Summary
Our readers know that it is our view that the economic problems faced by Asia are fundamental and not likely to be solved by the business cycle. The financial problems reflect a fundamental inefficiency in Asia's economies. These problems can be solved, but not without massive social dislocations. Asian political systems lack the means to impose these dislocations. As a result, the economic situation will deteriorate until the political consensus shatters under the strain. Once that consensus shatters, a harsh and direct politics will emerge, with intense political competition. We are already seeing this fully manifested in Indonesia. In various forms, the intensification of internal political conflict will spread through the rest of East and Southeast Asia. As internal political conflict spreads, international conflict in the region will also spread. Nationalism becomes a means for increasing internal political support. In addition, scarcity increases the probability of friction among nations. This means that Asia will come to resemble the rest of the world, with intense internal political disputes and serious international conflicts. The last generation of prosperity has been an aberration. The next generation will see Asia behave more like the rest of the world.
Analysis
For over a generation, the important news from Asia has been located on the business pages of newspapers. News of companies starting new ventures, entering new markets, and forming new alliances has constituted the substantial heart of this period of Asian history. It was as if the normal history of nations had been suspended. Political and military news was inherently secondary. Except for occasional news from East Timor or Mindano, or some new bellicosity from North Korea, it was as if the political history of Asia had been suspended. Most startlingly, this was even the case in the most politicized of Asian societies, China, where the state had, under Mao, completely usurped political life.
In some sense, politics is always suspended in times of prosperity. Where politics are suspended, so are military affairs. For the past generation, politics seemed frozen in Asia, except in relation to business. In essence, a political order put into place in the mid-1970s rolled on heedlessly. In Indonesia, China, Vietnam, Japan, personalities changed, particular politics shifted, but the political order and core policies remained intact. There was political upheaval, as in the Philippines, yet even there, the basic political order remained intact.
What was true for internal politics was triply true for international relations. From the end of the Vietnam War until today, relations between nations in the region remained fixed and essentially unchanging. War between nations in the region became unthinkable. Once the Vietnamese and Chinese settled matters between them, not a single international conflict occurred. There was internal instability that occasionally triggered cross-border incidents, but not a single act of regional warfare took place. An entire generation of professional soldiers in Asia came and went without once being called to wage international warfare.
In a real sense, East and Southeast Asian political history was suspended after the Vietnam War ended. What took its place was business: production, consumption, and exchange. What mattered were the institutions that facilitated that activity—corporations. To the extent the state mattered, it was the Ministries of Trade and of Finance that were crucial. Ministries of Defense and even Foreign affairs appeared more than a little archaic. Most important, East and Southeast Asia have come to regard this extraordinary circumstance as normal. These were, in fact, extraordinary years and they are drawing to a close. The problem is that Asian countries really no longer know how to make politics, particularly not international politics. This is one of the reasons that the region is evolving so slowly.
Prosperity overwhelmed politics. As wealth expanded, energy was devoted to accumulating wealth. To the extent that politics facilitated the accumulation of wealth, it was important. But only that aspect of politics that facilitated the accumulation of wealth was considered significant; the rest atrophied. In societies as different as China, Japan, and Indonesia politics became primarily a vehicle for managing the distribution of increasing prosperity. Even in China, other instruments weakened and atrophied. The People's Liberation Army, the primary guarantor of the Chinese Communist regime, became an instrument of business more than an instrument of internal security or international conflict.
With the decline in Asia's economic fortunes, we are witnessing the reemergence of politics in its fullest sense. In different ways throughout the region the problem of politics has shifted from maximizing income to managing scarcity. The management of scarcity is, of course, a much more difficult task. Scarcity is the management of disappointment. Asia is a region in which expectations concerning the future were high. It is a region that has been psychologically devastated by disappointment. To some extent, it is a region living in denial where neither the depths of the problem nor their longevity have yet sunk in. Nevertheless, the fact that the next generation will have to pay for the excesses of the preceding generation is slowly seeping into the consciousness of the region. Along with it, regimes are facing the necessity of coping with the accompanying deep-seated disappointment.
