The Witness of Two Solutions: Discussion on future economic development of East Asia

I. Introduction

In the modern history, the development of global political pattern is led by the western world, especially by the United States. The omnipresence of the US, to a large extent, has shaped the contemporary power distribution in Asia ever since the Second World War. The penetration of the US influence was first achieved by the bilateral relationships between the US and its Asian partners. In the late 1980s and 1990s, the US became more active in Asia through the promotion of the multilateral relationships of some institutions under the name of Asia-Pacific region which is designed to lead Asian countries to the way of globalization. However, with the recent rise of nationalism, the failure of the international help for the Asian Financial Crisis (AFC) and some other factors, more and more Asian countries are trying to find the other way to supplement the deficiency of global solution. That way is Asians-only economic regionalism, i.e. to exclude the United States as a member of the institution. The most well-known institution established to achieve that goal is ASEAN Plus Three (APT) which includes most countries in East Asia.

Is Asians-only economic regionalism a feasible and desirable way for the future of Asia? Are the United States and those international institutions losing their influence in Asia? The article first examines Asia’s economic development before the 1997 Asian Financial Crisis. It then describes the economic regionalism after the AFC. The article concludes with a possible prospect of the future economic development of East Asia.

II. Asia’s economic development before the Asian Financial Crisis

Before the 1997 Asian Financial Crisis, Asia’s economic development always seeks help from the western world. There are many reasons for this kind of dependence on the US and US-supported international institutions.

For the region itself, East Asian nations are not under something which is obviously quite common, making it difficult to promote regionalization. In terms of geography, the size of territory and the reserve of natural resources are of great variety. The various degree and institutional form of democracy and non-democracy in the region makes interactions between countries more difficult than those with similar political structure. Sharp contrast can also be found in economic development level. This region includes the world’s second strongest economy, Japan, one of the world’s most vigorous economy, China, and the world’s poorest countries as Myanmar as well. This kind of diversity in nature gives rise to the disparity and unbalance of power in the region and makes relative power gains matter a lot. This may cause perennial struggle for power and plenty and make it difficult to form sincere cooperation among East Asian nations.[1] As a result, the Asians-only economic regionalism lacks common grounds and seems not quite favorable to many East Asian politicians.

Asians-only economic regionalism has also been hindered by strong nationalism among regional members. After the Second World War, Japan develops under a burden of history. Perception that Japan is by nature a militaristic and aggressive society is widely spread among victim countries in East Asia. Any behaviors or signs towards establishing stronger military forces, denial of history or visiting the Yasukuni Shrine may trigger waves of condemnation and protests.[2] The strongest reaction towards Japan’s potential provocation in the region comes from China and South Korea. Both countries have important roles in East Asia, and China’s influence in the region is sufficient to call for a different approach when Japan proposes an unfavorable suggestion for future regionalization.

In the past years, Sino-Japan relations always face conflicts and frictions. Territory dispute on the Diaoyu Islands/the Senkaku persists while recent disputes on the border line between the two countries in East China Sea due to its abundant natural resources add to rising tensions. Japan’s support to jointly research on and develop the regional TMD system despite strenuous Chinese objections also worsens the bilateral relations. Although the fastening of mutual trade partnerships have counterweighed some negative factors in the Sino-Japan relations, 50 percent of Chinese respondents in a 2002 poll indicating that they disliked Japan while pressure on the Japanese government from the grass roots to reduce the amount of foreign aid to China increased.[3]

The sophisticated economic diversity and political rivalry make it difficult for attempts to cooperate without outside forces. To fuel economic development, East Asian countries have gradually learned to seek for global solution with years of help from the US and the US-supported international institutions.

Ever since the end of the Second World War, the US has established strong bilateral relationships with almost all the important players located in the East Asia. Under the strong support of its political, economic and military power, the US becomes a very important factor which not only influences the political development in these countries, but also fuels and stabilizes the economic development in the region.

The US established partnership with Japan under the San Francisco Peace Treaty in September 1951, which enshrined America’s efforts to integrate Japan into a network of US Pacific alliances through a non-vindictive peace. Under this system, Japan and the US become “bilateral, highly asymmetric US security alliances”; Japan also gets huge economic benefits from the US under the “asymmetrical economic arrangements” through which Japan gets an open American market while it can protect its national industries by putting restrictions on foreign firms.[4] It was these favourable terms that created the miracle of the economic giant, especially in the 1980s.

