Economic relationships between Asian countries may signal a stronger alliance - but not just yet, writes David McNeill
IN HINDSIGHT, it was a fiddling-while-Rome-burns moment. Even as global markets began to buck and writhe in the death throes of unbridled free-market capitalism, the leaders of the world's richest countries feasted on caviar, champagne and milk-fed lamb and failed to make a single important initiative. This year's G8 Summit in Hokkaido, Japan is memorable only for its impotency and its infamous kiss-off line by George W Bush: "goodbye to the world's biggest polluter".
The summit showed that the era when America and Europe could manage the world's economy - and exclude growing powers like India and China - has passed, warned commentators. "The G8 represents a sunset process," argued Kishore Mahbubani, author of The New Asian Hemisphere: The Irresistible Shift of Global Power to the East. "We are entering a new era of world history: the end of Western domination and the arrival of the Asian century."
Japan has heard this before. The granddaddy of Japanese manufacturing, Panasonic-founder Konosuke Matsushita, predicted way back in the 1970s that the center of world prosperity would shift eastwards. Pundits pouring into Japan in the go-go 1980s argued that Asia's most advanced industrial power had stumbled on a capitalist model that was more efficient and productive than anything on offer in the west.
The 1990s destroyed such talk. Japan spent a decade mired in low growth and picking up the pieces from a deep property and stock crash that sapped its confidence and sent pundits in search of other models. World attention shifted to China, which boasted year-on-year economic growth rates of 9.5 per cent, not seen since the heady days of Japan's "miracle" economy from the 1950s to 1970s.
The US-led global financial meltdown, however, has revived discussion about the Asian century, and Japan's place in it. But now China, which has intertwined its economy with Japan in a way unthinkable two decades ago, is part of the mix.
"I'm very bullish about east Asia," says Eamonn Fingleton, Tokyo-based journalist and author of the recently published In the Jaws of the Dragon: America's Fate in the Coming Era of Chinese Hegemony. "I think that we are seeing a shift in world leadership from the West to the East. The form of that leadership is economic, but in the long run it will be political."
Asia's burgeoning economic leadership is hard to dispute. According to the UN Industrial Development Organisation, while the US still accounts for over 23 per cent share of world industrial output, Japan and China together account for almost 25 per cent. And the US's share is stagnating; China's output doubles about every 10 years. Add mature industrial power South Korea and fast-growing India and the trend is clear. Barring catastrophe or revolution, China will have overtaken the US as the world's largest economy by 2050 and, with Japan and India, will account for over half of all global output, predicts BusinessWeek.
The world's political and financial architecture - forged during and after the second World War, has failed to keep up with this explosive growth. Although $3 trillion (€2.4 trillion) of world reserves sit in Asian banks, principally in Japan and China, the World Bank and the IMF are still led by Europe and the US. The G8 club excludes China and India. Japan is the world's second-largest economy with its fourth most powerful military, yet doesn't have a seat at the UN's permanent security council.
But merely to state these facts is to point out the problems of a collective Asian response to the decline in US influence. Although India, China and Japan are, in the words of one economist, "making beautiful economic music together", they are estranged politically, mired in historical and territorial disputes, and even arguments over how to run their economies.
"What we are seeing is a re-thinking of assumptions about neo-liberal economies," says veteran Japan-based author and commentator Karel van Wolferen. "The way the US and Britain have assumed successful industrial states should operate is untrue . . . the Japanese proved ages ago that industrial development is not something that depends on market forces. China is showing it again."
Fingleton agrees. "I think the key Asian economies, especially Japan and China, have developed a new economic system that is not capitalism but is more effective than capitalism in driving economic growth." However, there are enormous differences in the economic systems of China and Japan, to say nothing of Korea, Singapore and newly emerging powers like Vietnam. What they share is dirigisme: a strongly interventionist approach to managing economic growth sharply at odds with the US laissez fairemodel. A key element is "suppressed consumption", says Fingleton, which boosts the savings rate and provides the capital that gives ever more productive capacity.
For all their differences, this belief that the economy cannot be left to market forces unites China and Japan, which have forged one of the planet's most important economic relationships. The two Asian powerhouses traded 27 trillion yen (€0.22 trillion) in goods and services last year and China is now Japan's largest business partner, overtaking the US. Japan buys 60 per cent more from China than it does from the US. And many believe their stronger capital controls will help insulate them from the global financial tsunami.
The key question is whether the economic marriage of convenience between China and Japan and other Asian economies can mature into something deeper, perhaps an EU-style body that might see the region emerge as a major geopolitical force.
Trying to predict what will happen next is a "fool's game" - it depends on the outcome of the current turmoil, argues Mark Selden, senior fellow at the East Asia Programme of Cornell University. He believes the turmoil could as easily "sharpen divisions among Asian countries" as bring them together.
"What can be said is that the last half century of global economic and finance went far toward righting the peculiar imbalance that emerged from the second World War in which the US so thoroughly dominated geopolitics." Whatever happens, he says, the Asian economies are now deeply enmeshed by trade and investment flows. "The region, however, remains deeply divided."
A DIVERSE CONTINENTBRIDGING THE DIVIDE BETWEEN NATIONS
ONE REASON why many view a pan-Asian union with such scepticism is the presence of economies as diverse as Japan and, say, Cambodia, a third-world country still trying to shake off the impact of war, dictatorship and genocide. Although growing before this year's crash at an annual clip of about 9 per cent, Cambodia's GDP is about $8.3 billion, roughly what the US spends on pet food and accessories. Its population includes some of the poorest people on the planet.
Cambodia seems to lurch from one political crisis to the next, slowing international trade and foreign investment. Thailand and the Philippines suffer from the same affliction. Thailand has a $245 billion economy but has experienced a series of coups, including one in 2006 which removed Prime Minister Thaksin Shinawatra from power. Anti-government protestors have been occupying government buildings since the summer, resulting in crippling political deadlock and sometimes violent street protests that have hit the lucrative tourist industry.
The Philippines too is developing quickly, experiencing its strongest economic growth (again before the crash) in a quarter of a century. But two decades after a people's revolution kicked dictator Ferdinand Macros from power in the Philippines, its political system often appears on the brink of chaos. Another country prone to army-led coups, current President Gloria Macapagal-Arroyo hold on power appears tenuous and she is under suspicion for her role in dozens of extra-judicial killing by state-run death squads.
This is to say nothing of the enormous differences in political and cultural systems - from strongly Muslim Indonesia, to the Catholic Philippines, staunchly Buddhist Thailand and Stalinist North Korea.
For all these reasons, say observers, closer ties in the region will remain elusive. Instead, says US-based economist Pat Choate, expect to see something akin to a loose network of satellite states anchored to the two key economies in the region.
"I think we will see a China-Japan sphere, consisting of those two nations and those which surround it.
"Think of France-Germany in the EU. Japan and China will both be major technology players and the vast numbers of people in the region will provide the labour for mass production," he says.
