Authors: Darya Gribkova & Viktoria Ivanchenko*
According to Joseph Nye, the pioneer of soft power concept, Japan’s attractiveness potential is one of the highest in the world. But at the same time Japan faces obstacles to its comprehensive implementation. First of all, it is a policy towards preservation of internal values and the way of life, Tokyo’s aggressive policy in the first half of the 20th century still not forgotten by its milieu, demographic problems, successful competition by the rapidly developing neighbors, especially Republic of Korea and China, in the field of soft power. Today Japan’s desire to revive the status of military power makes the situation more complicated.
Japan is a convincing example of promoting the positive image by a non-great power without engaging military means. Economic success, urban development, high quality of education, futuristic technologies, mysterious culture which burst into information space by anime and manga created perception of Japan as a smart and advanced country. Demonstrative disregard of geopolitical ambitions helped Japan to keep up its stable position in the international arena for a long time.
But what components does Japan’s soft power include now? What role does the state play in it? Which regions of the world are priority-driven when choosing the directions of the Japanese soft impact? What are the prospects for Japanese soft power and which countries can compete with Japan? Let us try to examine the system carefully.
State, “soft power” and cultural diplomacy
Traditional spheres the state is in charge of are economic and military because they both guarantee state’s survival. In case of the state’s participation in public diplomacy space for activity of special-purpose funds, NGOs, media and large corporations occurs. In today’s world, one way or another, states are limited in the use of hard powerand it is soft power that becomes an instrument for creating favorable environment for foreign policy.
Japanese soft power developed independently of the state and rose from Japanese culture, national traditions, aureole of mystery and inaccessibility and later rose from modernization success and model of economic development. But at which stage did the state get involved and soft power become considered as a means of winning leading positions in the world economy, policy and culture for Japan?
After World War II Japanese government faced necessity not only to recover economy and reform governance system in the state but as well to overcome the image of aggressor in the international arena. Spheres of culture and public diplomacy offered Japan wide opportunities for such activity.
Today implementation of Japan’s soft power is under control of Foreign Affairs Ministry. In 1972 the Japan Foundation was established under the Ministry’s management for development of cultural exchange, promotion of Japanese studies abroad, researching activity of Western institutions and international cultural exchange standards and programs. In October 2003 the Foundation became an independent institution and now it has 24 offices around the world, its activity covers more than 190 countries. The main directions of Foundation’s activity are exchange programs for outstanding specialists in the field of cross-cultural communication, science and culture as well as sport exchange programs and participation of Japanese scientists in international conferences, preservation of Japanese cultural monuments by Japanese specialists , cooperation on realization of joint projects with UNESCO.
Japan International Cooperation Agency (JICA) regulates the issues related to the official development assistance; its goals are the reduction of poverty, increase of effectiveness of management systems, ensuring human security and stimulation of educational and cultural exchange.
In 1988 Japan’s Foreign Affairs Ministry began to publish the monthly journal on foreign affairs “Gaiko Forum”, which also covered issues related to Japanese popular culture and public diplomacy.
In 2005 the Advisory Committee led by Tamotsu Aoki, professor of Hosei University, was formed to conceptualize the elements of Japan’s soft power. In Diplomatic Blue Book 2004 a section of the 3rd chapter dedicated to the soft power concept and public diplomacy, improvement of image of the state abroad, students exchange programs, cooperation in the cultural sphere. One of the most important part is about “Cool Japan”, public diplomacy program aimed at the promotion of Japanese popular culture. By 2014 the government’s spending for promotion of Japanese pop-culture reached almost $883 million. In 2004, ex-prime minister Aso Taro in his speech about Japan’s strategic development stressed soft power as one of the most perspective direction and Japan’s attractiveness promotion in the world as one of the resources of growth.
There is a departure in the MOFA structure, that realizes Japanese film festivals, painting exhibitions, Japanese cuisine days. The MOFA’s internet-page provides links to resources related to public relations abroad, cultural and people-to-people exchange, cooperation with international organizations (UNESCO, UNU) including WebJapan (available in Chinese, English, Arabic, Russian, Spanish, Korean, Portuguese, Danish and French) which provides information on trends in Japanese fashion, cuisine, nature, Japan’s achievements in the field of economy, education, environmental protection and so on.
