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Paris, Saturday, January 8, 2000

East Asia's Revival Seems to Be Assured But Shaded by Risks

By Philip Bowring International Herald Tribune
The end of the century marked the end of the Asian economic crisis.

 But will the new millennium bring a resumption of East Asia's 50 years of rapid march from revolution and decolonization toward peace, prosperity and stability? Or are nasty surprises waiting to ambush assumptions that economic growth will resume the momentum that sustained the region before the crisis, which began in mid-1997 and mostly eased in 1999?

 Alternatively, will an upswing in the fortunes of South or West Asia make East Asia's attractions less compelling?

 East Asia - Japan, China, South Korea, Taiwan and the 10 countries of ASEAN, the Association of South East Asian Nations - has good reason to believe that it can keep growing faster than elsewhere, at least for the next decade. Educational standards, savings rates, openness to foreign capital and technology, age structure, social cohesion and trade networks are all in the region's favor.

 That does not mean a return to precrisis 8 percent growth in gross domestic product, the total value of goods and services. Some lessons of overambition - environmental degradation as well as debt - may have been learned. In most countries, growth in the labor force has slowed, so there is less pressure for job creation at any cost. 

The odds are now in favor of a return to slower but sustainable growth underpinned by increased regional trade and a flow of capital from Northeast Asia, with its wealth of technology, to Southeast Asia and China, with its wealth of manpower. 

Yet East Asia is struggling to enhance regional cooperation in the face of nationalistic head winds. And shadows of unification hang over Northeast Asia as disintegration hovers over Southeast Asia. 

Top of the list of issues that have the potential to upset expectations is the role of the United States.

 Asia is grateful for the U.S. boom. But the longer it persists, along with the enormous trade deficit that it creates, the more difficult the subsequent recession is likely to be and thus the greater the strains with America's trading partners in Asia. That will bring a new uncertainty to the relationship with a United States whose security umbrella and market have underpinned so much of Asian progress. 

Asian domestic demand and regional trade growth can absorb a U.S.-derived economic shock to the region, but there is no certainty that they will.

 Japan still needs to play a much larger role in generating regional trade and capital flows. This may well happen as Japan's economy recovers, industries move overseas and the Japanese use their financial and technological muscle for political gain.

 Smaller countries especially want closer East Asian trade and financial links to provide alternatives to links with the West and be a counter to perceived Western domination of international bodies like the International Monetary Fund and World Trade Organization. But China's desire to thwart Japanese influence may neutralize attempts at closer regional cooperation, and internal problems in ASEAN countries could well delay promised trade liberalization.

 Freer regional trade is badly needed. For 50 years East Asia has been the principal beneficiary of the circumstances that have enabled world trade to expand three times faster than world gross domestic product. But there is a huge amount of rationalization needed if East Asia is going to reduce its reliance on Western markets and make new, import-substituting industries more competitive. 

The regional and global trade agreements to push liberalization, which would increase Asian trade and industrial productivity, exist on paper; but practice often lags.

 Trade strains with the United States - sharpened by lingering Asian resentment at the Western role during the financial crisis - could have political fallout. 

U.S. strategic pre-eminence has been repeatedly underlined in recent years, whether in the Taiwan Strait crisis in 1996 or in the strengthening of U.S.-Japan military cooperation. But the financial cost of the U.S. presence is formidable, and there is a perception that U.S. global interests - for example in nonproliferation of strategic weapons - are diverging from the needs of Washington's Asian allies.

 Indian and Pakistani nuclear tests in May 1998 have exposed the fragility of nonproliferation efforts everywhere. China's arms development is seen differently in Taiwan than in Washington. South Korea is pursuing its own military capabilities, as demonstrated by its dispute with the United States over offensive-missile development. Japan is more conscious of its own defense weakness.

 Tokyo would increase the pace of its military buildup should U.S. interest in the region weaken or shift focus. 

Like most of the rest of Asia, the United States remains content with the status quo on the two unification issues, Korea and Taiwan. But these have their own dynamics. The future of North Korea is wholly unpredictable.

 War is unlikely but sudden political change would be hard to handle, certainly for South Korea and perhaps for China, Japan and the United States. Reunification would make the South much less rich and perhaps make the Korean Peninsula a nationalistic headache for its neighbors.

 Taiwan seems unlikely to provoke Beijing beyond endurance, but a China in economic difficulties could seek to end the status quo across the strait. For the next several years, U.S. protection is likely to remain. But thereafter Taiwan may have to look more to Japan if it is to sustain de facto independence in the face of China's military modernization.

