Why Nobody Invests in Japan
Tokyo’s Failure to Welcome Foreign Capital Is Hobbling Its Economy
THIS TIME IT IS REAL
The rise of China, if it continues, may be the most important trend in the world for the next century. When historians one hundred years hence write about our time, they may well conclude that the most significant development was the emergence of a vigorous market economy-and army-in the most populous country of the world. This is particularly likely if many of the globe's leading historians and pundits a century from now do not have names like Smith but rather ones like Wu.
China is the fastest growing economy in the world, with what may be the fastest growing military budget. It has nuclear weapons, border disputes with most of its neighbors, and a rapidly improving army that may-within a decade or so-be able to resolve old quarrels in its own favor. The United States has possessed the world's largest economy for more than a century, but at present trajectories China may displace it in the first half of the next century and become the number one economy in the world.
The only group that is paying serious attention to China's long-term prospects is the business community. Chief executives regularly whirl through Beijing and Guanzhou, and they are almost inevitably dizzied by the ubiquitous construction sites, the glitzy discos, the miniskirted prostitutes. They gush about how China's current economic revolution is the most important business trend they have ever seen and how they want to be a part of it, but they ignore the tectonic strains that can be expected in the years ahead. Almost nothing is so destabilizing as the arrival of a new industrial and military power on the international scene; consider Japan's history in this century or Germany's in the decades leading up to World War I.
There is still a significant possibility that China will never manage an economic takeoff. All kinds of things can go wrong, and economic trajectories are almost impossible to predict. Four decades ago, for example, the two countries in Asia that seemed to have the best economic prospects were the Philippines and Burma; ever since, they have been the laggards of the region. China must leap enormous hurdles, for its leaders face a crisis of legitimacy as well as a generational transition in the next few years (assuming that 89-year-old Deng Xiaoping is mortal). The central government rules territories-such as Tibet and Xinjiang-inhabited by ethnic minorities who yearn for independence. The government still has not dared to expose much of the huge state sector (accounting for about half of industrial production) to the cruelty of market forces, and when it does it could face strikes and revolts by disgruntled workers. Military coups, chaos and even civil war are all possibilities in China over the next dozen years. Yet there appears to be at least a realistic possibility that China will be able to sustain its boom for decades to come, and it would be foolish-and perhaps dangerous-to neglect this likelihood.
Yet the international community is not giving adequate consideration to the colossal implications-economic, political, environmental and even military-of the rise of a powerful China. It is fashionable these days for people to express wonderment at how the changes underway in China are breathtaking, but there is very little specific analysis of the economic, environmental and military effects of China's growth. Nor is there much analysis of whether China's attempt to expand its influence reflects the hostile intentions of an aggressive regime or is simply the natural consequence of rising power. The answer is crucial to determining the world's response to China.
THE ECONOMIC GIANT
For most of recorded history, China has been more developed, prosperous, sophisticated and civilized than the West. It is only in the last 500 years that Europe managed to pull ahead, and yet since the early nineteenth century we have often seen China's backwardness as inevitable. This smug condescension was expressed most arrogantly by Ralph Waldo Emerson when he rather brutally described China as a "booby nation" that did not compare with the great civilizations of the world: "But China, reverend dulness! hoary ideot! all she can say at the convocation of nations must be-'I made the tea.' " The problem is that 500 years is the blink of an eye in the Chinese time frame. The Eastern Zhou Dynasty lasted almost that long, and who in the West has ever even heard of the Eastern Zhou Dynasty? A country's fortunes can change very quickly, as Japan and South Korea have shown, and China now is on a road that could restore it to its original greatness.
The conventional wisdom is that the world economy these days is tri-polar, revolving around the United States, Japan and the European Community (particularly Germany). This is true in terms of financial markets, such as stock investing and currency trading. But in terms of global trade, market size and sheer economic bulk, China is becoming a fourth pole in the international system. This is particularly true when one looks at "Greater China," consisting of the People's Republic, Hong Kong and Taiwan. According to World Bank projections, Greater China's net imports in the year 2002 will be $639 billion, compared to $521 billion for Japan. Likewise, using comparable international prices, Greater China in the year 2002 is projected to have a gross domestic product of $9.8 trillion, compared to $9.7 trillion for the United States. If those forecasts hold, in other words, Greater China would not just be another economic pole; it would be the biggest of them all.