With a quite similar background as Japan-US relationships, South Korea depends on the US a lot on its national security and economic development as well. The presence of the US military forces in South Korea balances the military threat from the North Korea, and the strong economic tie between South Korea and the US is a strong support for ROK’s economy. In 2005, the United States was Korea’s third-largest trading partner, second-largest export market, third-largest source of imports, and its largest supplier of foreign direct investment.[5] The most important achievement in the economic field between the two countries is the reach of the world’s largest bilateral free trade agreement on April 2nd, 2007.[6]

As the largest country in the region, China also has its important place in the US diplomatic strategic plan. Generally speaking, Sino-American relations have largely relied on burgeoning economic ties against tensions on political and security issues. China is especially dependent on the US as an exporter market. Trade with the US represented 23.7 percent of total trade for China in 2002. The US ranks as China’s top trading partner. The US is also China’s leading partner as a source of foreign direct investment (FDI). It contributes to 9.5 percent of China’s inward FDI grew in 2001.[7]

Under the influence of the US promotion of free trade and globalization, especially after 1980s, East Asian countries began to understand more about globalization. The 1980s and 1990s witness their entries into international institutions and cooperation with global players.

In 1989, APEC was established in response to the growing interdependence among Asia-Pacific economies and to the need to advance Asia-Pacific economic dynamism and sense of community. Many East Asian countries become the founding members of the APEC forum, such as Japan, the Republic of Korea, Thailand, Indonesia, and so on.[8]

Even China gradually opens its door and finds its place in the international institutions after years of close. Chinese politicians have formed some kind of belief in globalization that it will benefit China a lot through participation in the international institutions. This participation will help China share the achievement of the world economic development and raise the recognition of China from other countries and international institutions. The entry of APEC in 1991, WTO in 2001 all shows China’s willingness to obey the international rules and behave as a responsible member of the international community.

To give an overall view, before the Asian Financial Crisis in 1997, East Asia seeks global solutions to fuel its economic growth. The US and US-supported international institutions play very important role in this course.

III. The Development of Economic Regionalism

However, the AFC serves as a turning point of the approach for East Asia to promote and stabilize its economic development. Politicians in East Asian countries find that the globalization brings not only economic booming in East Asia, but high risk of financial attack as well. “National economic security cannot always be achieved unilaterally or even bilaterally; in some cases, it may require de facto multilateral coordination or even formal cooperation.”[9] What’s more, the interest of East Asia in the global economy is not fairly and well represented in the existing international institutions. The feelings were proved when western countries in the International Monetary Fund (IMF) deeply intervened the economic policymaking of the region’s crisis-hit countries. As a result, AFC gives birth to ASEAN Plus Three (APT) which becomes one way out for the purpose of counterweighing the global solutions to economic development in East Asia.[10]

For East Asian countries, global solution has brought them tremendous benefit. Interdependence between east world and western world makes countries one economy. However, liberalism cannot fully illustrate the picture of the crisis. When in danger, the international institutions as representatives of the western world will provide help only on strict terms and will easily take over the control of the national economy to protect their own interest. This may even be practiced at the cost of the victim county’s whole social system to just stabilize the currency. Thus the role of APT is not an institution to make East Asia become totally independent, but as a measure to promote the regional cooperation and work as a backup and supplement for the region in case of the fail of the global solution to Asia’s economic development. As a result, the policies made by APT are characterized by its tentative and gradual integration and various latent links to the international institutions.

Two economic and financial cooperation measures can be used to illustrate these two characteristics: the Chiang Mai Initiative (CMI) and Asian Bond Fund Initiative (ABFI).

“The CMI is designed to provide liquidity support for member countries that experience short-run balance-of-payment deficits, with the purpose of preventing an extreme crisis or systemic failure in a country and subsequent regional contagion.”[11] Started from 2000, the initial amounts involved under CMI were only $36.5 billion for a total of 16 bilateral currency swap arrangements concluded among APT. This number is quite insufficient compared to the amount of assistance required by Thailand alone was $17.2 billion. This arrangement will necessarily lead to the supplement from the IMF or other international financial institutions. In the May 2006, the amount of CMI is raised to $75 billion. The gradual raise of the CMI amount is due to the increase of mutual trust between member countries and strengthen its ability to reduce the dependence on an IMF or the US-determined solution to financial crisis in the region.[12]

However, the CMI does not mean an Asians-only solution. The initial CMI required its member countries drawing more than 10 percent from the funds in the CMI to accept an IMF conditionality. Even after the review of the IMF linkage with the CMI, IMF conditionality will still need to be accepted at 20 percent level. This linkage is especially supported by China and Japan despite some member countries’ opposition.[13] Those important players in the region know well that without the support from the well-established international institutions, the CMI will become fragile whenever there are conflicts between member countries. The loss of US support on a CMI excluding the US influence may also have negative impact on the bilateral relations between these countries and the US.