Also it is worth to note that neither the Prime Minister nor the Minister of Foreign Affairs, nor the Japanese Ambassadors refuse to give comments to the major national and foreign media on such seemingly acute issues as territorial disputes with neighbors. This looks like demonstration of Tokyo’s willingness to discuss these issues openly and confidence in the legitimacy of the territorial claims.
The state invests a lot in support of external economic activity of Japanese enterprises. In the sphere of economy attractiveness of the state and national culture are valuable as they bring significant dividends to business. At the same time the country’s economic success is already a powerful tool of positive influence which forms the attraction of Japanese corporate culture. In the Intellectual Property Strategic Program 2006 cultural and economic aspects were identified as complementary, and also there were measures proposed to improve the image of the country through the use of rich cultural potential, through support of Japanese business and promotion of Japan brand all over the world. The brand “Made in Japan” around the world is associated with the quality and reliability of Japanese products and despite the high price it is in great demand.
In 2004 the Ministry of Economy, Trade and Industry launched the “Japan Brand” program, aimed at promoting certain products produced in Japanese regions at the foreign markets. This program became a part of a strategy for stimulating external economic activity of small and medium-sized enterprises.
Japan became the first state in Asia which realized the opportunities that opens up the proper use of soft power as a powerful instrument of influence in the world. After the World War II Japan was a defeated aggressor, which in order to restore its economy and position in the international community needed to achieve normal relations, primarily with the countries of Asia Pacific, which suffered the most during the war.
But active state involvement and directive approach to soft power produce some serious risks. Usually, the private sector evokes more trust abroad as more independent and free in its actions.
Here other players come, for example, transnational companies. One of the strongest soft power instruments they engage is corporate social responsibility. Such big companies like Mitsubishi and Toyota take part in various projects related to the social sphere in Russia. For instance, Mitsubishi Corporation supports the Center of Japanese language and culture in Moscow State Linguistic University. As well in 2017 on the base of Far Eastern Federal University Mitsubishi Corporation and Far Eastern Federal University established the Center for study of Russian-Japanese relations. Mitsubishi’s employees visit boarding schools, organize educational and leisure activities. In December 2015 Furusawa Minoru, CEO of Mitsubishi Corporation Russia, was awarded as a “Maecenas of the year” at the St. Petersburg Cultural Forum.
Vectors of dissemination
After the World War II Japan managed to solve an extremely difficult task: in a short period of time the country not only earned the reputation of a peace-loving country and a reliable economic partner but still continues to support it successfully.
Japan’s cautious, non-assertive policy and economic assistance to the countries of Asia Pacific after the World War II played a key role. In 1954 Japan became a participant of the Colombo Plan for the joint economic and social development of Asia and the Pacific. From that moment, directly or through participation in international projects, Japan began to provide official development assistance, grants without requiring their return and long-term loans on preferential terms. Today speaking of lending Japanese banks keep a leading position in the Asia Pacific region.
The construction of Japan’s infrastructure projects is another significant area, however today Japan faces strong competition from China. Tokyo invests in the construction of schools, hospitals, purchase of equipment, construction of roads. In May 2015 Shinzo Abe announced the launch of the “Partnership for Quality Infrastructure” project which should embrace South, Southeast and Central Asia countries. Next five years Tokyo intends to invest 110 billion dollars for the project implementation. Despite the recession that has continued since the 1990s, Japan remains the main donor of economic assistance and lender in Asia, one of the founders of the Asian Development Bank and the largest contributor to infrastructure development projects.
Assistance for developing countries, financing of development programs, provision of preferential long-term loans, training of personnel and sending Japanese specialists to developing countries allows to form the positive image of the country and favorable environment for Japanese business.
During the recovery period after the World War II the cautious Tokyo’s policy, the emphasis on the provision of economic means, loans, grants, and investments in infrastructure project played an important role in spreading the so-called soft influence of Japan in North Asia and Southeast Asia – closest Japan’s neighbours. Thus, after the beginning of reforms in the People’s Republic of China in the late 1970s Japan was one of the main trading partners and still one of the main investors.
