The Economic and Strategic Rise of China and India: Asian Realignments after the 1997 Financial Crisis

Please go to the bottom of this page to download a PDF of Professor Denoon's handout to accompany this transcript.

• Introduction
• Remarks
• Questions and Answers

DEVIN STEWART: I'm Devin Stewart, from the Carnegie Council.

Welcome. Thank you very much for coming.

The "rise of the rest" is a huge topic in the academic world, as well as the policy world and the world in general.

What does the rise of other countries besides the United States—the rise economically, politically, and culturally—what does it mean for the international system? What does it mean for norms? What does it mean for United States foreign policy and, generally, for the international system?

This is a heated debate that's going on right now between Fareed Zakaria, Anne-Marie Slaughter, Richard Haass, and Kishore Mahbubani, who was here recently. There are sides starting to be taken—people are kind of getting into teams—about the rise of Asia, what it means.

I personally think that we should look very carefully at this phenomenon, not as a monolithic phenomenon, but rather something to be broken down into its components, not only to understand the disparities and the differences within Asia, but also to be level-headed about what we mean by this Western concept of Asia itself.

We are very fortunate to have David Denoon from NYU here talking today about his latest book, which is going to look at some of the context to the rise of the rest. The book is The Economic and Strategic Rise of China and India. It's particularly looking at this phenomenon since the 1997 financial crisis in Asia.

Just as a reminder, Dr. Denoon is also an author of this edited volume on China, which he might talk about in a bit.

If I can butcher your nuanced argument into a sound bite, in a sense, Professor Denoon is arguing that the 1997 financial crisis set the stage for something that the United States has not been paying attention to, particularly since 9/11.

There has been, first, an economic and then a strategic shift from the Pacific Rim countries—particularly Taiwan, Southeast Asia, and Japan—toward what he is calling the continental powers of China and India. This is going to have implications for the United States, probably more quickly than many think. The longevity of United States preeminence might be shorter than some would expect.

Let me just give you a bit of information about David Denoon. Many of you know of his work, his books, his scholarship.

David Denoon is Professor of Politics and Economics at New York University.

He is a member of just about every prestigious foreign policy organization. I'm not going to name all of them, but a few of them are: the Council on Foreign Relations, the National Committee on U.S.-China Relations, and IISS [International Institute for Strategic Studies] in London.

Professor Denoon, please take it away. Give us about a 10- or 15-minute outline, and then we will go into discussion. Thank you very much.

DAVID DENOON: First of all, I appreciate Devin's introduction and his quick summary.

I think he got the essential points of the book. There is a tendency in this country to make some broad oversimplifications about Asia.

One is that Asia is basically a stagnant Japan, a rising China, and a subsequently rising Asia.

What I'm trying to show in this book, and will try to convince you of during the talk, is that it's much more complicated than that; that, in fact, what has happened is that there is an enormous shift of economic potential from the Pacific Rim to these continental powers, and it is probably permanent. Moreover, as Devin hinted, in addition to the economic changes, there are very deep strategic realignments that are under way.

Those are being ignored by the current administration, which is focused almost exclusively on the Middle East. I will note that we have a secretary of state who has missed two of the last three meetings of the foreign ministers in Southeast Asia. In one case, she was even traveling in the region and said she was too busy to go meet them.

It's this kind of inattention to the region which has created an opportunity for countries who wish to expand their influence. The two principal ones that have the ability are China and India. I will try to explain why.

I think it's also important to recognize that there are tendencies to oversimplify developments in large countries, like China and India. There is a very prominent investment bank here in New York which has coined the term "the BRICs"—Brazil, Russia, India, and China. Their basic argument is that China is headed for great trouble because of its age composition.

The basic argument they are making is that, because China has the one-child policy, India, which has a much different age profile and a faster growth rate, will therefore have cheaper labor over the foreseeable future. I'm not going to deal with that in the talk, but I'll be glad to get into that during discussion if you are interested.

The key element that I want to stress, however, is that, in addition to these economic changes which have gotten so much attention, the strategic realignments are clearly under way, and we need to prepare for them.

What I would like to do is turn to the handout and just go very quickly through some of this. The handout is something that you can take with you. I'm not going to go through each, in any detail, but it will give you a basic idea of the issues involved.

If you turn to the first example, it says "Total GDP." The reason this is important is to give you a sense that in 1970 China's GDP was about like that of Indonesia. So what we are talking about is an extraordinary transformation of a region. What you also see is that Taiwan and Hong Kong are so much larger than the rest of Southeast Asia that they clearly are the dominant economies.

Japan's GDP is about three times that of China. We can get into the discussion about how to measure GDP if you are interested. So Japan isn't on this particular table. But this gives you an idea of the countries that were considered the developing countries of Asia in the 1970s. China has outperformed them in a whole variety of ways. I'm glad to discuss that if you would like.

The next chart is titled "The Double-Dip Recession in Asia." This is part of what has led to the transformation. You may remember that in the 1990s there was a lot of enthusiasm about something called the Washington Consensus. This was pressed not only by the Clinton Administration, but very actively by the World Bank and IMF [International Monetary Fund]. It was partly the very bad advice that the World Bank and IMF gave to countries in Asia at the time of the 1997 crisis that has led to the diminution of their influence.

