The Future is Asian
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This event took place on Wednesday, February 6, 2019
JOANNE MYERS: Good evening, everyone. I'm Joanne Myers, director of Public Affairs programs, and on behalf of the Carnegie Council I'd like to thank you all for joining us.
Our speaker this evening is Parag Khanna. This well-traveled Singapore-based author is here to discuss his latest book, hot off the press, entitled The Future is Asian: Commerce, Conflict, and Culture in the 21st Century. His mission? To prepare us to see the world from the Asian point of view.
Historians often tell us that the 19th century belonged to Britain, the 20th century is linked to America, and the 21st century will become known as the Asian Century, to be long remembered for the majestic change it will bring.
Too often when we think of Asia it is China that immediately comes to mind, but as Parag will soon tell us the new Asian system taking shape is a multi-civilizational order that includes not just China but stretches from Japan to Saudi Arabia, from Australia to Russia, and Indonesia to Turkey. This span of countries is seen as linking 5 billion people through trade, finance, infrastructure, and diplomatic networks that together represent 40 percent of global gross domestic product (GDP). This new dynamic where business, technology, globalization, and geopolitics are intertwined includes rising superpowers such as India and Indonesia. As these countries collectively assert their interests, Parag tells us that "Asianization" will reshape the world and our future.
Now at this point, you may be wondering exactly in what ways is Asia shaping the new global order that encompasses us all, and just how did Asia come to occupy the economic and cultural center of the planet. In The Future is Asian, our speaker relies on basic facts. With his intimate knowledge of Asian history and geopolitics, Parag tells us that there is no more important region of the world for which we need a better understanding than Asia. Whether your benchmark is demography, geography, economy, or any other metric, Asia is the world's most ethnically, linguistically, and culturally diverse region of the planet. From investment portfolios and trade wars to Hollywood movies and holiday travels, no aspect of life is immune from Asianization.
For a more in-depth picture of what we can anticipate in the coming years, please join me in giving a very warm welcome to our guest this evening, Parag Khanna. Thank you for joining us.
PARAG KHANNA: Thank you. Good evening, everyone. Thank you, Joanne, for that very generous introduction. It's not the first that you've made for me here in this wonderful institution.
As we were just reminiscing earlier, the first time I spoke here was in 2008, about 11 years ago for those who are counting. That was my very first book, so there's a real nostalgia associated with having come here and presented at that time. There have been a couple of other visits in between, and here we are five books later, and I'm back. So I'm, as ever, grateful for your welcoming me here.
The conversations here have always been very enriching and spirited, so I'm looking forward to that. On that note, I'm going to keep this presentation relatively short so that we have ample time for discussion. So again, I want to thank you all for being here.
Let me jump right in even though in some ways, Joanne, you stole my thunder. You've summarized the book very, very capably. What I'll do, though, given that it's the evening and everyone's had a long day, I will go light on the economics and focus a bit more on some of the political, geopolitical, and of course cultural dimensions of the argument in the book and then kick it back over to you for the discussion. So let's get started.
What's interesting about the fact that Asia is the locus of the world's population—we know that China has a billion-and-a-half people; India's population is soon to exceed that of China, that's 3 billion; Southeast Asia, that's another 750 million, and so forth. If you add up Asia's total population, you get about 4.5 or so billion people. That's the majority of the world population today. [Editor's note: Parag Khanna refers to his Powerpoint presentation throughout. To see the Powerpoint, please watch the video of the event.]
What's important is that's always going to be greater than 50 percent of the world population because unlike 15-20 years ago when our demographic forecast put the projection of the maximum, the peak world population at 15 billion people—if you remember the conversations about global Malthusian crisis and a world in which we couldn't feed ourselves and so forth, that's not really going to be the reality in terms of the number. We're going to have lots of problems, but overpopulation of the world is not necessarily one of them. So we're looking at a world population of maybe 9.5 or so billion people, according to the latest forecasts, and therefore greater than 50 percent are going to be in Asia.
This is a picture that's truly worth a lot more than a thousand words that is captured here in just one sentence. If you look at just this spotlight, you have the majority of the population of the world there, and it's not really the full extent of Asia.
In geography there is one proper definition of Asia, and it stretches from the Mediterranean Sea and the Red Sea, which means that many of the countries that we call the so-called "Middle East" are actually West Asia, like Saudi Arabia, Iraq, Iran, Syria, Lebanon, Israel, and so forth. Those are geographically in Asia.
Of course, the last 20 years we've had a lot of books about Asia. It's just that most of them do in fact tend to be about China and maybe Japan gets a couple of pages and India gets a couple of pages and so forth, but they're basically about China.
So what I sought to do here is to put China in context. China is very much in Asia, it's very important to Asia, it's the most powerful and important country in Asia, but it isn't all of Asia. So what I felt was needed was a book that if you were to count the pages in this book and divide, maybe 40 percent of the book is about China. But there is this 60 percent that has been missing because there's a much bigger story, and I'm going to explain how that plays out.
Let me just talk a little bit about the geopolitical dimension here. We tend to have geopolitical conversations that begin with the question of who's number one. We're always looking to answer who's number one. And some of the brightest minds in geopolitics pose this question, who's number one, because in the 19th century it was Great Britain, in the 20th century it's America, and if America is experiencing relative decline and China is rising, therefore China must be the next number one.
Can I ask you something? Who said there has to be a number one? For most of recorded history has there been a number one global hegemon to whom all obeyed? No. So the wrong question leads to the wrong answers, doesn't it?
Here's my vision, my hypothesis, my rendition of what world order looks like today. This is not a forecast. We live in a world where for the first time in history every region actually matters. They don't matter equally, but we don't live in a colonial world order under European hegemony. We live in a world where Africans make decisions for Africans, Latin Americans make decisions for themselves, where every region is on the map in some way, shape, or form.
