The 2011 Lowy Lecture Lowy Lecture 2011 on Australia in the World

Lionel Barber Editor, Financial Times

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he annual Lowy Lecture is the Lowy Institute’s keynote event, in which a prominent thinker Trefl ects on the global infl uences shaping Australia and the world. The lecture supports our mission to generate fresh ideas and dialogue within Australia on international developments and to contribute to the wider international debate as an accessible and high-quality forum for discussion of Australian foreign policy and international relations. The shift of global economic and strategic weight from West to East is a change of world- historical signifi cance with particular implications for Australia. It has provided the focus of the Lowy Institute’s major research themes for 2011. The 2011 Lowy Lecture examines the implications of Asia’s rise for the world and offers some prescriptions for accommodating the rising Asian powers in a new economic order for the 21st century. It was delivered by the editor of highly respected newspaper the Financial Times, Mr Lionel Barber. In his lecture, Lionel Barber focuses on China’s phenomenal growth and how its aspirations as the ‘superpower in waiting’ might be accommodated without confl ict. He argues that all interested parties have a mutual interest in upholding and developing – rather than overturning – the rules- based system built up after World War II. While the West, principally the US, will have to adjust to accommodate China, Barber argues that China will also have to accommodate, notably in the fi elds of fi nance, money, trade and direct investment and energy. China’s great test is to achieve a balance between rapid development at home and stability abroad. Australia – and the rest of the world – has a huge stake in the outcome. Lionel Barber has been the editor of the Financial Times since November 2005. Since then the FT has won numerous global awards for quality journalism, including three newspaper of the year awards, which recognised the FT’s role ‘as a 21st century news organisation’. As editor, Barber has interviewed many of the world’s leaders in business and politics including: President Barack Obama, Premier Wen Jiabao of China, President-elect Demetri Medvedev of Russia, Chancellor Angela Merkel of Germany, and President Thabo Mbeki of South Africa. In 2001 European Voice named him one of the 50 most infl uential personalities in Europe. Barber has co-written several books and has lectured widely on US foreign policy, transatlantic relations, European security and monetary union in the US and Europe. The nature of power, and how it is being redistributed in Asia and the world, are the defi ning questions of our age. With the 2011 Lowy Lecture, Lionel Barber challenges us to think harder and deeper about these questions, and how they will test a Western country located on the edge of a rapidly changing Asia.

Michael Wesley Executive Director

1 ASIA’S RISE, THE WEST’S FALL?

Hence the mildly provocative title for my Lionel Barber lecture tonight. Editor, Financial Times Only last month, Jean-Claude Trichet, president of the European Central Bank, Sydney, 17 November 2011 told the Financial Times in a farewell Distinguished guests, ladies and interview that there was a crisis in the gentlemen, it is a great honour to deliver West, in terms of business models and this year’s Lowy Lecture. This is my fi rst political decision-making. Admiral Mike visit to Australia. As an Englishman Mullen, former chairman of the Joint with an Irish grandfather who long Chiefs of Staff, said earlier this year that dreamt of escaping Down Under, that’s the national debt posed the greatest threat an embarrassing admission. A bit like the to America’s national security.* skipper being out for a golden duck. But I The global fi nancial crisis must bear have already found so much to admire: the much of the blame. It was manufactured majestic architecture here in Sydney, the in the West and exported to the rest of the sulphur-crested cockatoos of Katoomba world, wreaking havoc with the public and the mystical beauty of Uluru. Truly fi nances of the US and much of Europe. this is the Lucky Country. Standard & Poor’s decision this summer Donald Horne’s barbed tribute has a to strip the US of its triple A credit rating special resonance today. Resource-rich appeared to confi rm the superpower’s Australia is enjoying the fruits of an steady slippage. Financial markets have extraordinary regional economic boom. challenged the creditworthiness not Luck plays a little part in this chains to riches story. But you are also reaping the merely of Greece, Ireland, Portugal and rewards of politically courageous decisions Spain – but also, crucially, Italy and the to curb public defi cits and infl ation more AAA status of France. than a decade ago. Western leaders have failed to respond Australia’s good fortune is also to be decisively. In early 2009, the newly part of an historic shift from West to East, formed Group of 20 countries did agree driven largely by the rise of the once-poor to recapitalise their banks and collectively countries of China and India. This shift pursue aggressive fi scal stimulus to revive in power, primarily economic power, has their economies. But too often, they have aroused much soul-searching in Europe been offered too little, too late. Western and the US; even talk of an Asian century. governments have either been held hostage