Just to give you an idea, the IMF today has about one-quarter of the outstanding loans that it had a decade ago. Most countries are not paying attention to the IMF. They are not borrowing from it. They can get their money through other sources, either other multilateral sources or private sources.

The other thing which is important to note is that there is a significant double-dip recession here. What that means is that the countries of Asia not only experienced a very significant decline in real income, but then had a second very serious set of difficulties to deal with in the period of 2000 to 2002. Again, we can get into those in more detail if you would like.

In terms of GDP and the way this relates to military power, I think it's important to note that China's GDP is significantly greater than India's. India is much farther along, however, in the development of many of the military capabilities that are important for modern warfare. We can talk about that if you would like.

Let's turn also to a table that says "ASEAN Exports to Main Destinations." ASEAN stands for the Association of Southeast Asian Nations. This table is from UNCTAD [United Nations Conference on Trade and Development], and therefore uses UN jargon. The export line, the thin black line that you see going up, is basically exports to China from ASEAN. ASEAN doesn't export much to other developing countries, but it does include a few others.

The important thing to note, however, is that if you were a businessperson in Southeast Asia and you were looking at what has happened in the last decade, your exports to the United States and Canada, Europe, and Japan have stayed roughly constant, whereas your exports to China have soared.

So if you were a young person in Asia and you were trying to figure out what languages you want to learn, where you want to travel, what kind of contacts you want to develop—a whole set of things that are just normal kinds of business or government activity—you would certainly say that you would want to pay attention to China.

The next table says "Effects on Strategic Linkages." It discusses options for guarantors, where we get into the question of how alliances are formed. I will go into that more.

But if we turn to the subsequent table, which says "Ability to Sustain a Rise to Great-power Status," my argument is that Japan, China, and India all have this ability. The question is simply the political will and whether countries will choose to do so. But they all have the capability.

There isn't any question that all three can move to great-power status, certainly within the next 20 years. I don't think it's going to be within the next ten years, but they could. I think it's unlikely that Japan will, but I think it's very likely that both China and India will. I will try to say why.

In terms of these tables, I just want you to turn to the last page, which says "Strategic Options." Again, these are from the book that Devin mentioned. U.S. dominance is the strategy advocated by the current administration in Washington. It's a strategy which focuses predominantly on military solutions and is a strategy which will certainly last until January, but it's not likely to last beyond that.

The question then is, where do we move? My personal view is that the most plausible option for the United States is to try to develop some kind of U.S.-Japanese-Indian combination. I wouldn't call it an alliance, because I don't think India will join an alliance, but I think there will be some kind of cooperation between those three.

Where we are headed, if there isn't any clear U.S. strategy, is Chinese informal preeminence. That is already occurring, for reasons that I will try to explain.

A final option is what's called the Asian "concert of powers." That is an option which is being pressed by some of the smaller states in Asia that don't want to be directly tied to either Japan or China. But the smaller states are definitely being forced to try to make choices.

If you look at the two principal multilateral institutions in Asia, one is called ASEAN Plus Three. It stands for the Southeast Asian states plus China, Japan, and South Korea. The other is called the East Asian Summit, which has a broader composition. Basically, those two organizations are ones where China and Japan are competing for influence with the smaller states.

Let me turn now to a few aspects that grow out of these economic issues and talk about the realignments that are in process.

The first and most significant, I think, relates to the Korean Peninsula. Here, as you know, in the six-party talks, the Chinese are now playing a leading role. They have hosted those talks. We have a situation where, despite the U.S.-North Korean-Chinese conflict in the 1950s, the United States today is cooperating closely with China, and the Bush Administration, despite its focus on military solutions in other arenas, chose a diplomatic solution for trying to deal with North Korea. There is no question that that has produced an enormous change in the way people are seeing the region.

Right now the Russians—they are part of the six-party talks—have been given responsibility for trying to come up with broader architectures for Asia. That would mean something like the European Union, possibly. It might mean something more casual. The idea is to try to come up with some formal mechanism that would limit the negative effects of great-power competition in Asia.

Another really fundamental change in Asia is the reduced tension between Taiwan and China. Right now there is a new government on Taiwan, the Kuomintang, which has been out of power for the last 12 years. They are seeking much closer at least economic cooperation with the mainland. I can get into those issues if you are interested.

The other thing that is clearly happening is that the northern tier of the ASEAN states in Southeast Asia are moving much closer to China. If you look at a whole series of indicators—trade, official visits, the character of communiqués between the governments—Cambodia, Laos, and Burma are very much identifying their political futures with China. Even Vietnam, which has a long and rather difficult history in dealing with China, is now taking a much quieter, I would say, or low-key position towards China.

That means that the original strategy of the Southeast Asian countries, which was to form a ten-nation grouping that would be an autonomous grouping, that would be like Europe—it has over 400 million people—and that would essentially play an independent role in Asia, is probably not likely to come to fruition. It's much more likely that ASEAN, the Southeast Asian states, will be split between the northern tier, which is linked to China, and the island states, which are more autonomous.

The question of whether Japan and China are the leading states in the region, I think, is still unresolved. Japan has lots of advantages. It has a larger GDP. It has a very substantial research and development capability. It has the largest aid program in the region. It's still a very substantial trading partner.

But if you look at the rate of change, the rate of change favors China, because people are focusing on what things will look like in five to 15 years, and certainly the slower growth rates in Japan affect that calculation.

