CHINA AND ITS REGION
Heavenly dynasty
Mar 29th 2007
From The Economist print edition
As long as China is not satisfied at home, it cannot be satisfied in the world
“LET us imagine”, says Lin Chong-pin, president of Taiwan's Foundation on International and Cross-Strait Studies, “how President Hu Jintao in his dreams might wish the opening of his Beijing Olympics to be.” Not only, says Mr Lin, will he have brought the world's finest athletes there, but also its artists and celebrities. So far, so plausible. He will also have, on his right hand, the leader of the communists' civil-war foe, the Kuomintang, newly elected in the spring of 2008 as president of Taiwan. And on his left a beaming Dalai Lama, thankful to be back on Chinese soil once more after an exile of nearly 50 years. “It would”, says Mr Lin, “be the heavenly dynasty all over again, and the barbarians coming to worship.” That this happy vision, though technically possible, is still implausible provides insights into the paradox of China's rise.
On the one hand, China appears over the past decade to have signed up wholeheartedly to an international order, of globalised trade and rules-based relations among states, that was not of its making—even as America, the chief architect of that order, has partly walked away from it, with its “coalitions of the willing” and growing opposition to unfettered trade.
China has signed up because it realises it is probably globalisation's greatest beneficiary. This, more than anything, explains the country's remarkable levelheadedness in its dealings with the United States ever since the last crisis in bilateral relations, in 2001, when an American spy plane collided with a Chinese fighter. The levelheadedness has paid off. For as American power has been distracted in the Middle East, so Chinese power has moved up.
A touch of the diabolic
On the other hand, Chinese intentions about what to do with its power in the long run remain deeply ambiguous. If China sees its constellation as heavenly—and the Chinese, like the Americans and the French, have a sense of manifest destiny—neighbours see hints of the diabolic.
Perhaps the growth in the military budget reflects China's growing wealth and prestige, along with a desire to protect its rising shipments of oil and other commodities: the country seems bent on building a blue-water navy. Understandable, perhaps, within China's terms of reference, to have a military strength capable of deterring Taiwan from declaring independence. But why missiles with a range to hit Japan? Why, in January, did China test-fire a rocket to destroy an old weather satellite, when it insists no one is more committed to the peaceful development of space? And why, last autumn, did a Chinese submarine suddenly pop up next to the Kitty Hawk, an American aircraft carrier?
Equally, what is China doing building roads, ports and pipelines in Myanmar and Pakistan, connecting west and south-west China with the Bay of Bengal and the Indian Ocean? The point could simply be to help the development of backward Chinese regions. But these links could equally serve as future supply routes for the Chinese navy. For Brahma Chellaney, at the Centre for Policy Research in Delhi, the conclusion is plain: along with the planned extension of the new Qinghai-Lhasa railway, which could in theory bring military material up quickly to the Tibetan border, “it amounts to a strategic squeeze of India.”
India's government is less willing than some of its intellectuals to see China's actions as a strategic squeeze. Nevertheless, it is trying to balance China's advances. Noting that the West's abandonment of Myanmar in the absence of democratic change opened the way for Chinese influence, India is trying to make its own advances to the awful regime there. ASEAN is doing the same.
Thus China's rise is quietly bringing about an opposite, if not yet equal, reaction. Japan's relations with China are much improved since the anti-Japanese riots two years ago sparked by visits by the then prime minister, Junichiro Koizumi, to Yasukuni, Tokyo's militarist war shrine. As soon as Shinzo Abe became prime minister last September, he made a fence-mending trip to Beijing. North Korea's nuclear games may also have pushed Japan and China closer.
As for Taiwan, China currently calculates that in next year's presidential election a pliable Ma Ying-jeou, the KMT's favoured son, will succeed the independence-minded Chen Shui-bian of the Democratic Progressive Party. Mr Ma's election prospects, however, have got murkier since his indictment in February over alleged misuse of funds during his time as Taipei's mayor. And even if he does win, China may face disappointments.
It believes it has an understanding with the KMT (whose elder statesman, Lien Chan, visited the mainland in a groundbreaking trip two years ago) that Taiwan is a part of China. Certainly, Mr Ma says he will push for closer economic co-operation and wants Taiwan to be a “peacemaker not a troublemaker”. But he also says the Taiwanese want to keep the status quo—in other words, a sovereign Taiwan that is independent in all but name. “We will not pursue talks on reunification,” Mr Ma insists. “The matter will have to wait until the mainland becomes democratic and prosperous.”
The home front
Doubts about China's intentions, however, stem perhaps less from its actions overseas than the values that underpin its behaviour at home. After all, China's political and economic affairs are still run with what is essentially a Leninist apparatus of state. The state's instinct is to co-opt those within the empire who question the political orthodoxy—or if that does not work, to deal with them harshly. Thus the Dalai Lama is vilified, and Tibetans are demeaned in their own land. Over Taiwan, China reserves the right to nuke what it says are its own people.
As the Dalai Lama puts it: “Mr Hu's constant emphasis on a ‘harmonious society' suggests that something is missing.” China is wracked by social inequality, environmental damage and government corruption. Beijing's preparations for the Olympics are a heart-rending metaphor for this. The games have provided a pretext for an orgy of official corruption and cultural vandalism which in a few brief years has all but destroyed a unique historical city. A few scraps have been left for touristic consumption. Beijing's inhabitants have been shunted into tower blocks on the city's edges. In their place rise vast bombastic structures, architects' and politicians' self-indulgences with no civic context.
A constant theme heard from thoughtful Chinese is that China's rise lacks a moral underpinning, and that a moral vacuum lies at the heart of Chinese life. The Dalai Lama puts the blame on the Communist Party's “radical atheism” and predicts that “sooner or later, a spiritual or moral culture will have to come to fill an internal emptiness; externally, there will have to be rule of law, democracy, freedom of the press.”
A slow enriching of both public and private life may already be under way. Non-government organisations to tackle social and environmental issues have grown hugely in number since earlier this decade. Some corners of the press have pushed the frontiers of what they can write about. And across China evidence is growing of a resurgence of spiritual and religious inquiry.
All the same, raw and volatile forms of nationalism lurk just beneath a usually placid surface. They erupted in 1999 when NATO bombs struck the Chinese embassy in Belgrade during the Kosovo war, and again in anti-Japanese riots in the spring of 2005. Internet chatrooms are full of vituperative anti-foreign sentiment.
Carrie Devorah - WENN
The Dalai Lama sees a moral vacuumThe memories of past horrors in China—foreign occupation, civil war, the cultural revolution—have made older Chinese generations into advocates of a peaceful region. All the same, the current leaders ignore popular sentiment at their peril. Passing on the lessons of history to a younger, more nationalistic generation that never experienced horrors at first hand is China's “big problem”, says Lee Kuan Yew, Singapore's elder statesman.
All this feeds into the neighbours' surviving suspicions about China's intentions, despite a decade-long charm offensive. So long as China is not satisfied within its own borders, how can it be satisfied in the world?
In the long run, this will place limits on Chinese power and influence. It is not just America's allies such as Japan and Taiwan that want it to stick around for a long while yet. ASEAN countries also need the United States to balance China. Singapore recently signed an agreement allowing American forces greater access; Indonesia and America have resumed bilateral military contacts; and Vietnam wants to forge a strategic alliance with its former enemy.
There is also, Thailand's recent military coup notwithstanding, Asia's general embrace of democracy. Michael Green of Georgetown University, a former Asia director at America's National Security Council, sees it as a tremendous potential source of “soft” power for America. Whereas China rigidly sticks to its policy of non-interference in the affairs of other nations, ASEAN has moved on. Malaysia's prime minister, Abdullah Badawi, says ASEAN's hallowed principle of non-interference must be “updated”. A new draft of ASEAN's governing charter says that regional stability rests on “the active strengthening of democratic values, good governance, the rule of law”, and so on.
Such sentiments around Asia might, at the very least, stand in quiet opposition to Chinese power. But if China embraced some of them for itself, who can guess at the limits to its celestial realm?
Tuesday, October 20, 2009
China & Its Region: Here comes trouble
Here comes trouble
Mar 29th 2007
From The Economist print edition
China's little brother is a big headache
WHEN North Korea lobbed a handful of missiles into the Sea of Japan last summer and then exploded a nuclear device beneath a mountain in October, its putative enemies, South Korea, Japan and America, had good cause for alarm. Yet the chief victim of North Korea's nuclear shenanigans appeared to be China, the obstreperous country's socialist ally and long-time big brother.
For a start, there was the loss of face. The tests made a mockery of the idea that China's policy of good neighbourliness could win over Kim Jong Il and his brutal regime. The Beijing government's credibility as a mediator—it had been the host of six-nation talks designed to get Mr Kim to disarm—was knocked. So China's decision to back United Nations resolutions condemning North Korea, imposing sanctions and even opening up the possibility of using force broke cleanly with the past. Despite a friendship treaty going back to 1961 which provides for both sides to come to each other's aid in danger, China made it clear it was no longer the North's protector. The North Korean regime chose to present this change of mind as an act of treachery.
Yet much to everyone's relief, North Korea soon sent out signals suggesting that it might sit down again at the six-party talks first convened in 2003 (and also including South Korea, America, Japan and Russia) from which it had flounced out in September 2005. In mid-February, against most gloomy predictions, a conceivably historic deal was struck and China regained a good deal of the face it had lost.
The deal cleared the way for international nuclear inspectors, kicked out in 2002, to return to North Korea. It also laid out a path for the country's nuclear facilities to be dismantled, normal relations between North Korea and America to be established and permanent peace to be declared on the peninsula at long last, more than half a century after the end of the Korean war. At each step of the way North Korea is to be rewarded for doing the right thing. Bank accounts in Macau are to be unfrozen, and North Korea is to get fuel oil or “equivalent” aid.
Nobody believes Mr Kim can be trusted to stick to the bargain without the closest supervision. Yet there is some cautious optimism that he can be tempted away from his nuclear ambitions. For President George Bush—who in early 2002 had included North Korea in his “axis of evil” and who had called Mr Kim a “pygmy”—putting faith in the deal marks an about-turn. He had been strongly critical of a similar bargain struck in 1994 by his predecessor, Bill Clinton, which later unravelled.
To judge by conversations in Beijing, China is the most sceptical, even pessimistic, about the deal with North Korea. Officially the tone is upbeat. Below the surface, however, run deep concerns.
North Korea-watchers in America, Japan and South Korea tend to suggest that Mr Kim's decision to go nuclear was a response to Mr Bush's axis-of-evil speech. The lesson that North Korea drew, this argument goes, is that if you do not want to be invaded by America, as was Iraq, then it is best to get your weapons of mass destruction up and running. Once your own security is assured, you can bargain from a position of strength.
Many Chinese disagree. Zhang Liangui, professor of international strategic research at the Party School of the China Communist Party Central Committee and a former student in Pyongyang, says that the Kim dynasty's quest for nuclear weapons has been relentless over two generations, beginning (with Russian help) with Mr Kim's late father, Kim Il Sung, in the early 1950s. Mr Zhang says the regime's motives are twofold. One is to strengthen internal legitimacy. The second is to transform strategic relations with all its surrounding powers, and particularly with China and Japan: the Korean psyche is deeply sensitised to a history of neighbours invading the peninsula. Meanwhile the regime can see for itself that the Bush administration is hugely stretched in Iraq and Afghanistan and does not believe America has the will for intervention (it may be wrong). North Korea might well want detente with America, says Mr Zhang, but that is a separate matter.
What's the deal?
It follows from this reasoning that not all policymakers in Beijing expect North Korea to give up its nuclear capability. The February agreement certainly leaves room for doubt. The government in Pyongyang is committed to freezing swiftly its main nuclear facility at Yongbyon, where, among other things, plutonium is extracted from spent fuel rods. But the deal mentions only an initial “disablement” of facilities, not their abandonment. Uncertainties remain about whether the regime will come clean about its uranium enrichment. There is nothing in the agreement to stop North Korea from conducting another test (though Mr Kim presumably knows that that would blow up the deal with it). Lastly, the deal does not make clear what will be done about North Korea's existing nuclear weapons, thought to number eight to ten. Mr Zhang thinks that the regime will want to hold on to its existing weapons but explains that “for China, this would be unacceptable.”
The pessimism runs deeper than not taking Mr Kim at his word. It has to do with how the Chinese think events on the Korean peninsula might affect the region's strategic balance, and how that, in turn, might affect the future of Taiwan. It helps to remember that whereas in economic terms China and America have a mutually beneficial, even symbiotic relationship (America buys Chinese exports, China recycles the dollars to help fund the American current-account deficit), in strategic terms Chinese policymakers see the rivalry as intense. America has military alliances that surround China, with troops in South Korea and Japan and powerful seaborne forces. Moreover, however much China might wish Taiwan to be an “internal” matter, America underwrites the island's security, through the Taiwan Relations Act (which commits it to helping Taiwan defend itself) and through the sale of weapons systems for defence against a Chinese attack.
All this explains why some policymakers in Beijing can see no satisfactory outcome to the nuclear crisis. Writing in China Security, a Washington-based journal, Shen Dingli, a prominent strategist at Fudan University in Shanghai, says that whether China likes North Korea or not, the country has for 50 years served as a strategic buffer, keeping tens of thousands of American troops pinned down and allowing China to deploy more force directly opposite Taiwan to dissuade the island from declaring independence. A nuclear North Korea would further help contain America, deterring it from intervening in any hypothetical conflict across the Taiwan Strait. North Korea, then, is China's “guard post,” Mr Shen writes. “This is the link between North Korea and Taiwan.”
And what if North Korea dismantles its nuclear programmes, exchanging weapons for American friendship, rather as Libya has done? Or if it keeps its nuclear weapons and thus provokes America into toppling the regime? For China, many strategists think, this would be disastrous, putting Japan, South Korea, North Korea and Taiwan—“a part of China”, after all—all firmly in the American camp. “In this case, China's security pressure regarding Taiwanese independence would be far more severe a burden, [one] that would be hard to bear.” It's a hard life being a Chinese strategist, obliged to look at the world in zero-sum terms.
Mar 29th 2007
From The Economist print edition
China's little brother is a big headache
WHEN North Korea lobbed a handful of missiles into the Sea of Japan last summer and then exploded a nuclear device beneath a mountain in October, its putative enemies, South Korea, Japan and America, had good cause for alarm. Yet the chief victim of North Korea's nuclear shenanigans appeared to be China, the obstreperous country's socialist ally and long-time big brother.
For a start, there was the loss of face. The tests made a mockery of the idea that China's policy of good neighbourliness could win over Kim Jong Il and his brutal regime. The Beijing government's credibility as a mediator—it had been the host of six-nation talks designed to get Mr Kim to disarm—was knocked. So China's decision to back United Nations resolutions condemning North Korea, imposing sanctions and even opening up the possibility of using force broke cleanly with the past. Despite a friendship treaty going back to 1961 which provides for both sides to come to each other's aid in danger, China made it clear it was no longer the North's protector. The North Korean regime chose to present this change of mind as an act of treachery.
Yet much to everyone's relief, North Korea soon sent out signals suggesting that it might sit down again at the six-party talks first convened in 2003 (and also including South Korea, America, Japan and Russia) from which it had flounced out in September 2005. In mid-February, against most gloomy predictions, a conceivably historic deal was struck and China regained a good deal of the face it had lost.
The deal cleared the way for international nuclear inspectors, kicked out in 2002, to return to North Korea. It also laid out a path for the country's nuclear facilities to be dismantled, normal relations between North Korea and America to be established and permanent peace to be declared on the peninsula at long last, more than half a century after the end of the Korean war. At each step of the way North Korea is to be rewarded for doing the right thing. Bank accounts in Macau are to be unfrozen, and North Korea is to get fuel oil or “equivalent” aid.
Nobody believes Mr Kim can be trusted to stick to the bargain without the closest supervision. Yet there is some cautious optimism that he can be tempted away from his nuclear ambitions. For President George Bush—who in early 2002 had included North Korea in his “axis of evil” and who had called Mr Kim a “pygmy”—putting faith in the deal marks an about-turn. He had been strongly critical of a similar bargain struck in 1994 by his predecessor, Bill Clinton, which later unravelled.
To judge by conversations in Beijing, China is the most sceptical, even pessimistic, about the deal with North Korea. Officially the tone is upbeat. Below the surface, however, run deep concerns.
North Korea-watchers in America, Japan and South Korea tend to suggest that Mr Kim's decision to go nuclear was a response to Mr Bush's axis-of-evil speech. The lesson that North Korea drew, this argument goes, is that if you do not want to be invaded by America, as was Iraq, then it is best to get your weapons of mass destruction up and running. Once your own security is assured, you can bargain from a position of strength.
Many Chinese disagree. Zhang Liangui, professor of international strategic research at the Party School of the China Communist Party Central Committee and a former student in Pyongyang, says that the Kim dynasty's quest for nuclear weapons has been relentless over two generations, beginning (with Russian help) with Mr Kim's late father, Kim Il Sung, in the early 1950s. Mr Zhang says the regime's motives are twofold. One is to strengthen internal legitimacy. The second is to transform strategic relations with all its surrounding powers, and particularly with China and Japan: the Korean psyche is deeply sensitised to a history of neighbours invading the peninsula. Meanwhile the regime can see for itself that the Bush administration is hugely stretched in Iraq and Afghanistan and does not believe America has the will for intervention (it may be wrong). North Korea might well want detente with America, says Mr Zhang, but that is a separate matter.
What's the deal?
It follows from this reasoning that not all policymakers in Beijing expect North Korea to give up its nuclear capability. The February agreement certainly leaves room for doubt. The government in Pyongyang is committed to freezing swiftly its main nuclear facility at Yongbyon, where, among other things, plutonium is extracted from spent fuel rods. But the deal mentions only an initial “disablement” of facilities, not their abandonment. Uncertainties remain about whether the regime will come clean about its uranium enrichment. There is nothing in the agreement to stop North Korea from conducting another test (though Mr Kim presumably knows that that would blow up the deal with it). Lastly, the deal does not make clear what will be done about North Korea's existing nuclear weapons, thought to number eight to ten. Mr Zhang thinks that the regime will want to hold on to its existing weapons but explains that “for China, this would be unacceptable.”
The pessimism runs deeper than not taking Mr Kim at his word. It has to do with how the Chinese think events on the Korean peninsula might affect the region's strategic balance, and how that, in turn, might affect the future of Taiwan. It helps to remember that whereas in economic terms China and America have a mutually beneficial, even symbiotic relationship (America buys Chinese exports, China recycles the dollars to help fund the American current-account deficit), in strategic terms Chinese policymakers see the rivalry as intense. America has military alliances that surround China, with troops in South Korea and Japan and powerful seaborne forces. Moreover, however much China might wish Taiwan to be an “internal” matter, America underwrites the island's security, through the Taiwan Relations Act (which commits it to helping Taiwan defend itself) and through the sale of weapons systems for defence against a Chinese attack.
All this explains why some policymakers in Beijing can see no satisfactory outcome to the nuclear crisis. Writing in China Security, a Washington-based journal, Shen Dingli, a prominent strategist at Fudan University in Shanghai, says that whether China likes North Korea or not, the country has for 50 years served as a strategic buffer, keeping tens of thousands of American troops pinned down and allowing China to deploy more force directly opposite Taiwan to dissuade the island from declaring independence. A nuclear North Korea would further help contain America, deterring it from intervening in any hypothetical conflict across the Taiwan Strait. North Korea, then, is China's “guard post,” Mr Shen writes. “This is the link between North Korea and Taiwan.”
And what if North Korea dismantles its nuclear programmes, exchanging weapons for American friendship, rather as Libya has done? Or if it keeps its nuclear weapons and thus provokes America into toppling the regime? For China, many strategists think, this would be disastrous, putting Japan, South Korea, North Korea and Taiwan—“a part of China”, after all—all firmly in the American camp. “In this case, China's security pressure regarding Taiwanese independence would be far more severe a burden, [one] that would be hard to bear.” It's a hard life being a Chinese strategist, obliged to look at the world in zero-sum terms.
China & Its Region: Can we help you?
Can we help you?
Mar 29th 2007
From The Economist print edition
How China is wooing a poor neighbour
THE quick way to Krang Skear forest in Cambodia that the Chinese are logging is to turn off the highway in Kampong Chhnang province, a few hours north of Phnom Penh, bump along a sandy track for 25km and, just as the track peters out, take the train through the scrub for the last 30km. Or, rather, as the railway built by the colonial French was abandoned years ago, you ride a dolly improvised from a few planks and an old petrol engine, taking the whole affair apart and to one side every time you meet a similar contraption coming the other way.