Second, there isn't one power at the center that gets to dictate what everyone else does get to do or not do, and it's not us anymore, it's not the United States, nor is it China, nor will it ever be China. I cannot envision a world—and you can't make a plausible argument that we will ever live in a world—where China tells Africans that they can't trade with Americans or Latin Americans that they can't trade with the Europeans or one Country X that they can't make an arms deal with Country Y. That world is not going to exist ever. It barely exists today; it barely existed even at the peak of American power, which didn't last very long.
For a whole host of reasons we have to stop asking who's number one and accept the fact—and I think this is a beautiful world in the sense that it is so unique. We've never lived in an historical era where there was a globally distributed multipolarity. It's fascinating. It's a more interesting world. Let's accept that, and let's explore those dynamics rather than these fake, artificial conversations that neither make sense in theory nor in practice about who's number one because this is what I think the world looks like.
Of these power centers in the world—again, they're not equal. The world is full of hierarchies, both within regions and globally, but every region matters. And what I see is that every region is deciding, again on its own, who it's going to trade with, who its complementarities are with, and so forth, and two of these regions in particular are sort of Asia-centric.
Again, there is South and East Asia, which we traditionally consider to be Asia, and then there is West Asia, which we traditionally call the Middle East but is in fact Asia. And you find that the connections between the two are getting stronger and stronger over time, such that Asia is returning to what it has been in centuries past but has not been for centuries, which is the phrase that Joanne used earlier, which is a "system."
In international relations theory, a system is when a set of countries have more to do with each other—it could be conflict, war, it could also be trade and commerce, it could be diplomatic institutions, but they certainly interact more with each other and spend more time on their interactions with each other than they do with the rest of the world. And Asia was a system 2,000 years ago, 1,500 years ago, 1,000 years ago, 500 years ago. We wouldn't have the term "silk roads" if these civilizations of Asia didn't have some relations with each other, and certainly this is a pre-colonial world. They weren't trading across the vast oceans and so forth, so it was a very light system.
But there have been periods in which Asians had these rituals and relationships with each other. And that's back, and it's back with a vengeance. And it has happened particularly in the last 30 years, since the end of the Cold War.
The last 30 years we have been, of course, obsessed with our—there was the period of the 1990s, the unipolar moment, the notion of America as a hyperpower. Then we had 9/11, the Iraq War, Afghanistan, all of the things that have consumed us, the financial crisis, all the way through Trump and Brexit.
But meanwhile, the experience of Asia in the last 25-plus years has been different. They've experienced obviously rising economic growth and prosperity, billions of people being lifted out of poverty, again the reconnection of trade networks, the energy providers of West Asia selling their oil and gas now more to the fast-growing economies of East Asia, new infrastructure projects spanning Central Asia which we now call Belt and Road, but it's been going on for about 25 years. It's what I documented in detail in my first book, The Second World: Empires and Influence in the New Global Order, which had a lot of chapters around my time in Kazakhstan and Uzbekistan and these kinds of places.
One of the principal arguments of the book is that the rise of China is not the biggest story in the world. The Asianization of Asia, the return of Asia, the rise of the Asian system, is the biggest story in the world. And China's a really big part of that, but it's more like the midway point rather than the endpoint. The reason is because we have such an ahistorical view about the global economy and geopolitics. We take whoever's the peer competitor, the going concern, the country of central focus, and we of course make it out to be the great rival and the alternate pole of power. But we have to take a step back and remember in the broader Asian context how China even got to be China, and the story really begins with Japan. The story of Asia's collective economic miracle begins in the postwar decades.
As you all know, Japan rose within 20 years to become the world's second-largest economy, and it was that phenomenon of its very rapid modernization and industrialization that inspired the "tiger" economies. That's the next wave of modern Asian growth. The tiger economies were South Korea, Taiwan, Hong Kong, and Singapore.
Then, exactly 40 years ago with Deng Xiaoping initiating the reforms in China, Shenzhen becoming the first Special Economic Zone, China opening up to foreign investment, becoming the factory floor of the world, you get the Chinese story. It's the sort of midpoint of the Asian story.
But you don't get the Chinese story without the Asian powers that were its role models that came first and to this day are among its largest investors. Where we think of economics today through this trade war lens—everything is zero-sum, I-win-you-lose sort of thing—but in the history of Asia in the last 70 years it is a story of mutually reinforcing waves. The rising economies are investing in the developing economies.
And history does not end today. China's present moment is not the end of the Asian economic story because what we see happening right now is that it is all of the countries in the left-hand three columns—it's Japan, South Korea, it's Taiwan, Hong Kong, Singapore, and now also China—that together are making massive investments in South and Southeast Asia, the next wave of growth. This is not just some little blip. These are not insignificant parts of the world. The population of the countries stretching from Pakistan through India through Southeast Asia is 2.5 billion people. That's a billion more people than China. And every single one of them is a younger population than China, younger median age.
Their wages are also lower, so they're the ones now attracting the foreign investment. India last year got more foreign direct investment (FDI) than China. The Association of Southeast Asian Nations (ASEAN) has been getting more FDI than China for five years already. If you take the GDP of these countries—of course I'm talking about more than one country; I'm talking about 12-13 countries—their collective GDP as the developing region of South and Southeast Asia, if they grow at only 5 percent—and by the way, a number of those countries are growing faster than 5 percent; India is growing faster than China already, but let's just give them a discount and say they'll only grow at 5 percent—they will equal China's present economic size in less than ten years, which is just a blink of an eye. They will be collectively as large as China.
They're fragmented. It's not one country. But we're realizing more and more how important it is for American companies, Western companies, to think beyond China. Companies have had all their eggs in the China basket. But if you picked up the newspaper or turned on the television in the last month, you see which companies have declining revenues in China—Apple, Intel, Qualcomm, NVIDIA, Caterpillar, probably next will be Boeing certainly as a consequence of the trade war. They've all got to wake up and realize that China has moved up the value chain very quickly. It's displacing foreign competition. They need to be looking at these other markets as well that they've more or less been ignoring because they're making plenty of money in China. So if you don't appreciate the Asian growth story from a corporate standpoint, you're in very, very big trouble.