In terms of another big change in Asia, what you see are the beginnings, as far as I'm concerned, of a rivalry between China and India. I don't necessarily see this as an imminent military rivalry. But you see a whole series of areas where China and India are competing. The most immediate is in Burma, where China dominates the economy and dominates its foreign policy.

But India is building a very substantial road across the center of the country to try to link India into Southeast Asia. China and India are very definitely competing in the East Asian Summit. Certainly, to the extent that what are called the quadrilateral talks— these are talks between Australia, India, Japan, and the United States—proceed, that will be something that China will see in a less positive light.

So there is a whole set of changes ahead. These tables, I hope, give you a sense for the magnitude of what's involved.

With that, why don't I turn to your questions?

DEVIN STEWART: Thank you very much, David.

First of all, what is the nature of the competition between India and China that you see emerging? You mentioned, for example, Burma. Is it investment relations? Is it military? Is it all the above? What do you see as the most tangible area of competition?

DAVID DENOON: Obviously, the most critical competition is not in Southeast Asia at all, and that's because China is a very close cooperator with Pakistan.

When India looks at the rest of the South Asia—in other words, the Indian subcontinent and surrounding states—India is able to dominate Nepal, Bangladesh, Sri Lanka; it's not able to dominate Pakistan. The fact that China has very close links with Pakistan means that the strategists in Beijing and New Delhi have to look at each other in a cautious light.

So that's the most important axis to look at first.

Then I think the question is, what's going to happen in trade? At the moment, both China and India are rapidly increasing their trade with each other. There are also quite a number of Indian businessmen who are operating in China. There are a smaller number of Chinese operating in India. That could even out over time. Both countries have relatively rapidly growing foreign exchange reserves. China's, of course, is enormous, $1.6 trillion. India's is over $200 billion now.

Again, the images that many Americans have of the countries in Asia as countries on the margin are really quite outdated.

The other types of competition are partly diplomatic. Let me just mention these differences between these organizations. ASEAN Plus Three is the countries of Southeast Asia plus China, South Korea, and Japan. ASEAN Plus Three is the lineal outgrowth of ideas that Prime Minister Mahathir of Malaysia had. ASEAN Plus Three represents an Asian grouping. Most notably, it excludes Washington, it excludes Moscow, and it also excludes India.

The East Asian Summit is a broader grouping, including virtually all the countries of East Asia. It includes India but does not include Pakistan. It includes Australia. It has Russia involved. But again, it does not have the United States involved.

So one of the big failures in the last eight years has been the United States' inability to play an active role in the creation of the next stage of multilateral institutions in Asia. This will be a key issue that I think either Senator Obama or Senator McCain would face, were they to be sworn in in January.

There is also military competition. The Chinese are now moving actively to develop their navy. Most of the effort has been focused on Taiwan in the last decade. But the Chinese are now moving to have the capability to extend their naval presence into the Indian Ocean and the Bay of Bengal.

The Indians are way ahead of the Chinese. The Indians have two aircraft carriers. The Indians also have a first-rate air force that most Americans are not familiar with.

One of the most important elements of new military technology is what's called real-time identification. That means knowing through satellites where your opponent is. The Indians are, again, ahead of the Chinese in terms of their satellite capabilities and in terms of their ability to identify potential opponents. That's partly through software. It's partly through their communication system, but also because they have made a major effort in this regard.

We can get into where India is going. Certainly the failure of the Manmohan Singh government to push through the civilian nuclear agreement with the United States is a big setback for U.S.-Indian relations. That's clearly on hold until January.

But I would say that Chinese and Indian competition is subtle at present. It's not overt. It's not blatant. It's certainly not directly military, but it's clearly in the background. For that reason, though there is a great deal of press attention devoted to warm diplomatic statements between Beijing and New Delhi, I think, in reality, strategists in both countries realize that their long-run position is not likely to be as cooperators, but more as competitors.

DEVIN STEWART: A lot to think about there. If I could start to put you in a box—I don't want to put you too much in a box, but just to provoke you a little bit—Bill Emmott's new book, Rivals, seems similar to your thesis that great powers are emerging and basically looking at one another warily, maybe with not a great deal of trust or confidence.

Then you have the rest of the big thinkers weighing in on this particular debate—Anne-Marie Slaughter, Richard Haass, Fareed Zakaria, Parag Khanna, even Ian Buruma, who was here just a couple of weeks ago, and Steven Weber from Berkeley.

Do you have any overall opinion about this debate, the nature of the debate, whom you agree with, whom you disagree with?

DAVID DENOON: I haven't read Bill Emmott's book, but I have gotten various invitations to hear him talk. From what I have seen of the synopses, I think there are, as you mentioned, some very close similarities with my view.

In terms of the other people that you mentioned, I think Anne-Marie Slaughter is identified very strongly with attempts to use international law, to try to use international institutions. I think those are going to be critical in developing the positive side of relations in Asia. I very much favor that. I'm not in any way opposed to it.

On the other hand, one needs to recognize that the reason that ASEAN didn't succeed in developing a coherent whole was because of traditional great-power competition. China wanted to develop its influence in Southeast Asia, and small, weak, and vulnerable countries—Burma, Cambodia, and Laos—were logical places to function.