The area is as poor as it gets even in Cambodia, where more than one-third of the population lives on less than 60 cents a day. It is dry and dusty, with infertile soil, and the summer rains run away too fast for a decent crop of rice. Most of the local families, living in raised single-room thatched huts without electricity, grow cashew nuts, bananas and corn for a meagre subsistence. Of the 250 families who live here, some 60, says Puy Sao, a 29-year-old mother of six, depend wholly on the forest for their livelihood, and many others in part. The nearest health clinic is in the provincial capital, 70km away, but the forest has medicinal plants. It also has resin trees that can be tapped, among other things, for oil used for lighting. And then there are wildlife products, such as beeswax. In her yard, Ms Sao is rearing a wild boar that her husband caught when it was young.
A few years ago a company from Guangdong in southern China was granted a concession to log a reputed 17,000 hectares (42,000 acres) in Kampong Chhnang province and elsewhere. That in itself is a breach of the law, which is meant to restrict concessions to 10,000 hectares per bidder. In 2004 about 100 locals, including Ms Sao, went to Phnom Penh to protest that they, too, had a claim to the forest, but police outside the forestry ministry threatened to beat them.
The Chinese have since logged 1,700 hectares at Krang Skear, replanting some of it with a monoculture of acacia, a fast-growing but poor-quality tree. A giant plough, made in China, lies abandoned, along with hundreds of smashed jars that contained the tree seedlings, also brought from China. The Chinese workers have vanished, but will presumably return to cut the less accessible virgin forest in the hills beyond. Both the company and the government refuse to talk to locals.
Cambodia is in the midst of a land grab. High politicians and fly-by-night Chinese companies suddenly crop up as owners of vast tracts of valuable hardwood forest that get cut and shipped out to Vietnam or up the Mekong River to China, now that Chinese engineers have dynamited a navigable channel into Yunnan province.
Tree of life
The problem is most serious in the deeply forested parts of the country populated by non-Khmer minorities, such as the Phnong. In these forests, households “own” particular resin trees that can be tapped for 50-60 years, bringing in perhaps $350 a year for the most valuable resins, according to the Wildlife Conservation Society. But, says an expert at one non-governmental organisation, Chinese companies come in and cut the trees down. Sometimes they promise schools and health clinics, but they rarely deliver.
The land grabs are only the most prominent examples of Cambodia's endemic corruption, from the office of the prime minister, Hun Sen, all the way down. Recently a government minister threw a housewarming party for his new mansion which features a moat around which you can jet-ski. He boasted to ambassadors about the value of his house.
Corruption is a constant gripe of locals and of aid donors trying to help rebuild this country of nearly 15m after the ravages of genocide by the Khmer Rouge and a civil war that sputtered on until recently. The government chafes at the conditions which donors place on their aid. In recent years the World Bank has suspended several projects after discovering misappropriation in the procurement process. For instance, one project included a service centre for maintaining (Chinese) motorcycles provided for demobilised former guerrillas; the centre turned out not to exist. When the World Bank presented the evidence to the powerful deputy prime minister, Sok An, he angrily refused to read the report. Only after the World Bank threatened to suspend its whole Cambodia programme did the government pay back money the bank had shelled out.
Now the government has an ally: China. Last March Cambodia's aid-givers—including the World Bank, the Asian Development Bank (ADB) and bilateral donors, though not China—agreed at their annual gathering with the government to provide the country with just over $600m in aid—the equivalent of three-fifths of the national budget. But at the same time they dressed the government down for the country's poor human-rights record and for letting one more year go by without passing an anti-corruption law. The aid would come with lots of conditions.
Alamy
Part of the bargainImagine the donors' shock last April when China's prime minister, Wen Jiabao, paid Cambodia a visit and announced that China would pony up $600m for roads, dams, whatever—equivalent to almost the entire international aid budget. And, it seemed, with no strings attached.
Mr Hun Sen has been rubbing donors' noses in it. At a recent ceremony to mark the opening of a Chinese-built road in the country's north-east, he praised China for honouring Cambodia's “independence and integrity”. All Cambodians ask, he said, “is for an equal relationship with its partners...China is a very big country...If 1.3 billion Chinese urinated all at once, they would cause a great flood. But China's leaders do good things with their partners...When China gives, it doesn't say do this or do that. We can do whatever we want with the money.”
Chinese aid, however, is not always as generous as it seems. Smoke-and-mirrors accounting certainly exaggerates the sums on offer. Besides, the great bulk of aid is in the form of loans that will have to be paid back one day. In Cambodia's case, Western diplomats suspect that Chinese pressure is a factor behind delays in a United Nations-backed tribunal that is meant to be trying elderly former Khmer Rouge leaders on charges of genocide.
No messing about
Even so, some development specialists show a degree of sympathy for Cambodians wanting to take China's cash. Of the many donors in Cambodia, only the World Bank, the ADB and Japan are really building the things that people need, such as roads, schools and hospitals. Too much traditional aid is in the form of so-called technical assistance that often benefits the donor countries more than the recipients. (South Korea's help in providing “smart” national identity cards is an egregious example.) Besides, the time spent dealing with so many do-good Western agencies, each with an aid agenda that almost certainly conflicts or overlaps with others, sorely tests the government of a poor country short of institutional resources. In this light, China's offer just to get on and build the road looks tempting.
But why should China want to help in the first place? The answer is energy. An oil and gas bonanza lies just offshore in Cambodian waters. Though Chevron of America has rights to the only block where large proven reserves exist, much more oil is expected to be found, and Chinese oil majors intend to bid for it. For China, oil shipped from Cambodia has strategic value, for it would not have to pass through the American-guarded Malacca Straits—called “China's windpipe” by strategists in Beijing—on its way to the mainland. For Cambodia, a country historically overshadowed by bigger powers, oil revenues of perhaps more than $1 billion a year will give its masters some of the respect they crave. A bit of the money might even trickle down to the people.
Mar 29th 2007
From The Economist print edition
How China is wooing a poor neighbour
THE quick way to Krang Skear forest in Cambodia that the Chinese are logging is to turn off the highway in Kampong Chhnang province, a few hours north of Phnom Penh, bump along a sandy track for 25km and, just as the track peters out, take the train through the scrub for the last 30km. Or, rather, as the railway built by the colonial French was abandoned years ago, you ride a dolly improvised from a few planks and an old petrol engine, taking the whole affair apart and to one side every time you meet a similar contraption coming the other way.
The area is as poor as it gets even in Cambodia, where more than one-third of the population lives on less than 60 cents a day. It is dry and dusty, with infertile soil, and the summer rains run away too fast for a decent crop of rice. Most of the local families, living in raised single-room thatched huts without electricity, grow cashew nuts, bananas and corn for a meagre subsistence. Of the 250 families who live here, some 60, says Puy Sao, a 29-year-old mother of six, depend wholly on the forest for their livelihood, and many others in part. The nearest health clinic is in the provincial capital, 70km away, but the forest has medicinal plants. It also has resin trees that can be tapped, among other things, for oil used for lighting. And then there are wildlife products, such as beeswax. In her yard, Ms Sao is rearing a wild boar that her husband caught when it was young.
A few years ago a company from Guangdong in southern China was granted a concession to log a reputed 17,000 hectares (42,000 acres) in Kampong Chhnang province and elsewhere. That in itself is a breach of the law, which is meant to restrict concessions to 10,000 hectares per bidder. In 2004 about 100 locals, including Ms Sao, went to Phnom Penh to protest that they, too, had a claim to the forest, but police outside the forestry ministry threatened to beat them.
The Chinese have since logged 1,700 hectares at Krang Skear, replanting some of it with a monoculture of acacia, a fast-growing but poor-quality tree. A giant plough, made in China, lies abandoned, along with hundreds of smashed jars that contained the tree seedlings, also brought from China. The Chinese workers have vanished, but will presumably return to cut the less accessible virgin forest in the hills beyond. Both the company and the government refuse to talk to locals.
Cambodia is in the midst of a land grab. High politicians and fly-by-night Chinese companies suddenly crop up as owners of vast tracts of valuable hardwood forest that get cut and shipped out to Vietnam or up the Mekong River to China, now that Chinese engineers have dynamited a navigable channel into Yunnan province.
Tree of life
The problem is most serious in the deeply forested parts of the country populated by non-Khmer minorities, such as the Phnong. In these forests, households “own” particular resin trees that can be tapped for 50-60 years, bringing in perhaps $350 a year for the most valuable resins, according to the Wildlife Conservation Society. But, says an expert at one non-governmental organisation, Chinese companies come in and cut the trees down. Sometimes they promise schools and health clinics, but they rarely deliver.
The land grabs are only the most prominent examples of Cambodia's endemic corruption, from the office of the prime minister, Hun Sen, all the way down. Recently a government minister threw a housewarming party for his new mansion which features a moat around which you can jet-ski. He boasted to ambassadors about the value of his house.
Corruption is a constant gripe of locals and of aid donors trying to help rebuild this country of nearly 15m after the ravages of genocide by the Khmer Rouge and a civil war that sputtered on until recently. The government chafes at the conditions which donors place on their aid. In recent years the World Bank has suspended several projects after discovering misappropriation in the procurement process. For instance, one project included a service centre for maintaining (Chinese) motorcycles provided for demobilised former guerrillas; the centre turned out not to exist. When the World Bank presented the evidence to the powerful deputy prime minister, Sok An, he angrily refused to read the report. Only after the World Bank threatened to suspend its whole Cambodia programme did the government pay back money the bank had shelled out.
Now the government has an ally: China. Last March Cambodia's aid-givers—including the World Bank, the Asian Development Bank (ADB) and bilateral donors, though not China—agreed at their annual gathering with the government to provide the country with just over $600m in aid—the equivalent of three-fifths of the national budget. But at the same time they dressed the government down for the country's poor human-rights record and for letting one more year go by without passing an anti-corruption law. The aid would come with lots of conditions.
Alamy
Part of the bargainImagine the donors' shock last April when China's prime minister, Wen Jiabao, paid Cambodia a visit and announced that China would pony up $600m for roads, dams, whatever—equivalent to almost the entire international aid budget. And, it seemed, with no strings attached.
Mr Hun Sen has been rubbing donors' noses in it. At a recent ceremony to mark the opening of a Chinese-built road in the country's north-east, he praised China for honouring Cambodia's “independence and integrity”. All Cambodians ask, he said, “is for an equal relationship with its partners...China is a very big country...If 1.3 billion Chinese urinated all at once, they would cause a great flood. But China's leaders do good things with their partners...When China gives, it doesn't say do this or do that. We can do whatever we want with the money.”
Chinese aid, however, is not always as generous as it seems. Smoke-and-mirrors accounting certainly exaggerates the sums on offer. Besides, the great bulk of aid is in the form of loans that will have to be paid back one day. In Cambodia's case, Western diplomats suspect that Chinese pressure is a factor behind delays in a United Nations-backed tribunal that is meant to be trying elderly former Khmer Rouge leaders on charges of genocide.
No messing about
Even so, some development specialists show a degree of sympathy for Cambodians wanting to take China's cash. Of the many donors in Cambodia, only the World Bank, the ADB and Japan are really building the things that people need, such as roads, schools and hospitals. Too much traditional aid is in the form of so-called technical assistance that often benefits the donor countries more than the recipients. (South Korea's help in providing “smart” national identity cards is an egregious example.) Besides, the time spent dealing with so many do-good Western agencies, each with an aid agenda that almost certainly conflicts or overlaps with others, sorely tests the government of a poor country short of institutional resources. In this light, China's offer just to get on and build the road looks tempting.
But why should China want to help in the first place? The answer is energy. An oil and gas bonanza lies just offshore in Cambodian waters. Though Chevron of America has rights to the only block where large proven reserves exist, much more oil is expected to be found, and Chinese oil majors intend to bid for it. For China, oil shipped from Cambodia has strategic value, for it would not have to pass through the American-guarded Malacca Straits—called “China's windpipe” by strategists in Beijing—on its way to the mainland. For Cambodia, a country historically overshadowed by bigger powers, oil revenues of perhaps more than $1 billion a year will give its masters some of the respect they crave. A bit of the money might even trickle down to the people.
China & Its Region: Grim Tales
Grim tales
Mar 29th 2007
From The Economist print edition
The more growth, the more damage to the environment
“THESE days,” says Pan Yue, China's deputy minister for the environment, “most Chinese missions go abroad to talk about securing energy, whereas most foreign missions come to China to talk about our environmental impact. It's a paradoxical diplomacy.”
For China's neighbours, the country poses an environmental threat on several levels. In late 2005 an explosion at a chemical plant in north-eastern Jilin province sent a slick of toxic benzene 80km long into the Songhua River. Local authorities attempted a cover-up, but the city of Harbin was forced to shut down its water supply. With Russia downstream, the spill became an international incident.
In South-East Asia, China's plan to double hydropower by 2010 is causing concern. Several large rivers that run through the region—the Salween, the Irrawaddy and the Mekong, among others—have their source in Tibet, and dams in China already diminish their flow. In India, policymakers and environmentalists are alarmed at reported plans by China to build a dam and divert the upper reaches of the Brahmaputra to dry parts of north-western China, though a Chinese specialist on South Asia says that engineers consider the plan unfeasible.
As for airborne troubles, South Korea and Japan both suffer from sandstorms exacerbated by desertification in China. The country is also the world's biggest emitter of sulphur dioxide. The resulting acid rain is damaging Korean and Japanese forests. Even Japanese fishermen are affected by China's pollution: giant Nomura's jellyfish, which spawn off the Chinese coast before drifting towards northern Japan, spoil catches of salmon and yellowtail and break nets and gear. Some of the recent huge increase in their numbers is thought to have been caused by nutrient-rich run-off (on which the larvae feed) from farms and industry in China.
Even when China takes steps to deal with environmental challenges, neighbours can feel unintended consequences. In 1998 the then prime minister, Zhu Rongji, imposed a total logging ban after floods in southern China that had been exacerbated by deforestation. The ban has been remarkably well enforced and forest cover in China is increasing, albeit of a monoculture of Chinese red pine rather than of mixed native species. Yet with Chinese demand for timber unmet, one outcome of the ban has been increased forest destruction in West Africa, Indonesia, Papua New Guinea, Myanmar, Laos and Cambodia (see article).
Bye, bye bicycle
The rate at which China uses up natural resources is simply not sustainable. Start with its oil consumption. Domestic crude production is rising only slowly, so imports are growing by more than 30% a year. China is already the world's second-biggest oil importer, behind America. There is little prospect of slowing the growth in China's oil consumption, because the government is committed to a car-led policy of development. The World Bank's Mr Dollar has recently described this as “a very questionable development choice”—though it had earlier been conceived with the World Bank's backing.
Already the idea of China as a nation of cyclists seems quaint. Some 45,000km of expressways have been built or are under construction. Through cheap petrol and other means, the government is supporting a domestic car industry, which it sees as an engine of future economic growth. The number of cars in China has leapt from just 4m in 2000 to 19m in 2005. That translates into eight cars per 1,000 people, compared with 500 cars per 1,000 in America. Goldman Sachs thinks the figure will more than double by 2010 and reach over 130m by 2020. But even then China will still be way below American levels of car ownership today.
Oil is only part of the picture. China is the world's biggest producer of coal (as well as of coal-mining fatalities), digging out 2.2 billion tonnes in 2005. Today coal accounts for four-fifths of China's energy use, and there is enough for at least another century.
It is both a blessing and a curse. China is breaking new ground liquefying coal to make oil substitutes, which may in the long run help change its energy mix. Yet abundant use of coal means that China will overtake the United States as the world's biggest producer of carbon emissions by 2009. Its current share is 17% of the world's total, against America's 22%. Last year alone China added the equivalent of California's entire current generating capacity, nine-tenths of it coal-fired.
Unsurprisingly, coal is also the main (though certainly not the only) source of air pollution. Twenty of the world's 30 most polluted cities are in China. According to a new book by the World Bank, “Dancing with Giants: China, India and the Global Economy”, air pollution is causing 427,000 extra deaths a year.
It is possible to find a few glimmers in the murk. Because energy demand is growing so fast, China has more incentive than countries with slow growth to adopt new technologies. It is already the world's largest user of alternative energies, including windpower.
With World Bank support, China has been trying since 2003 to cut its emissions of greenhouse gases through a mechanism set up under the Kyoto protocol. Companies from signatory nations are committed to capping their greenhouse-gas emissions. If they want to exceed their quota for emissions, they can buy carbon “credits” from companies in developing countries that have invested in cutting their own emissions. China has lots of emissions of carbon dioxide and other more noxious gases, and now accounts for three-quarters of all carbon credits traded under Kyoto's clean development mechanism for developing countries.
One reason for hope is that China's leaders appear to understand the scale of the environmental problem. In the government's latest five-year plan, which runs to 2010, it committed itself to increasing forest cover, cutting the discharge of the main pollutants and reducing China's energy intensity (the amount of energy consumed for every unit of GDP) by 20%. Energy intensity fell between 1990 and 2003, but has since risen sharply as heavy industries such as steel and cement have surged.
On the other hand, environmental regulators, by Mr Pan's own admission, are weak and divided. At the State Environmental Protection Administration, he cannot even appoint staff at the provincial level. That is up to the provincial governor, who is usually more interested in growth than in the environment. The true cost of China's environmental mess is hard to assess, but the official government figure, which puts it at about 3% of GDP, is certainly a gross underestimate.
Mr Pan thinks growth should be sacrificed for resource conservation and environmental protection. That sets him sharply at odds with the Communist leadership. “People talk about the peaceful rise of China,” he says, “with all that implies for continuing rates of growth and resource utilisation. But the earth cannot support it. China should control its growth and slow down its development, and the international community should do everything it can to support China if it does.” China's leaders know the calculations. But they are not in a hurry to sacrifice growth and thereby risk social unrest.
Mar 29th 2007
From The Economist print edition
The more growth, the more damage to the environment
“THESE days,” says Pan Yue, China's deputy minister for the environment, “most Chinese missions go abroad to talk about securing energy, whereas most foreign missions come to China to talk about our environmental impact. It's a paradoxical diplomacy.”
For China's neighbours, the country poses an environmental threat on several levels. In late 2005 an explosion at a chemical plant in north-eastern Jilin province sent a slick of toxic benzene 80km long into the Songhua River. Local authorities attempted a cover-up, but the city of Harbin was forced to shut down its water supply. With Russia downstream, the spill became an international incident.
In South-East Asia, China's plan to double hydropower by 2010 is causing concern. Several large rivers that run through the region—the Salween, the Irrawaddy and the Mekong, among others—have their source in Tibet, and dams in China already diminish their flow. In India, policymakers and environmentalists are alarmed at reported plans by China to build a dam and divert the upper reaches of the Brahmaputra to dry parts of north-western China, though a Chinese specialist on South Asia says that engineers consider the plan unfeasible.
As for airborne troubles, South Korea and Japan both suffer from sandstorms exacerbated by desertification in China. The country is also the world's biggest emitter of sulphur dioxide. The resulting acid rain is damaging Korean and Japanese forests. Even Japanese fishermen are affected by China's pollution: giant Nomura's jellyfish, which spawn off the Chinese coast before drifting towards northern Japan, spoil catches of salmon and yellowtail and break nets and gear. Some of the recent huge increase in their numbers is thought to have been caused by nutrient-rich run-off (on which the larvae feed) from farms and industry in China.
Even when China takes steps to deal with environmental challenges, neighbours can feel unintended consequences. In 1998 the then prime minister, Zhu Rongji, imposed a total logging ban after floods in southern China that had been exacerbated by deforestation. The ban has been remarkably well enforced and forest cover in China is increasing, albeit of a monoculture of Chinese red pine rather than of mixed native species. Yet with Chinese demand for timber unmet, one outcome of the ban has been increased forest destruction in West Africa, Indonesia, Papua New Guinea, Myanmar, Laos and Cambodia (see article).
Bye, bye bicycle
The rate at which China uses up natural resources is simply not sustainable. Start with its oil consumption. Domestic crude production is rising only slowly, so imports are growing by more than 30% a year. China is already the world's second-biggest oil importer, behind America. There is little prospect of slowing the growth in China's oil consumption, because the government is committed to a car-led policy of development. The World Bank's Mr Dollar has recently described this as “a very questionable development choice”—though it had earlier been conceived with the World Bank's backing.
Already the idea of China as a nation of cyclists seems quaint. Some 45,000km of expressways have been built or are under construction. Through cheap petrol and other means, the government is supporting a domestic car industry, which it sees as an engine of future economic growth. The number of cars in China has leapt from just 4m in 2000 to 19m in 2005. That translates into eight cars per 1,000 people, compared with 500 cars per 1,000 in America. Goldman Sachs thinks the figure will more than double by 2010 and reach over 130m by 2020. But even then China will still be way below American levels of car ownership today.
