Interview: Richard C. Bush on Northeast Asian Economies

 
 

Richard Bush is director of the Center for East Asia Policy Studies (CEAP) at Brookings Institution and is a senior fellow at the John L. Thornton China Center. For five years before that he was the chairman of the American Institute in Taiwan, the mechanism through which the United States government conducts substantive relations with Taiwan in the absence of diplomatic relations.

He is the author of At Cross Purposes: U.S.-Taiwan Relations Since 1942, a book of essays on the history of America’s relations with Taiwan, Untying the Knot: Making Peace in the Taiwan Strait, a book on cross-Strait political relations, A War Like No Other: The Truth About China’s Challenge to America (co-authored Michael O’Hanlon), which examines the challenges that the United States faces in avoiding conflict and developing its relationship with China, Perils of Proximity: China-Japan Security Relations and Uncharted Strait: The Future of China-Taiwan Relations.

What do you make of the global economy today and what are the implications for East Asia?

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For all its weaknesses, the United States economy has recovered beyond people’s expectations over the last five years. Granted that the recovery has been gradual, it has been steady. There are a couple of problems that remain. One is present and the other is over the horizon. The present problem is that the recovery does not affect all people equally. Wages are lagging behind corporate profits and the rise in stock market does not correspond to more general prosperity. This problem is found in all advanced societies. The United States, and other nations, haven’t figured out a way to address this problem. Perhaps the Scandinavians have come the closest.

But the long-term problem for the United States is our lack of attention to the “pillars” of national strength.

At the federal level, the fiscal system of the United States is a mess. We are neglecting our infrastructure to a dangerous degree. We could do a lot more to promote education and research in the sciences. That lack of concern for education and research recently is odd considering that ours is an economy that depends on innovation and services. Overall the quality of the civil service in the United States is declining and we are having tremendous problems finding to find the right balance between permitting market freedom to spur growth and imposing regulations to prevent market excesses and distortions. Finally, political battles over taxes and spending take all attention away from long-term strategic planning.

In the case of Japan and Korea, their aging population is the biggest concern. At present Korea’s doing better than Japan, but that may just be because it’s lagging behind Japan by a decade in terms of demographic change. Recently we are reading about South Korean villages that are disappearing because of the aging populations and the move to the big cities. We saw that sort of story already two decades ago with regards to Japan. The aging of the population is a major challenge to the entire economies of those two countries.

I think that China has done a good job since 1979 in taking advantage of its comparative advantages and establishing itself as the world’s major manufacturing center. In this respect, China resembles the United States of a hundred to one hundred and twenty years ago – but changes are taking place today much more rapidly than was the case then.

The United States back then experienced rapid growth, but it was undermined by entrenched corruption and a weak rule of law. The United States was hobbled at the time by difficulties regulating economic activity. Strong vested interests lined up against reform. In the U.S. case, it was private corporations and the families behind them that dominated the economy, and in the case of China today, it is state-owned corporations. We in the United States were fortunate that we had presidents who were willing to “betray their class” in the interests of the nation. First, there was Teddy Roosevelt, and then Franklin Roosevelt. Both were from wealthy families but bravely set out to strictly regulate industry. In some respects Xi Jinping is also going against the interests of his supporters in the Communist aristocracy, in his crackdown on corruption and waste. More power to him!

But some say that since no princelings have gone to jail yet, Xi Jinping has not actually “betrayed his class.”

Yes, there are limits to his actions, but he’s clearly making a lot of enemies through his crackdowns. I am talking about the communist aristocracy in slightly broader terms. China also has a serious aging population problem as a result of the one-child policy. China has serious environmental problems, as the U.S. also had a century ago, because of rapid industrialization. The air is a problem, but the pollution of water is an even more serious problem.

If China cannot successfully make the transition from an economy based on export-led growth to one based on consumption, the social and economic consequences will be serious.

There is a risk that China will peak in economic growth before it reaches its development goals and will be the first major economy that grows old before it gets rich.

I hope China succeeds, that Xi Jinping succeeds in his plans to reform the Chinese economy and eliminate corruption. If Xi is successful, we will see in China the emergence of a substantial middle class which will exert pressures for an opening the political system such as we so previously in Korea and Taiwan. But the jury’s still out concerning China’s political legacy.

So you feel that for all the limitations on his reforms, Xi Jinping is heading in the right direction.

Well, I think that first of all, he understands better than any of his predecessors, the endemic nature of corruption in China and he had committed himself to addressing this challenge. The Chinese Communist Party, the central government, the government at all levels, and the military cannot do their job well if offices and promotions are being sold to the highest bidder, if disagreements are settled with cash payments. Xi has an extremely hard and thankless job because the very people he needs to help him carry these reforms are those who are most likely to engage in corrupt behavior. Xi is trying to carry out his reforms through campaigns, public attacks on corrupt officials. But there are limits to such an approach. At a certain point the only way to build a sustainable system which is not corrupt is through institutions, not through people or campaigns. We have not seen signs of that form of political reform in China yet.