The Chinese have run a large aid program there. They have built roads down from southern China into those countries. In the northern part of Burma, Chinese traders handle a very large part of the trade. I think it's very clear that China, by, for example, putting intelligence stations in the Coco Islands (which are just off the Andaman Islands), are there to monitor Indian ships; they are for military purposes. You don't set up an intelligence station just to look out into the ocean. You set it up with a purpose.

So I don't think one should overemphasize the military competition part, but it certainly is a key element that can't be ignored.

In terms of Fareed's views, I will just focus on his article in Foreign Affairs. In that article, the one that came out about two months ago, what he does is start off with a really fascinating description of the role of the British in India and the role of the British in the commonwealth subsequent to that, and then makes some comparisons between the decline of Britain and the potential decline of the United States. That particular article, however, ends in an upbeat way. It essentially says that the United States will be able to deal with the rise of the rest.

The problem that I have with his article is that he really doesn't get into the economics in any detail, and only addresses it in a preliminary fashion. When I read some reviews of his book, I got the feeling that the book has a more negative cast than the article. I don't really want to comment on his book, because I haven't read it.

I guess I would put myself in a realist camp. I am opposed to the neoconservative vision that the United States has the right to go into other countries and reshape them according to our wishes. On the other hand, I'm enough of a realist to say that you have to look at a whole range of activities of states before you judge where they are going.

For example, at the time of the Wen Jiabao visit to New Delhi or the Manmohan Singh visit to Beijing, I think the press completely overstated the significance of trade between India and China. It's relatively small. It's growing quickly, but it's not the critical element. The critical element is that China is linked to Pakistan and it's not going to give it up. That is absolutely essential for understanding the relationship between New Delhi and Beijing.

Those factors are long-term. They are structural. They don't change quickly.

DEVIN STEWART: Your advice to the next administration is to take a look at Asian regionalism, Asian multilateralism.

DAVID DENOON: Yes.

DEVIN STEWART: This is sound advice from a lot of knowledgeable Asia watchers, including Kent Calder and Francis Fukuyama, who just put out a book on the very same topic. I believe Bates Gill and Michael Green, CSIS fellows, are also just coming out with a book on that topic. I think these people will be close to administration advisers. So let's hope that the message gets to them.

In Francis Fukuyama's book, in his chapter, he outlines different forms of multilateralism. His premise is that the U.S. "hub and spoke" system might not last forever. The Korean spoke, in particular, is of concern.

He sees two issues looming that bring into question the longevity of that relationship. One is the potential of Korean unification and the second one is what some believe is a moving-away from American influence. He believes that, as a result, we have to think about various methods for creating a multilateral system. He looks at military types and he looks at topical types of cooperation.

What would be your advice to the next administration in terms of the nature of the multilateral system that you would build?

DAVID DENOON: First of all, let's get to some of the terms. The term "hub and spoke" came out of the George H.W. Bush Administration. It was a term that was developed by the secretary of state at the time, James Baker. The term "hub" meant the United States and the spokes were direct bilateral relationships to countries in Asia. So at the time, there was some effort to try to create Asian regionalism. That Bush Administration didn't favor that and favored the continuation of the direct ties.

I think most Americans are aware that we have bilateral security treaties with South Korea and Japan. Most Americans are not aware, however, that we still have bilateral security treaties with the Philippines and with Thailand. You may not be aware of it, but you are legally obligated to defend Thailand; you are legally obligated to defend the Philippines.

I will also point out a theme from an earlier book of mine. The U.S.-Japan and the U.S.-Korean security treaties are called "mutual," but they are only minimally mutual. The title of this earlier book of mine is Real Reciprocity. I don't think we have it. We, as Americans, are obligated to defend Korea and Japan; Korea and Japan are not obligated to defend us, unless they are attacked. So it's a very limited kind of mutual obligation.

I very much look forward to hearing what Fukuyama and Calder have to say. I definitely agree with your summary. I think Korea is the hub of the new security balance in Asia. To the extent that Korea shifts and aligns itself more with China, or at least moves away from the United States, then the "hub and spoke" strategy of the first Bush Administration and James Baker clearly is going to fall apart.

That doesn't, however, mean that the United States doesn't keep close relations with Japan. To the extent that Korea shifts more towards China, then that probably strengthens our relationship with Japan.

My personal view, and what I have said on numerous trips to Korea and to any Korean who asks me, is that Korea's long-term interest is certainly far better served by maintaining either autonomy or links to the West than it is by close links to China. Though the economic links to China are fine, China will be a dominant power, and it's a neighbor. The advantage that Korea has in dealing with the United States is that we are over the horizon and a long way away.

I think if you simply look at today's New York Times and see that several hundred thousand people were mobilized in the streets of Seoul to protest the possibility of mad-cow disease, you can realize how completely irrational large groups of people can be and how emotional the links to outside powers often are. I think those demonstrations were mobilized by people who had a political agenda. I don't think most Koreans are worried about mad-cow disease. I think they want to protest the current administration in South Korea.

But that hits the second point that you mentioned. The U.S.-Korean alliance is certainly in a much more fragile situation than the U.S.-Japan alliance.

DEVIN STEWART: Which brings me to the big question mark in your book, which is Japan: a strategic keystone, in a sense. Certainly Japan could possibly afford to ramp up its military spending. It could assemble nuclear weapons fairly rapidly if it needed to. But you don't believe it has the will.