Oil is only part of the picture. China is the world's biggest producer of coal (as well as of coal-mining fatalities), digging out 2.2 billion tonnes in 2005. Today coal accounts for four-fifths of China's energy use, and there is enough for at least another century.
It is both a blessing and a curse. China is breaking new ground liquefying coal to make oil substitutes, which may in the long run help change its energy mix. Yet abundant use of coal means that China will overtake the United States as the world's biggest producer of carbon emissions by 2009. Its current share is 17% of the world's total, against America's 22%. Last year alone China added the equivalent of California's entire current generating capacity, nine-tenths of it coal-fired.
Unsurprisingly, coal is also the main (though certainly not the only) source of air pollution. Twenty of the world's 30 most polluted cities are in China. According to a new book by the World Bank, “Dancing with Giants: China, India and the Global Economy”, air pollution is causing 427,000 extra deaths a year.
It is possible to find a few glimmers in the murk. Because energy demand is growing so fast, China has more incentive than countries with slow growth to adopt new technologies. It is already the world's largest user of alternative energies, including windpower.
With World Bank support, China has been trying since 2003 to cut its emissions of greenhouse gases through a mechanism set up under the Kyoto protocol. Companies from signatory nations are committed to capping their greenhouse-gas emissions. If they want to exceed their quota for emissions, they can buy carbon “credits” from companies in developing countries that have invested in cutting their own emissions. China has lots of emissions of carbon dioxide and other more noxious gases, and now accounts for three-quarters of all carbon credits traded under Kyoto's clean development mechanism for developing countries.
One reason for hope is that China's leaders appear to understand the scale of the environmental problem. In the government's latest five-year plan, which runs to 2010, it committed itself to increasing forest cover, cutting the discharge of the main pollutants and reducing China's energy intensity (the amount of energy consumed for every unit of GDP) by 20%. Energy intensity fell between 1990 and 2003, but has since risen sharply as heavy industries such as steel and cement have surged.
On the other hand, environmental regulators, by Mr Pan's own admission, are weak and divided. At the State Environmental Protection Administration, he cannot even appoint staff at the provincial level. That is up to the provincial governor, who is usually more interested in growth than in the environment. The true cost of China's environmental mess is hard to assess, but the official government figure, which puts it at about 3% of GDP, is certainly a gross underestimate.
Mr Pan thinks growth should be sacrificed for resource conservation and environmental protection. That sets him sharply at odds with the Communist leadership. “People talk about the peaceful rise of China,” he says, “with all that implies for continuing rates of growth and resource utilisation. But the earth cannot support it. China should control its growth and slow down its development, and the international community should do everything it can to support China if it does.” China's leaders know the calculations. But they are not in a hurry to sacrifice growth and thereby risk social unrest.
China & Its Region: The Export Juggernaut
The export juggernaut
Mar 29th 2007
From The Economist print edition
Good for China, but good for its neighbours too
WHEN China joined the World Trade Organisation (WTO) in 2001, many developing neighbours felt more than a twinge of discomfort. With China already an export juggernaut, they feared that the dismantling of tariff and other barriers that went with WTO membership would make the country irresistible to manufacturers, diverting foreign direct investment that might otherwise have gone to them.
This appears not to have happened. Certainly, foreign investment in China has increased, as have China's already heady exports, which since 2003 have been growing at their fastest pace since the early 1990s. In 2004 China overtook Japan to become the world's third-largest exporter, behind America and Germany.
But foreign investment has grown elsewhere too. The ten ASEAN countries saw a record $37 billion of investment in 2005. For some manufacturers, South-East Asia (or India) serves as a hedge against something going wrong in their China operations—be it social unrest, economic problems or a business climate that turns against foreign investment.
But much investment outside China is in fact contingent on the China boom. So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half's slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China's appetite for raw materials for a long time to come.
Trade within East Asia has grown even faster than the region's trade with the rest of the world, suggesting deeper specialisation and integration. But China's impetus has also profoundly altered the course of trade flows in Asia. As a paper last year by the Centre d'Etudes Prospectives et d'Informations Internationales (CEPII) in Paris describes, the China effect over the past decade or more has been the driving force behind a shift in Japan from exporting finished goods to Europe and North America towards exporting parts and components for assembly on the mainland. In turn, Japan now imports finished goods (such as office machines and computers) from China where previously they came from America and Europe.
For South Korea, Taiwan, Hong Kong and Singapore, trade has also turned from the rich world towards China. For Hong Kong, Taiwan and this year probably even Japan, China is the biggest trading partner.
In China, according to the CEPII paper, the processing and assembly of imported parts and components now accounts for more than half of all exports. China's growing trade surplus, it argues, is explained entirely by this kind of assembly. William Fung, managing director of Li & Fung, a Hong Kong company that leads the field in finding suppliers and managing supply chains for Western retailers and brands, uses a talking toy as an example: the plush fabric was made in Korea and the voice chip in Taiwan, and the final assembly was done in Shanghai.
Toys are mostly relatively simple things. But China has recently recorded phenomenal growth in exports of high-tech products too, principally notebook and desktop computers, DVD players, mobile phones and the like. Nicholas Lardy of the Institute for International Economics notes in a new book, “China: the Balance Sheet”, that between 1998 and 2004 American imports of Chinese laptops jumped from $5m to $7.7 billion and display units from $860,000 to $4.9 billion. Some now ask whether China is vaulting up the technology ladder or even threatening American national security. These concerns are grossly overblown.
A recent edition of the China Economic Quarterly (CEQ) looked at the top exporters among foreign companies that had set up in China. In 2004 eight of the top ten were Taiwanese electronics companies—known as original design manufacturers (ODMs)—to which the world's top computer brands, such as Dell, Apple and HP, outsource their production and, increasingly, much of their design and innovation. At the start of this decade less than 5% of these firms' laptop production was on the mainland. Since 2001, when the Taiwanese government lifted restrictions preventing laptop-makers from investing in China, they have shifted virtually all of their production there. Thanks to much lower labour and land costs, each machine costs $20-30 less to make.
A surge in high-tech exports (in 2005, telecoms equipment, electronics and computers accounted for 43% of China's exports by value) might look like a leap up the value chain. Yet assembling many “high-tech” products is not that different from making Mr Fung's talking toy. Mr Lardy argues that a better label might be “mass-market commodities”: after all, the laptops are simply assembled from foreign components. As CEQ points out, most of the firms involved are foreign, accounting for three-fifths of all Chinese exports, four-fifths of exports assembled from imported parts and components and nearly nine-tenths of the high-tech stuff. China's export model, then, still consists in big measure of renting out cheap labour and land to foreigners. Even China's most successful domestic computer firm, Lenovo, which acquired IBM's personal-computer business in 2004, contracts its production out to Taiwanese companies.
Yet the model may already be changing. Home-grown exporters, especially privately owned ones, are honing their skills in China's cut-throat markets. Huawei, a telecoms company, already supplies handsets to Vodafone, the world's biggest mobile operator. Bo Xilai, China's commerce minister, promises vigorous support for his country's native car industry, which has leapt from nowhere to capture a quarter of the domestic market and is now poised to start exporting small, cheap cars.
Not the bargain it was
The next question is whether more of the foreign-owned production networks that currently span Asia will be moved to China. There is some anecdotal evidence that this is happening, though statisticians cannot yet put their fingers on it.
A more identifiable trend is working in the opposite direction. As the World Bank's country director for China, David Dollar, points out, wages in China are now rising two or three times faster than in other low-wage Asian economies, and companies are having problems keeping talented staff. Encouraged by the government, companies are moving further inland to take advantage of cheaper labour. Yet the further inland they go, the less skilled the employees and the higher the transport costs to market.
Along China's eastern seaboard, where most of the manufacturing for export takes place, total monthly pay averages $250-350. Some parts of Thailand have higher average wages in manufacturing, but elsewhere in that country, as well as in the Philippines and Indonesia, manufacturing wages are $100-200 a month. Two decades ago all export-sector wages in these countries were higher than in China.
So some argue that in many sectors the era of the “China price”—exporters being able to offer the world's cheapest goods—will soon have run its course. CEPII highlights how the terms of trade have worked against China. Between 1995 and 2004, it finds, China's export prices rose by 4% whereas imports rose by 38%, a total deterioration in China's terms of trade of 24% (see chart 6). Today exporters enjoy more of the benefit of an undervalued renminbi. Yet as CEQ points out, brow-beating by an American government concerned about its bilateral trade deficit with China suggests that the exchange rate is likely to rise in future. It has already gone up by 6% since 2005.
Yet even for some of the cheapest goods, productivity increases have more than offset a deterioration in the terms of trade. A new paper by staff at America's Federal Reserve points out that between 1989 and 2005 China increased its share of exports to America in 41 industries, among them clothing and shoes. It is too early to write off China's export machine, even at the cheap end.
Either way, the consequences for China's neighbours depend on whereabouts on the manufacturing ladder they are. For those increasingly competing with China, the challenge is to make their manufacturing more sophisticated or their design more specialised. Last year America's Intel greatly expanded its research facilities in Malaysia that design microprocessors, motherboards and chipsets. A number of high-tech firms, particularly Japanese ones, are wary of putting such centres in China, fearing that their best design work will get pirated. But for countries such as Taiwan that are losing their manufacturing to China, the emphasis should be on fostering competition in the service industries that now account for the bulk of the economy. Hong Deshang of the Taiwan Institute for Economic Research says that his country's future should be in research and development, design, branding, financing and logistics.
For poorer countries, says Mr Dollar, China's rise opens up opportunities. Vietnam, which recently joined the WTO, is already a beneficiary, with annual growth accelerating to nearly 8%; on the plain between Hanoi and the coast, South Korean and Japanese assembly plants are springing up among the paddy fields to take advantage of the country's low wages. Extraordinarily cheap jeans recently sold by Tesco, Britain's biggest supermarket chain, were made from Chinese fabric stitched together in Bangladesh. Yet in much of developing Asia the starting point needs to be to make up for past omissions: opening up to trade, creating a favourable climate for investment and ensuring an adequate infrastructure for manufacturing. Mr Dollar argues that success will be determined more at the local than at the national level. After all, China's industrial revolution nearly 30 years ago began in a small handful of experimenting cities.
Consumers galore
Moreover, China's exports have to be put in context. Though very open to trade, China's economy, like America's, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports. The World Bank forecasts that this will be the first year in which China's imports will be growing by more than America's, becoming the biggest source of import growth in the world. Goldman Sachs, an investment bank, reckons that China's imports for domestic use are now roughly the same as those used in assembling exports, whereas five years ago they were only half as big. Much of what is imported is in the form of raw materials—oil, copper, gas, timber—to feed the China boom. The next article will look at the environmental implications of that boom.
Mar 29th 2007
From The Economist print edition
Good for China, but good for its neighbours too
WHEN China joined the World Trade Organisation (WTO) in 2001, many developing neighbours felt more than a twinge of discomfort. With China already an export juggernaut, they feared that the dismantling of tariff and other barriers that went with WTO membership would make the country irresistible to manufacturers, diverting foreign direct investment that might otherwise have gone to them.
This appears not to have happened. Certainly, foreign investment in China has increased, as have China's already heady exports, which since 2003 have been growing at their fastest pace since the early 1990s. In 2004 China overtook Japan to become the world's third-largest exporter, behind America and Germany.
But foreign investment has grown elsewhere too. The ten ASEAN countries saw a record $37 billion of investment in 2005. For some manufacturers, South-East Asia (or India) serves as a hedge against something going wrong in their China operations—be it social unrest, economic problems or a business climate that turns against foreign investment.
But much investment outside China is in fact contingent on the China boom. So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half's slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China's appetite for raw materials for a long time to come.
Trade within East Asia has grown even faster than the region's trade with the rest of the world, suggesting deeper specialisation and integration. But China's impetus has also profoundly altered the course of trade flows in Asia. As a paper last year by the Centre d'Etudes Prospectives et d'Informations Internationales (CEPII) in Paris describes, the China effect over the past decade or more has been the driving force behind a shift in Japan from exporting finished goods to Europe and North America towards exporting parts and components for assembly on the mainland. In turn, Japan now imports finished goods (such as office machines and computers) from China where previously they came from America and Europe.
For South Korea, Taiwan, Hong Kong and Singapore, trade has also turned from the rich world towards China. For Hong Kong, Taiwan and this year probably even Japan, China is the biggest trading partner.
In China, according to the CEPII paper, the processing and assembly of imported parts and components now accounts for more than half of all exports. China's growing trade surplus, it argues, is explained entirely by this kind of assembly. William Fung, managing director of Li & Fung, a Hong Kong company that leads the field in finding suppliers and managing supply chains for Western retailers and brands, uses a talking toy as an example: the plush fabric was made in Korea and the voice chip in Taiwan, and the final assembly was done in Shanghai.
Toys are mostly relatively simple things. But China has recently recorded phenomenal growth in exports of high-tech products too, principally notebook and desktop computers, DVD players, mobile phones and the like. Nicholas Lardy of the Institute for International Economics notes in a new book, “China: the Balance Sheet”, that between 1998 and 2004 American imports of Chinese laptops jumped from $5m to $7.7 billion and display units from $860,000 to $4.9 billion. Some now ask whether China is vaulting up the technology ladder or even threatening American national security. These concerns are grossly overblown.
A recent edition of the China Economic Quarterly (CEQ) looked at the top exporters among foreign companies that had set up in China. In 2004 eight of the top ten were Taiwanese electronics companies—known as original design manufacturers (ODMs)—to which the world's top computer brands, such as Dell, Apple and HP, outsource their production and, increasingly, much of their design and innovation. At the start of this decade less than 5% of these firms' laptop production was on the mainland. Since 2001, when the Taiwanese government lifted restrictions preventing laptop-makers from investing in China, they have shifted virtually all of their production there. Thanks to much lower labour and land costs, each machine costs $20-30 less to make.
A surge in high-tech exports (in 2005, telecoms equipment, electronics and computers accounted for 43% of China's exports by value) might look like a leap up the value chain. Yet assembling many “high-tech” products is not that different from making Mr Fung's talking toy. Mr Lardy argues that a better label might be “mass-market commodities”: after all, the laptops are simply assembled from foreign components. As CEQ points out, most of the firms involved are foreign, accounting for three-fifths of all Chinese exports, four-fifths of exports assembled from imported parts and components and nearly nine-tenths of the high-tech stuff. China's export model, then, still consists in big measure of renting out cheap labour and land to foreigners. Even China's most successful domestic computer firm, Lenovo, which acquired IBM's personal-computer business in 2004, contracts its production out to Taiwanese companies.
Yet the model may already be changing. Home-grown exporters, especially privately owned ones, are honing their skills in China's cut-throat markets. Huawei, a telecoms company, already supplies handsets to Vodafone, the world's biggest mobile operator. Bo Xilai, China's commerce minister, promises vigorous support for his country's native car industry, which has leapt from nowhere to capture a quarter of the domestic market and is now poised to start exporting small, cheap cars.
Not the bargain it was
The next question is whether more of the foreign-owned production networks that currently span Asia will be moved to China. There is some anecdotal evidence that this is happening, though statisticians cannot yet put their fingers on it.
A more identifiable trend is working in the opposite direction. As the World Bank's country director for China, David Dollar, points out, wages in China are now rising two or three times faster than in other low-wage Asian economies, and companies are having problems keeping talented staff. Encouraged by the government, companies are moving further inland to take advantage of cheaper labour. Yet the further inland they go, the less skilled the employees and the higher the transport costs to market.
Along China's eastern seaboard, where most of the manufacturing for export takes place, total monthly pay averages $250-350. Some parts of Thailand have higher average wages in manufacturing, but elsewhere in that country, as well as in the Philippines and Indonesia, manufacturing wages are $100-200 a month. Two decades ago all export-sector wages in these countries were higher than in China.
So some argue that in many sectors the era of the “China price”—exporters being able to offer the world's cheapest goods—will soon have run its course. CEPII highlights how the terms of trade have worked against China. Between 1995 and 2004, it finds, China's export prices rose by 4% whereas imports rose by 38%, a total deterioration in China's terms of trade of 24% (see chart 6). Today exporters enjoy more of the benefit of an undervalued renminbi. Yet as CEQ points out, brow-beating by an American government concerned about its bilateral trade deficit with China suggests that the exchange rate is likely to rise in future. It has already gone up by 6% since 2005.
Yet even for some of the cheapest goods, productivity increases have more than offset a deterioration in the terms of trade. A new paper by staff at America's Federal Reserve points out that between 1989 and 2005 China increased its share of exports to America in 41 industries, among them clothing and shoes. It is too early to write off China's export machine, even at the cheap end.
Either way, the consequences for China's neighbours depend on whereabouts on the manufacturing ladder they are. For those increasingly competing with China, the challenge is to make their manufacturing more sophisticated or their design more specialised. Last year America's Intel greatly expanded its research facilities in Malaysia that design microprocessors, motherboards and chipsets. A number of high-tech firms, particularly Japanese ones, are wary of putting such centres in China, fearing that their best design work will get pirated. But for countries such as Taiwan that are losing their manufacturing to China, the emphasis should be on fostering competition in the service industries that now account for the bulk of the economy. Hong Deshang of the Taiwan Institute for Economic Research says that his country's future should be in research and development, design, branding, financing and logistics.
For poorer countries, says Mr Dollar, China's rise opens up opportunities. Vietnam, which recently joined the WTO, is already a beneficiary, with annual growth accelerating to nearly 8%; on the plain between Hanoi and the coast, South Korean and Japanese assembly plants are springing up among the paddy fields to take advantage of the country's low wages. Extraordinarily cheap jeans recently sold by Tesco, Britain's biggest supermarket chain, were made from Chinese fabric stitched together in Bangladesh. Yet in much of developing Asia the starting point needs to be to make up for past omissions: opening up to trade, creating a favourable climate for investment and ensuring an adequate infrastructure for manufacturing. Mr Dollar argues that success will be determined more at the local than at the national level. After all, China's industrial revolution nearly 30 years ago began in a small handful of experimenting cities.
Consumers galore
Moreover, China's exports have to be put in context. Though very open to trade, China's economy, like America's, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports. The World Bank forecasts that this will be the first year in which China's imports will be growing by more than America's, becoming the biggest source of import growth in the world. Goldman Sachs, an investment bank, reckons that China's imports for domestic use are now roughly the same as those used in assembling exports, whereas five years ago they were only half as big. Much of what is imported is in the form of raw materials—oil, copper, gas, timber—to feed the China boom. The next article will look at the environmental implications of that boom.
China & Its Region: History Wars
History wars
Mar 29th 2007
From The Economist print edition
Whose stele is it?
PUSHING up through the late-winter snows on a hill above Manchuria's Tumen river are scatterings of old burial mounds. For centuries these tombs and others like them attracted little attention. Now they are at the heart of a bitter international tussle that has, for once, united North and South Korea against China.
The tombs are the work of the Koguryo kingdom (Gaogouli in Chinese) that flourished between 37BC and 668AD. At its height, Koguryo territory stretched all the way from central Manchuria (north-east China) to south of present-day Seoul. At Koguryo's former capital, near Ji'an in China's Jilin province, a magnificent stele praises the deeds of a fifth-century king.
For every Korean schoolchild, Koguryo was one of Korea's three founding kingdoms. At the heart of the kingdom, Mount Paektu, which today spans the Chinese border with North Korea, is considered to be the fount of Korean culture and myth: indeed, Kim Jong Il's official biography insists that the North Korean leader was born on its slopes.
Even a short stay in South Korea impresses on the visitor that the matter of Korea's bloodlines is not to be messed with. Yet in 2002 Beijing's Centre for the Study of Borderland History and Geography launched a project that reinforces what a growing number of Chinese historians have been “scientifically” insisting, despite sparse archaeological evidence: that the Koguryo kingdom shared its lineage and culture with the Chinese, and was eventually absorbed into the Chinese body politic. Koguryo, in short, was not Korean but Chinese.
South Korean historians have taken to the streets, demonstrating against Chinese ones. South and North Korea tried to block Chinese attempts to have Koguryo monuments (as well as Mount Paektu) listed by UNESCO as a world heritage site. The South Korean government has challenged the legitimacy of the 1909 Kando convention in which imperial Japan, which had just annexed Korea, gave China a chunk of Korean Manchuria in return for concessions. This year, at the winter Asian games in north-east China, South Korean skaters held up signs which read: “Mount Paektu is our territory.” China wants to hold the 2018 winter Olympic games on its slopes.
