Wall Street Journal December 2, 1997

The Politics
Of East Asia's
Economic Crisis


East Asia's economic crises have shattered many supposed certainties, including the notion that Asians are destined to enjoy a stable political order. The belief that Asians do not need political pluralism was often encapsulated in the notion of Asian Values. But just as so-called "economic fundamentals" are now called into question, so there will be a reassessment of East Asia's political future. And as domestic politics change in many East Asian countries, the ground will be laid for a new pattern of international relations. For China in particular, this crisis could provide a tempting and dangerous opportunity.

When the problems first struck down the Thai baht in July, the region's economic powerhouse--Japan--fluffed an opportunity to lead a regional response. Then the collapse of Tokyo's Asian Fund proposal left Japan visibly humiliated, even in an area--economics and finance--where it claimed to be Asia's leader. Today, as Japan's already stuttering economy starts to unravel, there is little hope of Japan recapturing a window of leadership opportunity. Asia's economic crisis thus provokes the obvious question: Who will fill the vacuum?

For many, the obvious answer is China, whose economy seems to have escaped the regional meltdown. Yet there is reason to doubt both China's ability to lead and the region's willingness to follow. In fact, some indicators point to China and Southeast Asia becoming serious economic rivals with dangerous political and ethnic implications. Many Southeast Asians believe--correctly or not--that China's devaluation in 1994 and its emergence as a light-industrial competitor for Southeast Asia was a prime cause of their current economic crisis. Therefore, China's neighbors are bound to begin rethinking their strategy of unbounded welcome for Beijing into the international community, and especially into the WTO. If China gains entry without the constraints that restrain Asean states, then places like Indonesia, Thailand and even Malaysia stand to lose more than the United States and other more developed countries currently blocking Beijing's entry into the organization.

Many Asean states already harbor a finely balanced attitude toward China and the ethnic Chinese among their own citizenry. A more hostile view of China as an economic competitor could easily translate into open hostility to Chinese elsewhere. If overseas Chinese decide that they can make more money by investing in China than "at home" in Southeast Asia--or are accused of doing so--the racial issue could rise to the surface with serious consequences.

As feasible as these scenarios of divisiveness are, the greater risk is that China will seek unity with Southeast Asians on the basis of a shared distrust of the global economic order. Ultimately, China will be a competitor to Southeast Asia, but in the short term it is unlikely to escape the regional economic crisis unscathed. Beijing knows that Southeast Asian devaluations have hurt Chinese competitiveness. Yet a competitive devaluation by China would import inflation--a neuralgic issue for Chinese leaders struggling with the need to reduce debt, especially from state-owned industries. China is also very nearly a bubble economy. As growth rates tumble to 8% they come worryingly close to the 6-7% level that is said to be the point below which China is in fact in recession. Growing stockpiles and debts from SOEs, coupled with a 3% annual increase in the labor force, requires 6% growth just to stand still.

In short, even as China is being told by the West that it should speed up reform, privatize SOEs, reform its financial system, cut tariffs and generally open itself to competition, current economic realities may well lead China to reassess the notion of ever-closer interdependence with the global economy and the far- reaching domestic reforms that are its corollary. As WTO membership recedes into a less welcoming future, so does a freely convertible yuan. The upshot is a China less committed to interdependence and thus more worrying to neighbors and more distant great powers. If China grows more resistant to the constraining powers of the global economy, then there will be more reason to worry about its military muscle-flexing.

This is also the point where China may seek to build East Asian unity on an anti-Western basis. There is clearly a debate in Beijing about how to cope with a world dominated by a single American superpower. Jiang Zemin has experimented with the idea of seeking parity and partnership in global governance with the United States, but this strategy was rebuffed at the Washington summit in October. President Bill Clinton's comments portraying the West as the judge of who was on the right and wrong side of history were a graphic reminder that the United States is not prepared to share power, least of all with China.

For a growing cohort of Chinese nationalists, a far more appealing vision is to build an anti-Western coalition in Asia. It has already begun in Beijing's clarion calls for Asians to join China in rejecting Western pressure on human-rights issues or on the rules of arms-control accords. China uses its seat on the United Nations Security Council to champion an Asian view supposedly not represented by a Japan said to be compliant to American whims. Another important signal of China's intent comes in its strong support for Malaysian Prime Minister Mahathir Mohamad's notion of an East Asian Economic Caucus without the Caucasians. The mid-December summit in Kuala Lumpur of what may be called the Pacific Asia Caucus (PAC) will be a key test of the Chinese strategy. At the recent Vancouver APEC summit, with a strong American presence, we were never likely to see support for the notion of there being Asian solutions to Asian economic travails. But at the PAC summit in Kuala Lumpur, the conclusions may be very different. There, China will find vociferous Asian allies for the notion that stressing the role of the IMF is a way of perpetuating Western dominance. China will seek to assuage Asean concern about Beijing as an economic competitor by arguing that a China in the WTO will help turn the body away from Western domination. China will argue that it is the same Westerners who are out to change the domestic political orders in East Asia and who go on about human rights who also want to tell Asians how to spend their money and how they should submit to the rigors of the global economy.

Until recently, Japan and South Korea might have been counted on to defend the values and norms of the global system. Now, distracted by their own domestic crises, they may even be less confident themselves about the path to modernization. Yet as China explores the possibility of creating a PAC, Japan, South Korea and Singapore--who profess commitment to an open global trading system-- can no longer avoid deciding whether or not to resist China in economic as well as security terms. These choices and risks were always going to have to be confronted as China grew and Southeast Asia grew up. The economic crises have only brought forward the days of reckoning.

Mr. Segal is director of studies at the International Institute for Strategic Studies in London and director of Britain's Pacific Asia Programme.

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