Asian Bond Fund Initiative (ABFI) is another example. Up to present, the size of the initiative increases from $1 billion initially to $2 billion and the investment has shifted from a basket of dollar denominated bonds issued by Asian sovereign or quasi-sovereign issuers in EMEAP economies to local-currency bonds. For this initiative, Asian leaders have placed their emphasis on the Asian-Bond-Eurobond linkage. Senior ranking financial officers both from Asia and Europe had their meeting in Singapore to discuss the interests and consolidated relations between EMEAP and the EURO-system.[14]

IV. Possible Prospect of the Future Economic Development of East Asia

The precious discussion gives a general view on the background and present development of Asian regionalism. As East Asian countries benefit a lot through globalization in the past, it will not immediately give up the attempt to be involved to share the global achievement even after the Asian Financial Crisis. However, the AFC do ask the Asian politicians to make a second thought on how to develop a healthier and more stable financial market for the benefit of the region, and the world as well. The supplementary measure adopted is economic regionalism.

Asians-only economic regionalism may not be a good direction without globalization at the same time since Asia faces challenges of economic diversity and political rivalry. However, it is also not safe to have global solution only to the future of Asia’s economic development. As a result, the 21st century witnesses the use of both solutions to fuel the economic growth in East Asia. For liberalists, they will be happy to see that the globalization and regionalization helps to deepen the interdependence between countries. But they cannot illustrate the disparity in the international institutions. For realists, their prediction of the power acquisition will still be considered even within the regional economic institution. However, cooperation has been and will be seen between East Asian countries. Hopefully, East Asia will march towards a more open and cooperative future under the help of both global and regional solutions.

Reference
[1]Kim, S. S. (2004). Northeast Asia in the Local-Regional-Global Nexus. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.4-19). Oxford: Rowman & Littlefield Publishers, Inc.
[2]Berger, T. (2004). Japan’s International Relations: The Political and Security Dimensions. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.139). Oxford: Rowman & Littlefield Publishers, Inc.
[3]Berger, T. (2004). Japan’s International Relations: The Political and Security Dimensions. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.154-155). Oxford: Rowman & Littlefield Publishers, Inc.
[4]Calder, K. E. (2004). U.S. Foreign Policy in Northeast Asia. In S. S. Kim (Ed.), The International Relations of Northeast Asia (pp. 226-227). Oxford: Rowman & Littlefield Publishers, Inc.
[5]Manyin, M. E (2006). South Korea-U.S. Economic Relations: Cooperation, Friction, and Prospects for a
Free Trade Agreement (FTA). Congressional Research Service. Retrieved Nov. 17th, 2007, from http://keia.org/4-Current/CRSFTA.pdf?sort=01&seq=20060124142516.
[6]Choe, S. H. (April 2nd, 2007). U.S. and South Korea reach free trade agreement. International Herald Tribune. Retrieved Nov. 17th, 2007, from http://www.iht.com/articles/2007/04/02/asia/fta.php.
[7]Moore, T. G. (2004). China’s International Relations: The Economic Dimension. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.115). Oxford: Rowman & Littlefield Publishers, Inc.
[8]A Brief History of APEC. Canada. Retrieved Nov. 17th, 2007, from http://www.dfait-maeci.gc.ca/canada-apec/media/history-en.asp.
[9]Moore, T. G. (2004). China’s International Relations: The Economic Dimension. S. S. Kim (Ed.), The International Relations of Northeast Asia (pp.126). Oxford: Rowman & Littlefield Publishers, Inc.
[10]-[14]Sohn, I. (2007). East Asia’s Counterweight Strategy: Asian Financial Cooperation and Evolving International Monetary Order. Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development.

Kimberley Process Certification Scheme

In May 2000, governments and the diamond industry gathered at Kimberley, South Africa to come up a way to stop the conflict diamonds, or “blood diamonds” which aroused much attention at that time. The solution they put forward is the Kimberley Process Certification Scheme to ensure that the purchases of diamonds in the participants do not contribute to fund violent conflicts and human rights abuses in their countries of origin.
The scheme is of good implication but may not achieve its goal efficiently due to some of the uncontrollable economic factors.
It is true that diamonds producer countries, especially those suffering rebellions, are much more willing to be involved in this scheme. The scheme helps to enhance the international recognition to the governments in these riotous countries. The goal to prevent those conflict diamonds from entering the mainstream diamond market will in principle help to weaken the financial support of the rebels.
However, the other side of the story may not be that encouraging. There may not be any incentive for importers to comply with the scheme. Actually, since the certification scheme is of “voluntary self-regulation”, the transparency and independent monitoring efforts can be questioned. Even if most of the governments participated in the Kimberley system try to comply with these rules, the lack of monitoring and inspections may still leave some loopholes for the black-market. Smugglers may still find ways to get their profit from these blood gems.