 Given Taiwan's strategic position and technological prowess, mainland control would be a huge step toward China's becoming the premier regional power. That is a long way off, but all parties are thinking about the future, even if they keep their thoughts to themselves.

 In Southeast Asia, the state of relations with China is also always present in the background. In the foreground now is the region's potential for disintegration. There is an even chance that two years from now separatist insurgencies in several Indonesian provinces will be forgotten issues, like the Communist insurgencies of the past. But there is also a danger either of actual breakup, which would throw other borders open to question or, more likely, of the insurgencies that have plagued the southern Philippines and Burma for decades.

 Southeast Asia has had its star performers - like Malaysia and Thailand and, until recently, Indonesia. Their social progress has been as striking as their economic gains. But the region has almost as many countries - Burma, Vietnam and the Philippines - that have lagged far behind. Looking ahead, it seems unlikely that the whole region will fall on harder times.

 Buoyed by abundant resources, linkages to capital-rich Northeast Asia, to Chinese networks and to the West exist everywhere in the region and will generate prosperity under the right political conditions.

 But those conditions are not assured. It is possible that Indonesia flounders while a laggard nation starts to catch up, for example. The most likely catch-up candidate is Vietnam, which has a homogenous population and is very gradually shedding both socialism and distrust of the outside world.

 Indonesia may become more like India, a ramshackle democracy that has disappointed economically but has been a political success in preventing fragmentation. India's loose-knit system could even now deliver some economic and social gains while Pakistan has yet to prove that religion can override regional identity to create a strong state. It is hard to be optimistic about Pakistan; but Bangladesh, with its homogeneity and literacy, is the subcontinent's best candidate for pleasant surprises.

 While Pakistan, Afghanistan and Central Asia continue to wrestle with the role of religion, to the west there is the possibility that Iran, once the leader of disruptive fundamentalism, will again become a more accommodating state.

 But population growth and resource shortages, as much as religion, will probably keep West Asia too explosive for comfort.

 In Southeast Asia, there is the danger of semi-feudal tendencies, whether wrapped in Confucian robes or of the type of cronyism so familiar in Indonesia, Malaysia and the Philippines. These can be as damaging as Socialist inefficiencies. Wasteful use of resources, whether local forests or borrowings from foreign banks, can easily bring the pace of economic development down to or below the norms of South Asia or Latin America.

 Those with the right local conditions, including education, should continue to be pulled along by Northeast Asia. Taiwan and South Korea are both now on the leading edge of some technologies and their brands continue to win global market share. Yet Taiwan and South Korea, catching up to Japan, have maturing and almost static populations and excess savings. They need Southeast Asia's labor, resources and markets just as it needs their capital and expertise.

 Where does that leave a China that looks so big and strong but desperately needs difficult reforms and foreign technology to maintain its progress? An open China is an opportunity for trade. But its cheap labor, vast market and potential scale of production make it a challenge to the rest of developing Asia. 

Taiwan, Japan and South Korea must continue to ask themselves whether it is in their longer-term economic and political interests to provide the capital, markets and know-how to modernize China's industries and military potential.

 China is likely to find - as have Russia, India and Brazil - that size and even military might do not equal strength. Without excellence and innovation, size is actually a problem. The economic benefits of decentralization conflict with the political need for a strong central government.

 But the sheer size of China will intimidate small Asia nations, and its missile strength will make other powers wary. Many more years of stability are needed before the rest of the world can be confident that China's domestic politics are not going to take a sudden 180-degree turn, with unpredictable external consequences.

 Japan's capacity for innovation is intact and should flower again as the breakdown of the postwar economic system unleashes new energies - and creates social problems unfamiliar to Japan but well known in the West. Japan's weakness is its demographics. Unless it can achieve a much higher birthrate or allow significant immigration - unlikely in a race-conscious nation - Japan, like Western Europe, will become chronically risk-averse and lose opportunities for leadership in East Asia.

 Longer term, a united Korea, with its combination of technology, business skills, global presence, fierce nationalism and younger population would be as likely as China to supplant an aging Japan as the most dynamic nation in the region. But no one country will enjoy regional hegemony.

 In sum, East Asia will be looking for more expressions of its own identity, more ways of reducing dependence on the West and being able to challenge the West in global markets. It will be more confident of itself after the 1997-98 economic crisis but mostly shorn of what turned out to be excessive optimism.

 But the movement toward enhanced regional cooperation will highlight conflicts of interest, particularly between the economic and political objectives of nation states. As Western dominance slowly wanes, East Asian nations will be more conscious of their own rivalries. 

They will spend more on weapons and more time worrying about the perils of life in a dynamic but multipolar region where historical grievances are never far below the surface.

 The liveliest place on the planet has risks to match its rewards.