Because of geographical proximity and close historical ties China and South Korea became the first countries which felt Japanese soft power influence through the popular culture. In late 1990s Japan faced a strong competitor: South Korea film production, music (K-pop) and tourism to Korea, Korean ethnic cuisine, electronics intercepted interest in Japan. Korean pop culture first captured China and Japan, then Vietnam, Cambodia, Taiwan, Thailand, Russia, Mongolia, European, Central Asian, Middle Eastern and African countries, America. Nevertheless, 99% of the exports of the Korean cultural industry go to Asian countries.
To some extent Japan nurtured its competitor itself: it was the Republic of Korea that was the largest consumer of the products of the Japanese popular industry, and then the imitator, subsequently adding its national flavor to the most popular samples of Japanese pop culture.
In Southeast Asia Singapore became a kind of reference point for distribution of Japanese popular culture. In November 2009 the Japan Creative Center was opened in Singapore to introduce traditional and modern Japanese culture, technological achievements, cuisine, anime, crafts, cinema and music.
In Central Asia the basis of Japanese soft power is Japan’s Asian identity, similarity. Diplomatic relations with the countries of the region Tokyo established in the 1990s, but they won attention much earlier and today they are spurred by Tokyo’s interest in energy potential and transit opportunities of these countries.
The undeniable advantage of Japan in the Central Asian region is the absence of military aggression in the past and, as a result, the absence of negative memory of the peoples regarding Japan. “Residents of Central Asia remember tens of thousands of Japanese prisoners of war on the territory of Kazakhstan, Uzbekistan and Tajikistan after the World War II. Until now buildings built by their hands have been preserved, for example, the Central Telegraph and the Ministry of Culture in Tashkent, the Academy of Sciences in Almaty, the Farhad Hydropower Station in Tajikistan”, notes Olga Dobrinskaya, Research Officer at the Department of Japanese Studies, Institute for Oriental Studies of the Russian Academy of Sciences.
In the 1990s Central Asian countries had to choose the way for further development including economic model. The Japanese case with the leading role of the state seemed very attractive, as well as the fact that Japan acted as a carrier of Western values of democracy with some Eastern specificity.
Ryutaro Hashimoto’s concept of the “Eurasian diplomacy” meant revitalization of Japan’s relations with Central Asia, the Caspian Sea region and China. In 2004, Japan initiated the launch of the “Central Asia plus Japan” Dialogue to strengthen mutual understanding between countries. In 2006 Central Asia along with the South Eastern and Central Europe, the Caucasus, the Middle East, South, Southeast and Northeast Asia were inserted in the concept of the “Arc of Freedom and Prosperity”. Shinzo Abe’s visits to the countries of Central Asia in November 2015 became a demonstration of serious interest in cooperation with the countries of the region.
Among the examples of Japan’s soft power in Central Asia, it is significant to mention programs of official assistance to the development of the Central Asian states, projects in the field of ecology, green and energy-saving technologies, in the spheres of agriculture, education, health. Successes in these fields have strengthened Japan’s image as a state that promotes and develops non-military security.
Japan is interested in Central Asia’s transit routes and energy resources, and that’s why the Japanese government is interested in the stability of the region including environmental dimension, political, economic and social spheres.
Difficulties and prospects
In the Soft Power 30 global index of Portland in 2017 Japan ranks sixth while in 2015 it was located on the eighth position. Despite the high indices there are factors which contain the further realization of the potential of Japan’s soft power.
The most important one is related to the perception of foreign influence. Soft power becomes an unattainable ideal wherever different identities, ideologies, views collide. It becomes effective only if the ‘recipient’ of soft power shares the notions of the way of life, worldview, culture of the soft power ‘projector’. Concerning effectiveness of Japanese soft power the following question arises: how much is Japan’s soft power viable in Northeast Asia given the growth of nationalist sentiments in Asia including those in China and Korea, and Japan’s implementation of military reforms policy? Can it cope with competition from the Chinese cultural heritage which is much older than Japanese one?