Is North Korea Gambling?

North Korea is the focus of East Asia security for years. From many western people’s viewpoint, DPRK is always gambling on its nuclear programme. Many western people still cannot understand the logic of DPRK. One United States exchange student commented on yesterday’s International Relations of East Asia that he totally Kim Jung-il in DPRK does not use the money funding military programmes to fuel economic development.
However, what are the choices from which North Korea is able to choose? If you try to check the list of the bundles, not much can be used. But before that, a good estimation of the goal of DPRK should be made. Superficially, DPRK is to seek national security. Nevertheless, under the individual leadership of Kim Jung-il and the history of ruling labour party, it is not difficult to conclude that the North Korea authority wishes to keep the ruling of the communist regime.
If this is the goal, then what are the steps that DPRK can take?
Economic interdependence: Since DPRK is too small on the economic sense, even if it opens up, it is difficult for them to play a vital role in the international economic chain so as to sustain the function of the country.
International recognition: DPRK has not much leverage to win the international recognition. The present rivalry position towards the US makes it more difficult for other countries to build up normal relationship with it.
Military building (including trying to possess nuclear weapons): It seems to be the only way out. However, the possession of nuclear weapons for DPRK is just a way to deter the attempt to overthrow the communist regime of other countries, especially of the US. As a result, DPRK is balancing its way on the nuclear programme. It needs to go very carefully in order not to be destructed before its possession of the nuclear weapons.

The Past Catastrophe Becomes the Treasure

31 years ago, in the early morning of July 28, 1976, one of most destructive earthquakes in 20th century took place in Tangshan, an industrial city in Hebei Province. It claimed more than 240 thousand lives and more than 160 thousand people were injured.

However, the severe catastrophe does not become the obstacle for re-development of the glorious city. It becomes the motivation and the treasure. After recovering from the earthquake in 1986, the city developed very quickly with the double GDP coming in 1988 and the fourfold GDP in 1994. In 2006, the tax revenue ranks 1st in Hebei Province and 19th in China.

Nevertheless, the best treasure is not just the motivation for development. It’s the ruins and the most important thing, the care of ordinary people from the heart of Tangshan’s officials.

After the earthquake, seven sites of the ruins have been kept and three becomes the national historical sites. What’s more, the Tangshan urban planning bureau is planning to build up a memorial park to memorize those who died in the catastrophe.

It’s common that the government builds memorial tower or similar things for national heroes in China. For the ordinary lives died in catastrophe in China, it may be the very few cases to have that kind of treatment. One of the famous memorial sites for those ordinary lives is for the dead in the Massacre of Nanjing.

It is a sign to show that some of China’s local government, at least Tangshan government is trying to show more care for the ordinary peoples’ life. The memorial park may not only be a place to remember the serious catastrophe, but be a reminder of future tasks of good civil-related projects. It symbolizes the respect for peoples’ livelihood.

The catastrophe is a nightmare, but it is also a kind of treasure for the followers to build a brilliant future.

The Lessons Learned from Zimbabwe (Update1)

Probably Zimbabwe will never be forgotten by economists for its world famous hyperinflation and arbitrary restrictions. The fallen from the strongest economy in Africa to the weakest in the world alert people the importance of good governance and recognition of several important things.

Property rights are one of the important things that the president, Mr. Robert Mugabe denies for a long time. From expelling the white farmers to taking control of those private diamond mines, property rights become nothing but something can be easily stolen or robbed. Why people will attend to those things which they might lose at any time? (Read the article from Time and Bloomberg.)

The setting of the price is another thing that perhaps Mr. Mugabe has never learned from anyone who has a little knowledge of economics. The determinant of price is the relation between supply and demand rather than anything else. Again, when you find some policemen came to your store and told you that you might be arrested unless you cut your price of your goods under a certain price, those policemen were probably executing the order of Mr. Mugabe. (Read the article on Economist.)