2 by powerful interest groups or paralysed War, seems to share the doubts: ‘In many by ideological divisions. ways, Asian government, not just China, This is particularly true in the but Singapore and in an earlier day, Japan US. Democrats have adopted the and South Korea, had governments that language of European class warfare while looked more like a corporate board of Republicans – cowed by the Tea Party – governance…You run the whole country are dedicated to the proposition of no new like a corporation, and I think that is one taxes under any circumstances. Not even of their advantages at the moment.’* what Ronald Reagan euphemistically used Professor Fukuyama’s corporatist to call revenue enhancers. model may not take suffi cient account of The paralysis of the West contrasts democratic stirrings in, say, Singapore. But with activist leadership in the East, India his point is well taken. Still, I would like being perhaps the exception. China, for tonight to tackle the proposition head-on: Is example, has taken bold steps, fi rst in the West presently severely disadvantaged 2008/9, to stimulate its economy. Beijing with regard to Asia, if not in relative has followed with an ambitious fi ve-year decline? I also want to take a harder look plan to transform the economy from at the sustainability of the Chinese model export-dependent, investment-led growth of authoritarian capitalism. Finally, I to a model more conducive to bolstering would like to issue a friendly warning: wages and domestic consumer demand. if present trends prove durable, we are So will illiberal or authoritarian in the middle of an historic transition. capitalism, at least in the short term, And such transitions usually carry risks. prove more effective than a deadlocked Without accommodation, there is the risk democratic system of checks and balances of confl ict, either through protectionism as practised in the US – or indeed the or, in the last resort, war. What can be makeshift efforts to resolve the euro done to prevent such a negative outcome? crisis among a group of 27 nation states? Europe’s questionable decision to pass The rise and descent of the West round the begging bowl in Beijing offers a symbolic answer. By historical standards, the supremacy of Francis Fukuyama, champion of the West is a relatively recent phenomenon; liberal democracy who is best known for it may prove relatively short-lived too. his book The End of History and The Last Professor Ian Morris of Stanford has Man, published at the end of the Cold identifi ed two poles of civilisation: the

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West, the civilisations that descended battleships that President Theodore from the agricultural revolution in the so- Roosevelt had dispatched on a 45,000 mile called fertile crescent in today’s Middle cruise around the world as a show of East, and the ‘East’, the civilisations that American power.* emerged from an independent revolution America’s intervention in two world in a part of what is now China. Until the wars – supported by the Australian fall of the Western Roman Empire, the Imperial Force – rescued Europe from West was slightly ahead. It subsequently the demons of nationalism and fascism. fell behind until the 18th century when The US was also present at the creation it edged ahead. Now (even allowing for of a new world order after 1945 based on vagaries of state-sponsored statistics,) the liberal democracy, political reconciliation West looks once more to be lagging.* between France and Germany, and a For the fi rst three quarters of the new rules-based international system for nineteenth century, it was Britain that diplomatic, monetary and trade affairs. appeared as a colossus astride the world. This system was anchored by new Charles Darwin, visiting the thriving port institutions such as the International of Sydney, wrote in January, 1836: ‘My Monetary Fund, the World Bank, the fi rst feeling was to congratulate myself General Agreement of Trade and Tariffs that I was born an Englishman’. Darwin and the United Nations. contrasted Sydney’s bustling prosperity The make-up of these new institutions with the sedate former Spanish and naturally refl ected the preponderance of Portuguese colonies which he had just US power. To the victors of World War II visited. These colonies, he concluded, had went the spoils: the allocation to Britain, barely advanced over the past 300 years.* France, the US, the Soviet Union and Britain’s ascendancy was based on China of permanent veto-wielding seats the native inventiveness of its people, the in the United Nations Security Council; linked growth of manufacturing industry and a cosy carve-up between the Europe and naval supremacy which guaranteed and US of the top jobs at the IMF and the access to markets and made the country’s World Bank respectively. military a force to be reckoned with. In Today, the post-World War II settlement the same vein, the rise of America as is manifestly anachronistic. It no longer an imperial power may be traced back refl ects the balance of economic power in to February 1909 with the return of the the world. Europe, for example, is grossly Great White Fleet, the sixteen fi rst-class over-represented. That does not mean

