Martin Parkinson: joined-up government and the rise of China

By Martin Parkinson

February 4, 2016

Griffith Review 51: Fixing the System extract
Griffith Review 51: Fixing the System extract

Interdependence, as a result of globalisation of trade, capital and labour markets, brings with it great benefits for the global economy but also creates new complexities for countries in the pursuit of their national interests. In particular, rising interdependence, combined with the increasing economic weight of China and other countries with emerging economic power, requires Western nations, and particularly the US, to develop a more dynamic view of relative economic and strategic power, and how best to shape and deploy economic power to achieve national-interest objectives.

Yet very few countries think about policy interconnectedness in a strategic fashion. Indeed, very few countries could be said to do “joined-up” government well at all, as there is a recurring lack of co-ordination between the strategic, military, economic and cultural institutions within nation-states. While it may be hard to achieve this outcome, especially in democracies, history suggests those that do can have a disproportionate influence at key points in time.

The US has a long and enviable record of bringing together economic, strategic and soft power in the face of key challenges. It has been, perhaps, less successful in more “normal” periods — that is, where change is more gradual — in part, perhaps, because the stakes do not seem to be as high. Perhaps the pre-eminent example of joined-up policy, and the pursuit of economic diplomacy as part of a clear strategic agenda, can be found in the Marshall Plan.

Equally, US leadership in creating the institutions that underpinned the postwar liberal economic order — the creation of the International Monetary Fund, World Bank, General Agreement on Tariffs and Trade, and the World Trade Organisation — helped underpin post-war growth, trade and investment, lifted hundreds of millions worldwide from poverty and delivered rising living standards to billions more. More recently, US leadership in the establishment of the G20, with strong Canadian support, after the Asian financial crisis was recognition that the world had changed and that solving global problems required the involvement of a broader group of countries. The foresight embodied in that decision turned out to be particularly important when collaborative responses were needed to the global financial crisis.

But the question is not about the US’ track record. Rather, it is whether diplomacy in its current form will be as successful going forward, particularly in Asia. The fact that Asia’s importance has risen, and will continue to do so over the decades ahead, owes much to the US’ underwriting of the liberal economic order. It is that regime of open markets, trade and investment flows, rules and effective institutions that contributed to the environment in which regional economies have been able to grow and develop — from Japan to the Asian Tigers of South Korea, Taiwan, Hong Kong and Singapore, and now China, India, Indonesia and others.

Moreover, it has been US military primacy that has underpinned Asia’s fragile strategic balance. Without both of these contributions, Asia’s recent history and future promise would look much different. This should be acknowledged more often than it is. But what is striking about postwar Asia is the absence until the 1980s of virtually any regional institutions to support economic growth and strategic stability.

“The initial US ambivalence reflected disparate views within Washington as to the appropriate objective for APEC.”

By the late ’80s this was changing, with countries’ acceptance of the concept of an Asia region resulting in the institutionalisation of the reform processes and openness to trade and investment flows that had been fostered by the US and had come to characterise Asia’s postwar economic development. Geopolitical change — the end of the Cold War — was a key factor, leading to ASEAN’s expansion to cover all of South-East Asia, and the broader embrace of regionalism.

The ’89 Asia-Pacific Economic Co-operation initiative — led by Japan, Korea and Australia and designed to embed “open regionalism” — initially struggled to engage the US. After active lobbying of President Bill Clinton by Australian PM Paul Keating, who recognised that APEC couldn’t succeed without the US — then Asia’s largest trading partner — US engagement resulted in the first leaders’ meeting in Seattle in ’93.

The initial US ambivalence reflected disparate views within Washington as to the appropriate objective for APEC. “Community builders” saw it as fostering greater understanding and encouraging collaborative responses to issues in the region, helping countries become “normalised” to the idea of working together. As such, they took the view that the APEC project required patience and a long-term perspective. Others feared it was a vehicle to exclude the US from security and foreign policy discussions in the region and hence should be opposed, while a third group saw it predominantly as a vehicle to promote economic reform and trade liberalisation.

While ultimately the “community builders” prevailed, the tension between the manner of Asian multilateralism, with its focus on processes to deliver “behind the border” structural change, and the US’ more immediate focus on reciprocity, has been an ongoing source of friction within APEC.