This is another way of showing the same. Just to bring us up to the present, China is only a third of Asia's population; it's half its GDP; it's half the outbound capital, half the inbound FDI. Its growth is slowing, as we know, while others' growth is accelerating. But it is not zero-sum. There are ways in which, of course, there is industrial competition, supply chain competition. There is displacement for sure, "beggar thy neighbor" sorts of policies. We do see that, but by and large the pie continues to grow, and therefore there's a lot of knowledge sharing, resource sharing, and investment flows across the region as well.
It's not just the world that's multipolar, as I was saying earlier. In many ways, both economically and geopolitically, and very consistent with Asia's 4,000 years of history, Asia is itself multipolar, and that's again an argument that is very, very unfamiliar to us because we are very China-centric.
But if you look economically and you measure the economies of the world in Purchasing Power Parity (PPP) terms, which is the way we should measure them—what do they spend on things in their own country, and when you're talking about very large domestic-consumption markets such as those in Asia, you do need to do that—you find that India is significantly larger than it is in U.S. dollar terms and others as well. And again, if you add up the economies of Southeast Asia today, with half the population of India they have a larger GDP than India. So they are sort of a pole of power, clustered in a way the economy is.
You will see there that Russia, Iran, Saudi Arabia, Turkey, those are color-coded as Asian. If you take countries like Russia or Turkey, they have sought in the past, a couple of decades ago, to brand themselves as Western, aligning with the West. A country like Russia, it's hard to imagine or to even remember today, had dabbled in the Partnership for Peace agreement with NATO. Long gone are the days when Turkey wanted to join the European Union and where Saudi Arabia was very closely allied with Western powers and the United States. In some ways it still is, but I think we know that we have some disagreements with them, to put it mildly.
All of these countries, we look at them as aspiring to join the West—they want to be West; it's part of their sense of self-worth, dignity, identity, their aspiration—but we don't look at them ever from the standpoint of the East, and the fact is that almost all of these countries now trade or are beginning to trade more with Asia than with the West.
Obviously, Persian Gulf economies sell the vast majority of their oil and gas to Asia. That has been going on for a long time, so you're already aware of that. Russia has traditionally depended much more on investment from Europe and trade with Europe, particularly with Germany. Now China is its largest trading partner. I'll show you shortly Russia's trade with a wide range of Asian countries, and it's growing systematically. It's a big part of the Belt and Road network as well. So country by country, as you look at these places that we thought of as Western-leaning, they're more and more Eastern-leaning.
But that's not what our newspapers are going to tell us. The Wall Street Journal is not going to write a piece, or the Financial Times, about what are those Asians doing. Did you know that in the last 72 hours Iran, Turkey, and other countries of West Asia have been getting together to make their own kind of Syrian plan? That's just not going to make our news. It's all going to be about what did Trump say about Syria. So we very often miss the forest for the tree, and we're the tree.
This was interesting. I made a point earlier about the civilizations of Asia, and this would take too long to explain, but what I created here was a kind of layered map of many of the historical dynasties and empires of Asia and their overlapping boundaries just to remind everyone that there is a pre-sovereign, pre-national understanding of how civilizations evolve and how humanity evolves. And what you see in Asia is this incredible layering and overlapping.
For anyone who's of ethnic Asian stock, as I am, obviously you can take a DNA test, one of these genetic tests. I took one—National Geographic sells these kits—and I found out that I am 17 percent Northern European, meaning like sort of Lithuanian, sort of 20-something percent Mediterranean and West Asian and so forth, so I think of myself as a product of everything from the Aryan invasions into South Asia and Greco-Roman invasions and of course the Mongol Empire, and that's very, very typical for an Asian person, and this is actually why.
To understand Asia today we shouldn't be using the kind of Eurocentric theoretical frameworks about how it's about nation-states, proximate geographies, intense rivalries for control, the idea that one can dominate the others. They have overlapped, but they're so distinct linguistically and in terms of religion and so forth, and many Asian civilizations are mutually unintelligible from each other. They can't really conquer each other. Only the Mongols—and they've been kind of colored through here because that was 700 years ago and a lot has come since—only one power, one empire has really been able to dominate the proper vast swath of Asia, and it didn't last very long. Geopolitics in the Asian frame looks and plays out every differently.
Let me just show you here again that point about the Asianization of Asia. I went back 15 years, 10 years, five years, and now you have today. This is the state of play in terms of the vectors of bilateral trade between subregions and countries of Asia. All of them have increased quite steadily, in some cases astronomically.
Again, I've made maps like this that cover very specific commodities or sectors of trade, so oil and gas, food, and so forth. You can see the complementarities that exist within Asia. You've got your industrial powers, your agricultural countries, your rich countries, your poorer countries, and their ability to exploit these complementarities is just getting going with all of the new infrastructure that's being built between them.
So here's an oil map, food map. Transportation? All of the busiest international flight connections in the world, the top 10 out of 10, are all between Asian cities, generally clustered around, say, a Dubai or a Hong Kong or Singapore, but you're seeing the medium-haul flights increase as well, so there's a lot more business travel.
I use this also to bring up the issue of migration because we think that we live in a world where walls and borders are going up and xenophobia and populism are the order of the day, but between Asian countries you have a lot more free labor mobility, you have a lot more visa-free migration, you have all of these talent or entrepreneur investor migrant schemes. Countries are trying to attract people because you have aging Asia and young Asia. You've got South Korea, Japan, and coastal China that are aging, and you've got a younger Asia.
You've got lots of flows. You've got lots of Filipinos and Indonesians moving into Korea and Japan and China to care for the elderly and all of this kind of thing. There are countries like South Korea and Japan that I don't think have ever had such a high percentage—though it's still very, very low—of foreigners in their countries because of this demographic supply-and-demand. So there are many ways in which this integration is happening.
