N. Korea under restraint by China

China knows when to mount pressure on the DPRK and tell its ally what to do for the sake of its Asian neighbours’ interests in the region, say Chinese political analysts.

North Korea nuclear weapons could hit ....

TALKS that China has lost its influence on North Korea have emerged again as the Democratic People’s Republic of Korea (DPRK) is reported to be ready to launch a missiles attack on the Korean Peninsula.

The standard calm reaction and seemingly lack of action against DPRK by China have been the reasons why the international community feels that the China factor in the DPRK administration is fading.

But, China is not a country that one should underestimate. China knows when to mount pressure on DPRK and tell its ally what to do for the sake of its Asian neighbours’ interests in the region, said Chinese political analysts.

Historically, China and DPRK established solid strategic relations and partnership when the former entered the Korean War in support of DPRK in 1950.

During the war between 1950 and 1953, China sent as many as three million volunteer soldiers to assist the DPRK forces fight the Americans and South Koreans in the name of United Nations on the peninsula.

About 180,000 Chinese soldiers, including Mao Zedong’s son Mao Anying, were killed.

Since the end of the war, China and DPRK have continued their cooperation in security and defence issues. But in recent years, China has turned more of a peacemaker instead when tension occurs between North and South Korea.

In the Takung Pao newspaper’s editorial, veteran political analyst and The International Chinese Newsweekly correspondent Ji Shuoming said DPRK intentionally flexed its muscles to wage war in retaliation of a recent joint South Korea-United States military exercise.

He said the tension on the peninsula had been escalating with the North Koreans telling ambassadors, diplomats and tourists in South Korea to evacuate, as their forces were prepared to launch their missiles.

“At the UN Security Council meeting (in March), in a rare decision, China voted in favour of new sanctions on North Korea in view of its nuclear weapon tests. This has somehow caused North Korea’s hostility against China.

“North Korea is going too far by dragging itself to the edge of a war. The US, South Korea and Japan hope that China will restrain North Korea but some people say China has not been able to restrain North Korea anymore.

The Chinese leaders and the Chinese Communist Party-run newspaper recently sent out a clear message to North Korea, and this shows that China still has a degree of influence over North Korea,” he said.

Ji said that in past conflicts, China would talk about brotherhood and defend North Korea and this had made its ally a spoiled kid and had made it difficult to fundamentally solve the problem.

Today, China has chosen a more international approach. When North Korea goes against the international regulations, China will firmly safeguard the international interests. But this does not mean that China has lost its influence and it’s just that it is assessing the pros and cons of the influence, Ji added.

Nankai University International Relations Department Associate Prof Yang Lei was quoted by Global Times as saying that in the past, North Korea employed the approach of causing tension and then implying the possibility of dialogue and negotiation after achieving its target.

“North Korea continuously escalates its offensive rhetoric to draw the attention of the international community. It hopes that surrounding countries can get involved and provide a way to ease the situation,” he said.

He said China was adjusting its policy on North Korea according to the changing US and South Korean policies on North Korea but China could still continue to impose necessary sanctions on North Korea to make its ally aware of the importance of outside help and the strategic Chinese support.

“Such pressure should push North Korea to ease relations with South Korea.

“Then the next step for China is to persuade North Korea and South Korea to hold dialogue and offer North Korea a way out,” he said.

In its editorial, China Daily said the situation on the peninsula was dangerous and any miscalculation by any party might prove disastrous to the region.

The newspaper said Pyongyang might have adequate reasons to demonstrate its security concerns that was entitled to enhance its national defence and develop its science and technology, but it had no excuse either to defy the UN resolution requiring it to drop its nuclear programme.

“The tactic (employed by North Norea) is dangerous ... As a close neighbour of the two Koreas, China will not allow troublemaking at its doorstep.

“The message is loud and clear that it opposes any move to resolve the dispute by force,” it said.

MADE IN CHINA By CHOW HOW BAN

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Looming danger on contrast and competition of economic models

The successful East Asian model of ‘state-driven capitalism’ is being threatened by TPPA proposals.

The Trans-Pacific Partnership (TPP) is a secretive, multi-national trade agreement that threatens to extend restrictive intellectual property (IP) laws across the globe and rewrite international rules on its enforcement.

MANY articles and books have been published on the contrast and competition between the present Western and the Asian-style economic models.

Western countries are said to have the free-market model based on competition among private firms, with the government taking a hands-off approach.

East Asian countries are branded as practising “state capitalism” in which the government plays a major role in helping the local private sector and the state also fully or partially owns many enterprises.

