Thursday, November 11, 2010

The Clash between the West and Emerging Economies

The media and business societies talk about emerging economies these days, because they see new market opportunities in those countries, which should not be missed. But are emerging economies really the hope for the future? Contrary to myopic commercialism, they pose critical challenges to liberal world order of the global political economy. Developed nations face severe competitions against cheap labor rivals. Some of emerging economies defy Western-led liberal system to defend their autocracy.

Emerging economies consist of BRICs, ASEAN, South Korea, Mexico, South Africa, and so forth. They are not uniformly the same. Some are democratic and pro-West, while others advocate completely new world order, as expressed in China’s “peaceful rise”.

Among rising economies, the most important group is BRICs, because they have political aspirations for greater influence, based on their economic prosperity. While Russia and China explore “leading” position through challenging the West, India pursues the rise through strategic partnership with the United States. Brazil may have tried to meddle Iran and the global community in cooperation with Turkey, but it does not challenge American preeminence. Therefore, we have to pay special attention to China and Russia.

When I attended a policy round table on APEC by the Japan Forum on International Relations on October 15, I mentioned three problems of political environment in China. I wonder why so many businessmen explore market opportunities in this country, without solid assurance for economic freedom for foreign business. First, China is notorious for currency manipulation to win global competition unfairly. Second, human rights problems are serious risks. In the Senkaku dispute, the Chinese authority has no hesitation for retaliatory arrests of Japanese businessmen working for Fujita Construction Company. Third, due to information control by the Communist Party, Google has withdrawn from China.

Remember that Western great powers refused Meiji Japan’s request to improve the “unequal treaty” in the 19th century, because Japanese legal system was not well arranged, which could have led to human rights abuse to Europeans and Americans in Japan. Only when Meiji Japan persuaded Western great powers that it had become “civilized” enough, did they accept Japanese request for equal partnership. For foreign business, political environment in current China is more dreadful than Tokugawa and early Meiji Japan.

While advocates for mutual dependence insist that engagement with China and Russia will tame them regardless of their regimes, they make use of our liberal world order to exploit us. Chinese capitalists buy strategic industries in America, Europe, and Japan to pirate the knowledge and to dominate the world economy, in close cooperation with the Communist Party. Russian oligarchs buy luxurious condominiums in South Kensington, which made it easier for FSB agents to lurk in London to assassinate Alexander Litvinenko. Through close cooperation between authoritarian government and privileged business, both countries make money for military build-up, which will ultimately pose threats to free nations. During the bubble economy, Japanese bid for the Rockefeller Center in New York annoyed Americans. It is understandable that people hate such a Shylockian behavior, but it was no threat at all as “no one can take the Rockefeller Center to anywhere”. But Chinese and Russian capitalists openly defy Western liberal capitalism.

In addition to regime and great power rivalries, nationalism is another problem. In the 1990s, South East Asian nations advocated “Asian values” to legitimize their paternalistic authoritarianism of the state over citizens. Booming economy in those days strengthened their confidence, which led them to defy Western preeminence. Only when hit by the Asian financial crisis, did they stop claiming Asian values against Western liberalism.

As to economic aspects, competitive advantage of cheap labor is not the only problem when we talk of emerging nations. Stephen King, chief economist of HSBC, warns that competition for scare resource will be intensified between the West and emerging nations. With the rise of living standard and the demand, emerging economies will increase more influence on price setting of natural resource. While globalization makes world economy overall grow, cheap labor subcontracts with emerging economies erodes consumer confidence in the West. Though free market is expected to be a built-in-stabilizer to avoid resource conflict as seen in World War Ⅱ, autocrats in Russia and China simply want higher growth through capitalist economy, while strengthening their political positions by manipulating the market (“Stephen King on scarce resources”; The Economist Online; October 13, 2010). Actually, China announced to reduce export of rare earth materials when the Senkaku conflict with Japan broke out this October.

The most critical problem with the rise of emerging economies is erosion of liberal world order. Ian Bremmer, President of Eurasia Group, and Nouriel Roubini, Professor of Economics at the Stern Business School of New York University, raise serious concerns that the world is changing from unipolar hegemonic stability to nonpolar irresponsible instability (“Paradise Lost: Why Fallen Markets Will Never Be the Same”; Institutional Investor; September 2010). Seeing from the theory of hegemonic stability, only a liberalist nation can provide the global public goods of liberal world order. The hegemonic state may have to share responsibility with other powerful stakeholders as Britain explored “bi-gemonic” stability with America during the interwar period. However, burden sharing states must be free nations, and just simply being powerful is not enough. Britain never thought of sharing hegemonic responsibilities with Nazi Germany and the Soviet Union. None of current emerging economies are well qualified to share responsibilities with the United States, Europe, and Japan, and there is no wonder why G20 policy coordination works so poorly.

Of course, we need to respect their aspiration for equal relations with the West. What really matters is the nature of their regimes. Particularly, we need to pay attention to fundamental ideals of their nation building. While the “peaceful rise” of Maoist China is dangerous, the competitive rise of democratic India is peaceful. Since the independence, India has been pursuing economic development in Fabianism, which is the core value of British Labour Party. Therefore, we can welcome the rise of India, but not China.

Myopic businessmen need to see the world from “Country First” viewpoints. It is necessary to evaluate emerging economies who they are. Multinational corporations doing business with dangerous regimes may earn profit for a short term, but in the long run, they will lose. In the past, the Ohira administration of Japan continued the IJPC petro-chemical project with Iran when the United States and European allies imposed economic sanctions against the hostage crisis of the US embassy in Tehran. Business with the rogue regime ended is failure as the Iran-Iraq War broke out.

It is too naïve or Shylockian to regard emerging economies just simply as new market opportunities. They can be economic rivals, security threats, or anything that will destroy our liberal world order. Leaders of America, Europe, and Japan must think again how to deal with emerging economies.