There is the diplomatic domain. For those of us who follow the global governance field, we've tended to measure whether or not a country has influence by its role or stake in voting rights and Western institutions—the International Monetary Fund (IMF), World Bank, and so forth, global but of course originating in the postwar years through Western leadership. But what we didn't pay attention to was that Asians can also build their own institutions. They can have ASEAN, they can have now the Regional Comprehensive Economic Partnership (RCEP), which is meant to go into effect this year, and the Asian Infrastructure Investment Bank (AIIB), which was founded a few years ago, which not only has, of course, the majority of Asian countries as members, but even European countries have joined AIIB, and this is one of the institutions that embodies the Belt and Road initiative.
These are the institutions that matter quite frankly more to Asians than, say, the World Bank or the IMF. What I did—you'll see it in the book—is talk about the size and the distribution, the geography, of IMF aid programs in Asia. It's not particularly significant. Asia is not lacking for money at this point. Joanne mentioned Crazy Rich Asians earlier. That's a retail example of that phenomenon. We'll come back to that in just a bit.
Now here's something very again seismically significant, which is that the rise of Asia is really leading to not just an Asianization of Asia but of the Eurasian system, not just an Asian system but a Eurasian system. And all of this predates the trade war, but the trade war will accelerate it because it has been some years since Asia and Europe, who have been trading more with each other than either of them trades with us.
What we forget is that as much as we are the world's largest economy and play a very significant role in world trade we are not dependent on trade as much as others are. North America represents only 14 percent of global trade. This is actually wonderful from a geopolitical standpoint. North America has self-sufficiency. Here in North America we have all the people, all the water, all the food, all the energy, all the industry, all the talent and technology that we need. If globalization stops tomorrow, North America is fine, and everyone else is in big trouble. So that's a good thing geopolitically. This is the "splendid isolation" that we've talked about and celebrated since the 18th century.
However, from a geoeconomic standpoint it means that you're really not as important or essential or have as much leverage as you think you do. And here's the proof: Europe trades more with Asia than it does with us, and—this is of course a big rupture, a big rift from the trans-Atlantic era of the postwar decades where the trans-Atlantic free trade area has been the bedrock of the world economy, but now you're starting to see this shift.
This explains why, as I said before, Europeans enthusiastically joined the Asian Infrastructure Investment Bank. They may not have joined the Belt and Road Initiative, but they're engaging with it, and they're launching their own connectivity projects to help to stimulate these new silk roads.
What's interesting is that when two parts of the world trade $1 trillion a year with each other you would expect that they have free trade agreements and that they have seamless infrastructure and a shared set of regulations. Europe and Asia have no such thing. Europe has one free trade agreement with a major economy in East Asia; I think it's South Korea. They want to have a free trade agreement with Japan, with Southeast Asia, and with India, but they don't even have it yet. And all this Belt and Road seamless high-speed railways and cargo is a little bit there but not as much as there will be.
So now, take this $1.6 trillion that Europe and Asia trade with each other and add in a few free trade agreements, add in lots of railways and infrastructure, add in some more regulatory harmonization, and maybe even—maybe—a bit more opening of China, and that number is going to go way up.
But how about our trans-Atlantic trade? How is that going to go? Two very mature economic regions that already have effectively free trade with each other that are aging and not growing very, very quickly. What's that number going to be?
So where is the real center of the world economy today already? It's already in this sort of Eurasian system. And the trade war, as I said, is going to accelerate it because what Asians are saying to each other is: "Wow. If there are going to be politically motivated export controls on sensitive American technologies to China or maybe even to us"—whether you're Japan or South Korea or Singapore or whatever—they may be justified. Everyone knows that China cheats on trade and all these kinds of things and has these industrial policies, forced technology transfer, all the stuff you're hearing about. It's all true. That's how they got to be what they are today, a superpower. And that's how every power in history rises is through import substitution, neomercantile policies, and so forth. They're copying the playbook that Alexander Hamilton wrote and the British wrote.
But Asians are saying: "Well, if it's going to be tough to get those semiconductors and other sorts of things from Intel and Qualcomm, let's just get them from each other. We'll just buy more from Taiwan, we'll buy more from South Korea, buy more from Japan." Again, one of the stories that just doesn't make the news is that in September and October of last year that's exactly what the Northeast Asian countries decided to do. Japan, South Korea, and China said, "Well, we should really be trading more with each other."
It obviously serves China's interest because then they get more reliable supplies of sensitive technologies that they don't yet produce themselves. And of course, the South Koreans and the Japanese get to sell more and profit more. In other words, they're undercutting us. They're eating Americans' lunch in a way. And they're going to continue to do that.
Europeans see it the exact same way. They see how they can win from the trade war. If China decides to buy less Boeing aircraft, that's potentially really good news for Airbus, isn't it?
That's the way trade wars work. There are more than two players. There are at least six or seven players, and the other four or five are saying: "Hmm. You know, if there are reciprocal tariffs on American goods, that means that ours might be competitive,"—cheaper or more access in the Chinese market—"let's go." They're not sitting on the sidelines.
I'm going to jump ahead. I'm going to make just a couple of points. When we look at the developing markets of Asia like Southeast Asia, we tend to characterize them as being dependent on this historical growth model of export-led growth: "If we don't outsource to them our menial factory work, how will they ever raise their wages and standard of living and become middle-class economies? And now you've got the robots who are going to do all that work, so they'll just never—these billions of people are going to be out of jobs. They're never going to be able to duplicate that feat of the tiger economies before." They're going to experience what is called "premature de-industrialization," a fancy way of saying the robots are going to do it all, and you'll never make it to the middle class. You're stuck in not the middle-income trap but the lower-middle-income trap or the poverty trap even.
