285 An Invisible Clash of Financial Systems?

(1) Fingleton precis from In the Jaws of the Dragon
(2) WTO  permits East Asia protection but outlaws Western protection - Chalmers Johnson
(3) China's outplaying US - John Craig reply to James Petras
(4) An Invisible Clash of Financial Systems? - John Craig

(1) Fingleton precis from In the Jaws of the Dragon

In the Jaws of the Dragon

Eamonn Fingleton

New York: Thomas Dunne, 2008

{p. 289} Biggest Change Agent Since the Caravel?

The contrasting economic fortunes of the United States and China in recent decades are closely related: In large measure they reflect the fact that the Confucian economic system is engaged in a zero-sum game with Western capitalism.

The key to the entire Confucian economic phenomenon is a revolutionary new savings regimen in which consumption is systematically suppressed. This creates enormous savings surpluses that are then, by virtue of detailed industrial policies, deployed in boosting productivity in key industries—in the jargon, targeted industries. Not the least such industries are ones that were previously mainstays of the American economy.

Manifestations of China's version of the suppressed-consumption policy run the gamut. Consumer credit is tightly curtailed. A wall of trade barriers and an undervalued yuan block the Chinese people's access to foreign consumer goods. Much consumption potential is choked off by the simple expedient of allowing government-controlled companies to fleece the consumer. By charging exorbitant prices, such companies suppress the sales volume of key consumer goods. Their high profit margins are then channeled into investments in the latest production technologies. Meanwhile zoning restrictions keep housing both extremely cramped and extremely expensive. This enables government-owned land development companies to skim off huge profits

{p. 290} from China's booming housing market; and in one way or another this money too generally goes into improving industrial productivity.

Following in the footsteps of the earlier Confucian industrializers, Beijing uses the banking system as its main instrument in directing savings flows into favored industries. To this end it maintains majority stakes in most of China's significant banks. The banks favor industries where, because of the ready availability of new, more advanced production technologies, investment promises to yield disproportionately large productivity increases. Suitable cartelization enables manufacturers to maintain strong pricing in consumer markets while moving in lockstep to ever more advanced production methods. A key point is that the cartels ensure that older, less efficient production capacity is shut down, thus minimizing the risk of dangerously destabilizing capacity gluts and bouts of below-cost selling.

China's epic version of suppressed consumption has generated savings rates of typically more than 40 percent of gross domestic product in recent years. Saving on this scale has hitherto been virtually unheard of not only in the West but even in other parts of the Confucian region. In the short run the suppressed-consumption policy's effect has been to condemn the Chinese people to much lower living standards than they would otherwise enjoy. The upside is that the resulting boost to investment means that the rate of increase in productivity - and by extension in living standards—has probably been the fastest in world history In the long run therefore the Chinese people can aspire to an excellent return on their involuntary sacrifices (at least those of them who survive to collect the social dividends).

Because the suppressed-consumption concept blatantly violates China's WTO commitments, it has had to be hidden from Western view. One key consequence is that the Chinese authorities—and their spokesmen in the Western economics community—have invented an entirely misleading explanation for the high savings rates the Chinese people, it is said, are exceptionally concerned about the future and thus salt away an exceptionally large amount of their incomes in savings. The truth is, of course, that if insecurity were all that was needed to boost a nation's savings rate, the whole Third World would long ago have saved its way into the First.

In the early decades after World War II, it was perhaps understandable that there was little curiosity in the West about the unnaturally high savings rates that were beginning to emerge in East Asia. Given that China boasts more than

{p. 291} six times the population of all the earlier Confucian industrializers combined, however, the emergence of the Confucian savings regimen now clearly represents one of the great turning points in history. Economic leadership of the world is passing from nations that have long championed individual freedom to others that often pursue diametrically opposite policies. In the fullness of time the rise of the Confucian savings phenomenon may well induce the biggest transformation of the world power map since the first Portuguese and Spanish voyages of discovery more than five hundred years ago. Yet, far from comprehending the scale of the Confucian challenge, the American establishment persists with policies that assume it away.