4 Asia’s Rise, the West’s Fall?

that Britain or France will relinquish Let’s quickly deal with the economics. anytime soon their status as members of Operating a centralised monetary policy the Perm Five at the UN; but the economic with residual national budgetary and (as opposed to the political) imbalance economic policies has proven impossible. has at least been partially recognised German policymakers suffer from a ‘quasi- by a reweighting of voting power at religious belief’ that only fi scal defi cits the IMF as well as the creation of new matter. In fact, external defi cits have been international forums. shown to be a far more reliable guide to The most notable of course is the Group indiscipline because residents have been of Twenty which brings in the rising spending more than their income and powers of Brazil as well as important borrowing the rest from abroad. When regiona l players such as Indonesia, Mexico, credit was cheap – Greece, for example, Saudi Arabia, South Africa, Turkey, and, could borrow on near equal terms to yes, Australia. This adjustment is long Germany – reality was suspended. overdue. While the G20 remains a fl edgling Europe’s leaders have failed to convince body, it has the potential to enhance its fi nancial markets that they can contain legitimacy and strengthen its capacity as the crisis. After the last G20 meeting, a new institution of global governance. an historic opportunity may have been The pressing question for the West is missed. At best, Greece has bought time how to maintain infl uence and power in before the next aid package or a hard an international system where power is default. Europe’s rescue fi nd – the EFSF – ebbing to new players. This question is has admitted it cannot raise the promised particularly acute for Europe. funds through extra leverage. The severe problems of adjustment for uncompetitive Europe and the euro: the economies such as Greece and Portugal doctor’s dilemma remain. The banking system remains fragile. Economic growth is lacking. It was Charles de Gaulle who once And the one institution which is capable remarked of La France: How can you of providing a credible backstop – the govern a country with 246 varieties of European Central Bank – cannot do so for cheese? Imagine how much harder it is to political reasons. govern a Union of 27 different countries, Here we come to the politics. At one many more types of cheeses, and a level, it is possible to sympathise with monetary union with fundamental fl aws. Germany. The most powerful economy

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in Europe gave up the D-Mark and joined southern Europe – is too important to be a monetary union where several other kept to the elected politicians! members were unwilling or incapable The EU faces an existential choice. of staying the course. But Chancellor Either it continues to muddle along in a Angela Merkel’s fi rst instinct has been loose arrangement which suits national to treat all debtor countries as sinners sensitivities – a free-trade zone plus, deserving Lutheran retribution before if you like – or it moves toward tighter salvation through good works. Yet the integration, if necessary through the surplus countries stand to lose far more formalisation of a two-speed Europe in if monetary union fails than in a bail-out which an advance guard of countries led of Greece. by France and Germany takes shape. When President Sarkozy is not lecturing Europe has agreed to such arrangements the British about their semi-detached in the past. Think of the Schengen status in Europe, he is fi xated about arrangement allowing the free movement losing the triple A credit rating which of EU citizens and common visa policies. could cost him next year’s election. But at Think of the opt-outs which Britain has least he is capable of recognising political in this area and on monetary union. constraints in France and Germany. As Signifi cantly, the coalition government he told Chancellor Merkel recently: ‘Vous under David Cameron has also signalled avez un parlement très fort mais un peuple that it is willing to countenance tighter très faible; et moi, j’ai un parlement très integration among a continental core, on faible, mais un peuple très fort’. condition that the rights of Britain and In the space of a fortnight, the euro other ‘outs’ are protected. crisis has now claimed the scalps of two My guess is that the euro will just prime ministers – George Papendreou about survive, but a new system of in Greece and Silvio Berlusconi in Italy economic governance will have to be – each replaced by technocrats. The introduced to keep the monetary union appalled Franco-German reaction to intact. Membership may not be the same Mr Papandreou’s proposed referendum in three years’ time, or even less given the on the austerity measures underlines Greek crisis. If Italy were to default, the how democracy has been shunted aside, game would be up. But the euro focus does laying bear the broader crisis in popular not begin to answer the real challenges legitimacy. Monetary union – at least in facing a continent which suffers from an ageing population, low growth, hostility