Another issue concerns weakness of soft power in overcoming hostility and rivalry rooted back far in the past and kept in memory of several generations. It is evident within long-lasting memory of Japan’s militaristic and colonial policy in Asia in the first half of the 20th century.
Today in Japan military component as an invariable attribute of great power gradually displaces the ‘soft’ component, which is absolutely important in the world of international technologies and free information flows. Nevertheless, soft power cannot be disregarded, since it is one of the most important elements shaping the image of the state, which strives for a more weighty position among powerful actors and in dealing with global issues.
Moreover, the longest life expectancy results in a high rate of aging; the desire to preserve the culture, way of life, business ethics appears in rigid migration legislation, which exacerbates demographic problems. The migration legislation provides a facilitated regime for obtaining visas and citizenship for “unique” specialists, however, a language barrier remains a strong obstacle. Japanese popular culture is experiencing serious competition from the Korean one. Competition with China in Southeast Asia and Central Asia is increasing and India is rising a a new vigorous rival in the economic field.
So the question is if it is possible in the current conditions to give a new impetus to the Japanese soft power. In case Abe’s government is able to cope with domestic economic problems, Japan will be able to maintain its status as a reliable economic partner and one of the main creditors in the international community.
An important but hardly feasible step could be Japan’s willingness to discuss the issues related to its militaristic past, which the present government is trying to forget with all its might.
In cultural diplomacy Japan relies on pop-culture, the brand of anime and manga, which should promote a deeper interest in the country’s rich culture. But maybe today the world needs things which fascinated foreigners in the XIX-XX centuries? For example, traditional, authentic cultural heritage?
Today military reforms can eradicate the government’s efforts to project its soft power and their further implementation will require much more effort and resources to maintain Japan’s attractiveness in the world. A great opportunity to put life into Japanese soft power can be the 2019 Rugby World Cup and the 2020 Olympic Games which will be held in Japan.
As well 2018 is a cross-cultural Russian-Japanese year. For both countries it is a great opportunity to better understand each other, to make people interact more often and find more common points for cooperation. Despite the Kuril issue, which is yet to be resolved, current stable and friendly relations between Russia and Japan provide great potential for dialogue and collaboration. Within the Pivot to the East Russia now makes an attempt to establish close ties with promising and highly developed Asian countries, and 2018 grants Japan a more privileged position at least in terms of people-to-people contacts.
Japan`s cultural events are warmly welcomed in Russia. For instance, in Autumn 2017 just three big events took place in Moscow: 7th Moscow Biennale, exhibitions by Takashi Murakami “There will be a gentle rain” and Keichi Tanaami “Country of mirrors”.
But opportunities granted to Japan by international large-scale sports and cultural events have temporary effects although they give a good chance to show the country at its best. Japan as an influential soft power actor requires a long-term strategy which would work in accordance with other state policies. Otherwise, Japanese government run risks to lose its positions as one of soft power leaders if it chooses hard power instruments for projecting its influence and will have to fully revise its soft power strategy.
Original pre-revised text in Russian
*Viktoria Ivanchenko, PICREADI (Creative Diplomacy) editor-in-chief, researcher at Higher School of Economics, Moscow
The Implication of China’s Diplomacy in APEC and ASEAN
It is truly unusual that the Chinese President Xi Jinping and its Premier Li Keqiang are visiting the same area during nearly the same time: Xi’s visit to APEC from15th to 21st November and Li’s visit to ASEAN on 15th November. Yet, if we look into China’s foreign policy towards this area over the past years since President Xi took power, it is not difficult to understand both Xi’s and Li’s official visits to the “larger Pacific” and the meaning beyond.
As we know, President Xi has reiterated that the Pacific is large enough for the countries involved to share the prosperity with each other. In order to achieve the inclusive rather than exclusive benefits for all, China’s diplomacy aims to reject any kind of unilateralism, trade protectionism and anti-globalization. Given this, Xi’s at APEC and Li’s at AEASN is defined as a signal of China’s diplomacy to further reform and bold openness.