(2) WTO  permits East Asia protection but outlaws Western protection - Chalmers Johnson

BREACHING THE GREAT WALL

Chalmers Johnson

The American Prospect no. 30 (January-February 1997): 24-29

http://www.emayzine.com/lectures/breachin.htm
http://epn.org/prospect/30/30john.html

"Breaching the Great Wall" is adapted from a Japan Policy Research Institute working paper by Chalmers Johnson entitled "Nationalism and the Market: China as a Superpower."

In the textbooks, free trade is supposed to be mutually beneficial to all involved, expanding the global economic pie and spreading prosperity across borders and down the income scale. Nations agree to drop tariffs and other policies that protect domestic industry in the hopes that expanded trade will translate into more business overall. It sounds great but to work in practice, free trade requires tolerable symmetry—a mutual commitment among participating nations to disavow promotion of domestic industry at the expense of trading partners.

Until 1995, trade among the so-called "free market economies" was governed by the General Agreement on Tariffs and Trade (GATT). In January of that year, the GATT nations, with Clinton's eager support, agreed to institutionalize the WTO. While GATT's purpose was in large part strategic—the United States traded access to its lucrative consumer market and technologies to cement anticommunist alliances with nations such as Japan, South Korea, and Taiwan—WTO's primary rationale is the expansion of free trade for its intrinsic economic value.

The problem with the WTO treaty is that it does not outlaw the main protectionist practices of the East Asian capitalist developmental states but it does explicitly outlaw American attempts to protect itself from such protectionism. Tariffs are no longer important in international trade, but so-called nontariff barriers such as national industrial development policies, regulations with differential effects on foreign and domestic firms, unique standards, collusion among a country's firms to keep out foreigners (China's state-owned sector, Japan's keiretsu, South Korea's chaebol), governmental administrative guidance of privately owned enterprises, and the failure to enforce antimonopoly laws are all beyond the scope of the WTO. On the other hand, Section 301 of the American Trade Act, which allows the U.S. government to assist American firms facing access barriers in foreign markets, is explicitly barred. ...

This strategy that merges "the teachings of Chairman Mao with the economic experience of Japan," as Greg Mastel of the Economic Strategy Institute puts it, is the reason Business Week noted last year that "China may already have eclipsed Japan as America's number one trade headache." In a sense, the China trade problem is not a trade problem at all but one of "systems friction," the clash of different forms of capitalism. One of the secrets of China's development strategy, which borrows heavily from the experience of Japan and other successful Asian nations, is to bend the rules and norms of capitalism in order to achieve national wealth and power. In this view, economics is inevitably a zero-sum game, in which some nations win and others lose. China has never aimed at becoming a "market economy" but rather at engaging and exploiting other market economies to become a great power. It undertook economic reform in order to preserve the Communist Party's political control and to achieve through other means what it had failed to achieve through Leninism. ...

 In a speech to businessmen in Tokyo, the vice president and senior economist for J.P. Morgan in Asia, Huan Guocang, advised, "It is extremely important for . . . investors to develop solid working relations with local authorities in the regions where they have committed capital investment, as such working relations can enhance their operations and hedge against potential economic and political risk." This is a polite way to stress the importance of guanxi (connections or networks) in all Chinese trade dealings and helps explain why the overseas Chinese—who have established intricate and successful transnational networks—have been so far ahead of everyone else in trade and investment in China.

This, at last, is the heart of the matter: Simply requiring China to drop its tariffs, abolish prison labor, or stop domestic subsidies is only the first step toward symmetry. Writing in Asian Survey, Maria Hsia Chang explained,

Quite apart from their complementary interdependencies, the economic integration of Hong Kong-Taiwan-Guangdong-Fujian is fueled by the ability of the overseas Chinese to understand, utilize, and exploit guanxi, the predominant mode of getting anything done in mainland China. More often than not, guanxi includes bribery, backroom and insider dealings, and other forms of corruption that have become pandemic in China. Because of their language and cultural affinities, not to mention kinship ties, ethnic Chinese are better able than non-Chinese to develop guanxi—and thus to do business in China. ...