That's not true because that model is not the model on which these countries rely anymore, and this is the evidence of that. What I've simply done is look at the services' share of the economies in Asia. Other than the commodities exporters—Saudi Arabia obviously is an export-driven, commodities-driven economy. But if you look at the key Asian economies that have tended to rely on manufacturing—they're still getting the manufacturing. As I mentioned, ASEAN is getting more foreign investment than China. It has become the new world's factory floor.
But the majority of their GDP already comes from services, things that people do for each other. Especially because of the rapid urbanization, digitization, financialization, all of these things are playing out very, very rapidly in Asia.
So it's great that they're still getting the manufacturing. It's good for them, but they have also leapfrogged in many ways—and I spend a fair bit of time in the book looking at all of the ways in which Asia is sort of leapfrogging by the availability of low-cost technologies as people move into cities and so forth, and that's really the new model.
I could go on and on and on. I wanted to talk a little about Belt and Road, and I know we'll talk more about this in the conversation, but I just wanted to highlight here that there is myth and reality. Right now Belt and Road is pretty much everything and nothing at the same time. So I spend a lot of time in the book clarifying what it is and what it isn't. But to cut to the chase, it doesn't play out the same way in every country. There's this notion that: Well, here's a string of Chinese debt traps. China's heavily indebting poor countries to build infrastructure they don't need, and when they default on their debt it's going to take control of their economies. Open-and-shut case. The British East India Company is back. That's more or less the kind of caricature.
It's not true. It's just not the way it really is. There are poorer countries that are caught in debt traps. A lot of those countries already had very high outstanding debt to China, which is kind of our fault because we cut them out of global capital markets. They don't have sovereign credit ratings; we have not been lending to them. So who are they going to borrow from? From China at usurious, nonconcessional interest rates.
I argue throughout this book—it's sort of a sequel to my Connectography: Mapping the Future of Global Civilization book, which was sort of a prequel to this, saying: "You can't have influence if you're not connected. You can only influence who you're connected to." So if we just sit back and say, "Shame on you; don't take Chinese money," that not the way it works. If you want to be influential, you have to go and put your own money—"put your money where your mouth is" is the sort of schoolyard adage that is incredibly appropriate for diplomacy in the 21st century because, of course, power abhors a vacuum. If you don't go in there, if you don't help these countries, of course someone else is going to.
That said, though, the British East India Company analogies fail in many ways because this is not the 18th century. Today we have sovereignty, we have transparency, we have democracy, and we have scrutiny over everything that China does. If this were a colonial world or neocolonial world, then you wouldn't see countries saying no and ripping up deals with China, and that's what's happening all the time. Malaysia decided to cancel a railway project, Myanmar has forced China into a write-down on its debt, other countries are saying no to Chinese acquisition of large stakes in utilities in strategic sectors.
It's so funny. When we sit here and we look at China we see an empire with a thousand-year plan that always gets what it wants and will stop at nothing to displace America and to be number one. If I were in Beijing right now as the Chinese leader, I'd be pulling my hair out. I'd be pouting, saying: "You know what? I never get what I want. All these countries are ripping up contracts with me, and they're kicking me out, and my construction engineers are being thrown down mine shafts and shot in the head and kidnapped, and I'm having to take a haircut on all this debt," and so on. The reality is somewhere in between, and it plays out differently in every country.
I just wanted to show—and we can talk through a few examples in a little bit—no two countries fall into the exact same pattern of how Belt and Road will play out. But the message here is that geopolitics is nonlinear, and I just want to give the example of Sri Lanka. The Sri Lanka example is one that we all read about.
When the Sri Lankans were close to default on the Hambantota Port, which they didn't need and was too expensive, they were "coerced," if you will, into a debt-for-equity swap. China gained a 99-year lease on the port. Many people in our analytic community looked at that and said: "Here it is. The first domino to fall. The first of many debt traps across the entire Indian Ocean region." And yet, I think that was the first and the last because what happened is that the next day all of the cabinets of countries around this region got together and said, "How do we avoid becoming the next Sri Lanka?" And so they did. They said: "Uh-oh. No $60 billion worth of projects with China." This is what Pakistan said. "Let's cut that down to below $30 billion, and let's make sure it's sustainable debt." And others said, "Let's just not do this project altogether." And China is absorbing this. The ambitions of the plan are being dramatically reduced.
So again, nonlinear. Geopolitics is nonlinear. It's not just action, it's reaction. There are feedback loops to everything.
And I really am going to stop at the final point, which is just going to pave the way for a proper discussion about the political, ethical, intellectual, and moral dimensions of all of this, the layering, the new layer. As I said, the 19th century was the century of Europeanization. The world has learned so much from parliamentary democratic systems, Enlightenment values, professional governance, and civil service. The world has learned so much from the 20th century of Americanization, the virtues of democracy, of freedom, of free enterprise, all of those things that America represents.
What about Asia? What does Asia represent? One of the hardest things I had to do to do this book was to try to figure out: What do four-and-a-half billion people have in common, if anything, because admittedly they are very, very diverse? I wouldn't have put my own name on this because this is just a cut-and-paste from a newspaper article that summarizes the book, and they are:
- A preference for sort of more technocratic government, but bear in mind that Asia has more people living in democracy than the whole rest of the world. In the next six months, India, Indonesia, the Philippines, and Thailand are all having elections. That's 1.8 billion people. So Asia is not China writ large. It's not a monolithic, authoritarian bloc. But still there is a deference toward strong executives and so forth and a desire for leaders to have a long-term vision for modernization.
- Mixed capitalism. Strong role of the state in the economy. I think at this point we understand very well how that operates.
- And then social conservatism. That's more about a very restrained, cautious approach to everything from, say, gender equality, censorship, LGBTQ rights, you name it.
These are neither good nor bad. This is just what is in terms of what I see as common factors. There is again great disparity. Remember, in Asia you have democratic icons like Japan or New Zealand and so forth that rank the highest in the world in the quality of their democracy and civil service and freedom and quality and so on, and then you have the worst-performing countries in the entire world like a Turkmenistan or whatever the case may be. There's a vast range. But I try to explore how these three principles of conservatism, capitalism, and governance play out across the region.