In February the South Korean government said it planned to revise high-school books to trace Korea's ancient history back by 1,000 years more than hitherto. The Kojoson kingdom, the new books say, began in 2333BC, deftly outmanoeuvring China's claims on the younger Koguryo, which covers much of the same territory. Never mind the spurious precision of the date, or the statement that “Kojoson was established by Tangun,” a mythical demi-god.
China's version of the past has everything to do with its present territory and borders. In Japan Focus, an online journal, Yonson Ahn of the University of Leipzig calls it China's “territorialisation of history”. But why should it suddenly matter so much now, in this bleak corner of the country? For the answer, look to North Korea. Should the regime of Kim Jong Il collapse and the two Koreas be unified, then China's own 2.2m ethnic Koreans might agitate to come into the fold—and other supposedly happy “minority nationalities”, such as Tibetans and Uighurs, might also get fidgety.
When your correspondent asked his ethnic Korean guide to the tombs which country he loved, the answer was quick and unequivocal: “China, of course! That is where I was born.” When asked which country his home town should be in if the peninsula were ever to be united, the answer was equally firm: Korea.
Mar 29th 2007
From The Economist print edition
Whose stele is it?
PUSHING up through the late-winter snows on a hill above Manchuria's Tumen river are scatterings of old burial mounds. For centuries these tombs and others like them attracted little attention. Now they are at the heart of a bitter international tussle that has, for once, united North and South Korea against China.
The tombs are the work of the Koguryo kingdom (Gaogouli in Chinese) that flourished between 37BC and 668AD. At its height, Koguryo territory stretched all the way from central Manchuria (north-east China) to south of present-day Seoul. At Koguryo's former capital, near Ji'an in China's Jilin province, a magnificent stele praises the deeds of a fifth-century king.
For every Korean schoolchild, Koguryo was one of Korea's three founding kingdoms. At the heart of the kingdom, Mount Paektu, which today spans the Chinese border with North Korea, is considered to be the fount of Korean culture and myth: indeed, Kim Jong Il's official biography insists that the North Korean leader was born on its slopes.
Even a short stay in South Korea impresses on the visitor that the matter of Korea's bloodlines is not to be messed with. Yet in 2002 Beijing's Centre for the Study of Borderland History and Geography launched a project that reinforces what a growing number of Chinese historians have been “scientifically” insisting, despite sparse archaeological evidence: that the Koguryo kingdom shared its lineage and culture with the Chinese, and was eventually absorbed into the Chinese body politic. Koguryo, in short, was not Korean but Chinese.
South Korean historians have taken to the streets, demonstrating against Chinese ones. South and North Korea tried to block Chinese attempts to have Koguryo monuments (as well as Mount Paektu) listed by UNESCO as a world heritage site. The South Korean government has challenged the legitimacy of the 1909 Kando convention in which imperial Japan, which had just annexed Korea, gave China a chunk of Korean Manchuria in return for concessions. This year, at the winter Asian games in north-east China, South Korean skaters held up signs which read: “Mount Paektu is our territory.” China wants to hold the 2018 winter Olympic games on its slopes.
In February the South Korean government said it planned to revise high-school books to trace Korea's ancient history back by 1,000 years more than hitherto. The Kojoson kingdom, the new books say, began in 2333BC, deftly outmanoeuvring China's claims on the younger Koguryo, which covers much of the same territory. Never mind the spurious precision of the date, or the statement that “Kojoson was established by Tangun,” a mythical demi-god.
China's version of the past has everything to do with its present territory and borders. In Japan Focus, an online journal, Yonson Ahn of the University of Leipzig calls it China's “territorialisation of history”. But why should it suddenly matter so much now, in this bleak corner of the country? For the answer, look to North Korea. Should the regime of Kim Jong Il collapse and the two Koreas be unified, then China's own 2.2m ethnic Koreans might agitate to come into the fold—and other supposedly happy “minority nationalities”, such as Tibetans and Uighurs, might also get fidgety.
When your correspondent asked his ethnic Korean guide to the tombs which country he loved, the answer was quick and unequivocal: “China, of course! That is where I was born.” When asked which country his home town should be in if the peninsula were ever to be united, the answer was equally firm: Korea.
China & Its Region: Smile diplomacy
Smile diplomacy
Mar 29th 2007
From The Economist print edition
Working magic along China's periphery
THE Chinese government calls it—pick your phrase—a “harmonised world” or a “new security concept”, but Shi Yinhong of the People's University in Beijing expresses it more felicitously: “smile diplomacy”. Whatever it is called, the calculus behind it is simple, if not usually spelt out. Without encouraging peace and prosperity around China's long borders there will be no peace and prosperity at home. And without peaceful development at home the Chinese Communist Party is toast. This calculus has become increasingly important over the past decade and may well apply for decades more yet.
China's smile diplomacy would have had fewer chances of working without the economic forces of globalisation drawing much of East and South-East Asia closer to it (see article). All the same, the transformation is astonishing. Just two decades ago China had no diplomatic relations with South Korea, Singapore and Indonesia, among others. On the Korean peninsula, the government in Seoul eyed China warily for being North Korea's chief backer. In South-East Asia suspicions of China ran high, thanks in big part to attempts under Mao Zedong to export leftist revolution and stir up overseas Chinese communities against their rulers. As for Vietnam, which for much of its history was a vassal of China, it was still smarting from a border war in 1979 launched (with American blessing) to “teach Vietnam a lesson” for unseating the genocidal (China-backed) Khmer Rouge regime next door in Cambodia. Towards Japan, China used a sense of victimhood to play upon Japanese war guilt in order to extract more aid from its rich neighbour.
Relations with the Soviet Union were only just starting to thaw after a long falling-out between the two former allies that had included border skirmishes along the Amur in 1973; at the peak, 1.5m troops were ranged along both sides of the 7,000-kilometre (4,400-mile) border. In the Himalayas, tensions had recently risen again in China's border dispute with India which in 1962 had spawned a high-altitude war.
As well as border disputes on land, China pursued maritime and island claims with Japan, and also laid claim to a great swathe of the South China Sea stretching down almost to the coast of Borneo. That set it against rival claimants to some or all of it: Vietnam, Malaysia, the Philippines and Brunei, as well as Taiwan. As recently as 1995, China alarmed its neighbours when its armed forces occupied one of the larger specks of rock, aptly named Mischief Reef, that formed part of the Spratly Islands (around which large oil deposits are reckoned to lie). China has occupied the Paracel Islands, disputed with Vietnam, since a bloody skirmish in 1974.
Mutual engagement
Yet now China has applied balm to old sores, particularly in South-East Asia. Perhaps, as David Shambaugh argues in “Power Shift”, the opening came after the Tiananmen Square massacre in 1989, when Asian neighbours (except, partly, Japan) failed to join the rest of the world in ostracising China. Instead, though critical of the regime in Beijing, Singapore's then prime minister, Lee Kuan Yew, led a South-East Asian push to engage China.
As Chinese diplomats tell it, the Asian financial crisis of 1997-98 was a watershed. Around Asia, currencies and stockmarkets were buckling as foreign and domestic capital fled. The crisis threatened to spread to China. Yet if China devalued, a further round of competitive devaluations across Asia would redouble the turmoil.
China had every reason not to want a devaluation, which would have imperilled a dire banking system and might even have brought down China's autocracy. The regime also had the means easily to resist one. By standing firm, then, it was doing itself a favour. But that action, and the aid and loans that China offered to other countries, helped ease the crisis. China developed a taste for getting respect.
Ties with South-East Asia have swiftly evolved since. Indeed, many of the understandings that have governed relations among the ten members of ASEAN—in particular, non-interference in each other's affairs—are dear to China's heart. In its dealings with ASEAN, the key events came earlier this decade. China undertook formally to settle its territorial disputes with ASEAN members not by force but through collective mechanisms for conflict resolution. And it became the first non-member to sign up to ASEAN's Treaty of Amity and Co-operation, an undertaking never to use force against its members for any reason. (India, South Korea, Japan and Pakistan have since also signed.) Thus the risk of hostilities in the South China Sea, which in the 1990s was seen as a spark for a broader conflagration, has greatly receded.
Lastly, China boldly proposed a China-ASEAN free-trade area (FTA), which was agreed on in 2002 and will be implemented in stages (with safeguards for ASEAN's poorer members) up to 2015. The deal has done much to reassure South-East Asia that China's rise will not come at the expense of the region's prosperity.
In the mid-1990s China moved to ease tensions with its land neighbours. The “Shanghai Five” grouping with the former Soviet Union countries that share borders with China—Russia, Kazakhstan, Kyrgyzstan and Tajikistan—was formed to resolve remaining border issues, reduce military tensions and build confidence. In 2001 the grouping became the Shanghai Co-operation Organisation (SCO), which Uzbekistan also joined.
In South Asia, an unprecedented development in recent years has been huge Chinese road and rail projects that will eventually link the country's remote western regions with the Arabian Sea (at the Pakistani port of Gwadar) and its south-western regions with the Bay of Bengal, via Myanmar. Ever closer strategic (and military) co-operation between China and Pakistan, you would expect, might alarm India. Yet relations between India and China have warmed. Annual trade is now worth $25 billion—still modest, but a big leap in recent years. India's nuclear test in 1998 angered the Chinese; some Indian politicians had suggested that the nuclear deterrent had been developed with China in mind. However, since the visit to Beijing in 2003 of India's then prime minister, Atal Behari Vajpayee, relations have been on a more cordial footing.
There is even some prospect of resolving what is almost China's last remaining—and massive—border dispute (one with tiny Bhutan also remains). India appears to have concluded that better relations with China will act as a constraint on China's support for Pakistan, India's old foe. The strengthening of a growing strategic partnership between India and the United States might also further push China towards co-operation with India.
Ties that bind
Through its dealings with neighbours, China has been drawn into a cat's cradle of regional and sub-regional co-operation. It has shed its deeply held reluctance to get involved in multilateral groupings. Indeed, Hu Jintao, the president, Wen Jiabao, the prime minister, and other leaders seem at times to be doing an interminable round of summit meetings, including ASEAN plus one (ie, ASEAN and China), ASEAN plus three (China, Japan and South Korea) and the Asia-Pacific Economic Co-operation (APEC, the only trade forum embracing both sides of the Pacific). On sunny Hainan island, China itself hosts the Boao Forum, which it wants to become an Asian version of the Davos World Economic Forum. And some policymakers in Beijing even want to turn the six-party talks hosted by China (with the United States, South Korea, North Korea, Japan and Russia) launched in 2003 to get North Korea to dismantle its nuclear weapons into a broader north-east Asian security forum.
Other groupings are gaining heft. In particular, the ASEAN Regional Forum, with more than two dozen participants (including the United States and the European Union) has become the principal platform for discussing security issues in the Asia-Pacific region. The SCO has evolved to embrace issues such as drug-smuggling, energy and now economic co-operation in Central Asia. Zhou Li, director-general of European and Central Asian affairs at China's foreign ministry, says there is a possibility that India, Mongolia and others will be invited to join. But fighting what China calls “terrorism, separatism and extremism” remains a central purpose of the SCO. Ethnic Uighurs from western Xinjiang province have long chafed at Chinese rule, and many have fled to Central Asian states.
For China, the broader advantages of engagement are becoming ever more obvious. Relatively stable relations with its neighbours act as protection against volatility in relations with the United States—particularly as that superpower is absent from many of the groupings. China's stock and influence is undeniably on the rise. In January, at the second East Asian Summit of 16 Asian nations held in the Philippines, the country's president, Gloria Macapagal Arroyo, declared, without any Orwellian irony: “We are happy to have China as our big brother.”
Yet whereas Chinese policymakers see these growing webs of interdependency as a way to ease their country's rise, some neighbours see them also as a constraint on the giant among them. “Despite a wariness of China, which has its roots in the past,” says Rodolfo Severino, a former Philippine foreign minister and secretary-general of ASEAN, “South-East Asia's only choice has been to engage China. Its rapid economic advances awe people, who see this big presence in their midst. Yet this argues for viewing China not with concern but with a sense of caution. And if you ask whether the process of engagement has had the effect of ‘socialising' China, the answer is certainly yes.”
Smile diplomacy, then, is working, but not everywhere. Later, this special report will look at north-east Asia (see article), where a divided Korean peninsula, historical and territorial tensions between China and Japan and the uncertain future of Taiwan suggest that the cold war simmers on.
Mar 29th 2007
From The Economist print edition
Working magic along China's periphery
THE Chinese government calls it—pick your phrase—a “harmonised world” or a “new security concept”, but Shi Yinhong of the People's University in Beijing expresses it more felicitously: “smile diplomacy”. Whatever it is called, the calculus behind it is simple, if not usually spelt out. Without encouraging peace and prosperity around China's long borders there will be no peace and prosperity at home. And without peaceful development at home the Chinese Communist Party is toast. This calculus has become increasingly important over the past decade and may well apply for decades more yet.
China's smile diplomacy would have had fewer chances of working without the economic forces of globalisation drawing much of East and South-East Asia closer to it (see article). All the same, the transformation is astonishing. Just two decades ago China had no diplomatic relations with South Korea, Singapore and Indonesia, among others. On the Korean peninsula, the government in Seoul eyed China warily for being North Korea's chief backer. In South-East Asia suspicions of China ran high, thanks in big part to attempts under Mao Zedong to export leftist revolution and stir up overseas Chinese communities against their rulers. As for Vietnam, which for much of its history was a vassal of China, it was still smarting from a border war in 1979 launched (with American blessing) to “teach Vietnam a lesson” for unseating the genocidal (China-backed) Khmer Rouge regime next door in Cambodia. Towards Japan, China used a sense of victimhood to play upon Japanese war guilt in order to extract more aid from its rich neighbour.
Relations with the Soviet Union were only just starting to thaw after a long falling-out between the two former allies that had included border skirmishes along the Amur in 1973; at the peak, 1.5m troops were ranged along both sides of the 7,000-kilometre (4,400-mile) border. In the Himalayas, tensions had recently risen again in China's border dispute with India which in 1962 had spawned a high-altitude war.
As well as border disputes on land, China pursued maritime and island claims with Japan, and also laid claim to a great swathe of the South China Sea stretching down almost to the coast of Borneo. That set it against rival claimants to some or all of it: Vietnam, Malaysia, the Philippines and Brunei, as well as Taiwan. As recently as 1995, China alarmed its neighbours when its armed forces occupied one of the larger specks of rock, aptly named Mischief Reef, that formed part of the Spratly Islands (around which large oil deposits are reckoned to lie). China has occupied the Paracel Islands, disputed with Vietnam, since a bloody skirmish in 1974.
Mutual engagement
Yet now China has applied balm to old sores, particularly in South-East Asia. Perhaps, as David Shambaugh argues in “Power Shift”, the opening came after the Tiananmen Square massacre in 1989, when Asian neighbours (except, partly, Japan) failed to join the rest of the world in ostracising China. Instead, though critical of the regime in Beijing, Singapore's then prime minister, Lee Kuan Yew, led a South-East Asian push to engage China.
As Chinese diplomats tell it, the Asian financial crisis of 1997-98 was a watershed. Around Asia, currencies and stockmarkets were buckling as foreign and domestic capital fled. The crisis threatened to spread to China. Yet if China devalued, a further round of competitive devaluations across Asia would redouble the turmoil.
China had every reason not to want a devaluation, which would have imperilled a dire banking system and might even have brought down China's autocracy. The regime also had the means easily to resist one. By standing firm, then, it was doing itself a favour. But that action, and the aid and loans that China offered to other countries, helped ease the crisis. China developed a taste for getting respect.
Ties with South-East Asia have swiftly evolved since. Indeed, many of the understandings that have governed relations among the ten members of ASEAN—in particular, non-interference in each other's affairs—are dear to China's heart. In its dealings with ASEAN, the key events came earlier this decade. China undertook formally to settle its territorial disputes with ASEAN members not by force but through collective mechanisms for conflict resolution. And it became the first non-member to sign up to ASEAN's Treaty of Amity and Co-operation, an undertaking never to use force against its members for any reason. (India, South Korea, Japan and Pakistan have since also signed.) Thus the risk of hostilities in the South China Sea, which in the 1990s was seen as a spark for a broader conflagration, has greatly receded.
Lastly, China boldly proposed a China-ASEAN free-trade area (FTA), which was agreed on in 2002 and will be implemented in stages (with safeguards for ASEAN's poorer members) up to 2015. The deal has done much to reassure South-East Asia that China's rise will not come at the expense of the region's prosperity.
In the mid-1990s China moved to ease tensions with its land neighbours. The “Shanghai Five” grouping with the former Soviet Union countries that share borders with China—Russia, Kazakhstan, Kyrgyzstan and Tajikistan—was formed to resolve remaining border issues, reduce military tensions and build confidence. In 2001 the grouping became the Shanghai Co-operation Organisation (SCO), which Uzbekistan also joined.
In South Asia, an unprecedented development in recent years has been huge Chinese road and rail projects that will eventually link the country's remote western regions with the Arabian Sea (at the Pakistani port of Gwadar) and its south-western regions with the Bay of Bengal, via Myanmar. Ever closer strategic (and military) co-operation between China and Pakistan, you would expect, might alarm India. Yet relations between India and China have warmed. Annual trade is now worth $25 billion—still modest, but a big leap in recent years. India's nuclear test in 1998 angered the Chinese; some Indian politicians had suggested that the nuclear deterrent had been developed with China in mind. However, since the visit to Beijing in 2003 of India's then prime minister, Atal Behari Vajpayee, relations have been on a more cordial footing.
There is even some prospect of resolving what is almost China's last remaining—and massive—border dispute (one with tiny Bhutan also remains). India appears to have concluded that better relations with China will act as a constraint on China's support for Pakistan, India's old foe. The strengthening of a growing strategic partnership between India and the United States might also further push China towards co-operation with India.
Ties that bind
Through its dealings with neighbours, China has been drawn into a cat's cradle of regional and sub-regional co-operation. It has shed its deeply held reluctance to get involved in multilateral groupings. Indeed, Hu Jintao, the president, Wen Jiabao, the prime minister, and other leaders seem at times to be doing an interminable round of summit meetings, including ASEAN plus one (ie, ASEAN and China), ASEAN plus three (China, Japan and South Korea) and the Asia-Pacific Economic Co-operation (APEC, the only trade forum embracing both sides of the Pacific). On sunny Hainan island, China itself hosts the Boao Forum, which it wants to become an Asian version of the Davos World Economic Forum. And some policymakers in Beijing even want to turn the six-party talks hosted by China (with the United States, South Korea, North Korea, Japan and Russia) launched in 2003 to get North Korea to dismantle its nuclear weapons into a broader north-east Asian security forum.
Other groupings are gaining heft. In particular, the ASEAN Regional Forum, with more than two dozen participants (including the United States and the European Union) has become the principal platform for discussing security issues in the Asia-Pacific region. The SCO has evolved to embrace issues such as drug-smuggling, energy and now economic co-operation in Central Asia. Zhou Li, director-general of European and Central Asian affairs at China's foreign ministry, says there is a possibility that India, Mongolia and others will be invited to join. But fighting what China calls “terrorism, separatism and extremism” remains a central purpose of the SCO. Ethnic Uighurs from western Xinjiang province have long chafed at Chinese rule, and many have fled to Central Asian states.
For China, the broader advantages of engagement are becoming ever more obvious. Relatively stable relations with its neighbours act as protection against volatility in relations with the United States—particularly as that superpower is absent from many of the groupings. China's stock and influence is undeniably on the rise. In January, at the second East Asian Summit of 16 Asian nations held in the Philippines, the country's president, Gloria Macapagal Arroyo, declared, without any Orwellian irony: “We are happy to have China as our big brother.”
Yet whereas Chinese policymakers see these growing webs of interdependency as a way to ease their country's rise, some neighbours see them also as a constraint on the giant among them. “Despite a wariness of China, which has its roots in the past,” says Rodolfo Severino, a former Philippine foreign minister and secretary-general of ASEAN, “South-East Asia's only choice has been to engage China. Its rapid economic advances awe people, who see this big presence in their midst. Yet this argues for viewing China not with concern but with a sense of caution. And if you ask whether the process of engagement has had the effect of ‘socialising' China, the answer is certainly yes.”
Smile diplomacy, then, is working, but not everywhere. Later, this special report will look at north-east Asia (see article), where a divided Korean peninsula, historical and territorial tensions between China and Japan and the uncertain future of Taiwan suggest that the cold war simmers on.
China & Its Region: Reaching for a Renaissance
Reaching for a renaissance
Mar 29th 2007
From The Economist print edition
So far the world has come to China, but now a rising China is beginning to reach out to the world, starting with Asia, says Dominic Ziegler. Is that a good thing?