 How does the United States promote China's economic development while preventing predatory trade from provoking international conflict? The answer is managed trade—using public policy to manage outcomes rather than procedures. It assumes that when private companies in different economic systems trade with and invest in each others' economies, a mutually beneficial outcome cannot be assured merely through an agreement on the rules.

A great deal of international trade is already managed—in petroleum, steel, textiles, agricultural products, electronic goods, and many other products—even though global commerce continues to expand to unprecedented levels. Still, the U.S. refuses to recognize that management is needed and it therefore does a poor job compared with other trading nations. Trade management need not seek exact bilateral balances or zero trade deficits. Its criterion should be the health of domestic high-value-added industries—in other words, those that provide technologically advanced jobs for American citizens. ...

Unfortunately, Americans still remain confused by the shift in the nature of power from military strength to economic and industrial strength. They tolerate and even applaud bloated, irrational defense budgets while doing nothing to rebuild and defend the industrial foundations of national security.

(3) China's outplaying US - John Craig reply to James Petras

From: John Craig <cpds45@bigpond.com> Cc: James Petras <jpetras@binghamton.edu>
Date: 01.05.2010 12:13 AM
Subject: RE: China's outplaying US could see Transition from Empire to Republic - James Petras
Peter

I noted with interest James Petras' interpretations of China's prospects which you circulated, and would like to suggest that, while Petras is correct in relation to the significance of the contest between Western-style international order (dominated by the US) and an East Asian style order (in which China appears to dominate), the issues are not as simple as he portrays them on his assumption that the world is simply driven by 'imperial' logic because:

  the economic model that China adopted is a variation on that which Japan used as the basis of its pre-1990 economic miracles - and that model contains internal constraints, especially a dependence on the strength of the US economy and financial system to protect local financial institutions that make mercantilistic, rather than capitalistic / profit-seeking, investments (see Are East Asian Economic Models Sustainable?);

  China's long term ability to expand its political and economic influence is constrained by the nature of its political institutions and economic model (see Time May not be on China's Side). China could never seek to establish a 'global' order of any sort - merely arrangements with subordinate states (see Creating a New International 'Confucian' Political and Economic Order). Interestingly it may well be that Japan has already taken the lead role in trying to establish such an order, as China's political and economic transformation in the late 1970s certainly seemed to be undertaken under Japan's influence (see An Invisible Clash of Financial Systems?);

  while the types of changes that Petras suggests the US will need to make are arguably correct, they will tend very quickly to increase China's exposure to the limitations in Japan's neo-Confucian economic model - a variation of which China adopted as the basis for its modernisation. US Backing Away from Bretton Woods? and Restricting the Role of Financial Services? suggest that (as Petras implies it needs to) the US is already preparing to move away from its 'consumer of last resort' and financial-services-led economic status. East Asian economic miracles have been reliant on those features of the US economy, and will require massive adjustments to cope which they may well not be able to achieve.

History is going to be very 'interesting' over the next few years.

(4) An Invisible Clash of Financial Systems? - John Craig

http://cpds.apana.org.au/Teams/Articles/competing_civilizations.htm#financial_systems

An Invisible Clash of Financial Systems?

Financial systems have thus been the most obvious focus for a potential 'clash of civilizations' - though this has received essentially no attention from Western analysts.

Financial systems arise because money is used as a means of economic exchange, a store of economic value and a means for signally the need for economic change.