So that is just food for thought. I will stop right there. I've gone a little bit over, but we still have plenty of time for conversation. So Joanne, thank you so much for having me back here, and thank you all for being here. Thank you.
QUESTION: Don Simmons is my name. I enjoyed the talk very much.
To what extent do you think democratic government and civil liberties translate into economic advantage? In other words, is China disadvantaged with respect to the other Asian powers by its governance?
PARAG KHANNA: There has been a lot of research on what are the factors that best correlate to sustained economic growth, for example, and what we tend to find is that it isn't necessarily democracy but more the rule of law—protection of property rights, legal arbitration of disputes, and this kind of thing—that tends to be the single most significant factor. So a country doesn't have to be a democracy, in other words, to sustain high growth over time. It simply has to have rule of law. And obviously, a case like China is demonstrative of that.
That said, obviously democracy is a virtue unto itself in many ways, and the feedback loops of democracy can help governments change policies nimbly if they need to. That doesn't always work out that way. I think we have an issue with that situation right now.
One of the other interesting conversations that is happening in political science is to say, "Well, China is not just authoritarian, it's adaptive authoritarianism." They're constantly changing their policies to adjust to reality. They're not just the kind of ossified bureaucratic—they're not a Soviet Union redux.
The bottom line is it's very, very hard to generalize now about the interplay of these factors. Countries are learning from history, and they're learning from each other very, very quickly.
It's also difficult to answer the question because you can't really just typologize so neatly that you're a democracy/you're not a democracy. The Economist and Freedom House do this annual survey every year, and they're struggling to find a vocabulary to capture regimes that have consultative characteristics but are still one-party states, so they're calling them "hybrid authoritarian regimes."
You've got a guy like Duterte in the Philippines, who is perhaps one of the most popular leaders in the whole world right now in terms of public opinion, but we think of him as basically a thug. But he was democratically elected. We see illiberal tendencies in India, but India is most certainly a democracy.
The way I explain it in the book is that there is a distinction between inclusiveness, meaning are you sufficiently democratic, and effectiveness; "input legitimacy" and "output legitimacy" we call it in political science.
Input legitimacy is variable. You've got autocracy, you've got Gulf monarchies, you've got authoritarian states, and you've got democracies. There's a wide range, and you can see each country is color-coded here. In some countries inclusiveness has gone way down, like Thailand, because they had a coup. Political inclusiveness has decreased. But look at their effectiveness; it went up. So, according to The Economist and Freedom House: "Boy, Thailand, you've really taken a step back." But according to the World Bank, it's: "Wow, good job, junta."
The more time you spend just on the ground traveling around Asia, the more you cease to think about countries in these black-and-white rigid categories and much more about, well, are they effective and inclusive, and are they getting that balance right between the two? They're not going to look like us, but are they sufficiently utilitarian in terms of delivering an improvement in the quality of life and welfare.
QUESTION: I'm Thomas Dana.
Dr. Khanna, you foresee that within 10 years that India will be on some sort of parity with China, I trust economically. You mentioned that in your discussion.
PARAG KHANNA: No. I said that if the economies of all of South and all of Southeast Asia together with 2.5 billion people grow collectively at 5 percent, then in 10 years' time they will have the same GDP that China has today. But China will be much larger then, and I'm using much more than just India.
India may never achieve the kind of economic miracle that China has achieved. These are not like entities. The only similarity between China and India is their population size, which is more or less equal. But as an Indian who spends a lot of time in China I can tell you the similarities end there. That's the beginning and the end of it.
What it takes to become China—I want to make a broader point—absolutely no one else has that kind of discipline. I've spent 15 years traveling in countries, whether it's Africa, Middle East, elsewhere, that have talked about the "China model." "We're going to follow the China model. We're going to become like China." And guess what? None of them have. Because when they said "China model" all they mean is: "Please leave our kleptocratic authoritarian regime alone while we're stealing from the people and not delivering any benefits." That's not what China has done. China has done a lot better than that.
I think there really is only one China. India will do what India is destined to do at this point. It's secularly on an upward trajectory. They have a young population, a fast-growing economy. They're doing some good things. They're spending a tremendous amount on infrastructure, which they haven't in 70 years. Very few countries are spending 20 percent of their budget right now on building things like they are, which is a good thing. But they will not match China in many ways. But that said, they'll be a great naval power that will patrol the Indian Ocean.
QUESTIONER [Mr. Dana]: Then let me rephrase the question: Do you have a prognosis as to what India in conjunction with the other Southeastern Asiatic states will be in 10 years both economically and militarily in their relationship to the United States?
PARAG KHANNA: That's a great question. They are certainly trading a lot more with each other. India has a policy called "Act East," so it's trading more with them. It's not only trading more with the countries of Southeast Asia, it's also cooperating more militarily with them. It is doing joint naval exercises with them, sharing of resources, participating in a variety of diplomatic dialogues around how to share resources and patrol the Straits of Malacca in order to not have these territories in a de facto way need or even allow for an extensive Chinese presence and so forth, so it's a very vibrant area of strategic diplomacy, India and Southeast Asia, and how they maneuver.
It's generally very healthy relationships. It has been more a matter of capacity: How much capacity does India have to sustain its interest in that region given its democratic politics and relatively weak government from a fiscal standpoint.
QUESTIONER [Mr. Dana]: But what do you see their relationship being with the United States in that period of time?
PARAG KHANNA: Here's where one can generalize. We tend to think that Asian countries need to choose sides. We hear this all the time. We hear it diplomatically: "There's a new Cold War, a new Iron Curtain. Are the countries of Asia going to choose America or choose China?" And we hear it when it comes to artificial intelligence (AI) and 5G: "Are they going to use Huawei, or are they going to use Cisco?" Either/or.