Can you elaborate on the will factor in Japan? Also, just in terms of the long-term economic prospects for Japan, what are the possibilities? In other words, what are its power possibilities?

DAVID DENOON: First of all, I don't see any reason why Japan can't grow at the 2 to 4 percent range. Japan is already one of the wealthiest countries in the world. It's one of the wealthiest countries on a per-capita basis.

Japan is a society where the streets are clean; there is no crime. It is an attractive place to live. Many Japanese compare themselves to the Baltic countries or the Nordic countries. They like the idea of seeing themselves as autonomous. They like the idea of seeing themselves as not participating in some of the least appealing features of great-power competition.

I will also point out that more Japanese died in the fire-bombing of Tokyo in January and February of 1945 than died at Hiroshima and Nagasaki. We tend to focus on the nuclear explosions, but there are still millions of Japanese who lived through World War II, and they have a strong aversion to military conflict.

I don't think that Japan will go nuclear unless Japan is pushed into a corner. Therefore, I think most strategists from China, Korea, and outside would say that it would be a mistake for any country in the region to push Japan to the point where they went nuclear.

But the purpose of discussions like this is for us to broaden the range of options that we consider and recognize that the Japanese could do this. They are technically capable of doing it. If the situation in Northeast Asia were to get unstable and the United States were to play a significantly smaller role in providing security in the region, I think there is every chance that Japan would go nuclear.

There used to be the old line in Europe that the French loved Germany so much that they wanted two of them. The same thing is true about both China and Japan of Korea. The Chinese love Korea so much that they want to have two Koreas. The Chinese don't want Korea reunified unless it's a pro-Chinese reunified Korea. The Japanese certainly don't want a reunified Korea if it's a pro-Chinese Korea.

The question then is, what are the prospects for reunification, given that China is still the largest supplier of food and the largest supplier of oil, et cetera, for North Korea? I think China has played a very constructive role in the six-party talks. In my last trip to China two weeks ago, I met with the top Chinese negotiator on this, and I was very impressed with how she portrayed the long-term Chinese concerns.

The Chinese do not want a nuclear war on the Korean Peninsula. They don't want nuclear proliferation. They don't want hundreds of thousands or millions of Koreans streaming across their borders. So they have a direct security investment or interest in stability on the Korean Peninsula.

Similarly, they don't want American troops on the Yalu. They had that under MacArthur. They don't see that as a desirable result. So a reunified Korea that was pro-Western would not be attractive to China, and I don't think the Chinese would favor that.

So if you were asking me to predict whether Korea is going to be reunified, I would say, it may be, but not anytime soon.

I think, for those reasons, you are going to see the same basic states and some of the same basic strategic choices in Northeast Asia that you saw a decade ago. The real question is whether China and Japan can directly resolve things like oil development in the East China Sea, whether they can reach some kind of confidence-building measures, et cetera. All of these are really difficult to work out.

Remember, there was a cottage industry in the United States, starting in the 1960s and going into the 1980s, dealing with arms-control negotiations with the Soviet Union. Literally, people made careers out of mastering throw-weights and radiuses of different weapons capabilities. All of those are things that the Chinese and the Japanese need to start discussing themselves.

DEVIN STEWART: Getting back to the main theme of your book, the rivalry, the competition, between China and India, and getting back to our mission here at the Carnegie Council to reflect on ethics, and before we throw it open to the audience—there are ethical questions that arise from this competition between India and China. Two immediately come to mind.

One is the one that Richard Haass is concerned about. When you have a leviathan in the international system, the leviathan can kind of tell the rest of the international system what to do and make cooperation inevitable. In other words, currently or in the past 10 or 20 years, the gap has been so large between the United States and the rest of the world that the United States can force competition or things to work out.

The upside to the narrowing of the relative power balance is that maybe, in a new world where our destinies are chained to cooperation, people will find their enlightened self-interest. But Richard Haass sees a downside: When countries are closer together in relative power, they are less likely to cooperate.

That's one question: Does the vying of power make cooperation less likely?

The other question, what does it have for norms? What does it have for security norms, for business norms, and for economic development norms?

You can talk about any of them or none of them if you wish. This is something that Harry Harding has been talking about quite a bit. He testified on Capitol Hill recently about this very topic.

Does this kind of competition dilute norms? Does it make them more viable, stickier? Does it change them? How do you see these two big questions?

DAVID DENOON: Let me go back to themes from the book. For those of you who have an interest in economics, I want to point out that almost exactly half of the book is the economic substructure to these issues that we have been focusing on here. I think that were China to have a dramatic crash of its economy or were India to falter in its path towards liberalization, then a number of the generalizations that I have made would no longer apply.

But on the broadest issue, I think Richard Haass is probably reacting to the failure of the United States in Iraq. I think it's important to note that the American establishment supported the invasion of Iraq. It's now relatively common to blame the neoconservatives. They were certainly the ones who were in power in the current Bush Administration. But it's also important to note that the congressional votes were overwhelmingly in favor of supporting the venture. Some of the most prominent members of the Democratic Party—former secretaries of state, et cetera—also supported it.