Financial systems have often been a source of problems because of (a) the self-interest of the owners of capital - that can distort the economy and the political system, (b) the inherent 'boom-bust' character of financial markets (due to speculators' use of such markets as a primary way of wealth creation; the 'herd' behaviour of investors; cycles in the 'real' economy; and periodic failures in monetary and credit management) - and (c) the possibility that financial 'busts' can affect the real economy.

However Japan's economic system has involved a mercantilist policy goal of creating production capacity far in excess of domestic demand and without regard to profitability through the creation of credit by a tightly regulated financial system - which resulted in large current account surpluses that have been recycled into further expansion of production capacity and, in recent decades, into investments in $US assets (see Why Japan cannot deregulate its financial system). 

Even more significantly Japan's economic model involved the coordination of production capacity in terms of 'neo-Confucian' social relationships (amongst elites and by subordinates to superiors) rather than in terms of symbolic / financial outcomes (such as a search for profitable investments).

In Asia outside Japan, variations on this model had been adopted since the 1960s. China in particular eventually became very successful in attracting foreign investment and growing export-oriented manufacturing industries - following its acceptance of a variation of the Japanese economic model in 1979. This allowed large current account surpluses and holdings of foreign currency reserves to be accumulated - and so allowed China's financial institutions (though they carry enormous quantities of bad debts [1] which put their solvency at risk) to continue providing credit - because there has been no requirement to seek external capital.  

The different (relative to US / Western) characteristics of Japan's and some other East Asian economic systems first started to have obvious impacts on financial systems in the 1980s, when:

  Japan built a financial bubble by increasing the availability of credit on the basis of property values which were in turn sustained by this credit. Industrial capacity was created and many foreign investments were made - which were often unprofitable;

  in 1985 the US encouraged Japan to revalue its currency by 50% and to boost the availability of credit under the Plaza Accord in the vain hope that this would overcome a trade / current account deficit which had emerged  (due to the US's rapid consumer driven growth, and the communitarian / mercantilist character of Japan's economy). This hope had to be in vain because:

  currency revaluation can have only a minor impact on trade flows if production / distribution capacity does not exist;

  Japan's financial system is set up so that, domestically, any stimulus must mainly flow into industrial capacity rather than into consumer demand (op cit);

  the $US fell by around 50% against major currencies in the two years after 1985 [1];

  withdrawal of some $400bn from US Treasury bonds in 1987 led to increasing interest rates which triggered a crash in the value of US equities. This crash was interrupted when authorities (eg US Federal Reserve - and later IMF) developed methods to prevent this and later financial busts from affecting the real economy - through providing liquidity to prevent losses compounding. Ultimately those techniques enabled an asset bubble to grow in the 1990s especially in the USA because:

  P/E ratios escalated as investors concluded that they could ignore equity risks;

  cheap credit cut corporate costs, increased consumer spending and boosted profits; and

  increases in asset values fed-back into consumer spending.

Japan's financial bubble burst with a collapse in equity and property values around 1990, leaving Japan's financial institutions with large portfolios of bad loans, and considerable risk of insolvency. A decade of stagnation has followed with: impeded bank ability to invest in industry; heavy public spending to maintain growth (resulting in very large public debts); growing unemployment; and apparent difficulty in overcoming the bad debt problem. The problem could have been resolved by writing-off the bad debts, but this would have required:

  a 'fire sale' of assets to investors - and reduced control of Japan's economy;

  a loss of status and control of financial institutions by the 'merit-aristocratic' elites at the top of Japan's social system;

  challenging the socially and politically powerful nationalistic gangsters [1, 2] who dominate Japan's politically-and economically-important construction (and leisure) industries - and play a key role in enforcing discipline on behalf of Japan's social elites.

Across East Asia foreign investment grew rapidly in the 1980s and 1990s - until the Asian financial crisis emerged in 1997 as foreign investors found that profits were often likely to be limited (see The Asian Financial Crisis). Many events can be seen to have triggered that crisis, however it also reflected the institutional characteristics of  the  East Asian economies that have followed versions of the Japanese development model.