To build institutions, independent agencies in the government that can attack the issue of corruption, requires reform at a level that meets tremendous opposition in the communist system. Hong Kong, which is part of the People’s Republic of China, contains powerful institutions for addressing corruption. But there has been extraordinary resistance to importing those institutions. Such a reform may be beyond even Xi Jinping’s ability.

Certainly President Xi Jinping is putting people in jail for corruption, more so than say President Barack Obama is. But is perhaps the problem that enforcement is not systematic?

Well, the jury’s still out concerning the effectiveness of Xi’s approach. Hong Kong also implemented a get tough campaign and put people in jail. But it does not necessarily change the basic practices and ten years later you see the same practices returning. But Hong Kong has the advantage of being a sustainable system of rules and practices. Everybody is highly socialized and subject to peer pressure. Hong Kong has many rules within the bureaucracy to deter corruption. They have a system through which citizens can report corruption that they witness and the government follows up. Hong Kong’s approach is comprehensive. That’s really what China needs.

So you see Hong Kong as offering a model for China?

Absolutely. Hong Kong is already a model for the rest of China.

What about Taiwan? Is Taiwan also a model.

Until the late 1990s you could have said that Taiwan could be a model for good governance in China. But there has been some retrogression in Taiwan, [with] increased corruption at many levels. I’m not sure that the institutions in Taiwan are as strong as they were. Increasingly the best measure against corruption in Taiwan, and in the Republic of Korea, is hyperactive prosecutors.

The use of prosecutors to attack corruption is the distinguishing characteristic of Korea in its developmental period. That policy is what distinguished Korea from other developing nations in terms of the relatively low level of corruption. 

When we see prosecutors running around arresting high-profile figures, we have to ask ourselves where proper due process is being followed. But the approach followed in China is another order of magnitude.

But China has been wrestling with corruption for a long time. We read predictions that there would be some sort of enormous collapse because of corruption and speculation. And yet that hasn’t happened yet. Or we should say that such problems have not led to the disaster some predicted fifteen years ago.

No. That is certainly true. And the Chinese regime is good (at least in the economic arena) at spotting major problems quickly and surging to respond to them. The manner in which they intervened in the Shanghai stock market recently is an example of that. The government did make a mistake when it promoted a rise in the markets and they clearly learned a lesson. But it’s not as if the economy is beyond any government control. The government is constantly learning and adapting to new situations. The most serious problem is the consequences of rapid industrialization and what growth means in the context of an aging society. Will China be able to engineer a shift in its basic economic strategy in the face of strong vested interests? Even the immense power granted to the president does not guarantee success.

What do you think about Japan’s condition these days? There’s been a lot of concern about Japan’s economy and also about its politics. But whatever the concerns may be, Japan remains a massive economy with tremendous technological advantages.

Well, the number one problem for Japan is its aging population. I guess the second largest concern would be the lingering corruption in certain sectors, especially agriculture and construction. And the third would be overregulation of the economy. I think that Prime Minister [Shinzo] Abe, particularly with his “third arrow,” has recognized the imperative for deregulation.

Explain for us what the “third arrow” is, please.

The first arrow was monetary policy. That provides short-term benefits. The second arrow is fiscal policy. And the benefit it offers is balanced regarding the debt you take on. That issue is not a minor problem for Japan. You can take steps that stimulate the economy on the fiscal side, but then, if you raise the consumption tax, you undermine the effect. The third arrow is deregulation, and at last people recognize that it has been needed in Japan for a long time. I think that the TPP (Trans-Pacific Partnership) can serve as a mechanism in a number of areas to reduce overregulation and open up the economy. This stimulus to change will allow for transitions that should have taken place a long time ago to occur. And some sectors will lose out, and others will emerge that have been constrained from doing so for a long time.

And what do you think about the prospects for South Korea, in terms of economic growth?

I think South Korea’s prospects are actually better than Japan’s at this moment. Korea has some very strong companies – global leaders like Samsung and Hyundai – who are increasingly innovative in their approaches. If Korea can keep up its positive growth in global business, and somehow manages to produce enough people with the skills to staff an innovation-based economy, in the face of an aging society, it has excellent prospects.

What advantages do you think Korea has in the current global business environment, vis-à-vis Japan and China?