The Western countries are increasingly attacking the Asian model, claiming that state-owned companies or state-aided commercial firms have an unfair advantage vis-à-vis foreign firms competing with them.

In our region, countries with a substantial role of the state include China, Malaysia, Vietnam and Singapore. Of course, in Japan and South Korea, their domestic firms grew to become world-beaters with the systematic backing of their governments.

For these countries, the so-called state capitalism (or in the case of socialist countries, market-oriented socialism) have worked well through industrial development and relatively high and sustained economic growth.

Some Western countries have been trying to curb or even eventually eliminate the Asian model of state-owned or state-aided capitalism.

This is largely hypocritical because the America, European and Japanese agricultural sectors are highly subsidised and protected; many of their farms could not survive without massive state aid and high import tariffs.

Many of their banks and industrial firms are also subsidised in various ways, including through multi-billion dollar bailouts in the wake of the recent financial crises.

This has not stopped these countries from attacking the Asian model. The latest attempt to curb this model is through the negotiations in the Trans Pacific Partnership Agreement (TPPA), a trade and investment treaty involving the United States, Canada, Malaysia, Singapore, Vietnam, Brunei, Peru, Chile, Australia and New Zealand.

The TPPA contains an important section on State-Owned Enterprises (SOEs), championed by the United States and Australia.

The TPPA drafts are secret, so the text of the SOE section is not known. However, it can be anticipated that the section will contain disciplines to curb and shape the behaviour of three types of SOEs.

The recently concluded US bilateral FTAs contain a competition chapter that deals with two types of SOEs. For example, the US-Peru FTA has disciplines on designated monopolies and state enterprises, and it is likely that the United States will propose something similar in the TPPA.

That FTA says that government monopolies shall act solely in accordance with commercial considerations, including with regard to price, quality, availability, transportation, when buying or selling the monopoly goods or services.

They shall provide non-discriminatory treatment to investments, goods and services of other TPPA members. And they shall not use their monopoly position to engage in anti-competitive practices through its dealings with its parents, subsidiaries or other enterprises with common ownership in a non-monopolised market that adversely affect the investments of other countries.

State enterprises shall similarly provide non-discriminatory treatment in the sale of goods or services to investments of other countries.

More importantly, the United States and Australia are proposing a third type of SOE to be subject to disciplines. According to press reports, Australia has also introduced the principle of “competitive neutrality” to discipline the SOEs.

How this principle will apply can be anticipated from the Australian government’s competitive neutrality guidelines.

This is based on the concept of a “government-owned business”. The state-owned business enterprise which competes with private companies may obtain advantages, impeding the ability of the private sector to compete on equal terms.

According to the Australian guidelines, these advantages include exemptions from taxes; cheaper debt financing (because of the low-risk classification or government guarantees); absence of need to make a commercial rate of return; and exemption from regulatory constraints or costs.

To offset these advantages, the Australian guidelines cover how government businesses should pay taxes in full; pay back to the central government the difference in their loan costs vis-à-vis private sector loan costs; pay licence fees equivalent to the central government; and ensure they obtain a commercial rate of return.

It is likely therefore that the draft of the TPPA will have disciplines along the lines above on a third category of SOEs, government-linked business entities involved in commercial activities that compete with the private sector.

The proposed disciplines could be along the line that “advantages” enjoyed by government-linked businesses such as those mentioned in the Australian guidelines be disallowed.

The implications for Malaysia, Vietnam and Singapore would be serious because their national economies are characterised by important roles of state-owned enterprises or government-linked companies.

The countries would have to move away from their successful development model and economic structure.

Moreover, SOEs have many functions including providing social services to the public, ensuring that poor and vulnerable groups are given special consideration.

This often means that SOEs cannot operate on solely commercial grounds; and that several of them depend on government subsidies and assistance, and there are also cross-subsidies in that the profitable aspect of an SOE may finance non-profitable (but socially important) activities. There is a danger that the TPPA section on SOEs will prevent or hinder the socially useful functions of SOEs.

The TPPA negotiations are still going on, and a text on the SOEs section is not yet final, so there is scope for different views to be expressed.

GLOBAL TRENDS By MARTIN KHOR

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New economic thinking

LAST weekend, over 400 top economists, thought leaders, three Nobel Laureates and participants gathered in Hong Kong for the fourth Annual Institute for New Economic Thinking (INET) conference, co-hosted by the Fung Global Institute, entitled “Changing of the Guard?”