6 Asia’s Rise, the West’s Fall?

to immigration and, with some notable While the diagnosis (and the book exceptions, is lagging in innovation. title) may sound glib, Friedman and When I raise this on my visits to Berlin, Mandelbaum have put their fi nger on the Brussels or Paris, I am given a three-word institutional paralysis currently gripping riposte: the Lisbon agenda. Remember America. This paralysis makes it doubly Lisbon, the agreement in 2000 to make diffi cult to tackle long-term economic Europe the most competitive knowledge weaknesses long obscured during the near economy in the world by 2020? In two decades of US hegemony after the end retrospect, Lisbon looks like an airy pledge of the Cold War. made at the height of the dot com bubble. The Unipolar Moment, to use The burden of regulation in areas such Charles Krauthammer’s term, fl attered as the environment and employment law to deceive in two other important ways. has grown rather than been reversed. And It encouraged the military adventurism while the sovereign debt crisis has forced of President George W. Bush, and it countries such as Spain to dismantle labour fostered the notion that the free-trade, market barriers, others cling to a model deregulation-based American economic protecting insiders rather than young model, underpinned by fi scal discipline unemployed in search of a job. Yet without and easy monetary policy, was for export action, rewriting Europe’s generous social to the rest of the world. contract – and achieving decent growth It now turns out that America rates – Europe is condemned to lose was selling fl awed goods. Financial further ground to Asia and the US. engineering combined with cheap credit almost brought down the world’s banking America the Ungovernable system. We have come to understand that – sky-high remuneration levels aside – the In their new book, That Used to be Us: fi nancial services industry is similar to How America fell behind in the world and nuclear power: an essential utility but one how we can come back, Thomas Friedman which requires close supervision. Nor has and Michael Mandelbaum write that the American model responded well to the Americans are ‘getting only 50 per cent structural challenges facing its economy. of potential benefi ts from our fi rst-rate First, globalisation has put virtually system’, whereas ‘China is getting 90 per every American job under pressure. cent of potential benefi ts from its second- Second, the information revolution has rate political system.’* eliminated vast swathes of what were

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once deemed to be safe American jobs. habit of sticking around. Whatever the (It also requires a far higher level of conventional east coast wisdom may say, education than was once necessary to the current paralysis does not necessarily secure a job.) Third, the level of national spell a crisis of American governance. It debt and defi cits crimp America’s freedom is more tactical than structural. Let me of manoeuvre and impose an increasing explain. burden on future generations. In 2009, the White House understood Declining income and rising inequality that after the fall of Lehman, America faced have been most acutely felt among the the most severe fi nancial crisis since the 70 per cent of Americans who deem 1930s. The resulting economic downturn themselves to be middle class. And as a would be severe, but few predicted the seminal MIT study has made clear, income fi nancial repression, prolonged credit stagnation and political polarisation are squeeze and its impact on the broader tightly correlated.* The rise of the Tea economy forecast by the likes of Professor Party – the anti-tax, anti-government Carmen Reinhart. Indeed, the best White activists – is not only a visceral response House predictions were of a V-shaped to Federal government activism to tackle recovery, a sharp rebound with jobs to the Great Recession; it also refl ects the follow. In this scenario, it made sense to genuine pain of a squeezed middle- take out an insurance policy on recovery class America. through an economic stimulus but instead Political polarisation has exacerbated the main focus was a once-in-a-generation the paralysis in Washington, highlighting reform of health care. the weakness of a system biased toward The reform redeemed one of President inaction. Yet the scale of the crisis calls for Obama’s main campaign pledges but it action, not today’s stasis. In earlier times, was pushed through Congress on partisan a decisive president – Roosevelt, Truman lines, akin to a three-line parliamentary and Reagan come to mind – has galvanised whip. There was no serious effort to reach the legislature by invoking a sense of crisis across the aisle. Republicans may not and capturing the public mood. President have wished to embrace a reform many Obama, for all his rhetorical skills, has not dismissed as socialised medicine; but managed to do so. the White House and House Democrats Tom Friedman has fantasised have paid a heavy price for their partisan about having a dictator for a day to approach. Bill Clinton’s adage about the get things done. Well, dictators have a primacy of the economy was ignored. The