At no point did anyone ever ask them if they think that that's the way the world works, because it doesn't. They don't choose sides. It's not about are they going to be American allies or are they going to be Chinese allies. You don't paint Asian countries red or blue the way we used to paint countries during the Cold War. It's much more consistent with Asian history to play all sides, to be friends with everyone, to be "frenemies" with everyone, basically.
Yes, there are obviously core common interests with the United States, which is to say they're a lot more scared of China than we are. There's no question about that. That doesn't mean that their prescription and the way in which they want to approach China is the same as how we would.
For example, we may encourage them not to join certain diplomatic institutions with China, like the AIIB. Of course they're going to do it. We may say, "You shouldn't be in the Belt and Road." Of course they're going to join the Belt and Road.
They will play all sides. They will do things that align with their interests that we would like them to do but only the things that align with their interests. So we're seeing even our strongest, most steadfast traditional allies like Japan and South Korea saying, "You know, we'd prefer not to have that missile defense system" or not to house so many American troops or whatever the case may be.
Or, "When we do these regional military exercises, we actually want to include China in them," whereas of course we don't want to include China in them—or sometimes we don't and sometimes we do. It really depends. I cannot give you an answer, and anyone who does is lying.
QUESTION: My name is Paul Pope.
What do you think of the growth in the consumer, corporate, local, and provincial debt in China, and is there any there there?
PARAG KHANNA: For sure. It's a very big there that's there. It's a monstrous amount of debt. A lot of it, to put it in context, of course, China's debt has ballooned especially since the financial crisis.
Let's remember, to be fair, China had embarked on a path of capital account liberalization and other measures before the financial crisis, but they had to respond through a massive fiscal and credit stimulus, and that's part of what has contributed to having a 270 percent debt-to-GDP ratio and so forth.
The quick answer is you have kind of a Japanification effect in which you just live with this very high debt for a long time and it's effectively less productive growth. Your return on investment (ROI) decreases. But the way in which it's not like Japan is that, of course, China is still growing. Five percent or 6 percent or 7 percent is tremendous growth for what is effectively the world's largest economy. So they're still growing.
They still have a lot of levers that haven't been exploited around taxation, again opening up more to foreign investment. There is de-leveraging they can do, they're restructuring failing state-owned enterprises. So they're doing lots of things to attempt to manage the problem.
Usually when we look at them and say they're really screwed, they're sitting on these mountains of debt and they'll never get out of it and this is toxic and this is going to be not only the next financial crisis for them, but it's going to have a contagion effect on the rest of the world, they already thought of that. They're aware of the situation.
One of the things I've noticed over many years now is that we always underestimate "them," whoever "they" are. Whether it's saying that these countries have no ability to overcome the middle-income trap or they don't know how to make strategic decisions for themselves, or the Chinese aren't going to be able to manage this debt, there's no state capacity, Eurasia is becoming like the Balkans. These examples, these anecdotes kind of just illustrate what we know to be this kind of American arrogance about them, whoever "them" is. Doesn't even matter; could even be Europeans. In the 1990s we didn't think that they could maintain peace among themselves after the Cold War ended, let's remember.
So we underestimate their capacity, and if ever there was a country whose capacity we continue to underestimate, it's China.
QUESTION: Good to see you. Tom Sanderson.
What should the United States do to better compete in Asia? And also what should the U.S. posture be toward the Belt and Road Initiative?
PARAG KHANNA: Right. Fantastic. So this is the grand strategy question. We struggle to formulate a grand strategy for America that transcends an administration, and quite frankly their definition of a grand strategy is that it's supposed to be a long-term vision, not something that changes every time you have a change in president.
Strategy toward Asia should be to promote a multipolar Asia. I believe that again historically Asia is multipolar, so it shouldn't be that hard. Right now the pushback against China from all of its neighbors indicates that there is a strong desire amongst Asians for there to be a multipolar Asia.
So we should be asking ourselves what can we do to support that trend by which Asians take greater responsibility for their own affairs, which there doesn't have to be an American policeman and an American hegemon, an American offshore balancer, and instead we're restoring Asia to its natural systemic equilibrium or balance in which Asians more or less contain each other, they block each other from encroaching too much in their affairs. I think in the book I describe it as a healthy deference to each other. That has been the historical norm.
We can promote that in many ways by actually encouraging Belt and Road, funny enough, and by participating in Belt and Road. Right now the administration views Belt and Road as this sort of hegemonic threat, but the way these imperial cycles work, and especially when it comes to giving the gift of infrastructure to your periphery, is that countries can use this to modernize, to diversify their economies, to grow, to attract greater foreign investment, and then over time what happens is that these countries are no longer vassals of China, but they've grown out of their dependence on China.
But they'll still be dependent on China unless we actually help them grow out of the dependence on China. So the strategy should be to join the Trans-Pacific Partnership trade agreement, to invest more in these economies, to create the kinds of institutions—we've got this United States International Development Finance Corporation (USIDFC), but that's small potatoes—partner with Europeans and others, and when China is offering a 5 percent, 6 percent loan, go to that country and give the a 2 percent, 3 percent loan. When they're going to be doing contracts with Chinese construction companies, that's the kind of deal they should be doing with Bechtel or Siemens or something like that.
Again, you don't get anywhere by just telling countries, "Oh, that's a really bad deal." Give them a better deal. Put your money where your mouth is. So I strongly believe that we should be engaging.
There's a lot more to be said about the specifics of Belt and Road diplomatically and what constitutes membership or not-membership and how if you were inside the tent—if we were inside that tent, we would actually be able to influence how it plays out in a way that actually benefits everyone. It can still very much be win-win, actually.
QUESTION: My question is about power distribution in Asia among the countries. As we all know, technology development is rather disruptive, so the countries that in Asia now start from China that you have Alibaba and Huawei, you start having all those technologies that start having really rapid economic development. Now you have Vietnam and Indonesia that just kind of grow out of nowhere and grow really fast. So I wonder what's your opinion on what's going to be the new power distribution because of technology development.