Even after embracing APEC, the US has often looked to use economic forums to advance broader multilateral interests. For example, the expansion of APEC membership to include Russia, while probably desirable in the long run, added challenging complexity to a nascent institution and likely diminished its effectiveness for some period. The US also diluted the economic focus by broadening the agenda to include non-economic issues such as terrorism in the wake of 9/11. Each of these decisions seemed driven by US interests and short-term imperatives, not the long-term integration of the region. More recently, the same issues are presenting themselves in the G20 leaders’ meetings.

Fallout from the Asian economic crisis

But it was the handling of the Asian financial crisis of 1997-98 that fundamentally changed Asia’s perception of itself and the nature of US-Asian economic relations.

The US, through the IMF, was perceived as both misreading the nature and causes of the crisis and then orchestrating a response that advanced its own political and economic interests. The IMF’s overloading of the reform agenda, arguably at the behest of the US, was seen throughout the region as ruthless exploitation of the crisis to push countries in directions they may otherwise not have pursued. While the region has conveniently chosen to overlook the culpability of the countries at the centre of the crisis, this perception of the role of the US is now deeply rooted in public and official consciousness.

This experience also directly resulted in the long-term trend of Asia looking for new mechanisms for mutual support in order to reduce reliance on the IMF. This has not only damaged IMF credibility and effectiveness in the region, and arguably beyond, it directly triggered the proposal for an Asian Monetary Fund, which was ultimately killed off by vehement US and Australian opposition; the establishment of the Chang Mai Initiative, which created a network of bilateral financing facilities and foreign currency swap arrangements; and, most damaging to growth prospects, a widespread priori- tisation on building foreign exchange reserves as a (costly) form of insurance against refinancing risk.

Moreover, the region, at the time of the Asian crisis, contrasted US behaviour with that of China, concluding that China’s decision to maintain the value of its currency at the height of the crisis and in the face of depreciation and devaluation elsewhere in the region was a mark of leadership, notwithstanding that this was clearly in China’s own narrow self-interest.
The recurring tension between the short-term outcome orientation of the US versus the focus on the building blocks of future co-operation was seen again in the context of the Manila Framework Group, which emerged as a mechanism during the Asian crisis to build confidence in macroeconomic co-ordination and operated successfully for several years, until US reluctance to continue participation triggered its demise. It is an unfortunate reflection on regional inadequacies of the time that member countries couldn’t countenance continuation of the MFG without US involvement. Again, the apparent US rationale was that the pay-offs, as defined by (unspecified) concrete outcomes, were not obvious. In this regard, it echoed the initial disinterest in APEC and the ongoing frustration with its performance.

Such attitudes are, of course, never universally shared within any government, and senior Bush administration officials privately described the decision to kill off the MFG as “one the US would eventually rue”.

“These three examples suggest the US has not always understood Asian attraction to open regionalism via a suite of institutions …”

These three examples suggest the US has not always understood Asian attraction to open regionalism via a suite of institutions, or how the region thinks about economic co-operation and co-ordination. An affinity for non-interference and relationship building deeply underpins Asian economic diplomacy. America’s default position of bilateral, rules-based reciprocity has worked well with many countries and in some regions for decades, but has a more limited track record of success in Asia. This is something that the US should keep in mind as it responds to China stepping up its role in Asia — the default for Great Powers tends to be bilateral dealings as they are more likely to prevail (which again highlights the enlightened nature of US statecraft in the aftermath of World War II).

Yet the US has also shown great flexibility in other areas, such as championing the creation of the G20 to help strengthen crisis management efforts and the global financial architecture in the wake of the Asian crisis. The 2011 pivot to Asia is a reflection of how core US interests are at stake with the transition of economic weight to the region, and to China in particular. The pivot has embodied traditional elements of both economic diplomacy and military power in the pursuit of strategic objectives.

As part of this, the Trans-Pacific Partnership was an initially well-considered initiative and, if successful, will deliver a strong benchmark for others to emulate. As such, it would be a visible sign of US leadership in the provision of global public goods. Yet, if true liberalisation is the aim it seems short-sighted to keep the world’s largest emerging economy out of a core trading group, one in which it is the major trading partner of most, if not all, members. Moreover, it stands in sharp contrast to the approach taken by Asia toward involving the US in APEC. While the TPP is theoretically open to any country in the region, ANU Professor Michael Wesley asserts that in reality the costs would be heavy for many developing countries, suggesting its existence has spurred China’s “One Belt, One Road” trade, investment and infrastructure initiative.

And whereas the US has prioritised the TPP, and its partner Transatlantic Trade and Investment Partnership, China has put multilateralism at the core of its approach to trade policy, an approach that appeals to much of the developing world and to the other emerging economies.