8 Asia’s Rise, the West’s Fall?

resulting stand-off, exacerbated now by John Doerr, one of the foremost the 2012 election campaign, means that venture capitalists in America, was pressing long-term issues such as social once asked to grade America in terms of security and other entitlements are off research and development. He gave an the table. Washington might as well have A for information technology, a B/C for shut down. biotech (given regulatory hostility) and The paralysis has some echoes of the a C/D minus for energy innovation in 1970s after Watergate, though this was areas such as solar. As Doerr remarked: broken by the election of Ronald Reagan Americans spend more on potato chips who, for all his avowed conservatism, than on energy technology research. showed time and again he could strike Infl uential Americans are becoming bipartisan deals ranging from tax reform increasingly concerned that the US is to his broader supply side agenda. It would falling behind on innovation. In political be short-sighted to rule out another strong terms, this can translate into the commonly executive leader breaking the Washington held v iew t hat t he US is no longer operat ing stalemate. Future Presidents should be on a level playing fi eld. Authoritarian under no illusion: action is required. capitalism in countries such as China In their report Rising Above the holds an unfair advantage through tools Gathering Storm, produced jointly by such as a manipulated exchange rate. the National Academy of Sciences, the Remember: Americans love competition – National Academy of Engineering, the as long as they are winning. Institute of Medicine and Members of the So far economic hostilities have been National Research Council,* the authors contained, though Congress is examining identify the immediate threat to American trade reprisals because of China’s pre-eminence: in a world where advanced artifi cially low exchange rate. It would knowledge is widespread and low-cost be tempting to seek to use the strategic labour readily available, US advantages competition posed by China to mobilise in the marketplace and in science and public opinion against an external threat. technology are under threat. The authors This happened fi rst with the Soviet threat call for an immediate effort to raise in the late 1940s and, less justifi ably, with education standards in high school, boost Japan in the 1980s. The question worth investment in basic research and ensure asking at this point, however, is how the US is the best place for top students, sustainable is the Chinese model itself? engineers and scientists in the world.

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China: the paradox of power importer, (after the US), especially of raw materials and energy. Chairman Mao famously exhorted people In a provocative book published this to focus on contradictions because every year, Arvind Subramanian, a former IMF contradiction conceals a truth.* The economist, highlights the speed of China’s problem in China today is that there are ascent as an economic superpower. so many contradictions it is hard to know Assuming a (conservative) Chinese where to start looking. The country is annual growth rate seven per cent and a blur of social, historical, economic, an (optimistic) US annual growth rate geographical and political incongruities, of 3.5 per cent, as well as a debt-induced most of which either derive from or are growth crisis on the mainland, China’s related to a single, overarching paradox: GDP would still be one quarter higher China is three decades into running a than America’s by 2030 and it would have diverse capitalist economy with a single- twice America’s share of world trade.* party hierarchy. And yet, China’s gross domestic So far, of course, the model of state product per head, at purchasing power capitalism has been wildly successful. parity, is still only about a fi fth that of But strains and stresses in the system are the US. This was Japan’s relative position proliferating. Now, more than perhaps in 1950, before more than two decades of at any time since the era of ‘reform and extremely rapid growth. As my colleague opening’ began in late 1978, it is pertinent Martin Wolf has pointed out: China is set to ask whether China can continue to to become an economic superpower, while forge ahead with its current economic and still a developing country.* It is, to coin a political model. phrase, the premature superpower. Before examining these contradictions, This is the essential background to it is worth reciting a few facts. China is Beijing’s latest Five Year Plan which already the second largest economy. It recognises that the investment-driven, has the world’s largest current account export-led model that has delivered surplus and the biggest holding of foreign spectacular growth is less and less currency reserves, at close to $3.2 trillion. sustainable. Fixed asset investment now It is the world’s largest exporter (if the contributes more than 50 per cent of European Union is counted as a set of 27 GDP growth, but the effi ciency of that separate countries) and the second largest investment is declining rapidly. Nowhere is this clearer than within the crumbling