Sakakibara, a senior official in the Ministry of Finance which developed Japan's financial model, proposed an Asian Monetary Fund to protect against the effect of capital outflow - and under the Miyazawa Initiative assistance was provided to some countries [1].

The crisis was widely interpreted by nationalists in Asia as a deliberate US attack on the 'Asian' economic models though:

  it has been suggested that the financial weaknesses in SE Asia that gave rise to the 1997 crisis were exposed  by the withdrawal of Japanese capital from 1995 on because of Japan's domestic financial predicament (see Hartcher ‘Look East, Dr Mahathir, for the source of Asia’s decline’, Australian Financial Review, 25-26/10/97); and

  the author saw no evidence suggesting that culturally-introspective US analysts even properly understood how the Confucian / 'Asian' economic models worked;

A cultural revolution would have be required for many East Asian economies to operate profitably under Western / US financial principles. However:

  under East Asian traditions such difficulties would never be disclosed to, or discussed with, outsiders - (a) to save face and (b) because (given a lack of universalist ethics) there would be no expectation of a sympathetic response - but rather that any sign of weakness would merely be exploited;

   instead of a cultural revolution, all that has happened is that Asian countries adopted IMF principles for financial market liberalization and transparency in varying ways - while all countries in East Asia concluded that suppressing consumption so as to acquire substantial foreign exchange reserves (as Japan and China had done) was the key to avoiding a repeat of the financial crisis.

Since 1990:

  the US has continued to draw upon:

  cheap imports which kept inflation under control; and

  external capital inflows generated by: the strength of its financial system; the different economic character of East Asian economies; and the US's rapidly growing consumer-driven economy. This inflow has been offset by large US current account deficits, and has also further boosted the value of US assets; 

  a great deal of the latter capital has come through:

  investment of the current account surpluses generated by Japan's (and greater China's) non-consumer-oriented economies;

  the Yen 'carry-trade' which has resulted from the creation of cheap credit by Japan, which (because of the structure of Japan's financial and monetary systems) could never boost domestic consumption, but only boost the availability of credit in capital importing countries;

  Japan has led efforts to establish an AMF (an Asian Monetary Fund) which would operate under 'Asian values' (ie the rule of ethnic elites) as an alternative to the IMF (which is based on democratic-capitalist values) - See Note 17 of Queensland's Challenge ;

  Japan continued as the world's major source of capital - because of its high savings rate (eg see Abegglen J. 'Prospects for Japan's Economy, Journal of Japanese Trade and Industry, Sept / Oct 2001) - a role which could well be founded partly on poor accounting practices if the losses in its financial institutions were as bad as expected;

  large financial losses remain in Japanese financial institutions (and have also accumulated in Chinese institutions - see China's Development: Assessing the Implications);

  Japan seems to have been going to extra-ordinary lengths to create large quantities of credit that are made available to US consumers to maintain East Asian current account surpluses [1];

  there has been periodic concern that financial difficulties like those at the time of the Asian financial crisis could be re-occurring (eg Hughes H. 'Tigers return to endangered list', Australian Financial Review, 3/8/01);

  unexpected withdrawal of Japanese capital apparently played a significant role in triggering both the stock market crash of 1987, and the Asia Financial Crisis of 1997;

  Japan shifted in the 1990s to a policy of 'internationalization' and suddenly presented itself as a firm ally of US (quite the reverse of its tense economic rivalry of the 1980s). Getting close to one's enemies is reputedly a tradition 'Art of War' tactic, and provides much greater scope for insider influence. Moreover the methods for exerting influence that Japan seeks to use would not involve overt 'lobbying', but would tend to be invisible (eg by providing access to information to influence others' thinking without stating what conclusions should be drawn);

  the US Federal Reserve was clearly subject to Japanese influence in setting its low interest rate policies which contributed to the development of an asset bubble and ultimately the GFC. Fed chairman, Alan Greenspan, often referred to the need to prevent deflation as justification for setting very low interest rates - though this was a risk that only Japan faced. It wasn't a US problem. Thus it is clear that US Fed was seeking (presumably being influenced by Japanese officials) to use US monetary policy to keep global growth going in the face of deflationary demand deficits in East Asian economies. Greenspan also periodically expressed the hope that associated financial imbalances would eventually be resolved by market forces.