Of course, this growth is a function of population increase alone, and we shouldn't get carried away by what it means. China is still a country of poor people; it just has a lot of them. During my five years in Beijing, I often encountered giddy American business executives passing through for their first date with the Middle Kingdom. Their tendency to extrapolate ("if every Chinese consumed as much of our product as the average Australian does now, we would double our global sales . . .") reminded me of the British industrialists a century ago who calculated that if every Chinese added just one inch to his shirt tail, the mills of Lancashire could be kept busy for a generation.
One hundred years later the Chinese would come to afford longer shirt tails, but they would do so by manufacturing their own shirts-in sufficient quantities that they threaten to idle the West's great textile mills. China's present economic boom started in about 1978 and has since resulted in real annual growth averaging about 9 percent per year. It is not slowing down: in 1992, GNP grew by 12.8 percent, and this year 13 percent growth is predicted. Such a pace is dangerously overheated, but its sheer speed is staggering.
The economy will have to cool down for the next year or more, and in any case diminishing returns are likely to set in eventually as the economy becomes more efficient and sophisticated. But by and large the Chinese economy still has plenty of steam left in it. Some economists believe that if China enjoys political stability, and if the global trading system remains open to its exports, China could rack up 7 percent or 8 percent growth rates for at least another couple of decades. At an 8 percent clip, an economy quintuples in size every 21 years.
Already, China is much wealthier than statistics often show. Officially, per capita GNP is still only about $370 per year, but this figure is not very meaningful. The World Bank this year used two different approaches to purchasing power parity to derive GDP figures at internationally comparable prices. One method resulted in per capita GDP of $1,680, the other of $2,040. Because the data are of poor quality, the only thing that is certain is that the Chinese live much better than the official statistics would suggest.
GROWTH WITH CHINESE CHARACTERISTICS
One of the great uncertainties of China's economic takeoff, if it can be sustained, is what the environmental price will be and who will pay it. To the extent that China industrializes by dirtying its own air and fouling its own water, that is perhaps its right. But matters get a bit more complicated when China's economic miracle produces acid rain that destroys Siberian forests, or when it contributes to global warming that causes the seas to rise and inundate Bangladesh.
As it industrializes, China will require a dramatically larger share of world resources. In 1992, China unseated the United States as the leading buyer of gold, and the Chinese construction boom has caused a global scramble for certain kinds of steel. In coming years, China can be expected to use more of everything, especially energy. For now China uses relatively little energy, although it uses it inefficiently. In 1991, per capita consumption of energy in China was only 602 kilograms of oil equivalent, compared to 7,681 kilograms of oil equivalent in the United States. If, within a few decades, each Chinese uses as much energy as every South Korean does now, then China will use more energy than the United States.
In other words, a steady increase in China's industrialization would place a huge new strain on global energy supplies. This is particularly true because China is running out of oil-at least the kind that is easily exploited. Older oil fields, such as Daqing in the northeast, are running low, and it is unclear whether new fields are as promising as China says. China describes the Tarim Basin in the northwest as virtually another Saudi Arabia, and it has also brimmed with optimism about the South China Sea. But the Tarim Basin will require construction of a long and expensive pipeline through rugged terrain. In the meantime, Beijing is likely to become a net oil importer within a couple of years.
Most of China's energy comes from coal, particularly soft, high-sulfur, highly polluting coal. In 1991, Chinese polluters emitted 11 trillion cubic meters of waste gases and 16 million metric tons of soot. The sulfur in the coal also causes acid rain, which travels across international borders to attack forests far away in Siberia or Korea. Some experts believe that China will become the world's largest source of acid rain by the year 2010.