THE China story since Deng Xiaoping opened the country's doors three decades ago has by and large been one of discovery by the outside world. The discovery of cheap land and labour drew in more than $500 billion of foreign money (mainly from Asia) that today drives China's export juggernaut; now foreign firms are crawling over China's domestic market, hard to crack but perhaps lucrative in places. Rather newer is the cultural discovery by the West and by the richer parts of Asia of a certain “China chic”: the lush, epic cinematography of Zhang Yimou; the hyper-hip nightlife of a reborn Shanghai; and the Western infatuation with modern Chinese art, whose prices now leave a cynical smile on many a painter's face.
The world coming to China: the apogee will come when it hosts the Olympics next year in Beijing, a capital now dotted with signature buildings by the most fashionable architects rushing to get finished in time—from the Herzog & de Meuron stadium resembling a bird's nest to a titanium-and-glass opera house (the world's largest, naturally) by Paul Andreu.
But a more potent story that is only just starting to be articulated is that China is going out to the world. Indeed, China is rising—some say has already risen—to become the newest great power. Do not yet think of it as a global one. Even if commercial and diplomatic tentacles stretch increasingly round the world, the main site of China's power, for decades to come, will be in its Asian backyard.
Go back ten years and Chinese officials bristled at the notion of a rising power. They had surviving reserves of insecurity and cherished a historical sense of victimhood. After a long twilight, Deng, the paramount leader, had in February 1997 gone to meet Marx, leaving the Chinese Communist Party with unanswered questions about the stability of the “third-generation” succession, led by President Jiang Zemin. China was to get Hong Kong back in July 1997, yet even as one small territory was coming back, Taiwan, the great unfinished business of China's civil war, threatened to drift away in the direction of independence. China's bullying attempts to stop the drift—it had lobbed missiles into the seas around the island—had met with a show of American force when President Bill Clinton dispatched two aircraft-carrier groups. Hawkish Western circles were debating how best to “contain” China.
In this atmosphere China's ruling establishment—in many areas narrow, prickly and distrustful of the outside world—played down China's power. At the time an assistant foreign minister delivered a stinging lecture to your correspondent. The Economist, he said, was “exaggerating China's economic development, leading people to conclude that the rise of China will inevitably unbalance the region. Such arguments don't hold water. China is not any kind of power. It is not at present. And it will not be one in future.”
Times change. The favourite reading at the moment among a younger, more cosmopolitan generation of Chinese diplomats is “Power Shift”, a collection of essays by mainly American-based academics. Its premise is that the tectonic plates that have defined Asia for the past half-century are moving, and that China is the chief agent of change as it resumes its historical role as Asia's central actor. Gone, largely, are China's fears of encirclement. “Impossible!” a senior Chinese diplomat laughs. “China is now far too powerful to be contained.” One of Deng Xiaoping's tenets—that the country should, as a Chinese saying has it, disguise its ambition and hide its claws—seems to have been buried.
But what kind of power is China becoming? Some Western hawks find it unsettling that this is even being debated within China, but it is better to talk about it than not.
Only once a decade or so does a piece of television programming break through the variety shows and the propaganda to capture China's attention. A hugely popular 12-part series on China Central Television has just done so, showing how nine countries rose to prominence, beginning with Portugal in the 15th century and ending with the United States in the 20th. The conclusion, as befits state television, delivers an explicit political message, but one that may surprise outsiders. In finding plenty of lessons to learn from, the series attaches greater importance to social stability and peaceful foreign relations than to jingoism and brute military strength.
Indeed, a propos of the television series, the same senior Chinese diplomat mentioned earlier argued energetically that pacifist Japan's post-war rise was a model of good-neighbourliness that China itself could usefully emulate. That is intriguing. Much of the present bad blood between China and Japan has to do with China's constant harping on Japan's brutal deeds in the first half of the 20th century while glossing over its positive regional influence in the second half.
In a forthcoming book about China, David Lampton of the School of Advanced International Studies at Johns Hopkins University argues that nations define and achieve their goals using three means: coercion, material inducement or intellectual motivation. Put more bluntly, that means guns, money and ideas. How China blends the three, and how the rest of the world perceives the process, will more than anything shape the future course of Asia and beyond.
Velvet glove or mailed fist?
America, more than most countries, sees Chinese power as coercive. In late February Vice-President Dick Cheney on a visit to Australia became the most senior administration official to express grave concern about China's military build-up. The military budget has been growing at double-digit rates for years, with an 18% rise planned for this year. The People's Liberation Army is coy in the extreme about its capabilities and intentions, but in January a missile had been sent into space to destroy an old weather satellite. China' s military policies, Mr Cheney said, were at odds with the country's stated peaceful aims—suggesting perhaps that he did not really believe in those aims.
For now, though, it is clear that President Hu Jintao and the rest of the Chinese “fourth-generation” leadership are seeking to soothe neighbours—even Taiwan—by emphasising money and ideas over guns. As the next article will explain, this policy has had a transformational effect on China's relations in much of Asia, mostly for the better.
Yet suspicions remain. Mr Hu may have embraced the notion of China's “peaceful rise”, first advanced by Chinese academics in 2003, yet even the phrase itself is unsettling. As Lee Kuan Yew, Singapore's former prime minister and now its “minister mentor”, puts it: “‘Peaceful rise' is a contradiction in terms. I told China's leaders that. I said: ‘Why not call it a renaissance, a return to a golden age when poetry, painting, clothes, music and drama flourished?'”
China's economic rise is certainly impressive. The economy's growth—an average of 10% a year since 1990—is not really more remarkable than the earlier rise of other Asian economies, led by Japan, but there is a difference: the huge size of China's population, at 1.3 billion. In 2005 China overtook Japan in the volume of trade it conducts. Depending on how you measure size and guess at future growth rates, it may overtake both Germany and Japan within 15 years to become the world's second-biggest economy. Measured at purchasing-power parity, China's share of the world economy is already much closer to the rich countries' (see chart 1). But bear in mind that the average Chinese income remains low. If China is on its way to becoming a superpower, it will be the world's poorest one yet.
Opinion polls suggest that the vast majority of Chinese see their rise as nothing that should trouble others. For many of them it merely marks a return to historical norms. Angus Maddison, an economic historian at the University of Groningen, has estimated that between 1600 and the early 19th century China accounted for between a quarter and a third of global output (see chart 2). At that time China's agriculture was more advanced than the West's, its cities bigger and more literate and its ruling classes more meritocratic. The country had also proved itself capable of long-distance exploration by sea. Another historian, Niall Ferguson, reckons that what went so spectacularly wrong for China then is more remarkable and worthy of investigation than why things should now be going right.
But what is the nature of China's rising economic power now? There is room for misperceptions. Policymakers in Washington, DC, are alarmed by China's export strength and its ballooning trade surplus. China is lambasted for having mercantilist policies that artificially boost exports, depress the Chinese currency, restrict imports and widen America's trade and current-account deficits.
In several respects that view is wrong. With a trade-to-GDP ratio of around 70% and a sea of foreign investment, China is one of the world's most open economies. Much of the growth in America's bilateral deficit with China reflects a shift in low-cost manufacturing from other parts of Asia to the Chinese mainland. Certainly China's currency is undervalued, having followed the dollar down since 2002. But that is reinforcing inflationary pressures, particularly in wages, so China's advantage as always the lowest-cost producer can no longer be taken for granted.
America's emphasis on exports misses the point about China's economic power. That power comes not so much from being a seller of things but increasingly from being a buyer, an investor and a provider of aid, in Asia and beyond. One Chinese diplomat puts it thus: “Imports: that's real diplomacy, because it means you're attractive to others. It means other countries need you, not that you need them.” This subtle understanding sets China in stark contrast to how Japan viewed the world during its post-war rise.
With this new kind of power, the economic and geopolitical sides are ever more intertwined. China's presence as a commercial force is rapidly being felt around the world, through its growing investments overseas and through an apparently insatiable hunger for resources to fuel the industrial revolution at home. The shock troops of this force are there to see in China's main airports: planeloads of oil-drillers, pipe-layers and construction workers, in company overalls and hard hats, off to work on oil rigs or build ports, highways or railways in South-East Asia, Africa, Latin America or the Middle East. Chinese workers are also moving into other countries in less formal ways. In the northern birch forests of Mongolia, unofficial groups of them are cutting down trees for chopsticks. In poor northern Laos, thousands of Chinese labourers have come across from neighbouring Yunnan to grow corn and sugarcane for export back to China; traditional slash-and-burn agriculture is giving way to polytunnels and large-scale market gardening.
This is not the first time that mainland Chinese have fanned out to work the world's natural riches. In the 19th century hundreds of thousands of coolies—indentured workers lured by Chinese and Western recruiters using a greater or lesser degree of deception—toiled in some of the world's worst hellholes: the guano deposits of Peru, the canebrakes of Cuba or the gold mines of South Africa. Now the Chinese are back in some of the same parts of the world. The difference this time is that Chinese capital, usually state-owned, stands behind them.
Trying to charm
One of the advantages of state-led development is that China can entice countries with packages of corporate investment, cheap loans and other aid goodies. This way China has rapidly acquired interests and influence across swathes of South-East Asia, Africa and Central Asia. China's outward foreign direct investment more than quintupled in the first half of the decade, to $11.3 billion in 2005, and will have risen sharply since. Once a big aid recipient, China hosted a summit of 48 African leaders in Beijing last November, promising $5.5 billion in aid for Africa. According to a recent report by the Institute for Public Policy Research in London, China has become Africa's third-biggest trading partner after America and France.
China is also increasingly investing in the rich world. To some Americans, in particular, this is distasteful. In 2005, citing national-security concerns, Congress succeeded in thwarting the $19 billion bid by China National Offshore Oil Corporation (CNOOC) for Unocal, an American oil major with reserves in Asia. Competing resource companies from the West often claim that Chinese companies outbid them in third markets, using cheap, state-subsidised funds. Yet in growing numbers of countries, rich and poor, the Chinese presence is welcomed for bringing jobs, cash and infrastructure.
Australia has received more Chinese investment than most Western countries, much of it in mining. It is criticised in America and Europe for cosying up to a dictatorship. “We're also strong on the human-rights front,” an Australian diplomat says in defence. “But there's stuff to be done in the meantime.” When a senior Canadian official is asked what conclusions Chinese resource companies should draw from CNOOC's experience, he replies instantly: “Come to Canada.”
China's rise is a global phenomenon, but the rest of this special report will concentrate on its relations with Asia. After all, the region is on its doorstep. “If we can't get respect in Asia,” says a Chinese policymaker, “we can't get on in the world. If we can't have a peaceful and prosperous backyard, then there can't be any rise of China.”
In vying for influence in Asia, China has many competitors. They include India, rising in its idiosyncratic way; Japan, seeking a more robust foreign policy in the face of China's rise; Russia, a resource giant, even if a diplomatic minnow in Asia; the ten countries that make up the Association of South-East Asian Nations (ASEAN); and—still the top dog even if distracted in the Middle East—America.
It is in Asia that America risks falling prey to a final misperception. As Mr Lampton points out, just as Americans overstate China's export prowess as a source of economic power, so they underestimate China's intellectual, cultural and diplomatic influence. If policymakers view China's power “in substantially coercive terms when it is actually growing most rapidly in the economic and intellectual domains,” he writes, “they will be playing the wrong game, on the wrong field, with the wrong team.”
Mar 29th 2007
From The Economist print edition
So far the world has come to China, but now a rising China is beginning to reach out to the world, starting with Asia, says Dominic Ziegler. Is that a good thing?
THE China story since Deng Xiaoping opened the country's doors three decades ago has by and large been one of discovery by the outside world. The discovery of cheap land and labour drew in more than $500 billion of foreign money (mainly from Asia) that today drives China's export juggernaut; now foreign firms are crawling over China's domestic market, hard to crack but perhaps lucrative in places. Rather newer is the cultural discovery by the West and by the richer parts of Asia of a certain “China chic”: the lush, epic cinematography of Zhang Yimou; the hyper-hip nightlife of a reborn Shanghai; and the Western infatuation with modern Chinese art, whose prices now leave a cynical smile on many a painter's face.
The world coming to China: the apogee will come when it hosts the Olympics next year in Beijing, a capital now dotted with signature buildings by the most fashionable architects rushing to get finished in time—from the Herzog & de Meuron stadium resembling a bird's nest to a titanium-and-glass opera house (the world's largest, naturally) by Paul Andreu.
But a more potent story that is only just starting to be articulated is that China is going out to the world. Indeed, China is rising—some say has already risen—to become the newest great power. Do not yet think of it as a global one. Even if commercial and diplomatic tentacles stretch increasingly round the world, the main site of China's power, for decades to come, will be in its Asian backyard.
Go back ten years and Chinese officials bristled at the notion of a rising power. They had surviving reserves of insecurity and cherished a historical sense of victimhood. After a long twilight, Deng, the paramount leader, had in February 1997 gone to meet Marx, leaving the Chinese Communist Party with unanswered questions about the stability of the “third-generation” succession, led by President Jiang Zemin. China was to get Hong Kong back in July 1997, yet even as one small territory was coming back, Taiwan, the great unfinished business of China's civil war, threatened to drift away in the direction of independence. China's bullying attempts to stop the drift—it had lobbed missiles into the seas around the island—had met with a show of American force when President Bill Clinton dispatched two aircraft-carrier groups. Hawkish Western circles were debating how best to “contain” China.
In this atmosphere China's ruling establishment—in many areas narrow, prickly and distrustful of the outside world—played down China's power. At the time an assistant foreign minister delivered a stinging lecture to your correspondent. The Economist, he said, was “exaggerating China's economic development, leading people to conclude that the rise of China will inevitably unbalance the region. Such arguments don't hold water. China is not any kind of power. It is not at present. And it will not be one in future.”
Times change. The favourite reading at the moment among a younger, more cosmopolitan generation of Chinese diplomats is “Power Shift”, a collection of essays by mainly American-based academics. Its premise is that the tectonic plates that have defined Asia for the past half-century are moving, and that China is the chief agent of change as it resumes its historical role as Asia's central actor. Gone, largely, are China's fears of encirclement. “Impossible!” a senior Chinese diplomat laughs. “China is now far too powerful to be contained.” One of Deng Xiaoping's tenets—that the country should, as a Chinese saying has it, disguise its ambition and hide its claws—seems to have been buried.
But what kind of power is China becoming? Some Western hawks find it unsettling that this is even being debated within China, but it is better to talk about it than not.
Only once a decade or so does a piece of television programming break through the variety shows and the propaganda to capture China's attention. A hugely popular 12-part series on China Central Television has just done so, showing how nine countries rose to prominence, beginning with Portugal in the 15th century and ending with the United States in the 20th. The conclusion, as befits state television, delivers an explicit political message, but one that may surprise outsiders. In finding plenty of lessons to learn from, the series attaches greater importance to social stability and peaceful foreign relations than to jingoism and brute military strength.
Indeed, a propos of the television series, the same senior Chinese diplomat mentioned earlier argued energetically that pacifist Japan's post-war rise was a model of good-neighbourliness that China itself could usefully emulate. That is intriguing. Much of the present bad blood between China and Japan has to do with China's constant harping on Japan's brutal deeds in the first half of the 20th century while glossing over its positive regional influence in the second half.
In a forthcoming book about China, David Lampton of the School of Advanced International Studies at Johns Hopkins University argues that nations define and achieve their goals using three means: coercion, material inducement or intellectual motivation. Put more bluntly, that means guns, money and ideas. How China blends the three, and how the rest of the world perceives the process, will more than anything shape the future course of Asia and beyond.
Velvet glove or mailed fist?
America, more than most countries, sees Chinese power as coercive. In late February Vice-President Dick Cheney on a visit to Australia became the most senior administration official to express grave concern about China's military build-up. The military budget has been growing at double-digit rates for years, with an 18% rise planned for this year. The People's Liberation Army is coy in the extreme about its capabilities and intentions, but in January a missile had been sent into space to destroy an old weather satellite. China' s military policies, Mr Cheney said, were at odds with the country's stated peaceful aims—suggesting perhaps that he did not really believe in those aims.
For now, though, it is clear that President Hu Jintao and the rest of the Chinese “fourth-generation” leadership are seeking to soothe neighbours—even Taiwan—by emphasising money and ideas over guns. As the next article will explain, this policy has had a transformational effect on China's relations in much of Asia, mostly for the better.
Yet suspicions remain. Mr Hu may have embraced the notion of China's “peaceful rise”, first advanced by Chinese academics in 2003, yet even the phrase itself is unsettling. As Lee Kuan Yew, Singapore's former prime minister and now its “minister mentor”, puts it: “‘Peaceful rise' is a contradiction in terms. I told China's leaders that. I said: ‘Why not call it a renaissance, a return to a golden age when poetry, painting, clothes, music and drama flourished?'”
China's economic rise is certainly impressive. The economy's growth—an average of 10% a year since 1990—is not really more remarkable than the earlier rise of other Asian economies, led by Japan, but there is a difference: the huge size of China's population, at 1.3 billion. In 2005 China overtook Japan in the volume of trade it conducts. Depending on how you measure size and guess at future growth rates, it may overtake both Germany and Japan within 15 years to become the world's second-biggest economy. Measured at purchasing-power parity, China's share of the world economy is already much closer to the rich countries' (see chart 1). But bear in mind that the average Chinese income remains low. If China is on its way to becoming a superpower, it will be the world's poorest one yet.
Opinion polls suggest that the vast majority of Chinese see their rise as nothing that should trouble others. For many of them it merely marks a return to historical norms. Angus Maddison, an economic historian at the University of Groningen, has estimated that between 1600 and the early 19th century China accounted for between a quarter and a third of global output (see chart 2). At that time China's agriculture was more advanced than the West's, its cities bigger and more literate and its ruling classes more meritocratic. The country had also proved itself capable of long-distance exploration by sea. Another historian, Niall Ferguson, reckons that what went so spectacularly wrong for China then is more remarkable and worthy of investigation than why things should now be going right.
But what is the nature of China's rising economic power now? There is room for misperceptions. Policymakers in Washington, DC, are alarmed by China's export strength and its ballooning trade surplus. China is lambasted for having mercantilist policies that artificially boost exports, depress the Chinese currency, restrict imports and widen America's trade and current-account deficits.
In several respects that view is wrong. With a trade-to-GDP ratio of around 70% and a sea of foreign investment, China is one of the world's most open economies. Much of the growth in America's bilateral deficit with China reflects a shift in low-cost manufacturing from other parts of Asia to the Chinese mainland. Certainly China's currency is undervalued, having followed the dollar down since 2002. But that is reinforcing inflationary pressures, particularly in wages, so China's advantage as always the lowest-cost producer can no longer be taken for granted.
America's emphasis on exports misses the point about China's economic power. That power comes not so much from being a seller of things but increasingly from being a buyer, an investor and a provider of aid, in Asia and beyond. One Chinese diplomat puts it thus: “Imports: that's real diplomacy, because it means you're attractive to others. It means other countries need you, not that you need them.” This subtle understanding sets China in stark contrast to how Japan viewed the world during its post-war rise.
With this new kind of power, the economic and geopolitical sides are ever more intertwined. China's presence as a commercial force is rapidly being felt around the world, through its growing investments overseas and through an apparently insatiable hunger for resources to fuel the industrial revolution at home. The shock troops of this force are there to see in China's main airports: planeloads of oil-drillers, pipe-layers and construction workers, in company overalls and hard hats, off to work on oil rigs or build ports, highways or railways in South-East Asia, Africa, Latin America or the Middle East. Chinese workers are also moving into other countries in less formal ways. In the northern birch forests of Mongolia, unofficial groups of them are cutting down trees for chopsticks. In poor northern Laos, thousands of Chinese labourers have come across from neighbouring Yunnan to grow corn and sugarcane for export back to China; traditional slash-and-burn agriculture is giving way to polytunnels and large-scale market gardening.
This is not the first time that mainland Chinese have fanned out to work the world's natural riches. In the 19th century hundreds of thousands of coolies—indentured workers lured by Chinese and Western recruiters using a greater or lesser degree of deception—toiled in some of the world's worst hellholes: the guano deposits of Peru, the canebrakes of Cuba or the gold mines of South Africa. Now the Chinese are back in some of the same parts of the world. The difference this time is that Chinese capital, usually state-owned, stands behind them.
Trying to charm
One of the advantages of state-led development is that China can entice countries with packages of corporate investment, cheap loans and other aid goodies. This way China has rapidly acquired interests and influence across swathes of South-East Asia, Africa and Central Asia. China's outward foreign direct investment more than quintupled in the first half of the decade, to $11.3 billion in 2005, and will have risen sharply since. Once a big aid recipient, China hosted a summit of 48 African leaders in Beijing last November, promising $5.5 billion in aid for Africa. According to a recent report by the Institute for Public Policy Research in London, China has become Africa's third-biggest trading partner after America and France.