It eventually became obvious to financial authorities (eg Bank of International Settlements, World Bank) that the continued dependence of global economy on US demand and escalation of US debts could not continue - and that the global economic system itself was at risk. In this regard Structural Incompatibility Puts Global Growth at Risk (2003) suggested that:

  major East Asian economies (eg Japan and others who have adopted variations on the Japanese model such as China) contain an inbuilt demand deficit (ie a massive surplus of production for export over domestic consumption). Consumption of this production has been maintained by the US by creating credit - which has also flowed into escalation of asset values. In the process the East Asian economies built up current account surpluses, and claims against the foreign debts of the US;

  Western societies are increasingly developing largely symbolic, rather than real, production capabilities - and the former are of no use if the global financial system disintegrates;

  the demand deficit in the major East Asian economies is the result of a deliberate mercantilist policy (ie one that seeks to build national power by economic means, and one which views economics as a win-lose contest between nations rather than as a win-win partnership). Furthermore, it is likely that such economies were never intended to be sustainable - because economic capacity has been created with little regard to financial profitability (resulting in insolvent financial institutions).

This situation can even be interpreted as a 'clash of civilizations', which is presumably 'invisible' to Western economists and bankers who lack understanding of East Asian social and governance arrangements, and thus can't conceive that:

  financial profitability might be considered irrelevant; or that

  economic dealings could be used to construct a 'bomb' to destroy the global financial system;

  masterless samurai could view destruction of their dead master's enemies - as a worthy, though suicidal, goal (see 'The Tale of the 47 Ronin', Japan's most popular folk tale) 

Speculative scenarios that suggest how such an 'invisible clash' might relate to the September 11 2001 attack in America could also be considered - particularly because the Jewish interests who are often claimed to dominate the US financial system also appear to support Israel as a Jewish homeland in the midst of Islamic societies.

In SE Asia there certainly appears to be some association between countries whose political and economic systems were dislocated by the financial crisis and those in which al Qa'ida reportedly has connections [1].

The situation of Malaysia in particular seems interesting because it:

  is widely regarded as providing a model to demonstrate how Islamic societies might become economically successful - and has in fact developed an ideology about how Islam can be associated with modernization [1];

  has a large ethnic Chinese community who have key economic roles - but have often been subjected to discrimination;

  has repeatedly emphasized a 'look East' approach in developing policy;

  inhibited the impact of the Asian financial contagion on its economy by regulating its financial system - which seems likely to have been possible only if substantial foreign exchange reserves were available from somewhere;

  was in communication with very senior Japanese financial officials during that crisis.

Moreover its Prime Minister, Mahathir, spoke of:

  the need for Islamic societies to develop economically in order to defend themselves;

  opposing Jews who are seen to exert secret control over Western societies;

  the undoubted fact that Australia (seen as a US ally) does not know everything.

Signs of An Emerging East-Asian International Order?

None-the-less regional efforts to create an alternative international order may be gaining support.

China has incorporated other countries in the Asian region within its economic system by increasing imports (eg of components), in such a way that its overall current account surplus was small (eg perhaps $US 30bn pa) - though its surplus with the US was large (eg over $US 100 bn pa). This had the effect of sharing around the 'protection' offered by a current account surplus to countries who would also have difficulties operating under Western financial principles.

In 2005 a 'Confucian Union', similar in scope to the EU, was suggested for East Asia based on the concept of a 'worker caste system' in which bureaucrats / technocrats would have power which would be different to the 'merchant caste' system in which capital is the source of power [1, 2].

