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Future of the expanded East Asia Summit

Text of speech by Australian Foreign Minister Kevin Rudd at the Asia Society, New York, January 13, 2012

The world today is approaching a turning point of truly historic proportions. Historical trends are by definition slow to emerge. They then gather pace, often with a sudden burst of momentum. Then having gathered their own dynamic, a tipping point is reached, often well before the political community and broader public opinion has fully woken up to the fact. And so it is with the global economic power of the United States of America.

For the last 130 years the United States has been the world’s largest economy. Within the current decade, that will no longer be the case when China takes its place.

Australian Foreign Minister Kevin Rudd addresses the audience at Asia Society New York on January 13.

Two weeks ago The Economist almost as a matter-of-fact reported that China will have a larger economy than America’s in purchasing power parity less than five years from now.

And based on reasonable projections of relative real growth rates and the relative values of the US Dollar and the Yuan, China will have the larger GDP as measured by market exchange rates within the next seven years. Years 2016 and 2018 therefore loom as profound dates on both the global and historical calendars.

UN Charter

US global economic pre-eminence, together with the spread of the political and economic values that have accompanied that pre-eminence, have been with us across most of the modern industrial age.

From well before the collapse of China’s Qing dynasty.

Through the First World War. Proving to be decisive in the Second. And ultimately triumphant in the Cold War.

Initially isolationist, refusing to become embroiled in the wars of the European imperial powers.

Subsequently internationalist, the architect of the post-1945 global order, reflected in the UN Charter and the Bretton Woods institutions, but always anchored in the strategic fundamentals of American power.

This has been the deep reality underpinning the political, economic and strategic order for generations, whether we choose to be conscious of it or not.

History teaches us that all power is ultimately grounded in economic power and the economic principles that in turn drive an economy forward.

In the full sweep of history, therefore, we are now on the cusp of profound change. This is reflected across a range of economic measures beyond the crude calculations of GDP alone.

Once again, these are methodically chronicled by The Economist. Just consider the following measures, both past and projected:

• China’s net foreign assets surpassed the United States in 2003 (China’s net foreign assets of $ 2 trillion today versus US net foreign debt of $ 2.5 trillion);

• Chinese exports surpassed the US in 2007;

• Chinese fixed capital investment took the lead in 2009;

• Manufacturing output in 2010;

• Energy consumption also in 2010;

• The total number of Chinese patent applications granted exceeded the United States applications for the first time in 2010.

Looking forward,

• The total value of Chinese imports will be greater than the US by 2014;

• Chinese retail sales will outpace the United States by 2014;

• Chinese firms in the Global Fortune 500, now half those of the US, will pass the US by 2016;

• And Chinese stock market capitalisation will be greater than America’s by 2020, leaving Wall Street in its wake.

And finally, The Economist controversially projects that based on current trends, Chinese defence expenditure – currently one fifth of the United States – will pass the United States in absolute terms by 2025.

Economic reforms

None of this has happened by accident.

It has been the product of considered Chinese statecraft over the last three to four decades.

China’s leaders have sought to overcome a century of shame and humiliation brought about by a series of foreign occupations from the Opium Wars to the rise of the People’s Republic through their own national search for wealth and power, so that China can once again resume its historical place as a respected great power.

What is remarkable is that the rise of China, as measured by economic indicators alone, has been achieved within a generation of the initiation of Deng Xiaoping’s deep domestic and international economic reforms from late 1978.

Furthermore, the momentum of economic transformation has built on itself – most particularly in the decade that has elapsed since the Asian Financial Crisis of the late 90s.

China emerged intact from a financial crisis that impacted severely on Korea and South-East Asia. Not only intact, but for the first time, as a driver of Asian economic growth and one offering a different development model to that prescribed by The Washington Consensus and its embodiment in the policies of the International Monetary Fund.

This was repeated at scale during the Global Financial Crisis a decade later where Chinese demand (augmented by its own expansionary fiscal and monetary policies) has been critical to global economic recovery.

And with the threat of a second Global Financial Crisis still looming out of the continuing uncertainties in Europe, it has been remarkable to see European states publically seeking Chinese support to intervene in Euro-bond markets.

Domestic challenges

And all this within the last decade alone. Once again, none of this has been achieved by accident.

It has been the product of considered Chinese policy, entirely mindful of the fragilities emerging elsewhere in the global economy, as well as a decade of intensive, almost all-consuming US military and foreign policy engagement in Iraq, Afghanistan and the wider Middle East.