As a rising great country, China is surely eager to expand its investment and trade with the south Pacific area, and Papua New Guinea (PNG) is the first country visited by Chinese president. What is more, PNG joined the Asian Infrastructure Investment Bank (AIIB) early 2018 and then became the first state of Pacific islands to sign the MoU on “The Belt and Road Initiative” construction. As the theme “Harnessing Inclusive Opportunities, Embracing the Digital Future,” the APEC summit will focus on Regional economic integration, digital economy, connectivity, sustainable and inclusive growth and so forth.
Also during Premier Li’s visit to the ASEAN, he highlighted the necessity of the collaboration and mutual benefit among the countries involved on the 21st China-ASEAN leaders meeting. This is also the 21st ASEAN Plus Three Summit (10+3) and the 13th East Asia Summit (EAS).
Quite understandable, since the 1960s, the center of world economy has shifted from North Atlantic to Asia-Pacific, its dynamic growth in the region create countless jobs and push the development of world economy. This is the reason that Asia-Pacific region has the most trade agreements and the most complicated economic architecture around world. APEC and ASEAN, as two institutions that possess most member states, are the very pillars of the tumbledown regional economic architecture. APEC was launched by Australia and later included 21 member states in the region, amongst are United States, China, Japan, the economic giant three of the world economy. ASEAN is an institution that consist of ten small and middle states. Though they are not strong enough to meet the challenges from the power politics alone, ASEAN is a core force that firmly facilitate the economic integration of the whole region of East Asia and the Pacific. No matter what the way they embrace, they are the de facto basic regionalism of Asia-Pacific. The withdrawing of United States from Trans-Pacific Partnership (TPP) and hard-achieved Regional Comprehensive Economic Partnership (RCEP) once brought the regional economic architecture a fig leave and strengthened the impact of APEC and ASEAN.
As a result, the two visits of Chinese top leaders to the same region at the same time definitely attract worldwide attention, because they not only represent China’s recent diplomatic focus but also mark the fact that Asia-Pacific region has become one of the vital fields where China’s diplomacy will be actively conducting in terms of the Belt and Road Initiative, and carry on the good-neighbor policy. Since China has argued for creating a peaceful development milieu, to enhance economic transformation and upgrading oversea markets and partners in Asia-Pacific region.
Consider these facets, China, as the second largest economy, aims to promote its well-articulated stance on multilateralism and inclusiveness and globalization. As both President Xi and Premier Li have strongly said that China is ready to work with Pacific island countries to endeavor together and sail for a better future for bilateral relations. For the sake of that goal, China always believes that as long as all the countries involved have firm confidence in each other’s development, cooperation and the future of East Asia, and work closely together and forge ahead, all sides would achieve more and reach a higher level in the next 15 years.
For sure, China belongs to the part of a larger Asia-Pacific family, and the Chinese government defines its goal as the shared prosperity of this region. Therefore, China will continue to work hard and constructively to promote the overall development of impoverished but promising Pacific island countries under the Belt and Road Initiative.
An uncertain step in moving China-Japan relations
Authors: Meshach Ampwera & Luo Xinghuan
On October 26, Chinese President Xi Jinping met Japanese PM Shinzo Abe and praised that both China and Japan have pledged to strengthen bilateral ties amid continuous efforts made by the two nations. Xi said, “Bilateral relations have returned to the right track and gained positive momentum, which is something the two sides should cherish.” As the two largest economies in Asia, China and Japan are also the vital players in Asian security and the global development.
In addition, since this is the first official visit to China by a Japanese PM in a seven-year “Cold Peace” period, it is widely assumed that Abe’s visit symbolizes the resumption of high-level visits and will be followed by an increasing rapprochement between China and Japan. True, the leaders of the two economic giants witnessed a wide range of agreements, including a 30 billion US dollar worth of currency swap pact, the establishment of a maritime and air liaison mechanism, and enhancing people-to-people exchanges.
