • control by Chinese propaganda agencies of information available through Chinese language sources in Australia that is similar to what is done in China;
  • ‘post-modernism’ has come to dominate in university humanities faculties (see Eroding the West's Cultural Foundations). Post-modernism treats claims about 'truth' in human affairs as a reflection of political assumptions rather than of reality. It is a partly valid assumption which has parallels with the devaluation of abstract ideas / truth / law under traditional East Asian epistemologies. However it is a serious over-reaction to the limitations of 'positivist' views of knowledge. It makes it essentially impossible to analyse the practical consequences of different cultural traditions - because claims that such consequences exist would amount to claims that 'truth' exist. Post-modernism has also been a significant factor in the emergence of 'political correctness' movements (ie the presumption that whatever one wants to be 'true' can be made 'true' by maligning or otherwise attacking anyone who disagrees) and the latter has become a major obstacle to progress in many important areas;
  • public services in Australia have been politicised since the early 1980s (ie come to be dominated by political cronies or 'yes men'). The process was started by state governments (initially Victoria's Cain administration, NSW's Greiner Government and Queensland's Goss Government) and ultimately fully accepted at the federal level by the Howard Government. This has seriously limited governments' ability to to develop / competently implement realistic policy proposals - because public policy issues tend to be very complex and practical success is unlikely unless policy options are evaluated on the basis of very broad knowledge and experience. In the absence of civil institution that provide heavyweight inputs to policy debates, this had been the role of public services prior to their politicisation. Recognition of the importance of bureaucracies' ability to do this is deeply ingrained in East Asian Confucian traditions so encouraging politicisation in Australia would have been seen as a way to weaken it in the long term.
  • Australia's federal government produced a proposal for enhancing Australia's relationships with Asia which showed that its authors had no understanding at all what they were talking about (see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century, 2012 );
  • in late 2015 The Port of Darwin was leased to a Chinese company with state / PLA links which would facilitate the development of other Darwin-linked transport facilities in an environment in which: (a) defense analysts believed that China was behaving like Japan prior to WWII; (b) an overland thrust south from Darwin had been part of Admiral Yamamoto's plan for invading Australia in the 1940s; and (c) other infrastructure that would have supported that invasion plan (including the Darwin-Alice Springs Railway) had been facilitated / encouraged in the 1980s by notorious Japanese ultranationalists who had reportedly participated in the development of infrastructure in Manchuria to aid Japan's 1930's invasion;
  • in late 2016 Australia's federal government announced a plan for northern development that it seemed to view as being compatible with China's proposals for development of international transport networks (under the One Belt, One Road label) an arrangement that had potentially significant geo-political (eg military) as well as economic implications. Yet the government' s north Australia development plan did not indicate that its authors had any awareness of the need to consider geopolitical aspects (see More on Rethinking the Government's Northern Development Plan);
  • state-linked Chinese companies have been seeking to facilitate the development of opportunities by Australian industries through processes that would give them effective control of the future of those industries ( Are Service Exports to Asia Australia's Best Economic Options? and Enabling China's Regime to Gain Increasing Control of Australian Food Producers and Manufacturers);
  • separate proposals were made in 2016 by both China and Japan for establishing close economic partnerships with Australia which were also presented as a foundation for exploring geopolitical issues of mutual concern (see Economic Babes in the Asian Woods and Deeper Engagement with Japan Requires Analysis Equally from National Security and Economic Viewpoints). There are significant national security issues involved – and trying to deal with these through institutional arrangements dominated by economists who had no depth of knowledge of national security issues would increase Australia’s risk of being manipulated.
  • a High Level Dialogue between Australian and Chinese leaders from government, private sector and civil societies promoted the idea that Australia and China should be more than business partners. Concern was expressed about Trump's effect on global trade and that US only had its own interests in mind. China raised the question of an alternative security arrangement in Asia. Australia and China were seen as 'partners in transition'. Opportunities were seen in tourism and Chinese investment in Australia's Northern development [1]
  • Some Australian journalists / economists / business leaders / politicians are accepting (and thus presumably seriously advocating action on on) unrealistic ‘visions’ of the future (eg consider Economic Babes in the Asian Woods; Robins B., China’s never-ending boom – but are we prepared, Brisbane Times, 7/9/16; White G., All aboard the Asian super cycle as China powers regional growth, The Australian, 17/9/16); and Kohler A., Housing a risk, but Australia won’t have a recession for years, The Australian, 17/9/16). These example refer to economists’, academics’ and journalists endorsement of a dominant role for China in the future of Australia / Asia / the world while apparently being totally unaware of the financial crisis that is bearing down on, and likely to cripple, China because of weaknesses in its system if it can’t get influential people to believe that it is invincible and thus must be accepted as the ‘middle / coordinating / organizing kingdom’ in everything).

There is no guarantee that the above are the result of malicious 'suggestions'. Domestic blunders are also possible. However in an environment in which 'soft power' is likely to be being used to weaken enemies, the possibility of malicious 'suggestions' and intentional mis-information should not be ignored.

Other possible examples can be suggested in a global context. For example:

  • there are similarities between the ideologies of East Asian ultranationalists and Islamist extremists in that both oppose individual freedom and initiative and advocate social, economic and political systems in which individuals are conditioned to comply strictly with behaviours that are determined by the (respectively social and religious) elites who control the state. Influence by East Asian utranationalists in encouraging extreme Islamist groups as part of a process to challenge the liberal international order is thus not impossible;
  • US ‘idealists’ (ie the Neo-Cons) took the lead role in developing proposals for the Invasion of Iraq in response to the 911 attacks in America. The Neo-Cons opposed 'realist' foreign policies because collaborating with unsavory regimes against common enemies had often resulted in 'blow-back' against the US. From Neo-Cons' viewpoint invasion would reduce the threat associated with Islamist extremism by introducing and demonstrating the potential of liberal Western-style economic and political models as a basis for future prosperity and peace in the Middle East. However there was a fatal flaw in that strategy in that liberal economic and political institutions can only work well in a liberal social environment – and liberal social environments do not exist in the Middle East. The incompatability of liberal economic and political institutions with an illiberal social environment was well known to East Asian ultranationalists who had struggled with this issue for centuries. But it was not obvious to Western analysts. And the US official who had the key role in developing proposals for responding to the 911 Islamist attacks seemed to be encouraged in relation to invading Iraq as the ‘solution’ by a prominent Asian-American whose arguments could be interpreted as reflecting the viewpoint of East Asian ultranationalists;
  • In 2005 the UN Human Rights Commission established a project to promote 'international solidarity' as a fundamental human right. However the proposal was extremely vague in relation to how 'solidarity' would be organised, and (though this was probably not what was intended) potentially provided a framework to justify the international use of authoritarian / illiberal coercion in the name of 'human rights'.

Potential Problem: 'Solidarity' can be interpreted as being either 'collective' (ie involving a free association individuals with shared interests - such as a trade union) or 'communitarian' (ie involving all members of a community with necessarily diverse interests many of whom might have to be coerced to comply with what some social elite believed to be the 'communal' interest). The latter (which corresponds with the sort of authoritarian communalism which has emerged in China and may be being promoted internationally) is probably not what was intended - but could be construed to be a 'human right' if the intended nature of 'solidarity' is not clarified.

  • China was suggest