The story in Zimbabwe is miserable. Hyperinflation reaches 3,700% as officially estimated, which may be actually higher. Millions of Zimbabweans flee the country mainly to South Africa. Those who are still working finds the money they earn provide nearly zero purchasing power in the black-market, since the stores, supermarkets have already had nothing left. However, those who have access to limited greenbacks at the official rate of 250 Zimbabwe dollars to 1 US dollar can make a killing by earning 250,000 Zimbabwe dollars for just one greenback. (Read the article on Economist.)

Anyway, Zimbabwe used to be strong and is used to the extremely poor states. The case is so famous that my macroeconomics lecture always put forward the case for us to discuss. Maybe, if anything fails, there is always one thing that can assure you of immortality called great mistakes.

Money, Time and Cost

Time is money. Perhaps this is one of the most quoted proverbs. How much are you willing to pay for the time? HK$1,000? HK$1,000,000? Or countless?

Sometimes, maybe we are too naïve to believe time is valuable that we ignore the price we set for it at each different time.

I went to China Travel Service (Hong Kong) Limited to extend my passport last week. When I took the photo, waited for half an hour and was finally served, I was told that I came to the agent too early. My passport would go expire in August. But now it was only July. If I insisted to get it done on that day, the duration for extension was 2 years rather than 1 year and another $50 was needed. Well, if I came one month later, then I have to pay about $10 more for traffic fees and would wait for another half an hour and about one hour for traffic. $50 was a good deal, I thought. “I’d like to extend for 2 years then.” At that time, I was paying for time, $40 for saving about one and a half hours in the future. At that time, I was sure that the price I pay was much lower than my reservation price.

But what in hell is your reservation price? Really countless?

If the additional fee is $100, will I accept it? What about $500? What about $1,000?

Actually, I may probably reject the idea to continue the process before I reach the amount of $100. The price I set for time may probably be related to some other things, for example, the opportunity cost. Probably, I can earn $100 by working as a private tutor for one hour and a half. Then I would be just indifferent to the process if it only asks for $100. However, if the additional fee is $200, then I would just be willing to waste the time. If I don’t pay the fee, I only lost $100 equivalent of time; otherwise, I would pay $200!

In the traditional concepts, time is so valuable that it does not have a price. However, it does exist a price for exchange.

Rational Passion

Can a rational person have great passion?

Known to be rational, economists usually seem to be lack of passion when they work. However, this illusion of mine was broken by the book, “Rational Passion: the Chinese architects in the international palace of economics”, recommended by Prof. Tao Zhigang this morning.

It is a book collecting the profiles and conversations with reporters of 16 famous Chinese economists. Why would Prof. Tao recommend this book rather than some other economics textbooks to broaden my knowledge of economics?

“It seems that you do not know those big names in Economics?” said Prof. Tao in the discussion this morning. Yes, I’m so ignorant of those economists and top development of economics. Learning economics for only two years at an introductory level, I aim more on the basic economic sense which need to be cultivated step by step. Before I entered university as a student majoring economics and finance, I even mistook economics for the calculation of money exchange. In the past two years, I began to know what economics really is, but I need to know more before I can go further.

Apart from Prof. Tao, I only have a little knowledge with Qian Yingyi and have heard the name of Bai Chong-en. I still have much to do before I can catch the development of economics.

My knowledge of Prof. Qian is also from the project I am doing under the instruction of Prof. Tao. I was recommended to read his paper “The Process of China’s Market Transition (1979-98): The Evolutionary, Historical, and Comparative Perspectives”. It gave me a clear view of the development of the market transition in China with a unexpected foundation in the early years of PRC to the current situation. It also first time reminded me the difference of planned economy between the former Soviet Union and China.

The profiles and conversations in the book give me a clearer picture of this Chinese economist and extend my understanding of China’s economic development from his paper to a much wider range.

As a Chinese, we have our advantages to review the development of China. We know much more about the culture and more details than foreigners. We also feel the real change and see the unsatisfactory issues in our life. That is the good resources of our knowledge on China’s development. However, it also brings some side effect. We are too familiar with the situation that we might underestimate some improvements without notice and regard some problems as unique ones of China.

Sometimes we may use too much concepts from western culture but ignore some practical issues. As a result, this may also bring pessimism. A good example is how to view political development without a western way of democracy. Actually, democracy is just one part of politics. In the western civilizations, they may put democracy as the base of the development. However, in an eastern culture, rule of law may play a more important role. That’s why we can see the present economic and social development under the improvement of rule of law. As a result, though the nominal political development has not been much touched as is defined as popular election, the real political development is already underway and have exerted its great power in China.