Yet, three factors have to be considered seriously in looking into Japanese foreign policy given the current changing geopolitical landscape regionally and globally. First, Japan has still regarded itself as a “defeated” state during the WWII. Since then, Japan’s postwar posture has frequently described as a new pacifism; yet in fact it is considerably more complex. As Henry Kissinger put it: “Japan had acquiesced in the U.S. predominance and followed the strategic landscape and the imperatives of Japan’s survival and long-term success.” This means that the governing elites in Tokyo used to hold the constitution drafted by U.S. occupying authorities with its stringent prohibition on military action, and adapted to their long-term strategic purposes. As a result, Japan was transformed from the pacific aspects of the postwar order (that prohibited military action) into a nation that has focused on other key elements of national strategy, particularly using economic leverage regionally and globally, though not uncontroversial.
Second, in a recently-released paper written by the former US Secretary of Defense Ash Carter, he maintained that “Japan is a close ally of the U.S. and a rising military power, too, because of legal and constitutional changes of great significance championed by Prime Minister Abe.” In practice, the Japanese administration has engineered an expansion to enable its military to operate regionally and even globally in response to the rise of China, violent extremist activity in Asia, and the alleged North Korean belligerence.
Actually in 2013, Japanese Government White Paper revealed a desire to become a “normal country” with an active alliance policy. In a searching for a new role in the Asia-pacific region, Japan aims to act as an “anchor” of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) concluded in 2018 after the withdrawal of the United States. Now it involves 11 countries and representing 13.4% of global GDP ($ 13.5tri.). As the largest economy of the CPTPP, Japan has been active in moving it forward. Early this year when the British government stated it is exploring becoming a member of the CPTPP to stimulate exports after Brexit in 2019, Abe stated that the United Kingdom would be welcomed to join the partnership. It is said that even the U.S. reconsiders possibly rejoining the CPTPP if it were a “substantially new deal” for the United States.
Japan’s ardent involvement into the US-led strategy in Asia has also been endorsed to expand steadily as a normal power regionally and globally. For example, the Asia-Africa Growth Corridor (AAGC) is the result of the joint declaration issued by the India and Japan in 2016. Although it is premised on four pillars of development and cooperation, it is self-evident that the AAGC reflects a growing special “strategic and global partnership between India and Japan” in which both sides have viewed China’s growing, pragmatic and successful presence in Africa as a menace. There is no question that AAGC is a well-crafted vision and agenda of both India and Japan, linking with their own development priorities. But with increasing pressure from Washington and Brussels, Japan and India are in effect driven by the option for the AAGC to rebalance China’s Belt and Road Initiative (BRI).
From the inception of the BRI, they have more than ever before been concerned with being isolated in Africa by Beijing’s initiative. But, as Ampwera Meshach, a researcher at Jilin University put it, “Africa is on the growth trend and offers potential markets and raw materials. For this reason, Africa largely needs pragmatic and scientific, technological and development- oriented initiatives and these are clearly reflected in China’s BRI.” In light of this, the AAGC does neither reflect a novel nor pragmatic approach on how it fits within the African agenda. Instead, AAGC’s foundational pillars seem more inclined to the Western cooperation approaches that have for decades not been translated into development.
Controversially, two days before Abe’s visit to Beijing, Japan had decided to scrap official development assistance (ODA) to China, which is a program where Japan provides aids to developing countries starting back in 1954. Even though some people argue that Japan’s ODA is reasonably cancelled because China’s GDP is even 2.5 times larger than that of Japan, yet, it is necessary for Chinese to be aware of the reality that Japan is a longstanding ally of the United States. As Japan has long been an economic power, its impressive military capabilities would not be confined to a strict policy of territorial defense—no projection of Japanese power or the U.S.-Japan alliance to the region as a whole.
It is during the Abe’s administration which has recognized an environment of growing Chinese assertiveness, violent extremist activity in Asia, and North Korean hostility, and therefore, Japan has eagerly participated in Asian security, including training and exercising with other nations, beyond a purely passive, home-island defense role. This makes it an increasingly important player serving the US strategy in Asia but challenging the rise of China globally.
It is true that Abe tweeted about the trip — while recognizing the challenges in moving bilateral relations forward, he said that he would still work to “push Sino-Japan relations to the next level”. Given the two countries’ economic links, it is only understandable that there is a need for the two sides to come closer. Moreover, Japanese businesses has been an extremely active force behind the government’s shift of attitude on the Belt and Road Initiative (BRI).