Perhaps the biggest worry of all, at least for Americans and Europeans, may be China's contributions to global warming. Chinese burning of coal releases carbon dioxide, the most important of the greenhouse gases that are suspected of trapping heat around the earth's surface. The greenhouse effect could, in turn, lead to climate changes, a rising of the oceans and inundation of coastal areas around the globe.
In 1950, China produced carbon dioxide amounting to less than 22 million metric tons of carbon. By 1986, that had risen to 554 million metric tons-and the figure was rising by more than 25 million metric tons a year. At last count, China ranked third in emissions of greenhouse gases, behind the United States and the former Soviet Union. But it is the fastest-growing emitter of greenhouse gases. The Stockholm Environment Institute calculated that if China's economy grows 8.5 percent a year for the next three decades, then by the year 2025 China will produce three times as much carbon dioxide as the United States. In one sense that is perfectly fair, since China will have far more than three times America's population. In fact, while China is the third-largest contributor of greenhouse gases, it does not even rank among the top 50 countries in terms of per capita emissions. On a per person basis, every American churns out nine times as much greenhouse gas as every Chinese. And even if China eventually does become the largest emitter of such gases, that is understandable, since China has the largest population in the world. But it is discouraging for other countries, for while the West is making efforts to curb greenhouse gases China is blithely going ahead as it always has. Chinese officials make it clear that they will not sacrifice economic growth for the sake of the environment-their own or the world's.
KEEPING THE GUNPOWDER VERY DRY
While most countries have been cutting military budgets over the last five years, China has been using its economic boom to finance a far-reaching buildup. It seeks the influence of a great power, as well as its wallet. Thus the People's Liberation Army has purchased fighter aircraft and other equipment from the former Soviet Union, introduced new classes of naval vessels, and in some cases taken a more aggressive posture toward its border disputes with other nations.
The officially disclosed military budget is a bit of a joke, for it does not even include sums spent on weapons procurement or on research and development. Yet, however misleading the official figure is, it is worth noting that between 1988 and 1993 it leaped 98 percent, to $7.5 billion. In the same period, inflation rose only 32 percent. As a very crude benchmark, total military spending-including off-budget items-is around $18 billion this year. If that is adjusted to reflect equivalent purchasing power in the West, total military spending in international prices is much higher, perhaps as much as $90 billion. These figures are too imprecise for exact comparisons, but such a military budget would be one of the highest in the world. Just as important, it reflects a rising share of a rapidly rising GNP.
China has been using its economic boom to finance a far-reaching military buildup.
China has used the money to bolster its ability to project power beyond its borders. Last year it purchased 26 SU-27 fighter jets from Russia, and it is expected to buy another dozen or more. China has also reportedly bought SA-10s-a missile similar to the American Patriot, but perhaps not as sophisticated-from Moscow. By some accounts it is also negotiating for the purchase of up to 79 MiG-31 fighters, which would be built in China's Guizhou Province in a cooperative arrangement with Moscow. China has acquired air refueling technology, apparently from Pakistan and Iran, and is believed to have converted some bombers into tanker aircraft. It is working on training pilots and crew so that by the year 2000 the air force may have a significant fleet of fighter planes and bombers that can be refueled.
Perhaps the biggest symbol of China's new interest in projecting power is its desire to have an aircraft carrier. After browsing at a Ukrainian carrier under construction, the Varyag, China has apparently decided to look elsewhere-either to build its own or to buy another. But last year then-President Yang Shangkun confirmed in a secret speech to military officials that the leadership had already decided in principle to acquire an aircraft carrier. The aircraft carrier may reflect China's aspiration to develop a blue-water navy of ocean-going vessels, rather than just coastal ships. This naval expansion has attracted less attention than the air-force modernization but it is at least as significant. The new Jiangwei class of frigates, the Luhu class of destroyers and the newly upgraded version of the older Luda class destroyers are all formidable vessels, especially given the weaponry of the other powers in the region. A Jiangwei frigate might not intimidate an American admiral, but it looks quite unnerving to a Vietnamese.
