Geo-political Challenges and Economics in Asia

What can economics tell you about the geo-political challenges in Asia? Many strategic thinkers focus on defence capabilities, ideology, politics, environmental threats or history to envisage strategic futures. Economics provides a lens to focus on the fundamental drivers of regional power relations. National income limits a country’s capacity to mobilise resources for power projection, and hence influence the regional security order. For example, North Korea may be a security nuisance, but its pockets simply aren’t deep enough to be more than a bit player.

What can economics tell you about the geo-political challenges in Asia? Many strategic thinkers focus on defence capabilities, ideology, politics, environmental threats or history to envisage strategic futures. Economics provides a lens to focus on the fundamental drivers of regional power relations. National income limits a country’s capacity to mobilise resources for power projection, and hence influence the regional security order. For example, North Korea may be a security nuisance, but its pockets simply aren’t deep enough to be more than a bit player.

Australian Treasury’s long term international GDP projections are therefore a good starting point to considering strategic futures. They rely on slow moving variables, such as labour force and institutional capability, to project regional economic growth out for decades. The results are startling – Asia overtakes the traditionally ‘advanced’ economies on a PPP basis around 2020. This is led by China, which by 2030 could be producing a quarter of the world’s output. For comparison the United States at the end of the cold war produced 23 per cent of global output.

Some commentators disagree, pointing to the United States’ continued edge in technology. But ideas are easily copied and modern technology and international education means ‘catch up’ is getting faster. Others believe that GDP at market exchange rates is more relevant than ‘purchasing power parity’ for projecting power — to buy guns you need foreign currency, not bowls of rice. Using that measure, China doesn’t overtake the US until 2025, just a decade away. But market exchange rates are subject to market fluctuations, and PPP provides a better indicator or an economy’s underlying potential. Finally, other commentators note that the US will still have double China’s GDP on a capita basis by 2050. But this is much less relevant for geopolitics than raw command over resources; Singapore and Brunei both have per capita GDP higher than the United States or China. But they won’t decide the regional security order.

China has had consistently impressive growth record since starting reform and opening up in 1978. But current reforms to financial and capital markets are far more risky and ambitious than shifting workers from agriculture to industry. Continued economic growth requires increased reliance on markets to allocate capital. However, the effects of the Asian Financial Crisis on Indonesia, and more recently the wash-up of the Global Financial Crisis on Greece, have made the Chinese authorities well aware of the political risks of ceding control.

So what does this mean for Australian economic diplomacy? It’s hard to over-state Australia’s interest in drawing newcomers in to the open, rules based system. Both Australian commercial and strategic interests should be to see China integrate into world markets and regional institutions.

A little discussed role for Australian economic diplomacy is engaging its friends and allies on ways to bring China voluntarily into the self-constraining rules based market system. Part of this is advocating institutions that maintain an open trading and investment environment (such as the IMF) to become more inclusive of emerging countries’ interests. It also means prioritising institutions for the next fifty years, rather than those which consolidate cold war alliances. This means prioritising RCEP negotiations (which includes India and China) over TPP (which does not).

Another thing economics teaches us is that competition, not cartels, delivers the best value. Upsetting business as usual for the ADB (traditionally led by Japan) or the World Bank (headquartered in Washington DC) isn’t a good argument for shunning China’s first big multilateral initiative in the Asian Infrastructure Investment Bank.

At the highest level, it means encouraging the United States towards a regional trade and investment system where it realises its own interests are served through peaceably sharing regional leadership with China. Where possible, we should politely, but firmly, rebut US denials of China’s economic rise.

The projections also show that countries which might help balance China’s growth in the region, particularly Indonesia and India, are lagging their potential. Australia should be doing all it can to build the institutions of economic governance needed for a prosperous and coherent ASEAN. By contrast, Japan is more of a demonstrative footnote, given its precipitate decline. We should help a fellow democracy to grow old gracefully, not expect a great power renaissance.

Changing economic fortunes need not cause conflict; but misperceptions of national strengths and objectives do. Australia’s geo-political challenge is not just that for the first time its key strategic ally is different from its principal trading partner. It is that the key players in our region have different interpretations of the economic writing on the wall and haven’t yet realised that it’s in Chinese.

The economics of Asian geo-political stability is republished with permission from East Asia Forum