Regimes also have to deal with the distribution of static or diminishing economic pies. In the past, it has been a question of who gets what part of an ever-increasing amount. Now it is a question of who will give up what? Giving things up is much harder than allowing someone else to accumulate wealth at a faster rate than you. The fabulous wealth of the Suharto clan, or the strength of the Japanese keiretsu were tolerable when everyone's income was increasing. When everyone is getting less, the politics of distributed wealth becomes increasingly bitter and destabilizing.
Throughout the region, regimes are slowly destabilizing. They are responding by becoming increasingly rigid. Consider the first and most extreme case, Indonesia. We knew as far back as October that Suharto could not survive politically. It is increasingly clear that the regime itself will have difficulty surviving. Because Indonesia was both relatively poor and suffered the most unequal distribution of wealth, it is also natural that it should encounter the realities of politics first. The politics of disappointment have moved forward dramatically in recent months. The regime's attempts to contain the destabilization caused by extraordinary, sudden poverty that has taken masses of people to the edges of starvation, are necessarily inept. Having few levers for containing the unrest, the regime is compelled to become increasingly rigid while searching for allies. Each alliance weakens the regime by making it increasingly dependent on elements that have very different interests. The very process of preserving the regime in the short run increases the probability of regime failure in the long run.
This process is not confined to the least developed Asian countries. Consider Japan. The Liberal Democratic Party was extremely capable of managing prosperity. MITI and the Ministry of Finance presided over a political system whose primary role was adjudicating disputes over the distribution of ever increasing amounts of wealth, a process that is not too difficult to achieve. Managing the increasing disappointment of a society that had been led to expect permanent prosperity is much more difficult. Particularly difficult is the process of deciding on the distribution of scarcity. One of the great difficulties being faced in the management of the Japanese banking crisis is the fact that many of the institutions and their management will have to be liquidated financially. Deciding which ones and how the burden will be shared is an agonizing process in a country built around consensus. That consensus cannot hold, nor can the current Japanese political architecture.
Asian societies are built around consensus, which works well in times of prosperity. In times of scarcity, consensus serves as a mechanism for evading issues. Problems are not faced and are, therefore, never solved. The problems become worse until the consensus shatters. Then politics, in its most direct and brutal form emerges, with the focus on whose interests will be sacrificed and whose livelihood shattered. In Indonesia, that consensus has already shattered. The politics of disappointment is yielding to the politics of victimization. The primary issue: who will be held accountable, who will be made to pay the price, how misery will be distributed? This process will not be confined to Indonesia. Throughout the region, the carefully hewn consensus that governed since the 1970s is being strained to the limit. It is being held together by denial, by ignoring the issues in the hopes that something will turn up. Thus, every upturn in the stock exchanges is greeted as if salvation is upon the nation and the difficult decisions will not have to be made. Of course, the failure to make the hard decisions will inevitably abort every recovery, until the consensus finally shatters.
In every country of East and Southeast Asia, the consensus is straining and politics are reemerging. It is returning first in those countries with the most severe problems and the lowest absolute levels of prosperity: Indonesia, Malaysia, and Thailand. China's consensus is holding, but the regime is increasing its grip on society daily in preparation for the inevitable disappointments. In Japan, the evasion will go on the longest, but the shattering of consensus will be the loudest and most consequential. What happens in Japan will have global consequences.
The return of politics internally will be paralleled by the return of international relations. Until recently, the APEC and ASEAN meetings have been dominated by trade issues. Of late, they have come to include serious financial issues. But the other dimensions of international relations, issues of national security, have been either completely lacking or marginalized. Chinese-Taiwan issues were ever-present, but no one seriously expected a Chinese invasion. Japan was concerned over the Kuriles, the Koreans worried about each other, the Thai-Cambodian border was insecure, East Timor was in revolt and various nations squabbled over the Paracels. All of these were marginal. No one seriously expected any of these to result in major conflict. It would have diverted too much effort and energy from the most important of activities: making money.