I think there needs to be a rethinking of that process. I will just note that the reason people are no longer using the term "leviathan" or "dominant power" is that a dominant power can stub its toe. In the same way that the United States has gotten into a quagmire in Iraq, the Soviet Union got into a quagmire in Afghanistan. There, of course, were different objectives. I'm not saying that they were identical. But a very large power with seemingly extensive resources can find that even small wars are extremely exhausting. That's part of the issue.

Obviously, as a realist, my view is that a balance of power is the more stabilizing end result than hierarchies. I don't see any power able to challenge the United States in the next decade, but I will note—what we all know—that the United States is the world's largest debtor. We have the world's largest trade deficit. We had our financial system almost implode in the last year.

Certainly one of the themes of Fareed's article was that there were similar periods that Britain faced, and Britain barely squeaked through them. It looks like we may not face a cataclysmic recession now, but certainly we are facing very difficult economic times. I think the American public, regardless of who is elected in the fall, is going to be cautious about new ventures overseas.

That leads me to say that the United States, under whoever is elected, should be pressing countries in Asia to resolve their own differences. I think we should be extremely reluctant to extend new security commitments, unless the countries that we are dealing with are handling their relations with their neighbors well and want to continue with us.

My view is that if there is increasing sentiment in South Korea that they want to distance themselves from the United States, I think we should acknowledge that quickly and move U.S. forces to a lower profile.

I think one of the good things that the current Bush Administration has done is to take U.S. forces off the demilitarized zone and move them into the southern part of South Korea, so they are less likely to be involved if there is some conflict.

That's the realist part of the way I see the problem.

In terms of norms, I think the positive development in this region is that ASEAN is still a viable organization. ASEAN Plus Three is increasingly important. The Chinese have played a very positive role in setting up a free-trade agreement between China and all of ASEAN. They have actually proposed the same thing to include Korea and Japan. Japan is not willing to, because Japan isn't willing to open its markets in agricultural goods. But I think those are very positive steps.

I think there are some weaknesses to both ASEAN Plus Three and the East Asian Summit. But it's certainly to the advantage of the United States to encourage these. The reason that I am distressed is that both the East Asian Summit and ASEAN Plus Three exclude the United States. We are a Pacific power. We are still either the most important or the second-most important trading partner of every country in Asia.

We need to figure out some way to have our interests represented in a multilateral setting in the region.

So there is no question that we should be involved. It doesn't mean, however, that it has to be with these two organizations. It can be something different.

DEVIN STEWART: A big question, before I throw it open. The common wisdom is that Japan and/or India will carry out that function in these organizations. Do you not buy that?

DAVID DENOON: I think that Japan definitely does not want China to dominate these organizations. India isn't a major player yet in these organizations. The question is how India will see things in the future.

It's also disappointing to many Americans, who wanted a closer security relationship between the United States and India, to see how mishandled the U.S.-Indian civilian nuclear agreement was.

I don't believe that Prime Minster Manmohan Singh entered into that agreement thinking he was going to lose. I think he entered into it assuming it would be passed. But there is a very, very diverse coalition in India. Remember, it's the Communist Party—"M," Marxist—which is part of the coalition with the Congress, that threatened to pull out and made Manmohan Singh unwilling to press ahead with that.

Dealing with India is not like dealing with China or Japan, where you have a clear central government that can speak definitively for the country. When you are negotiating with India, you are dealing with a very diverse coalition.

DEVIN STEWART: We would like to take some questions.

QUESTION: I want to question you on one little point, the ability to sustain great-power status.

In your analysis, you point to a stable political system for Japan and India, but not for China. I served in the Marine Corps. My first encounter with the Chinese was with a Chinese division in 1953, north of Seoul. There is a natural American prejudice against China.

But wouldn't you argue that the Chinese political system is now much more stable than that of India? All of the large countries of India's size that have multi-ethnic arrangements have broken up, such as the Soviet Union.

DAVID DENOON: There is a quick answer to your question: No. I stand by what I put in the table.

The only reason that I have expressed any reservations about political stability in China is not that I think there is an imminent revolution around the corner, but that China has really fundamental political problems to deal with, which any regime—it doesn't matter whether it's the current Communist Party of China or any regime that was in power—has to deal with. Those issues are, how do you integrate the 800 million people who are in the rural areas into the modern economy?

The Chinese have done a fantastic job of raising living standards for the urban groups. But the rural population, which originally, under Deng Xiaoping's plan in 1979, got its incomes raised, is still significantly behind what has happened in the urban areas.

The second thing which creates real fundamental structural problems for China is the regional diversity. I'll just give you an anecdote.

The last time I was in Guangzhou, the former Canton, I was riding in on a bus and I passed a building that was clearly Soviet architecture. It was a result of the Soviet aid program in the 1950s. I turned to my guide and said, "What goes on in that building?"

He said, "Oh, that's where the communists stay when they come down from Beijing."

This is the way people think in Guangzhou, which is much more market-oriented, much more skeptical of Beijing than many other parts of China are—if you are in a province, like Fujian or Guangzhou, which is doing well, you don't see the advantages of the government.

This is somewhat similar to New York. Since most of you probably live in New York, you probably are aware that many New Yorkers feel that the federal government taxes New York and distributes the money elsewhere. If you are in the wealthier provinces of China, most Chinese feel the same way. And it's true. The federal government redistributes income to the poorer provinces.

So I'm not someone who is predicting imminent political instability in China. I'm just saying that whoever is in charge of China has really serious problems to deal with.