One of China's most puzzling forays abroad is its apparent deal with Burma to develop two islands in the Indian Ocean as observation posts-and perhaps eventually as some kind of a naval base. China has no traditional interest in the Indian Ocean, but in 1985 it sent the navy on a cruise through the area, with port calls in Pakistan, Sri Lanka and Bangladesh. If China really is trying to acquire a naval base in Burma, that would be a major stride toward a blue-water navy, and a significant concern for other countries in the region.
This buildup has to be kept in perspective. Chinese military spending probably accounts for only about 4 percent of GNP, compared to 5 percent in the United States. Moreover, Chinese skills and technology start at such a low level that its army may not even be a match for Taiwan's, let alone the West's. An aircraft carrier and aerial refueling will help, but it may be a decade before China figures out how to use its new skills and equipment effectively.
CHINA'S NEXT WAR
The most likely site for a war is probably the South China Sea, which China claims as its own 1,000-mile long pond. This huge sea, encompassing the Paracel and Spratly Island groups, covers major international shipping routes, including those that carry oil from the gulf to Japan. The area is also claimed in part by Vietnam, Malaysia, Brunei, Taiwan and the Philippines.
China and Vietnam have fought naval battles in the area in 1974 and 1988, and the danger of a more decisive conflict may be growing for two reasons. First, some experts believe that there are extensive oil and natural gas deposits in the area, enhancing its appeal. China itself has estimated that the South China Sea floor contains 105 billion barrels of oil, an extravagant guess that it has since backed away from. But even vague hopes that the area is so bountiful will encourage Beijing to use force to control the sea. Second, China has always regarded the area as its own, but it is only now gaining the ability to enforce its view. The Chinese armed forces have extended a landing strip on Woody Island, the largest of the Paracels, so that it is now 2,600 meters long, thus creating a staging ground for any conflict. More ominously, China last year awarded exploration rights for a disputed part of the sea-an area that Vietnam insists is part of its continental shelf-to Crestone Energy Corporation, an American oil company. The head of the company told me he was promised the full backing of the Chinese navy in exploring the area.
Another possible flash point is the Taiwan Strait, particularly if Beijing grows more confident about its military capabilities. China has repeatedly promised that it will use military force if Taiwan declares itself an independent country, and I think we should take Beijing at its word. Moreover, Taiwan is now taking the first tentative steps toward what might be construed as de facto independence-such as campaigning for membership in the United Nations-and the ruling Nationalist Party in Taiwan may be beginning to crumble. Taiwan is expected to hold its first direct presidential elections in 1996, and it is remotely possible that the Nationalists will lose. If that were to happen, and if the new president were to favor independence, there would be great pressure in Beijing for intervention against Taiwan. Such a course of events is not likely because the consequences would be disastrous for both sides. But it is a reminder that there is a continuing risk, and perhaps a growing one, of a clash in the Taiwan Strait.
The other possibilities for war seem much more remote. China and Japan, for example, quarrel over ownership of a group of islands to the northeast of Taiwan. Indeed, there is not even agreement on what to call the islands. China calls them the Diaoyudao, Taiwan says they are the Diaoyutai, and Japan calls them the Senkakus. For now, cool heads are prevailing on all sides, but Japanese and Chinese nationalists may try to force the issue.
WHOSE FAULT IS IT ANYWAY?
There is a tendency abroad to find fault with China for building up its army, bullying its neighbors and corroding the environment. This is unfair. What China is doing is in most cases perfectly natural, and even its territorial and military aspirations are reasonable. Any Chinese government, even a democratic one, might well follow similar policies, and any Chinese leader would be attacked at home for giving up claims to Taiwan, the South China Sea, the Diaoyudao or Hong Kong. China is not coveting territories with which it has no link, nor is it claiming some kind of Monroe Doctrine to police the region. The dispute over the South China Sea, for example, is enormously complex, and China can cite some historical ties to the area dating back hundreds of years.