In times of scarcity, international relations become much more important. Two forces drive this. First, the reemergence of internal political conflict causes competitors for political power to search for leverage. One of the important tools of political competition is nationalism. Sukarno, during the 1960s, used nationalism as an instrument of national cohesion. It is altogether likely that Habibie's successors will do the same. Nationalism does not function in a vacuum. It operates over and against some outside threat or opportunity. Sukarno's nationalism manifested itself in confrontation. The internal political process naturally increases the importance of national security issues.
Secondly, scarcity elevates national security issues naturally. As economic insecurity increases, the behavior of other nations becomes increasingly important. A trade dispute in a time of economic expansion is troublesome. During times of economic contraction, trade disputes can become matters of life and death. Prosperity makes manipulating other nations to achieve beneficial outcomes desirable; scarcity makes it essential. As nations seek to manipulate each other, international frictions increase rapidly and dramatically. The economic dislocations of the 1920s in Asia rapidly led to dramatic conflict in the 1930s. This was the same around the world and is a natural progression. It has not changed today.
It is our view that the economic problems faced by Asia are fundamental and not likely to be solved by the business cycle. The financial problems reflect a fundamental inefficiency in Asia's economies. These inefficiencies are generating rates of return on investment that are too low to generate investment-driven recoveries. Without new capitalization, Asian industries will not be able to compete on the world markets. These problems can be solved, but not without massive social dislocations. Asian political systems lack the means to impose these dislocations. As a result, the economic situation will deteriorate until the political consensus shatters under the strain. Once that consensus shatters, a harsh and direct politics will emerge, with intense political competition. From this will follow the intensification of international tension and conflict.
In short, Asia will begin to resemble the rest of the world. For the past generation, Asia has been in a unique and transitory condition. The very prosperity that made this possible was unsustainable and artificial. Now that it is gone, Asia will return to a more natural condition of internal political competition and international tension. This is not necessarily unhealthy. It is, however, a condition that Asia is neither used to nor prepared for. Asia is waiting for the nightmare to go away but this nightmare is normal, and it is here to stay. Business news will no longer dominate Asia's newspapers.
Our readers know that it is our view that the economic problems faced by Asia are fundamental and not likely to be solved by the business cycle. The financial problems reflect a fundamental inefficiency in Asia's economies. These problems can be solved, but not without massive social dislocations. Asian political systems lack the means to impose these dislocations. As a result, the economic situation will deteriorate until the political consensus shatters under the strain. Once that consensus shatters, a harsh and direct politics will emerge, with intense political competition. We are already seeing this fully manifested in Indonesia. In various forms, the intensification of internal political conflict will spread through the rest of East and Southeast Asia. As internal political conflict spreads, international conflict in the region will also spread. Nationalism becomes a means for increasing internal political support. In addition, scarcity increases the probability of friction among nations. This means that Asia will come to resemble the rest of the world, with intense internal political disputes and serious international conflicts. The last generation of prosperity has been an aberration. The next generation will see Asia behave more like the rest of the world.
Analysis
For over a generation, the important news from Asia has been located on the business pages of newspapers. News of companies starting new ventures, entering new markets, and forming new alliances has constituted the substantial heart of this period of Asian history. It was as if the normal history of nations had been suspended. Political and military news was inherently secondary. Except for occasional news from East Timor or Mindano, or some new bellicosity from North Korea, it was as if the political history of Asia had been suspended. Most startlingly, this was even the case in the most politicized of Asian societies, China, where the state had, under Mao, completely usurped political life.
In some sense, politics is always suspended in times of prosperity. Where politics are suspended, so are military affairs. For the past generation, politics seemed frozen in Asia, except in relation to business. In essence, a political order put into place in the mid-1970s rolled on heedlessly. In Indonesia, China, Vietnam, Japan, personalities changed, particular politics shifted, but the political order and core policies remained intact. There was political upheaval, as in the Philippines, yet even there, the basic political order remained intact.