China is also increasingly investing in the rich world. To some Americans, in particular, this is distasteful. In 2005, citing national-security concerns, Congress succeeded in thwarting the $19 billion bid by China National Offshore Oil Corporation (CNOOC) for Unocal, an American oil major with reserves in Asia. Competing resource companies from the West often claim that Chinese companies outbid them in third markets, using cheap, state-subsidised funds. Yet in growing numbers of countries, rich and poor, the Chinese presence is welcomed for bringing jobs, cash and infrastructure.
Australia has received more Chinese investment than most Western countries, much of it in mining. It is criticised in America and Europe for cosying up to a dictatorship. “We're also strong on the human-rights front,” an Australian diplomat says in defence. “But there's stuff to be done in the meantime.” When a senior Canadian official is asked what conclusions Chinese resource companies should draw from CNOOC's experience, he replies instantly: “Come to Canada.”
China's rise is a global phenomenon, but the rest of this special report will concentrate on its relations with Asia. After all, the region is on its doorstep. “If we can't get respect in Asia,” says a Chinese policymaker, “we can't get on in the world. If we can't have a peaceful and prosperous backyard, then there can't be any rise of China.”
In vying for influence in Asia, China has many competitors. They include India, rising in its idiosyncratic way; Japan, seeking a more robust foreign policy in the face of China's rise; Russia, a resource giant, even if a diplomatic minnow in Asia; the ten countries that make up the Association of South-East Asian Nations (ASEAN); and—still the top dog even if distracted in the Middle East—America.
It is in Asia that America risks falling prey to a final misperception. As Mr Lampton points out, just as Americans overstate China's export prowess as a source of economic power, so they underestimate China's intellectual, cultural and diplomatic influence. If policymakers view China's power “in substantially coercive terms when it is actually growing most rapidly in the economic and intellectual domains,” he writes, “they will be playing the wrong game, on the wrong field, with the wrong team.”
Business in Japan: JapAnglo-Saxon capitalism
JapAnglo-Saxon capitalism
Nov 29th 2007
From The Economist print edition
Have Japanese business practices changed enough?
TO AN observer watching a Toyota Prius drive by, the car's hybrid propulsion system is invisible, but its improved performance shows up clearly in its fuel-consumption figures. The same applies to Japan's new hybrid industrial model. Outsiders cannot always tell how much a particular company has changed the way it does things. But the improvement in Japan's economic performance is clear, and at least some of it is due to the adoption of the hybrid model.
“Japan has both embraced and rejected American capitalism,” observes Mr Vogel of the University of California, Berkeley. Having identified the American style of capitalism as a possible model, Japan's business leaders were highly selective about which aspects of it to adopt, he says. Under the resulting hybrid model, Japanese companies may well maintain close co-operation with employees yet at the same time profess support for shareholder value; remain committed to lifetime employment but also offer merit-based pay and share options; and engage more fully with the global economy yet keep certain activities in Japan and replicate some Japanese practices even in foreign markets.
How prevalent is the hybrid model? Gregory Jackson, an expert on international comparisons of corporate governance at King's College London, and Hideaki Miyajima of Waseda University analysed data on 723 Japanese companies gathered by the finance ministry and identified three clusters: 24% had adopted hybrid models; 42% were traditional Japanese firms; and the other 34% were somewhere in-between.
Of the firms with hybrid models, 94% offered lifetime employment, 45% merit-based pay and 39% employee stock options. These companies were more likely to have outsiders on the boards than traditional firms, made more use of corporate bonds as a source of finance and less use of banks, and had a high level of foreign or institutional share ownership. This group included many large, internationally oriented firms, such as Toyota, Canon, Yamaha, NTT DoCoMo, Hitachi and Mitsubishi. Toyota, regarded as an archetype of corporate Japan in many respects, is a typical example: it has switched from bank financing to bonds, has a high level of foreign ownership and has introduced stock options. But it remains committed to lifetime employment and has resisted putting outsiders on the board.
All of the traditional Japanese firms offered lifetime employment and none merit-based pay; 19% awarded employee share options. They generally had boards consisting entirely of insiders, relied on bank finance rather than bonds and had few foreigners and institutional investors holding their shares. They were typically involved in industries such as construction, chemicals, textiles, machinery and food. Companies in the third cluster retained traditional ownership and finance structures, but some firms had adopted more market-oriented employment policies. Firms in this group included retailers, technology firms and family-controlled companies in a variety of industries.
Illustration by JacOn average, notes Mr Jackson, hybrid companies performed significantly better (measured by return on assets) than traditional Japanese firms or those in the intermediate group. Evidently the hybrid model allows firms to bring their distinctive competitive strengths to the wider world. And although they accounted for only 24% of Japanese firms, this included a disproportionate number of Japan's industrial giants, so the hybrid cluster accounted for 67% of the workforce.
This raises the question of how stable the hybrid model is, and whether it is just a step on the way to a total embrace of the Anglo-Saxon model. Mr Jackson points out that the number of companies introducing the American-style committee system has begun to slow and the debate on corporate-board reform has cooled. Now that the economy has started to recover, the decline in cross-shareholdings has halted and even gone into reverse. All of this, he suggests, implies that the hybrid model is stable, and will not prove to be just a halfway house on the way to an American model.
Halfway to America
“We don't have to go all the way to America,” says Yukio Yanase, deputy president of Orix, a financial-services firm whose founder, Yoshihiko Miyauchi, is a strong proponent of more American-style corporate governance. “At Orix we often say: ‘Let's go to Hawaii.' It lies in the middle,” explains Mr Yanase. Appropriately enough, Orix is listed in both Tokyo and New York, and half of its board members are outsiders.
The idea of a middle way that can act as a model for other countries is seductive. “A lot of Asian countries are saying: ‘We hope Japan will succeed, so we have a new model that combines capitalism with social values',” says Hirotaka Takeuchi of Hitotsubashi University. Does that mean it is something like the European model? Yes, but not identical, because taxes are lower and the state is smaller in Japan—and unlike in France, Germany or Scandinavia, companies provide a lot of social support.
Another difference with many parts of Europe is that in Japan business is regarded as a respectable pursuit that provides social goods rather than a necessary evil, notes Mr Marra of A.T. Kearney. But he thinks taking the middle way would be a mistake. Unless it becomes more like America, he argues, Japan risks ending up like Switzerland: comfortable and complacent, but irrelevant. Japan is undoubtedly changing, he argues, but not fast enough.
Other Japan-watchers express similar concerns. Japan may be the world's second-biggest economy and may represent around half the entire Asian economy, but it could yet become an economic backwater as America and Europe focus instead on China, says Mr Jones of the OECD. The danger is that having bypassed Japan since the early 1990s, foreign companies might not even notice that the Japanese economy is recovering. Mr Porté of Shinsei Bank says faster reform is needed because Japan is changing more slowly than the rest of the world. “China and India are changing very rapidly, so we need to be concerned about keeping up with all of that,” he says. “The job is not finished, but we risk being stuck.”
Kuniko Inoguchi, a member of parliament and a former minister in the Koizumi government, does not think that the pace of reform has slowed. Instead, she says, the focus has shifted to fine-tuning the impact of the reforms. There is no question of backsliding, she insists: “companies now see there is no way to go back” and are continuing with their own programmes of internal reform.
Mr Vogel goes further, arguing that Mr Koizumi's influence has been overstated and that his departure does not mean that change has halted. “The most important reforms are technocratic things that just plod along, so that process will continue,” he says. He even argues that it is dangerous to reform too fast, and that Japan has been sensible to adopt reforms in a selective, incremental way.
Where will corporate Japan be in a decade's time? The optimistic scenario, says Mr Chhor of McKinsey, is that Japan's hybrid model will enable it to re-emerge as global leader, driving progress in electronics and environmental technology in particular. “That would provide the country with the vitality to address the two-Japans challenge,” he says, referring to the divergence between rich and poor, global and local companies, pensioners versus workers, regular and non-regular employees, and rural and urban communities.
The pessimistic scenario is that the slow grind of reform will continue, but without providing enough growth to enable the government to tackle the country's huge debt as the population ages and the tax base shrinks. “I am concerned that we'll have slower growth and weak consumption, and that Japan's problems will simply become exacerbated,” says Mr Porté. He is particularly concerned that Japan's brightest youngsters may leave the country in search of better opportunities.
The actual outcome will probably be somewhere in-between: a slow muddling-through, suggests Gerald Curtis of Columbia University. But there are two things that could change the picture dramatically. The first is that the demographic shift and the resulting labour shortage might actually help to spur faster reform and new technological developments. “Rather than being the biggest threat, the retirement of the boomers is the biggest opportunity,” says Mr Takeuchi.
Out of misfortune
When Japan is faced with a crisis, it often responds by devising new technologies, he notes. “So this will be a big impetus for Japan to move into robotics, nanotech and so forth to replace manpower. I'm really looking forward to it.” Atsushi Seike of Keio University recalls that Japan has successfully adapted to big changes in the past. And he points out that China and South Korea also have ageing populations, though they are further behind—so if Japan can solve the problem, it could provide a model for those countries.
The second intriguing possibility is that the pace and nature of technological change might shift in Japan's favour. It is clearly less successful than America in producing internet start-ups and software companies. But if the next big technological wave involves clean-energy technology, as seems likely, Japan could have an advantage. Once it is a matter of incrementally refining new energy technologies and manufacturing them in vast quantities, Japan will be very well placed. After all, it is already the leading manufacturer of hybrid cars and solar panels.
Inevitably, Japanese observers tend to stress how far their country has come over the past decade, while foreigners emphasise how far it still has to go. Yet there is general agreement that reform will continue; that the hybrid model will be developed further and refined as more companies adopt it; but that this does not mean Japan will drop its way of doing things in favour of an all-American approach.
Look at the Toyota Prius again. Its hybrid design is also being refined. The next version, due in 2010, will be a “plug-in” hybrid with a better battery pack that will be able to make short trips entirely on electric power. Toyota's Mr Cho says he has recently ridden in a prototype, “and believe me, it's wonderful.” The hybrid design will also form the basis of cars powered by fuel cells. To be sure, some people think cars should simply go all-electric, just as some people think that Japan should go all-American. But there are plenty, too, who believe that the future is hybrid.
Nov 29th 2007
From The Economist print edition
Have Japanese business practices changed enough?
TO AN observer watching a Toyota Prius drive by, the car's hybrid propulsion system is invisible, but its improved performance shows up clearly in its fuel-consumption figures. The same applies to Japan's new hybrid industrial model. Outsiders cannot always tell how much a particular company has changed the way it does things. But the improvement in Japan's economic performance is clear, and at least some of it is due to the adoption of the hybrid model.
“Japan has both embraced and rejected American capitalism,” observes Mr Vogel of the University of California, Berkeley. Having identified the American style of capitalism as a possible model, Japan's business leaders were highly selective about which aspects of it to adopt, he says. Under the resulting hybrid model, Japanese companies may well maintain close co-operation with employees yet at the same time profess support for shareholder value; remain committed to lifetime employment but also offer merit-based pay and share options; and engage more fully with the global economy yet keep certain activities in Japan and replicate some Japanese practices even in foreign markets.
How prevalent is the hybrid model? Gregory Jackson, an expert on international comparisons of corporate governance at King's College London, and Hideaki Miyajima of Waseda University analysed data on 723 Japanese companies gathered by the finance ministry and identified three clusters: 24% had adopted hybrid models; 42% were traditional Japanese firms; and the other 34% were somewhere in-between.
Of the firms with hybrid models, 94% offered lifetime employment, 45% merit-based pay and 39% employee stock options. These companies were more likely to have outsiders on the boards than traditional firms, made more use of corporate bonds as a source of finance and less use of banks, and had a high level of foreign or institutional share ownership. This group included many large, internationally oriented firms, such as Toyota, Canon, Yamaha, NTT DoCoMo, Hitachi and Mitsubishi. Toyota, regarded as an archetype of corporate Japan in many respects, is a typical example: it has switched from bank financing to bonds, has a high level of foreign ownership and has introduced stock options. But it remains committed to lifetime employment and has resisted putting outsiders on the board.
All of the traditional Japanese firms offered lifetime employment and none merit-based pay; 19% awarded employee share options. They generally had boards consisting entirely of insiders, relied on bank finance rather than bonds and had few foreigners and institutional investors holding their shares. They were typically involved in industries such as construction, chemicals, textiles, machinery and food. Companies in the third cluster retained traditional ownership and finance structures, but some firms had adopted more market-oriented employment policies. Firms in this group included retailers, technology firms and family-controlled companies in a variety of industries.
Illustration by JacOn average, notes Mr Jackson, hybrid companies performed significantly better (measured by return on assets) than traditional Japanese firms or those in the intermediate group. Evidently the hybrid model allows firms to bring their distinctive competitive strengths to the wider world. And although they accounted for only 24% of Japanese firms, this included a disproportionate number of Japan's industrial giants, so the hybrid cluster accounted for 67% of the workforce.
This raises the question of how stable the hybrid model is, and whether it is just a step on the way to a total embrace of the Anglo-Saxon model. Mr Jackson points out that the number of companies introducing the American-style committee system has begun to slow and the debate on corporate-board reform has cooled. Now that the economy has started to recover, the decline in cross-shareholdings has halted and even gone into reverse. All of this, he suggests, implies that the hybrid model is stable, and will not prove to be just a halfway house on the way to an American model.
Halfway to America
“We don't have to go all the way to America,” says Yukio Yanase, deputy president of Orix, a financial-services firm whose founder, Yoshihiko Miyauchi, is a strong proponent of more American-style corporate governance. “At Orix we often say: ‘Let's go to Hawaii.' It lies in the middle,” explains Mr Yanase. Appropriately enough, Orix is listed in both Tokyo and New York, and half of its board members are outsiders.
The idea of a middle way that can act as a model for other countries is seductive. “A lot of Asian countries are saying: ‘We hope Japan will succeed, so we have a new model that combines capitalism with social values',” says Hirotaka Takeuchi of Hitotsubashi University. Does that mean it is something like the European model? Yes, but not identical, because taxes are lower and the state is smaller in Japan—and unlike in France, Germany or Scandinavia, companies provide a lot of social support.
Another difference with many parts of Europe is that in Japan business is regarded as a respectable pursuit that provides social goods rather than a necessary evil, notes Mr Marra of A.T. Kearney. But he thinks taking the middle way would be a mistake. Unless it becomes more like America, he argues, Japan risks ending up like Switzerland: comfortable and complacent, but irrelevant. Japan is undoubtedly changing, he argues, but not fast enough.
Other Japan-watchers express similar concerns. Japan may be the world's second-biggest economy and may represent around half the entire Asian economy, but it could yet become an economic backwater as America and Europe focus instead on China, says Mr Jones of the OECD. The danger is that having bypassed Japan since the early 1990s, foreign companies might not even notice that the Japanese economy is recovering. Mr Porté of Shinsei Bank says faster reform is needed because Japan is changing more slowly than the rest of the world. “China and India are changing very rapidly, so we need to be concerned about keeping up with all of that,” he says. “The job is not finished, but we risk being stuck.”
Kuniko Inoguchi, a member of parliament and a former minister in the Koizumi government, does not think that the pace of reform has slowed. Instead, she says, the focus has shifted to fine-tuning the impact of the reforms. There is no question of backsliding, she insists: “companies now see there is no way to go back” and are continuing with their own programmes of internal reform.
Mr Vogel goes further, arguing that Mr Koizumi's influence has been overstated and that his departure does not mean that change has halted. “The most important reforms are technocratic things that just plod along, so that process will continue,” he says. He even argues that it is dangerous to reform too fast, and that Japan has been sensible to adopt reforms in a selective, incremental way.
Where will corporate Japan be in a decade's time? The optimistic scenario, says Mr Chhor of McKinsey, is that Japan's hybrid model will enable it to re-emerge as global leader, driving progress in electronics and environmental technology in particular. “That would provide the country with the vitality to address the two-Japans challenge,” he says, referring to the divergence between rich and poor, global and local companies, pensioners versus workers, regular and non-regular employees, and rural and urban communities.
The pessimistic scenario is that the slow grind of reform will continue, but without providing enough growth to enable the government to tackle the country's huge debt as the population ages and the tax base shrinks. “I am concerned that we'll have slower growth and weak consumption, and that Japan's problems will simply become exacerbated,” says Mr Porté. He is particularly concerned that Japan's brightest youngsters may leave the country in search of better opportunities.
The actual outcome will probably be somewhere in-between: a slow muddling-through, suggests Gerald Curtis of Columbia University. But there are two things that could change the picture dramatically. The first is that the demographic shift and the resulting labour shortage might actually help to spur faster reform and new technological developments. “Rather than being the biggest threat, the retirement of the boomers is the biggest opportunity,” says Mr Takeuchi.
Out of misfortune
When Japan is faced with a crisis, it often responds by devising new technologies, he notes. “So this will be a big impetus for Japan to move into robotics, nanotech and so forth to replace manpower. I'm really looking forward to it.” Atsushi Seike of Keio University recalls that Japan has successfully adapted to big changes in the past. And he points out that China and South Korea also have ageing populations, though they are further behind—so if Japan can solve the problem, it could provide a model for those countries.
The second intriguing possibility is that the pace and nature of technological change might shift in Japan's favour. It is clearly less successful than America in producing internet start-ups and software companies. But if the next big technological wave involves clean-energy technology, as seems likely, Japan could have an advantage. Once it is a matter of incrementally refining new energy technologies and manufacturing them in vast quantities, Japan will be very well placed. After all, it is already the leading manufacturer of hybrid cars and solar panels.
Inevitably, Japanese observers tend to stress how far their country has come over the past decade, while foreigners emphasise how far it still has to go. Yet there is general agreement that reform will continue; that the hybrid model will be developed further and refined as more companies adopt it; but that this does not mean Japan will drop its way of doing things in favour of an all-American approach.
Look at the Toyota Prius again. Its hybrid design is also being refined. The next version, due in 2010, will be a “plug-in” hybrid with a better battery pack that will be able to make short trips entirely on electric power. Toyota's Mr Cho says he has recently ridden in a prototype, “and believe me, it's wonderful.” The hybrid design will also form the basis of cars powered by fuel cells. To be sure, some people think cars should simply go all-electric, just as some people think that Japan should go all-American. But there are plenty, too, who believe that the future is hybrid.
Business in Japan: No Country is an Island
No country is an island
Nov 29th 2007
From The Economist print edition
Japan is reluctantly embracing globalisation
THROUGHOUT its history Japan has oscillated between openness to foreign ideas and fierce isolationism. This ambivalence is still reflected in its attitude to globalisation. Despite the worldwide presence of companies such as Toyota, Honda, Canon and Sony, Japan's integration into the world economy is surprisingly weak.
Japan has the lowest levels of import penetration, inward foreign direct investment (FDI) and foreign workers in the OECD (see chart 8). Foreign affiliates' share of turnover in manufacturing and services, at 3% and 1% respectively, is the lowest in the OECD. Nor has Japan participated in the global wave of cross-border mergers and acquisitions (M&A). In 2004 the sale of companies in the European Union to foreign firms accounted for 47% of global M&A by value, and that of American firms for a further 22%. The Japanese share, by contrast, was just 2.3%. In an era of unprecedented mobility of people, as well as goods and services, Japan's net migration since the second world war has been approximately zero. And so on.
Why is Japan such an outlier? Part of the reason is regulatory hangover from the post-war period. Rules restricting inward flows of goods and investment, put in place to protect growing domestic industries after the second world war, have hindered economic integration. So too have complicated regulations governing particular markets, which deterred foreign firms from entering the Japanese market. (In one infamous example, Japan restricted imports of foreign skis, arguing that Japanese snow was different.) The use of cross-holdings made it very difficult for foreigners to take over Japanese firms.
For their part, many Japanese firms have been too preoccupied in the past 15 years to expand abroad, says Heang Chhor, the head of the Tokyo office of McKinsey, a consultancy: “They have been so busy with the domestic crisis that they have forgotten to remain connected with the rest of the world.” Having been enthusiastic about overseas expansion in the 1980s, many Japanese companies retrenched at home during the dark days of the 1990s. Now that the domestic market has matured and the population has started to shrink, Japanese firms must look abroad for growth opportunities.
That is the main reason for Japan to globalise more vigorously, but not the only one. As well as seeking new markets, Japanese firms will be able to benefit from foreign ideas, which could help to boost innovation. “There should have been a Japanese Silicon Valley,” says Mr Chhor. But during the 1990s, he explains, Japan's connection to the outside world actually weakened, “so the engine for innovation became much less powerful.”