Part of the problem is that China lost significant amounts of its territory over the last century and a half, in periods when it was weak. Any country in such a position would yearn to recover at least some of its land, and China by and large has been fairly reasonable in its demands. Since the end of the Cultural Revolution, for example, it has not demanded the return of the lands taken by Russia in the nineteenth century, nor has it sought the return of Mongolia. Even in the case of the South China Sea, the foreign ministry is making reasonable, cooperative noises at the same time that the navy is sounding more jingoistic. This divide between foreign ministry doves and military hawks may become more evident in coming years. The foreign ministry already has an important role, namely building warm relations between China and the rest of the world. But the army is searching for a new role following the decline of the Russian threat, and so to maintain its own prestige and influence, it is forging for itself a new identity as protector of China's economic and political interests in the South China Sea and other disputed areas.
When they have been cheated, weak nations cite principles while powerful nations invoke artillery. This is as natural today as it was when the Athenians explained international relations to the Melians more than 2,400 years ago: "The strong do what they can and the weak suffer what they must." China is now in the process of transforming itself from a weakling to one of the strong. It will have the opportunity to do what it wants instead of what it must.
It is entirely understandable that China would want a blue-water navy, that it would seek a more powerful international role, because that is what great powers are supposed to do. China perceives a power vacuum in the Pacific as Russia and the United States retrench, and it wants to expand its interests there. For a nation that has always felt profoundly insecure, nothing makes more sense than a spanking new aircraft carrier as a symbol that it has made it. India already has two aircraft carriers-although they are not of much use-and China's leadership resents the fact that the West objects to it having even one. Likewise, for all the concern about China's military buildup, the People's Liberation Army is actually cutting the number of its troops from the present level of about three million. Such cuts will, however, improve the army's effectiveness, for they will free funds for much-needed equipment and training, and even after the cuts China will still have ten times as many soldiers as Japan.
The one area where China has been indisputably irresponsible is in arms sales. The evidence is overwhelming that it has sold M-11 missiles, or at least the technologies to make them, to Pakistan. The M-11 can carry nuclear warheads about 300 kilometers and adds to the risk of a war on the Indian-Pakistani border. China has also helped Algeria, in suspicious circumstances, build a nuclear power plant, and there are profound concerns about Chinese assistance to Iran's putative nuclear and chemical weapons program. On the other hand, China is not alone in being irresponsible. Almost all countries, including the United States, France and Japan, have engaged in dubious transfers of weapons and technologies. For its part, China sells far fewer weapons than does the United States or Russia.
Growth is destabilizing. To understand the problems that erupt from the rise of a new power, we need not look only at Bismarck's Germany or Tojo's Japan. The rise of the United States a century ago is also a cautionary lesson, for, from the perspective of Latin America, the economic takeoff of the United States also led to a bullying of the neighborhood. It may well be, however, that dictatorial and insecure nations make the worst great powers. There was widespread suspicion, for example, of Germany's rise in the years before World War I, of Japan's rise before World War II, and of the Soviet Union's rise after 1945. In each case, the suspicions had a good basis, but these suspicions also reinforced the paranoia and hostility in Germany, Japan and the Soviet Union. Now, history may repeat itself, for there is a growing suspicion in Asia and abroad about China's intentions and aspirations.
For a reminder of the dangers, it is helpful to remember the experience of another great nation that possessed a great civilization and yet had been humbled in conflicts with its neighbors. Germany was humiliated by the Napoleonic invasion and by the way it was left behind in the scramble for colonies abroad. Under Bismarck, the country enjoyed the beginnings of an economic boom and industrial revolution that whetted its appetite for more power and prestige. Yet Bismarck himself had limited ambitions, wanting to maintain the "concert of Europe," not overturn it. It was only after Bismarck was ousted in 1890 that Germany, under Wilhelm II, became more greedy. Wilhelm pursued a rapid arms buildup, including the establishment of a blue-water navy, that gave Germany new opportunities to redress the injustices that it felt had been done to it. Feeling its new strength, Germany jockeyed for a place at the head table of nations. The result, to condense a long and complex saga, was World War I.