Let me also mention that the Chinese have an exceptional current leadership. The Politburo right now, which is the political leadership of China, are all engineers. These are pragmatic, practical people who all want to solve problems.

China doesn't have any slums. China does not have the slums that you see in Latin America. China does not have the slums that you see in India. The reason is that the government controls movement of population. It's not as tightly controlled as it was 20 years ago, but it's still controlled.

The question is, will that kind of control continue? I'm not someone who is pessimistic about China. There certainly has been a continuity. But as China begins to open up, it's going to have challenges to the leadership in Beijing. And because it's such a large and diverse country, it's not going to be easy to govern.

Put yourself in the hands of somebody who runs the bus system in Shanghai. How would you like to run a bus system for 25 million people? It's not an easy job.

These are really fundamental issues. If the government doesn't handle them well, people are dissatisfied. That's my only point.

DEVIN STEWART: David, before we go to the next question, just to follow up on that, if you could point to the biggest risk in China, just in a short phrase, fomenting any type of movement in China.

I think the current wisdom is it's something tied to environmental degradation. But you could think of food prices. You could think of pollution, generally speaking. You could think of rights of migrants, job security, people not getting enough jobs, or even the non-performing loans and the banking system. Which one worries you the most?

DAVID DENOON: I think it's very hard to see a country where roughly a third of the people have had a dramatic increase in their living standard being brought down by an environmental problem, anything other than a true crisis—let's say the Three Gorges Dam breaks; millions are killed. Something like that could have some traumatic effect. So I don't actually see environmental challenges as fundamentally challenging the government.

I think the biggest challenge would be an economic slowdown which dramatically reduced living standards and reduced people's expectations for the future.

I also think that as computer literacy spreads—and China now has the largest number of cell phone users in the world—as more and more people are linked to the outside world, lower-income Chinese are going to be less and less happy with their circumstances in life.

Albert Hirschmann had the wonderful tunnel theorem, which I will just mention.

He basically said, think of economic development as being in a tunnel which is blocked. You are in your car. Your spouse is with you. You are looking at the car in the next lane. The next lane starts to pick up. Initially you are happy. You say, "Ah, well, the tunnel's no longer blocked," and so on. But if that lane picks up momentum and you don't move, then you get increasingly frustrated. You first complain to your spouse and then you get out of your car and you start shouting at other people. You say, "What's going on? Why isn't my lane moving?"

So China is in a situation where one lane is moving very, very rapidly, and the other lane is moving somewhat, but it's not moving rapidly.

Again, I don't think this has anything to do with ideology. I think it has to do with fundamental aspects of human nature. People are willing to wait if they think their turn is soon. They are not willing to wait if they think their turn is never. So the question is, can you give them that opportunity?

On those grounds, I just want to point out that India has much more fundamental problems than China does. India's problems are that you have several hundred million people who are still illiterate and they have no ability to participate in the modern economy.

One of the reasons I'm skeptical of this Wall Street report that I mentioned—the assumption is that people who are illiterate are going to participate in the modern economy. That's nonsense. If you can't read, you can't read instructions, you can't run modern equipment, you can't perform in the modern economy.

One thing the Chinese have done—it started under Mao, but it has been vastly extended in the last two decades—is, they have developed universal literacy. Even low-income people can read and function, at least in some fashion, in the modern economy. You have to give the Chinese a great deal of credit for that.

QUESTION: Jumping off of your focus on institutions, I'm curious as to what you see as the evolution of the Shanghai Cooperation Organization and, more generally, what role you think Russia will play in the dynamics you described in Asia.

DAVID DENOON: For those of you who don't follow this closely, the Shanghai Cooperation Organization was an effort launched by China, which includes Russia and the Central Asian states. It picked up momentum in the late 1990s and then became sort of quiescent, I would say, after 9/11, and then, in the summer of 2006, sprang back to life, with a press release calling for the U.S. withdrawal from Central Asia.

I think the Shanghai Cooperation Organization represents an issue. The issue is, who will provide the great-power stability for the region? The Russians think they are the natural provider. They served that role when the Soviet Union was dominating those states. Most of those countries don't want the Soviet Union back. They certainly don't want Russian domination. There are links to China. There are cultural links, which came basically as a result of Genghis Khan and the migration of Mongols into that area.

It's not clear where Central Asia is going to go. I think what is clear is that the U.S. role in Central Asia and the Middle East is likely to decline under whoever is elected this November. Therefore, the U.S. role will decline.

Now, the Shanghai Cooperation Organization was started on the premise that Russia and China could cooperate and that their interests were sufficiently similar that they would be able to form a cohesive unit and that this would tend to balance the United States.

On these tables, I have some data for Russia. Some of that data is clearly going to be eclipsed if oil prices stay high. Certainly the Russians have strategic options today that they didn't have two to three years ago. But I don't think that means that Moscow and Beijing see eye to eye. I think it's much more likely that they will be competing in Central Asia.

Also it's important to note that India has very sharply rising energy needs, and India wants to play a role in Central Asia. India's problem is that to get to Central Asia, you have to go through either Pakistan or Afghanistan. So the Indians have chosen another alternative, which is to try to set up a natural gas pipeline to Iran.