10 Asia’s Rise, the West’s Fall?

transport empire administered by the markets to tap. But they do mean that Ministry of Railways. the current investment-heavy model is In the last fi ve years, the Ministry’s nearing the end of its line. There is a need total debt jumped by 227 per cent to more – again, as the Five Year Plan says – to than Rmb 2,000bn at the end of the fi rst boost consumer spending and develop half of this year. But revenue over the the service sector. But this is much same period rose by a mere 62 per cent. easier said than done. Japan still has to The result is an insolvency so pronounced achieve this, 30 years after declaring it a that even those stalwarts of Chinese state national priority. capitalism – the ‘big four’ state banks – The fi rst impediment is that much of are starting to refuse to lend to the state- China’s success has been built upon the owned railway construction companies. involuntary sacrifi ces of the consumer. Tensions between state enterprises and State banks have kept interest rates private enterprises in China are not new; artifi cially low, penalising savers in but they are more potent than ever. order to preserve minimal borrowing Rail is not the only sector in which costs for corporations. If this trade-off huge debts are threatening long- is now reversed, then the big state-run term sustainability. Many road toll companies – which form the bulwark of expressways, which were energetically the Communist party’s economic power – built in 2009–2010 as local governments would suddenly be disadvantaged. answered Beijing’s call to stimulate In other words, while it is easy to see growth, are also generating insuffi cient the rationale behind moving to a more cash to service their the interest on the consumer-centric economy, pushing loans used to construct them. Only one out through such reforms against the interests of all China’s provinces makes a net profi t of a phalanx of corporate power brokers – on its toll roads; the rest are running up many of whom hold the rank of minister red ink. A similar situation exists in the or vice-minister within the party system real estate sector, with several developers – would be infi nitely more diffi cult. failing to generate enough income to Other aspects of the state capitalist service debts. system are also showing the strain. China These stark infrastructure problems keeps electricity prices artifi cially low do not mean the Chinese edifi ce is about by mandating a state price for ‘thermal’ to come tumbling down – Beijing still coal. But coal miners chafe at having to has plentiful fi scal resources and capital sell their produce to power stations at far

11 Lowy Lecture 2011

below the prices they would get by selling China’s manufacturers are scouring the it on the free market. Every summer, world searching for markets, acquiring when air conditioners are turned up companies, upgrading technology and across the country, the coal mines restrict building brands. supply of thermal coal just when power The era of Chinese offshoring is upon stations need it most. Sudden power us, and is likely to last for several decades. cuts introduce people – in a palpable As Gerard Lyons, chief economist of sense – to the heat produced by China’s Standard Chartered Bank has observed: systemic contradictions. the sense that everything is ‘Made in Another cornerstone of the model China’ may give way to a perception that is also crumbling. After 30 years of everywhere is ‘Owned by China’ – though abundant cheap labour, there is now an of course that may take a good while. absolute shortage of migrant workers in Seminal moments have already taken the big factory towns along the east and place. In the fi rst quarter of this year, south coasts. Migrant worker wages have for the fi rst time, Chinese companies did climbed by around 30 per cent this year more M&A deals in the manufacturing, compared to last, meaning that many low- distribution and retail sectors than they tech manufacturers have had to relocate to did in the resource and energy sectors, the cheaper production bases in inland China former mainstay of the country’s outward or move overseas. With the boom in rural push. The size of outward investment is China reinforcing a growing reluctance also growing, and it is possible that this among rural workers to migrate, the trend year, or maybe next, Chinese companies of rising manufacturing costs is likely to will invest more overseas than foreign continue, hitting China’s competitiveness companies invest in China. – though the response will be to move up The key destinations are already the value chain. coming into focus: Brazil, Indonesia, As China embarks on the convulsive Vietnam, Mexico, South Africa and even shift from low-cost manufacturing the United States. What distinguishes champion to a more consumer- China’s internationalisation from, say, friendly economy, the impact will be that of Japan is the speed and scale of felt well beyond China’s borders. The change. In the case of Brazil, Chinese most obvious impact will be via the trade used to account for just 2 per cent outward reach of China Inc. Propelled of trade a decade ago but now accounts for by waning competitiveness at home, 16 per cent, overtaking the US.