This seems to parallel Ministry of Finance views (publicly expressed by Sakakibara) of Japan as a 'non-capitalist' market economy [1].

In 2008(?) Eamonn Fingleton,  a long term close observer of East Asia (especially Japan), speculated about the possible future global political and economic dominance of 'Asian authoritarianism'  [1]

In brief he suggested that:

  East Asian economic systems are radically different to Western capitalism yet, to the surprise of economists, they are very effective in boosting exports and growth, so there is a need to understand why this is so. Characteristics include (a) a lack of commitment to truth, and a manipulative approach to citizens and outsiders; (b) authoritarian government control of the economy (through regulation / market rigging / selective enforcement of regulations); (c) suppressed consumption (through small living spaces / tight control of credit etc) which leads to high savings rate; and (d) a key role for cartels in ensuring that favoured investments are profitable and controlling industrial capacity;

  these systems were originated by the Japanese military in the 1930s and subsequently spread throughout Asia - with China's authorities having become convinced in 1979;

  while East Asian economic systems have advanced their people's welfare, the suppressed consumption that they are based on adversely affects others. Western and East Asian economic systems are incompatible and need to be kept apart (as was done with the former Soviet Union). This could be achieved by gradual introduction of tariffs - as something quite severe is needed to overcome structural trade imbalances;

  despite theatrical bickering, Japan did all it could to boost China's development - because it would prefer China as the world's superpower. East Asian societies prefer to be isolationist - eg they will ignore others human rights abuses. Western / US influence is resented for it forces a pretence of (say) democracy. Moreover it is believed that China will outlast the US empire as it has done many others in the past;

  Western societies have never before had to cope with Asian authoritarianism. But China's leaders believe they have to become the world's dominant power, as external influences are now so significant that isolationism is not an option.

Comment: Fingleton's conclusion (ie that East Asian and Western economic models are incompatible) parallels the present writer's conclusions in Structural Incompatibility Puts Global Growth at Risk (2003). However Fingleton's suggestion that the erection of defensive tariff barriers would be best / only solution seems suspect, because:

  there is doubt about the future sustainability of the demand-deficient economic models that Japan originated and spread throughout East Asia - for reasons outlined in Are East Asian Economic Model's Sustainable?  For example, the fact that East Asian economic models involve coordination of economic activities by social relationships amongst elites (rather than in terms of 'abstracts' such as financial outcomes) can be an advantage in organising production systems in response to external market demand. But this depends critically on outsiders providing strong demand and scope for investing savings. In isolation, suppressed consumption would lead to macroeconomic catastrophe. And, given the limited role of price signals, these models contain no internal arrangement for managing the relationship between supply and demand that would be any more reliable than in the former Soviet Union - and so could not be viable on the basis of domestic consumption;

  societies such as the US and Australia have pro-active options for developing the supply side of their economies by accelerating 'learning' within whole economic systems - perhaps along the lines suggested in A Case for Innovative Economic Leadership (which deals with the Australian context). Information is regarded as the key factor in economic productivity and growth. However just as information can be used to drive innovation within enterprises, it can also potentially be used to drive productive change within whole economic systems - providing leadership in this process can be successfully disentangled from political systems.

Thus, in future, it is possible that aid to East Asia in establishing more sustainable economic models may be more necessary than the fear that Fingleton expressed about Asian authoritarianism.

In 2009, increased substance appeared to be given to Japan's late-1990's proposal for the creation of an Asian Monetary Fund (AMF) as a 'virtual AMF' was emerging as a result of the Chiang Mai initiative whose existence and implications seemed to attract little attention in the West.