Looking back, it is hard to avoid the conclusion that, overall, US economic diplomacy has become increasingly more tactical rather than strategic. Far from the clarity of purpose and commitment that underpinned US leadership in the formation of global institutions and their initial direction, US strategic intent has been increasingly difficult to discern. This can be seen repeatedly, from the failure to deliver on US-championed IMF quota reform to the response to the proposal to establish the Asian Infrastructure Investment Bank, or the willingness to undermine US credibility with the pursuit of short-term domestic political agendas across multiple forums.

To some extent, this echoes criticism of US diplomacy more broadly — in particular, that the collapse of the Soviet Union took away the organising framework for thinking about how to achieve US national interests and allowed the pursuit of short-term, single issues without any strategic connection. The apparent focus of the US on short-term expediency at the expense of long-term goals all raise questions about what has been, and what may become, the organising framework for US economic diplomacy in the Asian region. This question becomes more important as it becomes harder for the US to unilaterally determine the rules of the game — the costs of short-termism are rising.

This raises two intriguing questions. First, does China risk becoming a new organising principle for US policy if it pursues a determined strategy to displace the US as the pre-eminent power in the Indo-Pacific? Second, will the structural slowing of China’s economic growth rates change perceptions about the speed of US relative decline? If so, it would be a clear case of economic outcomes with strategic consequences.

Far be it, though, for an Australian to criticise US diplomacy — Australia’s own history of economic diplomacy is, at best, a mixed bag. As a small open economy, Australia has benefited from the US-led liberal international order. It was Australia’s ‘mates’ who wrote the rules and Australians have benefited from that – but, increasingly, it will not be the West holding the pen, so we also ask ourselves how should we respond?

Australia can’t play the bully

Australia faces a reality different to many other countries. As the secretary of Australia’s Department of Foreign Affairs and Trade, Peter Varghese, has noted, Australia belongs to no natural global, regional or cultural grouping, and “cannot bully or buy its way in the world”. This has made us firm advocates of multilateralism alongside our bilateral relationships — indeed, both are “anchored in our national interests”.

But Australia has also long recognised that its economic weight and influence in global forums are a direct consequence of what happens at home — that is, policy success begets both greater economic weight and global influence. But unlike the US, Australia lacks what economists call “market power” — it is effectively a “price taker” rather than a “price setter” when it comes to global rules and institutions. Accordingly, Australia has a long history of trying to use its limited influence to strengthen existing global institutions, to a degree that some might say is annoying.

Like the US, however, Australia has not always been as strategic as possible in pursuit of national interests — witness the strident opposition to the Asian Monetary Fund proposal, which damaged Australia’s credentials within the region for several years, and the opportunity missed to shape the AIIB with an initial rebuff of China, notwithstanding China’s genuine efforts to respond to Australia’s concerns.

“… successive Australian governments have recognised the centrality of a successful and effective G20 to the pursuit of national interests.”

This being said, successive Australian governments have recognised the centrality of a successful and effective G20 to the pursuit of national interests. Were the G20 to fail, politicians and policymakers recognise that Australia may not have a seat at its successor. It is this realisation that underpins the extensive efforts Australia makes in this forum, especially during its 2014 presidency.

While the collapse of the Soviet Union left the US as the dominant global power economically and militarily, that dominance has come to an end, replaced by continuing US pre-eminence accompanied by the rise of other countries, each individually weaker on each dimension of power, yet able to stymie or challenge, although not displace, the US on different issues at different times.

As a result, we now live in a world where no country indisputably leads, and this makes for a more fluid environment where regionalism and plural narratives are more likely to be the order of the day, as Amitav Acharya explores in great detail in The End of American World Order. This is a change in circumstances in terms of the breadth of issues and the number of countries able to constrain American capacity for unilateral action, or required to be ‘on-board’ for effective multilateral responses to issues.

Arguably, the issues confronting the world — transnational threats like weak global growth, terrorism, pandemics and climate change — and the diffusion of power from nations to non-state actors, make multilateralism critical at a time when it appears in crisis. What is unclear is whether this crisis is, as Peter Varghese has asked, transitory or permanent.

This is an edited version of the Warren Hogan Memorial Lecture, delivered at the University of Technology, Sydney, on December 2, which itself is drawn from a longer paper US Economic Diplomacy: A View from Afar, delivered at a public lecture at Princeton University on September 28. This extract was published in Griffith Review 51: Fixing the System, out now.

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