12 Asia’s Rise, the West’s Fall?

China’s commercial integration with July, a storm of anti-government criticism the 10 member nations of ASEAN is also fl ew on weibo. Beijing was accused of accelerating, and it looks possible that the covering up evidence at the crash site, region will overtake the US as China’s rescuers were charged with callous second largest trade partner as soon as indifference to the plight of victims. next year. Wen Jiabao, the premier who claimed Yet even as China’s embrace of the that his late appearance at the scene was world proliferates and deepens, questions because he was ill in Beijing, was shown persist not only about what type of power on weibo to have been attending meetings it will be but also about how much power during the time he said he was ill. The Beijing actually wields at home. authorities are now seeking to curb the This year a few unheralded spectacles activities of the bloggers, but it is unclear have emerged. Chinese savers have if they can regain decisive control over withdrawn their money in droves from the public opinion. big state banks – where the interest they What we are witnessing, therefore, is the earn falls woefully short of infl ation – and emergence of fundamental contradictions deposited them in shadow banks, where in the Chinese political-economic they earn a real return. The haemorrhage model. In the past, with the exception of has been so large that the shadow fi nancial Tiananmen Square, the Chinese elite have system – which exists beyond regulatory proved exceptionally adept in modifying remit – now extends more credit every their model without surrendering control month than the offi cial banks do. The loss of the levers of power. Their legitimacy of fi nancial control is startling but it is has also rested on the mantra of delivering matched in the sphere of media, another ever improving living standards. bulwark of Communist party power. All this creates considerable soul- The rise of sina weibo – China’s searching among those in charge of version of twitter – has punched a big China’s body politic. Foremost among hole in the party’s propaganda control. them is Premier Wen himself. Speaking Some 200 million Chinese citizens now at the World Economic Forum in the air opinions on events at home and northeastern city of Dalian in September, overseas real time, and the sheer volume he prefaced his remarks by saying: ‘I feel of comments is so large that the censors a strong sense of responsibility to present can no longer keep up. When a tragic high my views on various issues in an accurate speed train accident killed 41 people in and candid manner.’

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The man who once accompanied the Conclusion former Communist party boss, Zhao Ziyang, onto Tiananmen Square in 1989 In this lecture, I have focussed on China to plead with the student demonstrators to to the exclusion of other important Asian leave the square for their own safety, then countries, notably India and Japan. That set out a plan for political reform. He said is not because they are marginal – far China should: from it. Indeed, the growth of China and India is already having a profound impact 1. Separate the functions of the party on trade patterns, in particular helping and the government in order to exporters of natural resources in Angola, prevent over-concentration of power. Argentina, and Brazil and purchasers of 2. Create a truly independent judiciary labour-intensive products, above all in the to uphold justice. West. But rising prosperity and expanded 3. Safeguard the people’s right to know, opportunity do not take into account the elect, participate in and supervise the challenges of contested political power government. and the scramble for natural resources. 4. Promote social justice through China’s rise, when measured in redistribution of income and create terms of higher living standards for a a social security system that covers long-suffering population, should draw unemployment, old age and medical admiration and respect. But it should not care. be a matter for euphoria. China’s rise is 5. Fight corruption resolutely. likely to have far-reaching economic and geopolitical consequences which in turn It is quite a to-do list. But it is far from require deft statesmanship. certain that anyone will try to implement Throughout the ages, the failure to it. However, if they do not, the China that accommodate rising powers, or rather the bestrides the world may remain a nation failure of rising powers to accommodate apart, starkly different in character the existing state system, has been a source from the capitalist democracies around of confl ict. Germany’s search for a place it and riven by unreconciled domestic in the sun at the end of the 19th century contradictions. is one example; resource-hungry Japan’s quest for a co-prosperity sphere in the interwar period is another. In the case of China, it is vital that all interested parties