A 'Virtual Asian Monetary Fund'

An Asian Monetary Fund is taking shape as nations pledge to help one another. ASEAN, China, Japan and Korea agreed to expand the scope of the Chiang Mai Initiative - an agreement amongst their central banks to advance funds in times of crisis. The Chiang Mai Fund was expanded to $120bn - 80% of which is to be provided by China, Japan and Korea. This is growing into an Asian Monetary Fund - like that Japan suggested at time of 1997 Asian Financial Crisis (which US opposed). China and Japan are main buyers of US government bonds. They have saved and lent so US could borrow and spend. Regional integration will increase regional stability. Asian crisis occurred because foreign capital lost confidence in region with world's highest savings rate. If Asia had kept money at home it would not have needed foreign capital. Recent step increases sovereignty and reduces scope for IMF intervention (which seeks to expand the role of markets and reduce role of governments - policies that have produced few development successes). All countries in East Asia prospered through government intervention that Washington consensus would never have permitted. An Asian Monetary Fund will allow Asia to steer its own course, and be good news for Australia as its linkages into the region increase [1]

However, what has been going on and what a "virtual AMF's" prospects for success are, can't be understood without considering the cultural framework in which this  has been developing. As noted above , there are differences in the nature of knowledge, power, governance, strategy and economic goals in societies which lack Western societies' classical Greek heritage but rather are derived from ancient Chinese traditions.

This is essential to understanding the implications of a 'virtual AMF' because it would involve the creation of credit and the control of monetary systems by social elites operating under neo-Confucian traditions whose concern was with building the power of their ethnic communities rather than with generating profits by meeting the needs of their citizens as consumers.

The monetary and financial systems which have been the basis of economic miracles in East Asia have not taken the profitable use of capital seriously - primarily for cultural reasons related to difficulties in handling abstract concepts.

This was the reason for the 1997 Asian Financial Crisis (see Understanding the Cultural Revolution Needed for Success under Global Financial Systems). The fact that the region is characterised by high savings does not imply that that those savings would be used productively or that sound bank / corporate balance sheets would be seen to be needed.

It was also the reason for the global financial imbalances that have arisen, as the US (mainly) tried to sustain global growth in the face of the macro-economically unsustainable demand deficit that has been necessary in major East Asian economies to protect banking systems from having to demonstrate the sound credit rating needed to borrow in international markets (see Financial Imbalances in Financial Market Instability: A Many Sided Story). Some have seen those imbalances as significant in causing the global financial crisis.

Establishing a 'virtual AMF' seems to be part of attempts that are being made to permit Asia's nationalists to continue economic growth by creating credit and using savings without serious concern for return on capital.

However this would not be economically viable under a Western-style global economic regime in the absence of sufficient final demand for the production capabilities that are being established (eg see China: Victor or Victim?). It may be that efforts are in place to overcome that constraint which would not be easily understood by Western observers, and may not be effective either (see After the GFC?).

Feedback: An observer with considerable background in Asian culture and history suggested that:

..  we are witnessing the success of superior East Asian strategies and culture that are re-establishing the global order that existed 200 years ago, when China was the world's dominant production economy and technological leader, having more or less held that position for several millennia.

Western conceptual (particularly economic) structures and theories are a handicap for Westerners in trying to understand all this but are an ally for Easterners, because they are so predictable and clumsy. The East learned much from 1997 but the West nothing.

To talk of return on capital as a meaningful rationale for any community in the midst of the ongoing farce on Wall Street smacks of a form of racial and intellectual insensitivity and arrogance that can only lead to disaster. China already has critical and unrivalled leverage in global consumer, commodity and financial markets. Indeed, it has already established a tributary relationship with America, where it manages the 'barbarian' by giving more than it receives. This allows it to progress much more than what the Americans denied the Japanese in 1997 - in fact the Chinese and like-minded neighbours have established a nascent alternative global financial system. The game is already over, but the Chinese will move discreetly and slowly.

By May 2009 it appeared that China may have responded to the global financial crisis by implementing a plan for a new international 'Confucian' economic order involving socially-coordinated economic activities - that would operate in parallel with the global system based on Western financial principles (and also that the socially-coordinated order faced severe risks). ...