Also, quickly, you mentioned this whole conservative ideology in China and in Asia in general. I was asked a question that—in Japan right now it's already a democracy, but we don't think people are very vocal, especially women. Also, gender-based violence or women's status is still relatively low. What do you think of that?
PARAG KHANNA: About Japan in particular?
QUESTIONER: Yes. Is that because of the whole kind of conservative ideology in Asia, or how can Asia improve?
PARAG KHANNA: Right. The "social conservatism" rubric is just two words to try to capture the fact that there is this caution or hesitancy or again just cultural recalcitrance around liberalization of culture in many dimensions. It could be women's rights, it could be women in the workforce. It could be a wide range of things. It could be whether the death penalty should be abolished, or it could be about media laws and censorship. It plays out in many, many, many domains. Again, for every country, because we're talking about such unique societies, I actually can't generalize other than saying that in each country you will find evidence of how slow they are to embrace—and I use social media and technology as an example here where it actually plays to their benefit.
For example, we have a "say whatever you want" kind of approach to these things, and we've learned the hard way what consequences that can have, where you can just fling all the fake news you want. But in Asia they're extremely cautious about this. You can be arrested for spreading false rumors.
What they've done—and this is all part of leapfrogging or second-mover advantage. If you're the first mover, "you move fast and break things," as we like to say, but you also suffer the consequences of the disruption.
In Asia they've been watching Russian meddling in our election and fake news and so forth, and here's what their solution is: "Aha! We love Facebook. We love Twitter. We love Google"—not in China, but in the rest of Asia—"but you, Facebook, Twitter, Google, better install very large offices in our country. You're going to be monitoring and filtering"—and WhatsApp, too—"24/7, and the second there's something fake or whatever, you're going to take it down, or we're going to shut you down."
So they've co-opted the tech companies to—in some cases, this is again we would think of it as bad because it may perpetuate censorship, which serves the government. On the other hand, it does prevent fake news and viral campaigns that can be deadly—and there have been in some cases in Myanmar and India—from spinning out of control. But again, they're watching and they're learning.
In this case, a conservative or cautious attitude toward technology is proving to actually be beneficial to maintain the support for those technologies whereas meanwhile here it's like, "Everyone's to get off Facebook and arrest and imprison its executives," even though we invented this stuff. The baby is not being thrown out with the bathwater in Asia.
On your first question, which was about technology as well, it is so nonlinear. Technology is spreading so fast. You can already see that in terms of industrial technology, the Internet of Things and factories of the future have been replicated not just in China, but you can have it in Vietnam and Thailand and other countries. They're really leapfrogging there as well. And that means that some of the clustering effects that have made China so successful—again, which they learned from Japan as well—are starting to get replicated elsewhere in Asia, and that will really help them move up the value chain quickly, again attracting so much foreign investment. And if they can offer to protect intellectual property (IP) and so forth, then that's going to be good for them.
When it comes to AI, there's this notion that it's a bipolar arms race. I don't think that's actually true. I think that again technology diffuses so quickly. You have AI as a service, AI coming in laterally. India is investing so much in AI, and it offers the kind of data privacy and protection so you don't have the kind of "Huawei risk" or whatever you want to call it.
So I foresee in just a couple of years a marketplace for even the most advanced technologies. Whereas China can obviously do things in its own population and society with that data set that others can't do, when it comes down to what happens in all these other countries it doesn't mean that they will therefore be exploited by China, because you will be able to get this stuff more or less off the shelf, and you really already can.
QUESTION: Ron Berenbeim.
So much of what one reads today says that a great deal in terms of the performance of the world economy depends on China's ability to develop a large class of consumers, which at least sometimes you read that they've not been entirely as successful as one would hope at this point. What do you foresee in terms of China becoming a nation of consumers in the future?
PARAG KHANNA: It already is a nation of consumers. Look at Alibaba Singles' Day and the revenues. It blows the rest of the world out of the water in terms of a single-day's e-commerce consumption.
Other Asian countries are growing very quickly as well. If you look at the rate of digitization as well and e-commerce uptake and all of these kinds of things, when you put together the logistics and supply chains and the growth of e-commerce and mobile payments and all this kind of stuff, you're going to see enormous growth in the consumption class.
Remember, consumption and services already represent the lion's share of China's GDP, again not that antiquated model where factory work and exporting widgets to us is how they survive. That ceased to be the case a while ago. That is just so 10 years ago at some level.
So I think that they already are maturing in that way, "rebalancing," as it's known in the economic discourse. And they are rebalancing. It's just that in China everything is big, so even the old model of investment-led growth is still really, really big. But guess what? The consumption model is even bigger. If that weren't true, it would be really bad news for all of our companies, wouldn't it? Why is it that the Western luxury sector—whether it's retail, fashion, cosmetics, automobiles, GM cars—is doing so well in China if it's not already a consumer economy? Of course it's a consumer economy.
It's going to continue to be one evermore. That rebalancing will continue along with the de-leveraging of the economy, and again it's going to happen in the rest of Asia as well.
I've looked at everything from all of this e-commerce/digitization stuff to the building of shopping malls around the region. If you take the top 20 cities with the most number of new shopping mall projects, as I described the proportionality of my research in the book, it's like half those cities are in China, and the other half are not in China. It'll be Indonesia, Philippines, India, and so forth. So it's all of Asia, and it's because of urbanization, the youth population, the growth, and of course again more and more consumption in Purchasing Power Parity terms, flexible exchange rates, and more stable currencies. It's a thousand factors that contribute to it, but it's certainly happening without a doubt.
JOANNE MYERS: Thank you so much for giving us a newer look at Asia.
PARAG KHANNA: Thank you, everyone. Thank you.
JOANNE MYERS: Parag's book is available as we continue the conversation, so I hope you'll buy it and read it.