So what was new?

In the opening session, Dr Victor Fung, founding chairman of Fung Global Institute, quoted Henry Kissinger as saying, “Americans think that for every problem, there is an ideal solution. The Chinese, and Indians and other Asians think there may be multiple solutions that open up multiple options.”

That quote summed up the difference between mainstream economic theory being taught in most universities and the need to build up a new curriculum that teaches the student to realise that there is no flawless equilibrium in an imperfect world and that there is no “first-best solution”.

Instead, what is important is to teach the aspiring economist to ask the right questions, and to question what it is that we are missing in our analysis. It is important to remember that theory is not reality, it is only a conceptualisation of reality.

Nobel Laureate Friedrich Hayek, one of the leading thinkers on open societies and free markets, explained why the practice of mainstream economics is flawed. In 1977, he said, “A whole generation of economists have been teaching that government has the power in the short run by increasing the quantity of money rapidly to relieve all kinds of economic evils, especially to reduce unemployment.

Unfortunately this is true so far as the short run is concerned. The fact is that such expansions of the quantity of money, which seems to have a short-run beneficial effect, become in the long run the cause of a much greater unemployment. But what politician can possibly care about long-run effects if in the short run he buys support?”

Sounds familiar on present day quantitative easing?

In his 1974 Nobel Laureate Lecture entitled “The Pretense of Knowledge”, Hayek showed healthy scepticism: “This failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences an attempt which in our field may lead to outright error.”

Hayek understood what is today recognised as quantitative model myopia. What cannot be easily measured quantitatively can be ignored. Then it is a small step to assume that what can be ignored does not exist. But it is precisely what cannot be measured and cannot be seen the “Black Swan” effect that can kill you.

In other words, economists must deal with the real world of asymmetry information, that there exists Knightian uncertainty, named after University of Chicago economist Frank Knight, what we call today unknown unknowns.

Unknown unknowns arise not just from accidents of Mother Nature, but from the unpredictability of human behaviour, such as market disorder, which is clearly complex and ever-changing.

If unknown unknowns are common in real life, then a lot of the economic models that appear to give us precise answers may be wrong. In other words, for every question, there is no unique answer and the solutions are “indeterminate”.

George Soros, who helped found INET, explained his theory of reflexivity based on the complex interaction between what he called the cognitive function (human conception of reality) and the manipulative function (the attempt by man to change reality).

His theory of reflexivity in markets differs from mainstream general equilibrium theory in one fundamental aspect. General equilibrium models assume that market systems are self-equilibrating, going back to stable state. Borrowing from engineering systems theory, we now know that this is a situation of negative feedback a system that gets disturbed fluctuates smaller and smaller till it returns to stable state.

The trouble with nature and markets is that positive feedback can also happen. The fluctuations get larger and larger until the system breaks down. Nineteenth century Scottish scientist James Maxwell discovered that steam engines can explode if there is no governor (or automatic valve) to control the steam building up.

At about the same time, English bankers learnt that banks can go into panic regularly without the creation of a central bank to regulate the system. Markets therefore need a third party the state to be the system “governor”. Free market believers think that the market will take care of itself. John Maynard Keynes was the first to recognise that when free markets get into a liquidity trap, the state must step in to stimulate expenditure and get the economy out of its collective depression.

In the 21st century, we have evolved beyond Keynes and free market ideology. Belief in unfettered markets has created a world awash with liquidity and leverage, but the capacity of advanced country governments to intervene Keynesian style has been constrained by their huge debt burden.

Larry Summers has pointed out that Keynes invented not a General Theory, but a Special Theory for governments to intervene to get out of the liquidity trap. The fact that we are still struggling with the liquidity trap means that economists are searching for new solutions, such as borrowing from psychology to explain economic behaviour.

The INET conference introduced the thinking of French literary philosopher, Rene Girard, and his theory of memetic desire, to explain how social behaviour more often than not get into unsustainable positive feedback situations, either excessive optimism or pessimism. How do you get out of such situations? Girard introduced the concept of sacrifice. We will have to wait for the next conference to explore this new angle.

Intuitively, all life is a contradiction. The sum of all private greed is not a public good. It does not add up. Someone has to sacrifice, either the public or a leader.

Schumpeter's great insight about capitalism is that there is creative destruction. He only restated the old Asian philosophy that change is both creative and destructive. But out of change comes new life.

In sum, contradictions are creative. What is new is often old, but what is old can be new.

 
Tan Sri Andrew Sheng is president of Fung Global Institute.