14 Asia’s Rise, the West’s Fall?

grasp the mutual interest in upholding to preserve the stability which is the best and developing – rather than overturning guarantee that Beijing can continue to – the rules-based system built up after deliver the increasing levels of prosperity World War II. shared by its people. Of course, the West, principally the US, If this is to be an Asian century, will have to adjust to accommodate China. what does this mean for Australia? Well, But China will have to accommodate too, to paraphrase former British foreign in particular in the fi elds of fi nance, money, secretary Douglas Hurd, Australia does trade and direct investment and energy. In punch above its weight. You can call on coming years, this will have to cover the longstanding cultural and familial ties liberalisation of the banking system, the with Britain and Europe; you work closely outfl ow of offi cial capital resulting from with the United States in economic and massive intervention to support the Yuan security matters; but you are also closely and ensuring sterilisation, and the future linked to the Asian region, especially convertibility of the RMB (though that China. You might even be characterised as prospect is not immediate). It will also the West’s early warning system in Asia. cover intellectual property and foreign Australia is also an active player in the direct investment. G20, bridging developing and developed In the same spirit, China has an interest countries. You can speak as an advocate in pursuing policies which are both of free trade but also as a critical supplier consistent with protecting its own interests of natural resources. You have every right and the international order. It is troubling to be seen as a strong country committed therefore to note the number of territorial to the region but also as an aspiring global disputes which China is involved with in player. Asia’s rise should therefore be a the neighbourhood. These include spats source of encouragement, even if the West’s with Japan, the Philippines and Vietnam present travails will cause trepidation. as well as the protracted stand-off with History however rarely travels in India and Taiwan. straight lines. The rise and fall of nations As Chinese power grows and its blue- is no exception. In the case of America, water navy capability expands, and the decline is at worst relative. Europe’s search for security of supply for natural problems are very serious, especially in resources intensifi es, the risks of tensions terms of its aspirations to be a coherent escalating are obvious. It cannot be international actor. The rise of China to stressed enough that China’s interest is economic and political superpower seems

15 Lowy Lecture 2011

assured. But this is not – and should not Acknowledgements be – a zero sum game. China’s great test is to achieve a balance between rapid Admiral Mike Mullen speaking to the Hill development at home and stability abroad. breakfast club June 24, 2011 as reported Australia – and the rest of the world – has in US media. a huge stake in the outcome. Francis Fukuyama, Lunch with the FT, May 28, 2011. The Rise and Fall of the British Empire, Lawrence James, p 236, Abacus. Why the West Rules – For Now, Professor Ian Morris, Profi le Books, as cited in Martin Wolf, Financial Times, January 12, 2011. First Great Triumph, Warren Zimmerman, Farrer Strauss Giroux. That Used to be Us: How America fell behind and how we can come back, Thomas Friedman and Michael Mandelbaum, Farrer Strauss Giroux. A cure for a sick country, Stanley Hoffman. New York Review of Books, November 9, 2011. America in the Age of Descent, by Edward Luce, to be published in 2012. Martin Wolf, China in the World Economy, delivered to a Beijing conference September 2011. Martin Wolf, There is no sunlit future for the euro, Financial Times, October 18, 2011. James Kynge, author of China Shakes the World and publisher of China Confi dential – various comments.

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