Globalisation should also speed internal reform as more efficient foreign firms, particularly in services, shake up the domestic market. The government has duly set about dismantling regulations that hindered tighter integration with the rest of the world, and in 2006 the Council on Economic and Fiscal Policy even produced a “globalisation strategy” for Japan to enhance the country's international competitiveness by making better use of goods, services and expertise from abroad.
Better late than never—but it will not be easy. For while corporate Japan spent the past few years restructuring, a global M&A binge created multinational giants in many industries, often leaving Japanese firms looking puny by comparison. Japanese firms also face a shortage of managers with international experience and the mindset and skills needed to operate globally. In addition to competitors in America and Europe, they now also have to contend with new rivals from China, India and South Korea in many markets. But “Japan cannot continue to live as an isolated island,” says Keizai Doyukai's Mr Hasegawa. “Japan must strengthen its relationship with other countries.”
Some Japanese firms, of course, embraced globalisation years ago and have prospered as a result—notably Toyota, which is now nearly the world's biggest carmaker. For the past two decades, says Fujio Cho, the company's chairman, “we have been changing our business and management style to respond to the race of globalisation.” Today the company has factories in 27 countries around the world. Other Japanese multinationals include Sony, which makes 74% of its sales outside Japan, and Nintendo and Canon, Japan's second- and third-largest companies by market capitalisation after Toyota.
How to go global
But what of the Japanese companies that have come late to the globalisation party? They have several options, says Mr Marra of A.T. Kearney. The boldest is to try to achieve global scale through domestic and foreign acquisitions. This was the route taken by Nippon Sheet Glass, Toshiba and Japan Tobacco—as well as by Takeda, Japan's largest pharmaceuticals company, of which Mr Hasegawa is president. After spinning off non-core businesses in chemicals, agriculture and food, Takeda went on an acquisition spree, buying domestic and foreign pharmaceutical and biotech firms. A decade ago 50% of Takeda's revenue came from Japan; now the figure is below one-third, and falling.
Mr Hasegawa notes that Europe accounts for 30% of the world market for pharmaceuticals but only 14% of Takeda's sales, so future acquisitions in Europe are on the cards. And further consolidation is looming in Japan, he says, where there are still dozens of drugs companies that will be vulnerable once protectionist measures are unwound. Rather than grumble about this, says Mr Hasegawa, it is best to accept what is coming and plan accordingly.
Other options for Japanese firms, notes Mr Marra, are to move into high-value specialist products, as many Japanese steel and chemicals firms have done; adopt a regional strategy, focusing on Asian markets; or form a global alliance with a foreign firm, as Renault-Nissan has done in cars and Sony Ericsson in mobile phones. Alliances have the advantage of allowing Japanese firms to avoid the indignity (in their eyes) of a takeover. They also provide them with quick access to foreign markets and management expertise, says McKinsey's Mr Chhor: “Allying with international players will be the name of the game for the next five years.”
Even as they globalise, Japanese firms continue to do some things in distinctly Japanese ways, points out Steven Vogel of the University of California, Berkeley. Toyota, for example, has to some extent replicated its domestic supplier networks in other countries. “It doesn't act exactly like it does at home, but it doesn't act like an American company either,” he says. Japanese electronics firms have also taken a cautious approach to outsourcing. Sony, for example, outsources the manufacturing of standardised items such as mobile phones and PCs to India, China and Taiwan, but for digital cameras and video camcorders, where it has specialist manufacturing technology, it prefers to keep production in Japan, says Katsumi Ihara, head of the firm's electronics division.
Japan's relative lack of enthusiasm for outsourcing to China is due partly to the deep-rooted enmity between China and Japan, but also to Japanese firms' desire to protect their intellectual property and to a belief that manufacturing remains a core Japanese competency. The two countries have strikingly complementary economies and look like natural partners: Japan makes high-tech, high-margin goods whereas China tends to concentrate on high-volume, low-tech products. But China represents both an opportunity and a threat: it is a big market on Japan's doorstep, but it seems set in due course to displace Japan as Asia's biggest economic and political power.
China recently surpassed America as Japan's main trading partner, but new investment by Japanese firms in China actually fell by 30% in 2006, to $4.5 billion. In a survey asking Japanese firms to rate the best countries to invest in over the next three years, the proportion picking China fell from 91% in 2004 to 77% in 2006. That is still an impressive number, but the decline reflects both the expense of making things in China (compared with India and Vietnam) and growing concern over anti-Japanese sentiment.
Come in, gaijin
Globalisation is a two-way street, and Japan has as much to gain from letting in foreign firms as it does from sending its own firms out into the world. So in 2003 JETRO, a government agency that used to be in charge solely of promoting exports, was given a new mission: to encourage more FDI in Japan. This is not because Japan is short of capital; it has an excess of the stuff. It is because the government recognises that inviting in foreign firms is an indirect means of promoting reform, by exposing sleepy Japanese firms, particularly in the service sector, to a dose of competition.
“It is important to have new players in the Japanese economy with new ideas and new business models,” says JETRO's Nobuyuki Nagashima. In 2003 the then prime minister, Mr Koizumi, set a target of doubling FDI between 2001 and 2006, which was only just missed. Now JETRO has a new target: for FDI to reach 5% of GDP by 2010, more than twice the 2005 figure. But even if that target is reached, Japan's figure will still be far lower than other rich countries' (around 15% in America and 30-40% in Britain, France and Germany).
There is clear evidence that foreign investment has a galvanising effect. In 2002 labour productivity in foreign affiliates in Japan was 60% higher than the national average in manufacturing and 80% higher in services. Foreign companies operating in Japan also outperform domestic firms in profitability, capital investment and R&D spending. This is partly because they are not bound by existing business relationships, but also because only the most globally competitive and efficient firms enter the Japanese market. “We are benefiting a lot from the stimulus that foreign capital is bringing,” says Kuniko Inoguchi, a member of parliament and a former minister in the Koizumi government.
Deregulation has encouraged foreign firms to enter fields such as telecoms, retailing and financial services. The arrival of Starbucks forced outmoded and overpriced kissaten coffeeshops to do better. Foreign insurers offered new products that had previously been unavailable in Japan, prompting local rivals to follow suit. When an old rule banning roadside advertising hoardings was abolished, JCDecaux of France introduced bus-stop advertising. It now operates in 13 Japanese cities. And the simplification of complicated rules relating to large shops prompted IKEA, a Swedish furniture retailer, to open superstores in Japan, offering a wider range and lower prices than local firms, along with an unusual shopping experience. All this shows that Japan is not closed to foreigners, says Mr Nagashima, “but when things are very different, it just looks closed.”
Foreign firms going into Japan need to understand the local market but must also offer something distinctive, says Gerhard Fasol of Eurotechnology, a consultancy based in Tokyo that advises foreign companies about doing business in Japan. Starbucks, he notes, carefully crafted a strategy for the Japanese market; but Vodafone, a big European mobile operator, provides a cautionary tale. When it took control of Japan's third-largest mobile operator in 2001, it made the mistake of trying to introduce European-style handsets into Japan, causing customers to defect in droves. (Vodafone sold its Japanese arm to SoftBank in 2006.) “When you want to sell to Japanese consumers you have to give them what they want, not what you think they should buy,” says Mr Fasol. Another foreign giant that has failed to gain traction in Japan is Wal-Mart, which in 2002 bought a controlling stake in Seiyu, a Japanese retailer, and has yet to turn it around.
The introduction of the new triangular-merger law, which enables foreign firms to use their own shares to buy Japanese firms via local affiliates, should encourage more foreigners to enter the Japanese market. The first example—Citigroup's takeover of Nikko Cordial—will set a precedent for Citigroup's customers, says Mr Fasol. More deregulation is still needed, says Mr Nagashima, “but we are changing.”
Illustration by JacUnder new management
That foreigners might have useful expertise was strikingly demonstrated by Carlos Ghosn's turnaround at Nissan; another instructive case was the rescue by Ripplewood, a private-equity firm, of Long-Term Credit Bank of Japan in 2000. The bank was relaunched as Shinsei (which literally means “newborn”) with new management, including many foreigners who had previously worked for financial institutions in Japan. Shinsei went public in 2004, netting Ripplewood and its partners over ¥100 billion in profit. Goldman Sachs recently fixed and resold Universal Studios Japan, an ailing theme park, and is part of a consortium trying to sort out Sanyo, an electronics conglomerate.
In theory, Japan ought to offer rich pickings for foreign private-equity firms. There are lots of troubled companies that would benefit from an injection of management expertise, and Japan itself has few turnaround specialists. But suspicion of private-equity firms is even greater than elsewhere, so investors must tread carefully. “It's a market with a lot of potential, but requires an enormous amount of patience and determination,” says Thierry Porté, who became boss of Shinsei Bank in 2005. But, he points out, foreigners have often been catalysts of change in Japanese history: “They can be used in Japan to bring in new ideas, which are then adopted and get adapted to the Japanese system.”
Nov 29th 2007
From The Economist print edition
Japan is reluctantly embracing globalisation
THROUGHOUT its history Japan has oscillated between openness to foreign ideas and fierce isolationism. This ambivalence is still reflected in its attitude to globalisation. Despite the worldwide presence of companies such as Toyota, Honda, Canon and Sony, Japan's integration into the world economy is surprisingly weak.
Japan has the lowest levels of import penetration, inward foreign direct investment (FDI) and foreign workers in the OECD (see chart 8). Foreign affiliates' share of turnover in manufacturing and services, at 3% and 1% respectively, is the lowest in the OECD. Nor has Japan participated in the global wave of cross-border mergers and acquisitions (M&A). In 2004 the sale of companies in the European Union to foreign firms accounted for 47% of global M&A by value, and that of American firms for a further 22%. The Japanese share, by contrast, was just 2.3%. In an era of unprecedented mobility of people, as well as goods and services, Japan's net migration since the second world war has been approximately zero. And so on.
Why is Japan such an outlier? Part of the reason is regulatory hangover from the post-war period. Rules restricting inward flows of goods and investment, put in place to protect growing domestic industries after the second world war, have hindered economic integration. So too have complicated regulations governing particular markets, which deterred foreign firms from entering the Japanese market. (In one infamous example, Japan restricted imports of foreign skis, arguing that Japanese snow was different.) The use of cross-holdings made it very difficult for foreigners to take over Japanese firms.
For their part, many Japanese firms have been too preoccupied in the past 15 years to expand abroad, says Heang Chhor, the head of the Tokyo office of McKinsey, a consultancy: “They have been so busy with the domestic crisis that they have forgotten to remain connected with the rest of the world.” Having been enthusiastic about overseas expansion in the 1980s, many Japanese companies retrenched at home during the dark days of the 1990s. Now that the domestic market has matured and the population has started to shrink, Japanese firms must look abroad for growth opportunities.
That is the main reason for Japan to globalise more vigorously, but not the only one. As well as seeking new markets, Japanese firms will be able to benefit from foreign ideas, which could help to boost innovation. “There should have been a Japanese Silicon Valley,” says Mr Chhor. But during the 1990s, he explains, Japan's connection to the outside world actually weakened, “so the engine for innovation became much less powerful.”
Globalisation should also speed internal reform as more efficient foreign firms, particularly in services, shake up the domestic market. The government has duly set about dismantling regulations that hindered tighter integration with the rest of the world, and in 2006 the Council on Economic and Fiscal Policy even produced a “globalisation strategy” for Japan to enhance the country's international competitiveness by making better use of goods, services and expertise from abroad.
Better late than never—but it will not be easy. For while corporate Japan spent the past few years restructuring, a global M&A binge created multinational giants in many industries, often leaving Japanese firms looking puny by comparison. Japanese firms also face a shortage of managers with international experience and the mindset and skills needed to operate globally. In addition to competitors in America and Europe, they now also have to contend with new rivals from China, India and South Korea in many markets. But “Japan cannot continue to live as an isolated island,” says Keizai Doyukai's Mr Hasegawa. “Japan must strengthen its relationship with other countries.”
Some Japanese firms, of course, embraced globalisation years ago and have prospered as a result—notably Toyota, which is now nearly the world's biggest carmaker. For the past two decades, says Fujio Cho, the company's chairman, “we have been changing our business and management style to respond to the race of globalisation.” Today the company has factories in 27 countries around the world. Other Japanese multinationals include Sony, which makes 74% of its sales outside Japan, and Nintendo and Canon, Japan's second- and third-largest companies by market capitalisation after Toyota.
How to go global
But what of the Japanese companies that have come late to the globalisation party? They have several options, says Mr Marra of A.T. Kearney. The boldest is to try to achieve global scale through domestic and foreign acquisitions. This was the route taken by Nippon Sheet Glass, Toshiba and Japan Tobacco—as well as by Takeda, Japan's largest pharmaceuticals company, of which Mr Hasegawa is president. After spinning off non-core businesses in chemicals, agriculture and food, Takeda went on an acquisition spree, buying domestic and foreign pharmaceutical and biotech firms. A decade ago 50% of Takeda's revenue came from Japan; now the figure is below one-third, and falling.
Mr Hasegawa notes that Europe accounts for 30% of the world market for pharmaceuticals but only 14% of Takeda's sales, so future acquisitions in Europe are on the cards. And further consolidation is looming in Japan, he says, where there are still dozens of drugs companies that will be vulnerable once protectionist measures are unwound. Rather than grumble about this, says Mr Hasegawa, it is best to accept what is coming and plan accordingly.
Other options for Japanese firms, notes Mr Marra, are to move into high-value specialist products, as many Japanese steel and chemicals firms have done; adopt a regional strategy, focusing on Asian markets; or form a global alliance with a foreign firm, as Renault-Nissan has done in cars and Sony Ericsson in mobile phones. Alliances have the advantage of allowing Japanese firms to avoid the indignity (in their eyes) of a takeover. They also provide them with quick access to foreign markets and management expertise, says McKinsey's Mr Chhor: “Allying with international players will be the name of the game for the next five years.”
Even as they globalise, Japanese firms continue to do some things in distinctly Japanese ways, points out Steven Vogel of the University of California, Berkeley. Toyota, for example, has to some extent replicated its domestic supplier networks in other countries. “It doesn't act exactly like it does at home, but it doesn't act like an American company either,” he says. Japanese electronics firms have also taken a cautious approach to outsourcing. Sony, for example, outsources the manufacturing of standardised items such as mobile phones and PCs to India, China and Taiwan, but for digital cameras and video camcorders, where it has specialist manufacturing technology, it prefers to keep production in Japan, says Katsumi Ihara, head of the firm's electronics division.
Japan's relative lack of enthusiasm for outsourcing to China is due partly to the deep-rooted enmity between China and Japan, but also to Japanese firms' desire to protect their intellectual property and to a belief that manufacturing remains a core Japanese competency. The two countries have strikingly complementary economies and look like natural partners: Japan makes high-tech, high-margin goods whereas China tends to concentrate on high-volume, low-tech products. But China represents both an opportunity and a threat: it is a big market on Japan's doorstep, but it seems set in due course to displace Japan as Asia's biggest economic and political power.
China recently surpassed America as Japan's main trading partner, but new investment by Japanese firms in China actually fell by 30% in 2006, to $4.5 billion. In a survey asking Japanese firms to rate the best countries to invest in over the next three years, the proportion picking China fell from 91% in 2004 to 77% in 2006. That is still an impressive number, but the decline reflects both the expense of making things in China (compared with India and Vietnam) and growing concern over anti-Japanese sentiment.
Come in, gaijin
Globalisation is a two-way street, and Japan has as much to gain from letting in foreign firms as it does from sending its own firms out into the world. So in 2003 JETRO, a government agency that used to be in charge solely of promoting exports, was given a new mission: to encourage more FDI in Japan. This is not because Japan is short of capital; it has an excess of the stuff. It is because the government recognises that inviting in foreign firms is an indirect means of promoting reform, by exposing sleepy Japanese firms, particularly in the service sector, to a dose of competition.
“It is important to have new players in the Japanese economy with new ideas and new business models,” says JETRO's Nobuyuki Nagashima. In 2003 the then prime minister, Mr Koizumi, set a target of doubling FDI between 2001 and 2006, which was only just missed. Now JETRO has a new target: for FDI to reach 5% of GDP by 2010, more than twice the 2005 figure. But even if that target is reached, Japan's figure will still be far lower than other rich countries' (around 15% in America and 30-40% in Britain, France and Germany).
There is clear evidence that foreign investment has a galvanising effect. In 2002 labour productivity in foreign affiliates in Japan was 60% higher than the national average in manufacturing and 80% higher in services. Foreign companies operating in Japan also outperform domestic firms in profitability, capital investment and R&D spending. This is partly because they are not bound by existing business relationships, but also because only the most globally competitive and efficient firms enter the Japanese market. “We are benefiting a lot from the stimulus that foreign capital is bringing,” says Kuniko Inoguchi, a member of parliament and a former minister in the Koizumi government.
Deregulation has encouraged foreign firms to enter fields such as telecoms, retailing and financial services. The arrival of Starbucks forced outmoded and overpriced kissaten coffeeshops to do better. Foreign insurers offered new products that had previously been unavailable in Japan, prompting local rivals to follow suit. When an old rule banning roadside advertising hoardings was abolished, JCDecaux of France introduced bus-stop advertising. It now operates in 13 Japanese cities. And the simplification of complicated rules relating to large shops prompted IKEA, a Swedish furniture retailer, to open superstores in Japan, offering a wider range and lower prices than local firms, along with an unusual shopping experience. All this shows that Japan is not closed to foreigners, says Mr Nagashima, “but when things are very different, it just looks closed.”
Foreign firms going into Japan need to understand the local market but must also offer something distinctive, says Gerhard Fasol of Eurotechnology, a consultancy based in Tokyo that advises foreign companies about doing business in Japan. Starbucks, he notes, carefully crafted a strategy for the Japanese market; but Vodafone, a big European mobile operator, provides a cautionary tale. When it took control of Japan's third-largest mobile operator in 2001, it made the mistake of trying to introduce European-style handsets into Japan, causing customers to defect in droves. (Vodafone sold its Japanese arm to SoftBank in 2006.) “When you want to sell to Japanese consumers you have to give them what they want, not what you think they should buy,” says Mr Fasol. Another foreign giant that has failed to gain traction in Japan is Wal-Mart, which in 2002 bought a controlling stake in Seiyu, a Japanese retailer, and has yet to turn it around.
The introduction of the new triangular-merger law, which enables foreign firms to use their own shares to buy Japanese firms via local affiliates, should encourage more foreigners to enter the Japanese market. The first example—Citigroup's takeover of Nikko Cordial—will set a precedent for Citigroup's customers, says Mr Fasol. More deregulation is still needed, says Mr Nagashima, “but we are changing.”
Illustration by JacUnder new management
That foreigners might have useful expertise was strikingly demonstrated by Carlos Ghosn's turnaround at Nissan; another instructive case was the rescue by Ripplewood, a private-equity firm, of Long-Term Credit Bank of Japan in 2000. The bank was relaunched as Shinsei (which literally means “newborn”) with new management, including many foreigners who had previously worked for financial institutions in Japan. Shinsei went public in 2004, netting Ripplewood and its partners over ¥100 billion in profit. Goldman Sachs recently fixed and resold Universal Studios Japan, an ailing theme park, and is part of a consortium trying to sort out Sanyo, an electronics conglomerate.
In theory, Japan ought to offer rich pickings for foreign private-equity firms. There are lots of troubled companies that would benefit from an injection of management expertise, and Japan itself has few turnaround specialists. But suspicion of private-equity firms is even greater than elsewhere, so investors must tread carefully. “It's a market with a lot of potential, but requires an enormous amount of patience and determination,” says Thierry Porté, who became boss of Shinsei Bank in 2005. But, he points out, foreigners have often been catalysts of change in Japanese history: “They can be used in Japan to bring in new ideas, which are then adopted and get adapted to the Japanese system.”
Business in Japan: Not Invented Here
Not invented here
Nov 29th 2007
From The Economist print edition
Entrepreneurs have had a hard time, but things are slowly improving
TAKASHI MASUDA wiggles his finger next to an apparently random collage of tinsel, cuddly toys and cutlery, illuminated by a spotlight. A small black chip, glued to a plastic ruler, is propped up nearby, with wires running to a circuit board festooned with blinking red lights. From this another cable runs to a large high-definition TV where every ridge of the skin on Mr Masuda's finger, every twinkly highlight on the tinsel and every hair on the cuddly toys can be clearly seen.
Mr Masuda's company, Acutelogic, makes specialist image-processing chips and software for digital cameras. Its newest product, which picked up every nuance of Mr Masuda's wiggling finger, is a tiny high-definition video sensor that can fit into a mobile phone. The idea is to make camcorders obsolete, says Mr Masuda.