Yet, all in all, we should never ignore that Japan’s ambitious foreign policy has gone beyond the economic goal.
Red Flags: Why Xi’s China is in Jeopardy – Book Review
George Magnus writes about the dangers of the Middle-Income Trap in the Middle Kingdom, among other issues, in Red Flags: Why Xi’s China is in Jeopardy. President Xi’s face adorns the book cover, with his name looming above. Fitting, seeing as China has removed presidential term limits; China’s fate is thus likely to be tied to the decision making of Xi for the next couple decades.
Magnus writes about the dangers of Xi’s likely ascendance to President-for-Life. Ever since the excesses of Mao’s one-man rule, China’s Communist Party has largely ruled by consensus, while provincial governments have served as a counterweight to federal authority via control of their land and many of their local State Owned Enterprises (SOEs). Xi is challenging this staus quo. So-called Xi Jinping Thought is now official party canon, being taught in schools and in the media. The 2012 crackdown on corruption by Xi in his inaugural year was widely seen as a pretense for taking out political opponents and sending a message to his potential opponents. Ever since, Xi has been working to centralize power to himself. Magnus notes that being leader for life largely shields Xi from short-term popular discontent, but also means that every long-term decision, good or bad, will become part of Xi’s legacy. Hence, the book informally reads as a personal policy checklist for Xi.
Red Flags lists four, well, red flags of likely impediments to Chinese economic development. Firstly is debt. China has been an unprecedented money-making machine for the past three decades or so. However, signs are starting to appear of a possible economic slowdown. Most significant is the debt-GDP ratio, which has skyrocketed over the past few years. Magnus writes extensively about how China’s growth, up to this point, has largely been fuelled by credit (debt). China’s much-maligned (by Trump, most notably) trade balance surplus has shrunk to no more than a few percent, statistically insignificant. China could theoretically make up for shrinking foreign demand for goods and services with domestic consumers. Magnus is unfortunately the bearer of bad news in this regard: “Household savings rose from about 5% of disposable income in the late 1970s to about 38% in 2016, or just over 25% of GDP. Savings by companies are also elevated, amounting to about 17% of GDP in 2016.”
Hence, the Xi regime has been trying to maintain economic growth via ever-greater sums of state investment funding. Magnus explicitly warns against this: “The reason the investment rate has to fall is because the more China relies on it, the more inefficient that investment will become.” Such a statement might seem self-evident, but Magnus backs it up with facts. For instance, he points out, “Between 1978 and 2006, for example, China spent between 2 to 4 yuan of investment to get 1 additional yuan of GDP. Since then, the amount has risen steadily to reach about 9 yuan in 2015, corresponding to a marked fall in investment efficiency.”
Magnus writes a lot about the inefficiency of China’s thousands and thousands of SOEs. “Officially, and according to some China-watchers, SOEs now account for just a fifth of output and a tenth of employment. The presumption though that the rest of the economy is in private hands, as we understand it in the West, is incorrect. Many private firms have large or majority state owners, who exercise significant control over senior appointments and corporate strategy, and state ownership is often disguised by multiple layers of investment companies ultimately owned by a state entity. Allowing for these opaque adjustments, the purely private part of the enterprise sector may actually be little higher than 20–30 per cent.” SOEs have built much of modern China, but their efforts are increasingly being wasted on skyscrapers and airports that remain almost empty, Chinese Roads-to-Nowhere. A blank check invites planners to ignore long-terms concerns of viability, blinded by short-term gains that go directly into the pockets of Party-affiliated contractors. China’s financial services sector isn’t much better off. Magnus writes about all the bailouts, takeovers and general heavy-handedness by the government of various Chinese banks and other related companies. Due to a slowdown in trade and many other issues discussed in the book, state investment will figure to play an ever-larger role in China’s economy, inefficiency be damned.