I favor cooperation between India and Pakistan. I think in the long run, if some resolution can be reached with Iran about its nuclear program, it's probably even to the advantage of the United States for India to have closer links in that region. But again, I see these not necessarily as sort of a pre-1914 arms race or a 1939-type arms race; I see this as natural competition.

My personal view is that the Shanghai Cooperation Organization can only be as strong as the links between Moscow and Beijing, and I think they are going to be limited, at least for the foreseeable future.

QUESTION: I'm interested in your view on the Taiwanese-Chinese relationship and how you see it evolving in the next few years.

DAVID DENOON: In the next few years, I think things are very positive. I was just on a trek, a diplomatic mission, where we went to Taipei, Shanghai, and Beijing, and we met with the senior leadership in each place. I was impressed that the current leadership on Taiwan wants to have significantly expanded economic links with the mainland.

These are, first, to have direct, what are called charter flights. (You might as well just call them direct flights.) If you make the trip from Taipei into Hong Kong and then up to Shanghai [as at present], you waste a whole day. If you could have direct flights, you could be in Shanghai in the morning and Taipei in the evening, and it would be a much more manageable prospect.

So direct flights are one part of it. The second part is increased tourist trade. The third part is increased investment of China into Taiwan.

As most of you probably know, Taiwan is the largest single foreign investor in China. I have an article on this, if you are interested. Most of the Taiwan investment in China is not listed. Most of it goes through third parties, like the Cayman Islands and so on, or Hong Kong, and is disguised. But there is absolutely no question that Taiwan is the largest investor in the mainland.

The Taiwanese want to have clearer representation on the mainland for their business community. Like any foreign investor, there are often differences over taxes and repatriation issues and things like that. So the Taiwanese want to try to resolve that.

The current president of Taiwan, Ma Ying-jeou, did a first law degree at Harvard and then he came to NYU and did a master's in law. I have known him for a number of years. I think he's a very pragmatic person and I think he wants to improve relations with the mainland.

Similarly, the leadership on the mainland, as I mentioned in response to the earlier question, is also pragmatic. The current president, Hu Jintao, has made a special effort to try to improve relations with Taiwan. He made a special visit down to Hainan Island to meet with Vincent Siew of the Taiwanese delegation and talk about trying to improve relations.

So I think in the short run, relations will definitely improve and the focus will be economic.

There is an element which needs to be dealt with. One of the sticking points in the development of closer relations between Taiwan and China is how to provide confidence-building measures for the Taiwanese, so that as the general Chinese strategic buildup proceeds, the Taiwanese don't feel threatened.

I raised this issue with some of the very top people in Beijing, and I don't think that they have sorted that out. For example, the Chinese are almost certain to have a bigger submarine fleet five years from now than they do today. If that submarine fleet were focused on encircling Taiwan, it would be directly threatening. If that submarine fleet were spread over the Pacific, the Indian Ocean, and other places, it's much less threatening.

The same thing is true for the missile deployments on the Fujian coast. The Chinese almost certainly will have to move those missiles if they want greater cooperation from Taiwan.

There are a whole host of other things that China could do, mostly because China is the big player and Taiwan is the small player. If those steps are taken, I think relations will definitely improve.

QUESTION: What will be India's relationship with Asia, with East Asia, in the next five years or 10 years? Do you think that India is willing to have a close relationship with the Asian countries or, rather, do they want to be a more independent power?

East Asia already has China and Japan, and they are more powerful than India.

DAVID DENOON: I don't see the issue the way you posed it. You posed it as two alternatives: Either India is more integrated or India is an independent power. I think India will be an independent power, but I think it will be more integrated. So I think it's both, rather than either/or.

The reason I say this is that India is making major investments to expand its military capabilities. You don't have two aircraft carriers unless you intend to sail the carriers somewhere. What's the purpose? The purpose is that India is, as you know, sort of a triangular-shaped country. The major oil routes run south of India. There is no question that India wants to play a major role in naval protection.

What concerns India? China has made a major investment in a port called Gwadar, G-w-a-d-a-r, in Pakistan. Why are the Chinese doing that? The Chinese are doing that because they want to park their ships there on the way to the Persian Gulf.

This is partly in response to Devin's point. You can talk all you want about international law, but when countries move ships around or they build ports and they dock them, you have to watch it. You have to figure out what's behind it.

I think the Indians are very closely watching the expansion of Chinese power in the Indian Ocean. As I said in the beginning, because of the very close link between Pakistan and China, India is always aware of that.

So I think India will pursue a multifaceted strategy. First of all, we are all aware of India's high-tech capabilities. That's going to help India with the high-end part of business. India also has a very stable banking system. It has its own investment bankers. It has world-class manufacturing firms. They can compete effectively on a global basis. This is true in steel. This is true in autos. It's true in consulting. All of these are firms that will operate on a global basis. They don't need the Indian government to coach them along. These are firms that are capable on their own.

So at one level you will have a strategic expansion; at another, you will have a business expansion. In terms of government activities, I think the Indian government is going to expand its diplomatic visibility in the region. I think, for that reason, India wanted to join the East Asian Summit. I think it will try to expand that.

What will be a good test of this, whether my view of this is accurate or somebody else's view which sees it differently, is whether India devotes major resources to this. You can start looking at the budget numbers. You can start seeing how many conferences the Indians show up at. There are lots of ways to measure their level of interest.

DEVIN STEWART: Thank you all for coming. Thank you, David Denoon.