Well, first of all, I think that although the Asian financial crisis was a great shock for Korea, the adjustments that Korea was forced to make coming out of that crisis have benefitted it. I think that Korea has been much more willing than its neighbors to negotiate truly meaningful free-trade arrangements with other countries, such as those with the United States and with Europe. And those free trade agreements are not only going to open up markets, but they will also foster needed structural adjustments in the domestic economy. So you have a few losers, but you also have winners. And you those winners will be players in sectors that didn’t exist before. So I think that Korea is ahead of Japan and China in that regard. As I understand it, the free trade arrangements that China has engaged in are so riddled with exceptions that China is missing out on the true benefits that these arrangements can offer.

And what about North Korea? Does it even have the economic scale to be taken seriously in global economics? What are the prospects for North Korea’s position in the Northeast Asian economy?

I think that in the short term North Korea is managing to get by. Bu their long-term prospects aren’t good. The economy has stabilized after tremendous chaos mainly because of the exploitation of natural resources for export. And most of these resources are being exported to China. That trade creates real revenue, but it also saddles North Korea with what’s called “the resource curse.” When economic strategy and growth are dictated by a need to export natural resources, tremendous distortions will set into the economic structure of a country.

What exactly is this “resource curse?”

The resource curse refers to the problems that emerge when natural resources become the main source of growth for a country. There is a tendency in economies based on resources for the government to devote its resources to regulating the production of resources and capturing rents from the exports of those resources, rather than developing the manufacturing sector or expanding research in science and technology. We see a marked break with what happens in the development of a manufacturing economy. So if you look at oil-producing and mineral-producing countries, they tend to have a rather simplistic economy, a shallow ecosystem for innovation and a relatively authoritarian system of governance.

Now there are a few exceptions like Australia , Mongolia and Norway, but it takes an advanced democracy and constant vigilance to avoid the tendency to let the export of resources completely dominate the economy, and, by extension, the politics.

Although there has been some liberalization, particularly at the consumer level, North Korea remains a controlled economy. And North Korea has missed out on the wave of globalization that has swept Asia over the last twenty or thirty years. North Korea still has, hypothetically, an opportunity to become, with a lot of South Korean help, a manufacturing economy. But that would require a lot of changes in state policy and it would not be as easy as relying on natural resources. We do not see any evidence of that sort of fundamental shift yet.

I’ve heard conflicting descriptions of North Korea’s relationship with China. Some people believe that China has made enormous, long-term contracts with North Korea for raw materials, and that therefore North Korea’s becoming increasingly dependent on the Chinese economy. Others have said that the North Koreans have taken all sorts of measures to limit their exposure and the degree to which China controls the economy. What is your sense of the process of economic integration between the two countries?

Well, at the risk of being snide, I would say that given the stress on national independence of North Koreans (and to some degree of all Koreans ), I don’t think there’s too much of a danger of North Korea being overly dependent on China. The problem is that although this economic relationship benefits the elites in the North Korean regime and benefits a handful of Chinese companies, its impact is limited. It’s my impression that the North Korean regime understands the political dangers of economic dependence and is vigilant about managing them. So it’s no surprise that the political relationship between the two countries is today not good at all.

You are perhaps referring to the decision by President Xi Jinping to travel to Seoul and obviously snub Pyongyang.

That is one glaring example Beijing has adopted an attitude of indifference towards Pyongyang. They’ll help keep North Korea afloat as a means of limiting China’s geopolitical exposure, but that is about all. China is engaged in quiet diplomacy at many levels to limit the reckless activities undertaken by North Korea regarding its the nuclear program, its missile program and conventional attacks on South Korea.

Finally, perhaps you could say something about Taiwan and its role in East Asia. What are its actions towards China and their significance?

In my personal view President Ma Ying-jeou’s economic and political strategy for engaging China has been reasonably effective, especially in his first term. Exchanges went smoothly because the two sides agreed on things that were mutually beneficial and were easy to do. But the situation grew harder in Ma’s second term because the proposed market opening was much larger and therefore politically controversial. Those political debates within Taiwan have a special character because of the China-Taiwan political relationship and public fears in Taiwan of becoming too dependent on China economically. Taiwanese are not only afraid of competition from China in their domestic market, they are also concerned because economic dependence makes it easier for China to pressure Taiwan to accept its goals. The two governments are engaged in an elaborate political dance and as a result the market opening and market liberalization measures proposed have essentially stalled. And that situation isn’t good for Taiwan, given the unique character of the political relationship with Beijing. Taiwan needs to step up its economic liberalization with China before China will give the green light to third economies to liberalize their economic relations with Taiwan via free trade agreements. Taiwan badly needs to diversify its liberalization, including taking advantage of the TPP. But its trade strategy has been held hostage to cross straits politics.

And so Taiwan may end up missing the structural adjustment benefits of economic liberalization. Like Korea, like Japan, Taiwan has some innovative and savvy companies. They will probably do ok. But for other firms, the lack of reform in Taiwan will slow them down significantly.

Emanuel Pastreich is Director of the Asia Institute

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