There are huge differences, of course, but China shares with turn-of-the-century Germany the sense of wounded pride, the annoyance of a giant that has been battered and cheated by the rest of the world. Beginning with its defeat in the Opium War 150 years ago, China lost chunks of territory to its neighbors, and it has never enjoyed the international respect that it craves. Yet now it is undergoing an industrial revolution and arms buildup that within a decade or two will allow it to avenge these wrongs. Deng Xiaoping is in many respects like Bismarck, seeking strength and modernization, but without trying to overturn the entire balance of power. The risk is that Deng's successor will be less talented and more aggressive-a Chinese version of Wilhelm II. Such a ruler unfortunately may be tempted to promote Chinese nationalism as a unifying force and ideology, to replace the carcass of communism. For all the differences between China and Germany, the latter's experience should remind us of the difficulty that the world has had accommodating newly powerful nations.
Internal Chinese documents, circulated among senior Chinese officials, underscore the paranoia and sometimes irrationality at the highest levels of the Chinese government. "One cold war has ended; two more are beginning," one such document declared last year. "The Sino-Soviet Cold War has ended, but the confrontation and battle between the two systems and the two ideologies continues to rage." Another document explained that the fall of communism in Eastern Europe was nothing but the outcome of a careful plot by the United States. A classified analysis earlier this year warned: "The United States may be running out of energy, but it has never abandoned its ambition to rule the world, and its military interventionism is becoming more open." This sense that it is under assault from the West has caused China to make serious policy misjudgments, including its threats to seize Hong Kong before 1997. This feeling of encirclement also partly explains China's escalation of military spending.
Whoever is in power in China, Beijing will often seem to us to be prickly, mulish and fiercely independent-France cubed. China may sometimes appear to be thumbing its nose at the West, but such behavior in many cases reflects a profound insecurity that is unlikely to change any time soon. Insecure nations, like insecure people, get very touchy and resist guidance from others. Moreover, we must realize that the landscape looks very different in Beijing than in Washington. From the U.S. point of view China's leaders often seem like thugs in the way that they lock up dissidents, suppress Tibet, bully Hong Kong and peddle missiles. From Deng Xiaoping's perspective China is merely preserving stability and territorial integrity, as well as supplying relatively modest amounts of weaponry to friendly nations. From Deng's point of view the United States is the thug: inspiring "traitors" with Voice of America broadcasts, encouraging rebellion in Tibet, leading the way in weapons proliferation and even allowing plutonium to get into the hands of really dangerous countries like Japan
China is not a villain. It is not a renegade country, but rather an ambitious nation.
From Beijing's perspective, it is Washington that betrayed the bilateral relationship by abandoning a nonjudgmental friendship based on mutual interest and respect. Instead, the United States openly favored the Tiananmen "counterrevolutionaries" and then had the gall to complain when they were crushed. Of course, we do not need to agree with Beijing and we may still regard it as a brutal and self-deluded paranoiac. But the first step in dealing with China is to understand why it acts as its does and to recognize that the gulf between us is real-in interests as well as perceptions. A less repressive regime would ease the problems in the Sino-U.S. relationship but it would not end them. China will continue to give us migraines.
Western hostility toward China encourages the paranoia and strengthens the domestic political position of the paranoiac. Consequently, such hostility is counterproductive, as well as wrong. We should be skeptical of Chinese intentions, without falling into hostility. We should maintain a dialogue with China, even if the tone is not always cordial. We should regard China as a complex and contradictory nation, one likely to be alternatingly partner and adversary.
China is not a villain. It is not a renegade country like Iraq or Libya, but rather an ambitious nation that is becoming the behemoth in the neighborhood. One of the oldest problems in international relations, ever since the rise of Assyria and Sparta, has been how the international community can accommodate the ambitions of newly powerful states. It is rarely a question of right or wrong, but rather of the instability that is inevitable as the previous military, economic and political balance must be recalibrated. If China is able to sustain its economic miracle, then this readjustment of the scales will be one of the most important-and perhaps dangerous-tasks in international relations in the coming decades. "The size of China's displacement of the world balance is such that the world must find a new balance in 30 to 40 years," Lee Kuan Yew, the former Singaporean prime minister, said earlier this year. "It's not possible to pretend that this is just another big player. This is the biggest player in the history of man."