Both Hu Jintao and Wen Jiabao have spoken publically about the need for China to grasp these strategic opportunities during the first two decades of the 21st century. As early as 2003 Hu had spoken of a unique convergence of domestic and international trends, putting China in a position to advance its development by “leaps and bounds”…

And like other rising powers before it, if China “lost the opportunity presented it would become a straggler”.

Again in 2007, Wen warned the opportunities were “rare and fleeting”, but that the first two decades of the new century was a period “which we should tightly grasp and in which we can get much accomplished”.

China has therefore been exceptionally diligent in achieving its national objectives of lifting its people out of poverty, developing its national wealth and power, and resuming its rightful place in the community of nations.

Of course, we are all familiar with the dangers of linear projections about China’s inexorable rise.

Sociological challenge

And China’s leaders themselves constantly remind us of the formidable domestic challenges that lie ahead, any one of which could de-rail their national project.

• According to the World Bank, more than 150 million Chinese live in abject poverty;

• Massive income inequalities between cities and the countryside (although, once again, it should be recorded that last year for the first time in history, more Chinese lived in urban rather than rural China);

• The profound development gaps between coastal and inland provinces; between Central and Western China; as wealth declines the further West you travel;

• The problems of corruption;

• Urban pollution on a massive scale;

• China’s significant dependency on energy and raw materials from abroad;

• Separatist movements in Tibet, Xinjiang and Taiwan;

• And China’s own date with demographic destiny with the peaking and then rapid aging of its population, with alarming new figures on the working age/retirement age population ratios for the future – all the product of the one child policy as well as rising living standards.

Then there are the rigidities of a political system that finds it difficult to embrace diversity and dissent, be it local protest movements on controversial land use decisions, or crises or anxieties that arise from Tiananmen, or individual cases such as Fang Lizhi, the Nobel Laureate Liu Xiaobo and the artist Ai Weiwei. It is also important to monitor the deep changes in Chinese society itself, always notoriously difficult to measure, often relying on subjective judgements of the type recorded by William Hinton half a century ago at the village and local community level in his landmark work Fanshen.

But this is part of a much broader sociological challenge of understanding what the Chinese people actually expect of their government today -rather than the narrower debates on the future of Chinese democracy and the future of human rights.

Nonetheless, despite these great challenges, China has continued to drive ahead in rigorous pursuit of its national objectives in the three sets of leadership changes that have occurred since 1978 – and, as we are about to see, the fourth later this year.

Therefore I have so far found no evidence to support the multiple analyses over several decades now that China was on the verge of breaking up, or its rising middle class was about to bring about a Chinese version of the Arab Spring and with it the collapse of Communist Party rule.

This has perhaps been more of a reflection of wishful thinking by some, rather than any real analysis of Chinese politics on the one hand and the actual performance of the Chinese economy on the other.

Deng once urged the Chinese people to 'seek truth from facts'.

We should heed his exhortation and do the same. One further cautionary note, however, on China and American economic relativities is that as we analyse China’s rise, we should be very wary of any conclusions of America’s absolute decline.

The data continues to demonstrate that America will continue to grow and because of its vast migration programme, it has no impending date with demographic destiny.

Furthermore, both America and the American economy have demonstrated time and time again a formidable capacity to re-invent itself, to generate new innovations, technologies, and enterprises on a mass scale.

America, therefore, will remain a formidable economy and strategic force through to mid-century and beyond.

Cultural revolution

The rise of China and its impact on the Global and Regional Order -

The real question today is what does the rise and rise of China mean for the regional and global order - for peace, prosperity and stability for the immediate decades ahead.

Because the historic shift I referred to earlier is already upon us.

And the challenge for policy makers everywhere is how to shape the changes that are unfolding in the international system today, rather than simply being interested, arm-chair analysts and critics, passively observing the unfolding events, sometimes politely, other times not.

Because when placed in an even wider historical context than the relative metrics of Chinese and American power, let us recognise the global implications arising from China rising to the top of the global economic ladder.

This will be the first time since the rise of the Spanish Empire 500 years ago that a non-Western power will be the dominant global economic power.

And the first time since Pitt the Younger that a non-democracy will be the world’s largest economy.

It is therefore a subject worthy of the most serious reflection and analysis, not just in Beijing and Washington, but across Asia, across Europe and across the world. Because how Asia embraces the rise of China will not just be of significance to Asian peace and prosperity.

How we in Asia embrace this change will have profound consequences for the world at large.

And as a Western, democratic nation of largely Judeo-Christian origin, fully engaged in practically all of the institutions of Asia, Australia finds itself in a unique position of experiencing the winds of change earlier than most.

To be continued

 

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