The book’s second diagnosed problem for China’s future growth is its currency, the renminbi. Xi mirrors the isolationist mindset of China’s ancient emperors with regards to cash inflows and outflows. It’s very hard for Chinese investors to send renminbi out of the country. Likewise, China restricts the ability of foreigners to own reserves of renminbi, or Chinese financial assets in general. The renminbi is subject not only to this lack of liquidity, but also the confines of a planned economy. China is infamous for its strict control of its currency valuation, as well as its monetary policy via diktats, investment and bailouts. Its ownership of USD and other foreign currency reserves must always be flawlessly balanced to safely back up the value of the renminbi. This resulted, for instance, in the selling off of a trillion of its USD reserves between 2014-2016. The combination of currency illiquidity and over-management limits the ability of the renminbi to fuel Chinese economic growth.
Thirdly, the book mentions the so-called Middle Income Trap. Once a country reaches a certain benchmark of development, it’s hard to maintain further momentum. China’s already experiencing slowed growth due to factors such as increased global manufacturing competition. As Magnus points out, China has already had its coming-out party to the world economy. It can’t join the WTO again or eliminate mass hunger again. Likewise, China has stalled in terms of rural development and education. Rural China is increasingly falling behind the major cities and the hukou system of restricted movement and rights for migrant workers isn’t helping. Students in China still attend far fewer years of school than students in developed countries like the US, especially in advanced fields like IT. These issues of inequality and 21st-century education must be addressed if China is to fully develop.
Lastly, Magnus writes about the demographics crisis. China has one of the highest ratios of elderly people in the world. Combine this with China’s 1.45 birth rate and the gender disparity caused by the 1-Child Policy and you have a ticking time bomb. The workforce is increasingly running out of youngsters who can take the place of retirees, causing a slowdown in economic output. The higher the elderly population becomes, the more each working-age person will have to contribute to pensions and healthcare. The economic burden that only-children will have to shoulder taking care of their aging parents will inevitably lower marriage rates and thus further lower the unsustainably low birth rate.
This is the most dire problem because there’s very little that society can do about it. Xenophobia has prevented any meaningful amount of migration to China, but even if China were to let in tens of millions of foreign workers, that would be a drop in the bucket for a nation of 1.4B people. Even after China ended its One-Child Policy, couples are still averaging well below 2 children, despite increasing prosperity. The only real hope for China’s demography problem would be a literal ex machina: automation. Robots may be able to generate untold wealth that could buoy a small nation like Singapore, but even an army of robots is unlikely to completely offset the gradual loss of hundreds of millions of working-age people to aging. Even if AI is a magic bullet for all productivity woes, it take probably at least a century to meaningfully scale up, by which time China’s population will have substantially shrank. It doesn’t help that China is, in many respects, barely keeping pace in the AI race with the US, Japan and the EU. In the race for artificial intelligence, even being a year behind the competition can cost trillions of dollars; China’s tech sector will likely take a few decades to completely match Silicon Valley. Lastly, it should be noted that not even innovation can overcome the limit resources of our planet. We’re already running out of industrial resources like oil and lithium. It would be foolish to place all of one’s eggs in the basket of a sci-fi utopia.
Red Flags is a very detailed and interesting book about the future of China. Magnus isn’t anti-China by any means; he gives credit to China’s marvelous successes and doesn’t moralize. If anything, the book was too generous by barely mentioning the unrest in Xinjiang and not mentioning the occupation of Tibet at all. In an objective fashion, he succinctly explains China’s problems and offers possible solutions. China has shown an unprecedented ability to adapt to change. This flexibility may wind up being undone not external adversaries or limitations, but by increasing autocracy. Dictatorship has rarely resulted in long-term, across-the-board growth. One can look at a fellow Communist country for an example: the Soviet Union. Though the USSR made impressive leaps in technology, manufacturing and agricultural output and human longevity, it was ultimately undone by its ideological rigidity. A lack of accountability for its leaders meant that the USSR was forever a captive to bad policy. Likewise, a lack of freedom stunted innovation. If Xi is to avoid the pitfalls of the USSR, he must avoid letting his power get to his head and embrace a flow of ideas from both fellow Party members and private citizens. Xi’s consolidation of control and crackdown on dissent would point otherwise, unfortunately. Only time will tell if China will continues to beat the odds…
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