The Hindu Business Line : The West and Asia's perceived dominance

MANY observers of the global economy have noticed the rising importance of Asia in the global power equation. The US' increasing dependence on support from the Asian central banks' forex reserves invested in US Treasuries is one instance of the economic muscle of rising Asia. Indeed, it is the savings of Asia that help finance the current account deficit of the US, running at around $1 billion or more a day.

If an Asian central banker even hints at deploying his or her reserves in currencies other than the dollar, the markets shiver, as happened recently when a South Korean central banker suggested such a possibility; the Dow plunged 171 points and the dollar fell 1.4 per cent against the euro.

This turned out to be a more potent market-spoiler than Greenspan's more blatant hints that the US' current account deficit was unsustainable.

In a recent broad-ranging review of the US dilemma, Financial Times writer Chris Giles makes a fanciful suggestion that the US President, Mr George W. Bush, may himself make a courtesy call on Asia's central bankers — Governors Fukui of Japan, Zhou Xiaochuan of China, Perng Fai Nan of Taiwan, Park Seung of South Korea, Joseph Yam of Hong Kong and our own Yaga Venugopal Reddy.

He mischievously points out that these central bankers may be more important for America's monetary policy than Alan Greenspan, the Chairman of US Federal Reserve, or his successor, who will take office next year.

Facetious as the suggestion is, it would not be entirely unreasonable in normal circumstances to expect a US President, as a large borrower, to come and explain to his creditors why and how his economy is worth investing in and also offer promises of better behaviour.

This is no more or less than what the West's big bankers used to expect of the "poorer" countries' chiefs in earlier days. Now the time has come, so to say, to return the calls. The Financial Times, in its above-cited survey, includes a piece from Mr Martin Wolf, who analyses the paradox in the following pithy way: "The world in which emerging market economies not only run vast current account surpluses but also recycle the capital that investors want to place in their economies is unprecedented, undesirable and unsustainable.

The surpluses of oil exporters may be temporary, but those of emerging market countries seem likely to be less. Yet, this dynamic region is among the best places in the world to let long-term foreign capital, finance current account deficits (which do not exist in their case mostly).

"The reserves these countries now have are big enough to cope with any conceivable shock. China, for instance, has foreign currency reserves as large as its annual imports. This is not a reasonable pattern of development in the medium term."

The dilemma of the poor financing the rich is clear. The alleviation of poverty, according to the Millennium Development Goals, demands a strengthened flow of aid from the rich to the poor.

But, at least in respect of emerging Asia, the flow is defying all laws of gravity. It is flowing from the poor to the rich.

The recent story of global capital flows confirms our impression of the rise of the Asian countries and economies from a state of desperate dependence to one of relative plenty. This is true notwithstanding the fact that the people of these countries still remain poor. But they collectively save more than they spend. The difference is reflected in a current account surplus of the order of $191 billion in Asian emerging economies alone last year.

In addition, the Asian economies were recipients of foreign private capital amounting to $130 billion last year. All this led to an increase in reserves of these countries by significant amounts, which, in turn, they diverted back into the securities of the richer countries.

There have been a number of attempts at explaining the continuing global imbalances resulting from this perverse flow of funds. One is the obvious explanation that the poorer countries save more — although this seems implausible at first sight. It is not also true that poorer countries invest less — witness the gigantic investment drives in China, and Asia generally. The overall conclusion seems to be that the US is spending more than it earns and the deficit is financed by Asia.

In one sense, Asia's dominance in the global political economy, especially that of the West, has been strong ever since the OPEC crisis when the Sheiks of West Asia flexed their muscles and imposed a hefty "tax" on the oil consumers of the West with the first OPEC price rise.

Since then, the oilfields of Asia have evidenced a remarkable, but perverse, sign of the emergence of Asia's power in the global economic and political power game. Closely following on OPEC's footsteps and, in some sense, financed by it, have come the rising impact of the militancy of Islamic radicals, led by misguided fundamentalists such as Osama bin Laden, out of the caves of Afghanistan, Pakistan's madrassas, Iraq and Egypt.

These have, in turn, played a role in framing the geopolitical response of the West to terror. Oil is behind all this. Indeed, the hard fact of Asia's dominance in the West cannot be denied, be it in the 9/11 incidents in New York and Washington or the 7/7 blasts in London.

Asia rising has become an undeniable fact of global geopolitical importance, be it in economic development or religious fundamentalism. The West is merely reacting to these developments of Asia arising.

The world has come a full circle from the days of Japan's surrender in 1945 following the atomic attacks on Hiroshima and Nagasaki.

The West is now engaged in its own struggle to put the nuclear genie, which it had unleashed in Asia, back in the bottle, be it in the North Korea or Iran.

Meanwhile, the Chinese military machine is flexing its muscle over a "perceived" threat across the Taiwan straits.

One may, however, remark that even as Asia is asserting its political and military powers, it is still at the mercy of the West's superior power — both military and economic. It is ironical, but true, that Asia's current account surplus itself depends largely on America's continuing prosperity.

Unless the US continues to grow and sustain its rising demand for China's exports, China's current account surplus will vanish.

It is a paradox that Asia's dominance depends on the US' willingness to be an economy that sucks Chinese exports. There are golden loops of interdependence about Asia's current dominance.

If the US devalues its dollar — as is inevitable with its growing current account deficit — the worst sufferers will be Asian economies themselves because their reserves will suffer a capital loss of grievous proportion. It is, therefore, in the self-interest of China, Japan, Vietnam, Taiwan and India to see to it somehow that the greenback does not fall too precipitously since such a fall will inflict a heavy blow on the value of their savings, which are invested in the dollar-backed securities. "Heads I win, tails you lose" seems to be a succinct summary of the US economy's path forward.

Asia's current dominance itself is, however, at the mercy of the strength of the Western powers. After all, they control the sources of knowledge, the power of innovation and have the military superiority, which their geopolitical superiority warrants.

The West has held the high ground over the years in intellectual matters, especially scientific studies of the new type — bio-genetics, space research and information technology. Of course, Asia has been a good copier, but has not been a good innovator.

Asia's dominance will be sustainable only when Asia's intellectual superiority rises in the fields of innovation, creativity and fundamental scientific research.

It is here that the emphasis on knowledge revolution is important. Asia has to lead from the front in the new areas of knowledge if its dominance has to be sustained in a meaningful and fair manner. The current account surpluses of today will vanish in due time, but knowledge surplus will remain.

The key to an effective Asian revolution lies in the emergence of a new Asian drive to dominate in innovative education and research. That has to be the focus of the newly emerging Asian economies.

Otherwise, we will ever be the hewers of wood and drawers of water for the West, mostly workers at the call centres of the West's outsourced efforts — all to the greater glory of Western multinationals and not innovated ourselves.

We have to bridge a large current account deficit in knowledge innovation and creativity before Asia can be truly dominant in the world scene.

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