What was true for internal politics was triply true for international relations. From the end of the Vietnam War until today, relations between nations in the region remained fixed and essentially unchanging. War between nations in the region became unthinkable. Once the Vietnamese and Chinese settled matters between them, not a single international conflict occurred. There was internal instability that occasionally triggered cross-border incidents, but not a single act of regional warfare took place. An entire generation of professional soldiers in Asia came and went without once being called to wage international warfare.
In a real sense, East and Southeast Asian political history was suspended after the Vietnam War ended. What took its place was business: production, consumption, and exchange. What mattered were the institutions that facilitated that activity—corporations. To the extent the state mattered, it was the Ministries of Trade and of Finance that were crucial. Ministries of Defense and even Foreign affairs appeared more than a little archaic. Most important, East and Southeast Asia have come to regard this extraordinary circumstance as normal. These were, in fact, extraordinary years and they are drawing to a close. The problem is that Asian countries really no longer know how to make politics, particularly not international politics. This is one of the reasons that the region is evolving so slowly.
Prosperity overwhelmed politics. As wealth expanded, energy was devoted to accumulating wealth. To the extent that politics facilitated the accumulation of wealth, it was important. But only that aspect of politics that facilitated the accumulation of wealth was considered significant; the rest atrophied. In societies as different as China, Japan, and Indonesia politics became primarily a vehicle for managing the distribution of increasing prosperity. Even in China, other instruments weakened and atrophied. The People's Liberation Army, the primary guarantor of the Chinese Communist regime, became an instrument of business more than an instrument of internal security or international conflict.
With the decline in Asia's economic fortunes, we are witnessing the reemergence of politics in its fullest sense. In different ways throughout the region the problem of politics has shifted from maximizing income to managing scarcity. The management of scarcity is, of course, a much more difficult task. Scarcity is the management of disappointment. Asia is a region in which expectations concerning the future were high. It is a region that has been psychologically devastated by disappointment. To some extent, it is a region living in denial where neither the depths of the problem nor their longevity have yet sunk in. Nevertheless, the fact that the next generation will have to pay for the excesses of the preceding generation is slowly seeping into the consciousness of the region. Along with it, regimes are facing the necessity of coping with the accompanying deep-seated disappointment.
Regimes also have to deal with the distribution of static or diminishing economic pies. In the past, it has been a question of who gets what part of an ever-increasing amount. Now it is a question of who will give up what? Giving things up is much harder than allowing someone else to accumulate wealth at a faster rate than you. The fabulous wealth of the Suharto clan, or the strength of the Japanese keiretsu were tolerable when everyone's income was increasing. When everyone is getting less, the politics of distributed wealth becomes increasingly bitter and destabilizing.
Throughout the region, regimes are slowly destabilizing. They are responding by becoming increasingly rigid. Consider the first and most extreme case, Indonesia. We knew as far back as October that Suharto could not survive politically. It is increasingly clear that the regime itself will have difficulty surviving. Because Indonesia was both relatively poor and suffered the most unequal distribution of wealth, it is also natural that it should encounter the realities of politics first. The politics of disappointment have moved forward dramatically in recent months. The regime's attempts to contain the destabilization caused by extraordinary, sudden poverty that has taken masses of people to the edges of starvation, are necessarily inept. Having few levers for containing the unrest, the regime is compelled to become increasingly rigid while searching for allies. Each alliance weakens the regime by making it increasingly dependent on elements that have very different interests. The very process of preserving the regime in the short run increases the probability of regime failure in the long run.
This process is not confined to the least developed Asian countries. Consider Japan. The Liberal Democratic Party was extremely capable of managing prosperity. MITI and the Ministry of Finance presided over a political system whose primary role was adjudicating disputes over the distribution of ever increasing amounts of wealth, a process that is not too difficult to achieve. Managing the increasing disappointment of a society that had been led to expect permanent prosperity is much more difficult. Particularly difficult is the process of deciding on the distribution of scarcity. One of the great difficulties being faced in the management of the Japanese banking crisis is the fact that many of the institutions and their management will have to be liquidated financially. Deciding which ones and how the burden will be shared is an agonizing process in a country built around consensus. That consensus cannot hold, nor can the current Japanese political architecture.