He founded Acutelogic after leaving Sony, where he worked on the team that created the Cyber-shot digital camera. He felt that the electronics giant's management had lost its way and wanted to start his own company. So he set up Acutelogic, with venture-capital funding, some investment from Fujitsu, a computer giant, and money raised from friends and family.
All this sounds very similar to the way things are done in America's Silicon Valley, where large firms such as IBM, Oracle, Sun and Hewlett-Packard often act as unofficial “incubators” for engineers who spend a few years learning the ropes and then leave to set up on their own. But Mr Masuda's story differs in one crucial respect: he was 50 when he left Sony, and was able to make the leap because he was offered an early-retirement package. “It would have been better to do it at 40,” he says. But had he done so, he would have lost his company pension. His story illustrates not how easy it is to start a company in Japan, but how difficult.
Japan scores poorly on almost every measure of entrepreneurship. It has the second-lowest level in the OECD of venture-capital investment as a share of GDP, and what little venture capital is available goes disproportionately into existing firms rather than start-ups. Venture-capital investment in Japan amounts to some $2 billion a year, around a tenth of the figure in America. Start-ups account for 4% of all firms, compared with 10% in Europe and 14% in America. Japan also came last in the International Institute for Management Development's rankings on entrepreneurship and second-last in the Global Entrepreneurship Monitor's ranking of early-stage entrepreneurial activity (defined as the proportion of people of working age who are involved in such activity). Why?
Cultural factors are a big part of the explanation. As a hoary old Japanese saying has it, “the nail that sticks out is hammered down.” Conformity is valued over individualism. “Students work hard at school, but they learn how to take tests, not how to think,” laments Sakie Fukushima of Korn/Ferry. And unlike American culture, which venerates the maverick self-made millionaire and is tolerant of failure, Japan frowns upon public displays of wealth and stigmatises business failure.
On the outer edge
Take Takafumi Horie, an example of the sort of entrepreneur who remains extremely rare in Japan. With his characteristic jeans, sneakers and spiky hair, this self-styled rebel against Japan's corporate establishment transformed his internet start-up, aptly named Livin' On The Edge, into a vast conglomerate, which he renamed livedoor in 2004. At its peak, livedoor was worth some ¥930 billion ($8 billion) and owned an accounting-software firm, an internet travel agency, a securities house and a second-hand car business.
In 2005 Mr Horie mounted a takeover bid for Nippon Broadcasting System, a radio station, which would have given him control of Fuji Television, Japan's biggest commercial television station. The battle ended in a truce between Fuji and livedoor, but Mr Horie had infuriated the business establishment. In January 2006 raids on his home and office were broadcast live on television, and in March this year he was convicted of fraud and sentenced to two-and-a-half years in jail.
Mr Horie's critics regarded his use of elaborate financial engineering as evidence that pro-market reforms had gone too far; his supporters claimed that the attack on his empire had been orchestrated by Japan's corporate old guard. But his fate sent a clear signal to anyone who regarded Mr Horie as a new role model for Japanese entrepreneurs, says Hirotaka Takeuchi, dean of the school of corporate strategy at Hitotsubashi University. “He showed you can be an entrepreneur and be successful, but you shouldn't take it to excess. You've got to abide by the rules.”
In truth, Mr Horie was not the American-style capitalist people imagined him to be; indeed, the way he concealed the precarious financial state of his sprawling empire reeked of old-style Japanese book-cooking. But his behaviour served to reinforce the traditional Japanese scepticism towards showy entrepreneurs.
“If you stand out too much you become a target,” says Yoshito Hori, a venture capitalist and the founder of Globis Management School, a business school. That alone persuades many entrepreneurs to keep a low profile. But they face more than just cultural obstacles: the rigidity of the Japanese labour market makes life that much harder for them. Anyone who leaves a regular job for a start-up will find it difficult to get another job if the venture fails. And pensions are a particular problem: as Mr Masuda's example shows, people working for large companies are reluctant to leave their jobs in their 30s and 40s because they will lose their retirement benefits.
Other difficulties facing entrepreneurs include the lack of venture-capital funding, a dearth of knowledgeable angel investors, difficulty in hiring experienced managers and a lack of support networks, says Joichi Ito, an internet investor with experience both in Japan and in Silicon Valley. This forces some entrepreneurs to rely on foreign funding. “VCs and entrepreneurs are not as professional as they are in Silicon Valley,” says Sachio Semmoto, the entrepreneur behind a series of successful Japanese telecoms firms. Goldman Sachs, an American investment bank, put $25m into his most recent venture, whereas local Japanese venture funds contributed just a few hundred thousand dollars.
Given the innovative prowess of Japan's industrial giants, does it matter if start-ups have a hard time? The Economist Intelligence Unit, a sister company of this newspaper, ranked Japan first in a recent study of innovation, based on the number of patents awarded per million people. Japan generates 51% more patents than America in absolute terms, which works out at around 3.5 times as many patents per person. It also has more scientific researchers per million people (5,900 compared with 4,200 for America) and a higher research-and-development (R&D) intensity, at 3.4% of GDP compared with 2.8% for America.
But things may not be as rosy as these numbers suggest. Patents are an imperfect proxy for innovation; Japan's armies of researchers spend more time than their foreign counterparts on non-research activities such as administration, which reduces their effectiveness; and a report by the Cabinet Office found that the effectiveness of Japan's private-sector R&D—the ratio of operating profits to R&D expenditure—declined throughout the 1990s (see chart 7).
All this has fuelled concerns that Japan might now be on the wrong side of several trends. Japan's most famous innovations, such as the Sony Walkman and the Toyota Prius, originated in big companies. But the internet boom highlighted the vibrancy of the American way of innovating, in which a host of entrepreneurial start-ups try out risky new ideas and the most successful of them either become, or are acquired by, larger firms. The American approach supports radical technological breakthroughs but depends on plenty of risk capital.
Akira Takeishi of the Institute of Innovation Research at Hitotsubashi University has investigated why Japanese firms are highly competitive in some industries (carmaking, electronics, imaging products, video games) and less so in others (personal computers, software). He concluded that Japanese firms did best in manufacturing industries with closed product designs that do not require collaboration with the rest of the industry, and worst in fields based on open standards and modular architectures. So if the nature of innovation has changed, and it now depends on collaboration with other firms around the world, Japan could be in trouble. Japanese patents with foreign co-inventors accounted for less than 3% of the total, compared with 12% in America.
Another worry is that Japanese companies concentrate too much on incremental innovations rather than radical breakthroughs. This served them well in the second half of the 20th century. But given the disruptive impact of the internet and the need for entirely new energy technologies to mitigate climate change, it may no longer be the right thing to do.
The government has formulated a series of plans and targets, including measures to boost international co-operation and increased funding for researchers in fields such as nanotechnology and clean energy, where breakthroughs could open up big new markets. It has also set about improving the climate for entrepreneurs and start-ups, for example by offering more favourable tax treatment for venture-capital investments, reducing the minimum capital requirement for new businesses to ¥1 and making it easier for start-ups to issue share options to staff.
Land of opportunity?
One sign of progress is the higher turnover of new firms. Between 1997 and 2004 an average of 99 new companies a year were listed in Japan, up from 26 a year in 1981-89 and 36 a year in 1990-96. The number of delistings also rose, from four or five a year in the 1980s and early 1990s to an average of 41 a year in 1997-2004. This is due in part to the rise of second-tier stockmarkets such as Mothers in Tokyo and Hercules in Osaka, and the loosening of listing requirements on JASDAQ, which has made it easier for start-ups to go public. Mr Hori notes that there were 747 IPOs in Japan between 2001 and 2005, compared with 617 in America.
The slightly more flexible labour market has made it easier for start-ups to attract skilled workers. “Things are changing—people are coming out of big firms to join us,” says Mr Masuda, whose firm has hired engineers from JVC, Canon and other electronics giants. He says start-ups also offer more opportunities and better prospects to Chinese and South Korean engineering students in Japan: “We evaluate people for their skills, not their skins and eyes.”
Mr Hori goes so far as to suggest that start-ups have played an unacknowledged role in helping to turn around Japan's economy in recent years. He says the rebound was partly driven by the emergence of new companies in knowledge-based industries, led by entrepreneurs in their 20s and 30s. He points to Rakuten, an internet-shopping firm that now has a market capitalisation of nearly $6 billion, making it one of the largest internet-commerce firms in the world. Other Japanese success stories include DeNA, an internet-auction and shopping site, and Mixi, a social-networking site. Mr Ito is heartened by Japan's latest crop of internet entrepreneurs, such as Mixi's Kenji Kasahara. “The new generation of internet CEOs are very humble. They don't spend all their money in Ginza buying cars,” he says.
It seems that entrepreneurs can do well in Japan as long as they do not draw too much attention to themselves. Mr Hori thinks they have excellent prospects. There are still relatively few of them, and productivity in Japan's service sector is notoriously low, offering plenty of opportunities for start-ups. He says 70% of his venture-capital investments are in services companies, from nursing homes to wedding planning. Apart from services, says Mr Hori, “we are betting in areas where Japan has an edge,” such as mobile technology, optics, robotics, digital animation and video games.
Despite these hopeful signs, however, some worries remain. One concern is that if economic growth strengthens and more full-time jobs are created, would-be entrepreneurs may be tempted to take the safer option of a job instead. Japan's recent wave of entrepreneurship, suggests Randall Jones at the OECD, was caused in part by the lack of job opportunities for talented graduates during the hiring freeze of the 1990s. But Mr Hori insists that times have changed, and “the best and brightest are now going into the entrepreneurial field, which has never happened before.”
Another concern is that too much government effort to encourage start-ups and promote innovation is concentrated on manufacturing and technology rather than services, which is arguably where change is most needed. To keep the momentum going, the OECD recommends reductions in capital-gains tax to encourage venture capital; more portable pensions and performance-based pay for researchers to encourage mobility between academia and industry; a broader educational curriculum; and the promotion of cross-border trade and investment, since good ideas often come from abroad. Changing Japanese attitudes to entrepreneurship will take time and further reforms, but at least the wheels have started turning.
Nov 29th 2007
From The Economist print edition
Entrepreneurs have had a hard time, but things are slowly improving
TAKASHI MASUDA wiggles his finger next to an apparently random collage of tinsel, cuddly toys and cutlery, illuminated by a spotlight. A small black chip, glued to a plastic ruler, is propped up nearby, with wires running to a circuit board festooned with blinking red lights. From this another cable runs to a large high-definition TV where every ridge of the skin on Mr Masuda's finger, every twinkly highlight on the tinsel and every hair on the cuddly toys can be clearly seen.
Mr Masuda's company, Acutelogic, makes specialist image-processing chips and software for digital cameras. Its newest product, which picked up every nuance of Mr Masuda's wiggling finger, is a tiny high-definition video sensor that can fit into a mobile phone. The idea is to make camcorders obsolete, says Mr Masuda.
He founded Acutelogic after leaving Sony, where he worked on the team that created the Cyber-shot digital camera. He felt that the electronics giant's management had lost its way and wanted to start his own company. So he set up Acutelogic, with venture-capital funding, some investment from Fujitsu, a computer giant, and money raised from friends and family.
All this sounds very similar to the way things are done in America's Silicon Valley, where large firms such as IBM, Oracle, Sun and Hewlett-Packard often act as unofficial “incubators” for engineers who spend a few years learning the ropes and then leave to set up on their own. But Mr Masuda's story differs in one crucial respect: he was 50 when he left Sony, and was able to make the leap because he was offered an early-retirement package. “It would have been better to do it at 40,” he says. But had he done so, he would have lost his company pension. His story illustrates not how easy it is to start a company in Japan, but how difficult.
Japan scores poorly on almost every measure of entrepreneurship. It has the second-lowest level in the OECD of venture-capital investment as a share of GDP, and what little venture capital is available goes disproportionately into existing firms rather than start-ups. Venture-capital investment in Japan amounts to some $2 billion a year, around a tenth of the figure in America. Start-ups account for 4% of all firms, compared with 10% in Europe and 14% in America. Japan also came last in the International Institute for Management Development's rankings on entrepreneurship and second-last in the Global Entrepreneurship Monitor's ranking of early-stage entrepreneurial activity (defined as the proportion of people of working age who are involved in such activity). Why?
Cultural factors are a big part of the explanation. As a hoary old Japanese saying has it, “the nail that sticks out is hammered down.” Conformity is valued over individualism. “Students work hard at school, but they learn how to take tests, not how to think,” laments Sakie Fukushima of Korn/Ferry. And unlike American culture, which venerates the maverick self-made millionaire and is tolerant of failure, Japan frowns upon public displays of wealth and stigmatises business failure.
On the outer edge
Take Takafumi Horie, an example of the sort of entrepreneur who remains extremely rare in Japan. With his characteristic jeans, sneakers and spiky hair, this self-styled rebel against Japan's corporate establishment transformed his internet start-up, aptly named Livin' On The Edge, into a vast conglomerate, which he renamed livedoor in 2004. At its peak, livedoor was worth some ¥930 billion ($8 billion) and owned an accounting-software firm, an internet travel agency, a securities house and a second-hand car business.
In 2005 Mr Horie mounted a takeover bid for Nippon Broadcasting System, a radio station, which would have given him control of Fuji Television, Japan's biggest commercial television station. The battle ended in a truce between Fuji and livedoor, but Mr Horie had infuriated the business establishment. In January 2006 raids on his home and office were broadcast live on television, and in March this year he was convicted of fraud and sentenced to two-and-a-half years in jail.
Mr Horie's critics regarded his use of elaborate financial engineering as evidence that pro-market reforms had gone too far; his supporters claimed that the attack on his empire had been orchestrated by Japan's corporate old guard. But his fate sent a clear signal to anyone who regarded Mr Horie as a new role model for Japanese entrepreneurs, says Hirotaka Takeuchi, dean of the school of corporate strategy at Hitotsubashi University. “He showed you can be an entrepreneur and be successful, but you shouldn't take it to excess. You've got to abide by the rules.”
In truth, Mr Horie was not the American-style capitalist people imagined him to be; indeed, the way he concealed the precarious financial state of his sprawling empire reeked of old-style Japanese book-cooking. But his behaviour served to reinforce the traditional Japanese scepticism towards showy entrepreneurs.
“If you stand out too much you become a target,” says Yoshito Hori, a venture capitalist and the founder of Globis Management School, a business school. That alone persuades many entrepreneurs to keep a low profile. But they face more than just cultural obstacles: the rigidity of the Japanese labour market makes life that much harder for them. Anyone who leaves a regular job for a start-up will find it difficult to get another job if the venture fails. And pensions are a particular problem: as Mr Masuda's example shows, people working for large companies are reluctant to leave their jobs in their 30s and 40s because they will lose their retirement benefits.
Other difficulties facing entrepreneurs include the lack of venture-capital funding, a dearth of knowledgeable angel investors, difficulty in hiring experienced managers and a lack of support networks, says Joichi Ito, an internet investor with experience both in Japan and in Silicon Valley. This forces some entrepreneurs to rely on foreign funding. “VCs and entrepreneurs are not as professional as they are in Silicon Valley,” says Sachio Semmoto, the entrepreneur behind a series of successful Japanese telecoms firms. Goldman Sachs, an American investment bank, put $25m into his most recent venture, whereas local Japanese venture funds contributed just a few hundred thousand dollars.
Given the innovative prowess of Japan's industrial giants, does it matter if start-ups have a hard time? The Economist Intelligence Unit, a sister company of this newspaper, ranked Japan first in a recent study of innovation, based on the number of patents awarded per million people. Japan generates 51% more patents than America in absolute terms, which works out at around 3.5 times as many patents per person. It also has more scientific researchers per million people (5,900 compared with 4,200 for America) and a higher research-and-development (R&D) intensity, at 3.4% of GDP compared with 2.8% for America.
But things may not be as rosy as these numbers suggest. Patents are an imperfect proxy for innovation; Japan's armies of researchers spend more time than their foreign counterparts on non-research activities such as administration, which reduces their effectiveness; and a report by the Cabinet Office found that the effectiveness of Japan's private-sector R&D—the ratio of operating profits to R&D expenditure—declined throughout the 1990s (see chart 7).
All this has fuelled concerns that Japan might now be on the wrong side of several trends. Japan's most famous innovations, such as the Sony Walkman and the Toyota Prius, originated in big companies. But the internet boom highlighted the vibrancy of the American way of innovating, in which a host of entrepreneurial start-ups try out risky new ideas and the most successful of them either become, or are acquired by, larger firms. The American approach supports radical technological breakthroughs but depends on plenty of risk capital.
Akira Takeishi of the Institute of Innovation Research at Hitotsubashi University has investigated why Japanese firms are highly competitive in some industries (carmaking, electronics, imaging products, video games) and less so in others (personal computers, software). He concluded that Japanese firms did best in manufacturing industries with closed product designs that do not require collaboration with the rest of the industry, and worst in fields based on open standards and modular architectures. So if the nature of innovation has changed, and it now depends on collaboration with other firms around the world, Japan could be in trouble. Japanese patents with foreign co-inventors accounted for less than 3% of the total, compared with 12% in America.
Another worry is that Japanese companies concentrate too much on incremental innovations rather than radical breakthroughs. This served them well in the second half of the 20th century. But given the disruptive impact of the internet and the need for entirely new energy technologies to mitigate climate change, it may no longer be the right thing to do.
The government has formulated a series of plans and targets, including measures to boost international co-operation and increased funding for researchers in fields such as nanotechnology and clean energy, where breakthroughs could open up big new markets. It has also set about improving the climate for entrepreneurs and start-ups, for example by offering more favourable tax treatment for venture-capital investments, reducing the minimum capital requirement for new businesses to ¥1 and making it easier for start-ups to issue share options to staff.
Land of opportunity?
One sign of progress is the higher turnover of new firms. Between 1997 and 2004 an average of 99 new companies a year were listed in Japan, up from 26 a year in 1981-89 and 36 a year in 1990-96. The number of delistings also rose, from four or five a year in the 1980s and early 1990s to an average of 41 a year in 1997-2004. This is due in part to the rise of second-tier stockmarkets such as Mothers in Tokyo and Hercules in Osaka, and the loosening of listing requirements on JASDAQ, which has made it easier for start-ups to go public. Mr Hori notes that there were 747 IPOs in Japan between 2001 and 2005, compared with 617 in America.
The slightly more flexible labour market has made it easier for start-ups to attract skilled workers. “Things are changing—people are coming out of big firms to join us,” says Mr Masuda, whose firm has hired engineers from JVC, Canon and other electronics giants. He says start-ups also offer more opportunities and better prospects to Chinese and South Korean engineering students in Japan: “We evaluate people for their skills, not their skins and eyes.”
Mr Hori goes so far as to suggest that start-ups have played an unacknowledged role in helping to turn around Japan's economy in recent years. He says the rebound was partly driven by the emergence of new companies in knowledge-based industries, led by entrepreneurs in their 20s and 30s. He points to Rakuten, an internet-shopping firm that now has a market capitalisation of nearly $6 billion, making it one of the largest internet-commerce firms in the world. Other Japanese success stories include DeNA, an internet-auction and shopping site, and Mixi, a social-networking site. Mr Ito is heartened by Japan's latest crop of internet entrepreneurs, such as Mixi's Kenji Kasahara. “The new generation of internet CEOs are very humble. They don't spend all their money in Ginza buying cars,” he says.
It seems that entrepreneurs can do well in Japan as long as they do not draw too much attention to themselves. Mr Hori thinks they have excellent prospects. There are still relatively few of them, and productivity in Japan's service sector is notoriously low, offering plenty of opportunities for start-ups. He says 70% of his venture-capital investments are in services companies, from nursing homes to wedding planning. Apart from services, says Mr Hori, “we are betting in areas where Japan has an edge,” such as mobile technology, optics, robotics, digital animation and video games.
Despite these hopeful signs, however, some worries remain. One concern is that if economic growth strengthens and more full-time jobs are created, would-be entrepreneurs may be tempted to take the safer option of a job instead. Japan's recent wave of entrepreneurship, suggests Randall Jones at the OECD, was caused in part by the lack of job opportunities for talented graduates during the hiring freeze of the 1990s. But Mr Hori insists that times have changed, and “the best and brightest are now going into the entrepreneurial field, which has never happened before.”
Another concern is that too much government effort to encourage start-ups and promote innovation is concentrated on manufacturing and technology rather than services, which is arguably where change is most needed. To keep the momentum going, the OECD recommends reductions in capital-gains tax to encourage venture capital; more portable pensions and performance-based pay for researchers to encourage mobility between academia and industry; a broader educational curriculum; and the promotion of cross-border trade and investment, since good ideas often come from abroad. Changing Japanese attitudes to entrepreneurship will take time and further reforms, but at least the wheels have started turning.
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