Asian societies are built around consensus, which works well in times of prosperity. In times of scarcity, consensus serves as a mechanism for evading issues. Problems are not faced and are, therefore, never solved. The problems become worse until the consensus shatters. Then politics, in its most direct and brutal form emerges, with the focus on whose interests will be sacrificed and whose livelihood shattered. In Indonesia, that consensus has already shattered. The politics of disappointment is yielding to the politics of victimization. The primary issue: who will be held accountable, who will be made to pay the price, how misery will be distributed? This process will not be confined to Indonesia. Throughout the region, the carefully hewn consensus that governed since the 1970s is being strained to the limit. It is being held together by denial, by ignoring the issues in the hopes that something will turn up. Thus, every upturn in the stock exchanges is greeted as if salvation is upon the nation and the difficult decisions will not have to be made. Of course, the failure to make the hard decisions will inevitably abort every recovery, until the consensus finally shatters.
In every country of East and Southeast Asia, the consensus is straining and politics are reemerging. It is returning first in those countries with the most severe problems and the lowest absolute levels of prosperity: Indonesia, Malaysia, and Thailand. China's consensus is holding, but the regime is increasing its grip on society daily in preparation for the inevitable disappointments. In Japan, the evasion will go on the longest, but the shattering of consensus will be the loudest and most consequential. What happens in Japan will have global consequences.
The return of politics internally will be paralleled by the return of international relations. Until recently, the APEC and ASEAN meetings have been dominated by trade issues. Of late, they have come to include serious financial issues. But the other dimensions of international relations, issues of national security, have been either completely lacking or marginalized. Chinese-Taiwan issues were ever-present, but no one seriously expected a Chinese invasion. Japan was concerned over the Kuriles, the Koreans worried about each other, the Thai-Cambodian border was insecure, East Timor was in revolt and various nations squabbled over the Paracels. All of these were marginal. No one seriously expected any of these to result in major conflict. It would have diverted too much effort and energy from the most important of activities: making money.
In times of scarcity, international relations become much more important. Two forces drive this. First, the reemergence of internal political conflict causes competitors for political power to search for leverage. One of the important tools of political competition is nationalism. Sukarno, during the 1960s, used nationalism as an instrument of national cohesion. It is altogether likely that Habibie's successors will do the same. Nationalism does not function in a vacuum. It operates over and against some outside threat or opportunity. Sukarno's nationalism manifested itself in confrontation. The internal political process naturally increases the importance of national security issues.
Secondly, scarcity elevates national security issues naturally. As economic insecurity increases, the behavior of other nations becomes increasingly important. A trade dispute in a time of economic expansion is troublesome. During times of economic contraction, trade disputes can become matters of life and death. Prosperity makes manipulating other nations to achieve beneficial outcomes desirable; scarcity makes it essential. As nations seek to manipulate each other, international frictions increase rapidly and dramatically. The economic dislocations of the 1920s in Asia rapidly led to dramatic conflict in the 1930s. This was the same around the world and is a natural progression. It has not changed today.
It is our view that the economic problems faced by Asia are fundamental and not likely to be solved by the business cycle. The financial problems reflect a fundamental inefficiency in Asia's economies. These inefficiencies are generating rates of return on investment that are too low to generate investment-driven recoveries. Without new capitalization, Asian industries will not be able to compete on the world markets. These problems can be solved, but not without massive social dislocations. Asian political systems lack the means to impose these dislocations. As a result, the economic situation will deteriorate until the political consensus shatters under the strain. Once that consensus shatters, a harsh and direct politics will emerge, with intense political competition. From this will follow the intensification of international tension and conflict.
In short, Asia will begin to resemble the rest of the world. For the past generation, Asia has been in a unique and transitory condition. The very prosperity that made this possible was unsustainable and artificial. Now that it is gone, Asia will return to a more natural condition of internal political competition and international tension. This is not necessarily unhealthy. It is, however, a condition that Asia is neither used to nor prepared for. Asia is waiting for the nightmare to go away but this nightmare is normal, and it is here to stay. Business news will no longer dominate Asia's newspapers.
