"The Asian Economic Crisis: Future Security Implications"

Professor Paul Dibb; Strategic and Defence Studies Centre,
Australian National University

We live in a period of strategic turbulence: the collapse of the Soviet Union, the reunification of Germany, and the disappearance of the Warsaw Pact mark the greatest changes in global geopolitics for more than half a century. None of these events was foreseen by defence planners.

Now, in our own region - the Asia-Pacific region - three recent events have once again confounded the international security policy community: the Asian economic crisis, the collapse of the Soeharto regime, and the development of nuclear weapons and ballistic missiles by India, Pakistan and North Korea.

In my experience, politicians do not like being caught short by major strategic surprises such as these. They expect us at least to be on the correct side of the trend line, even if we cannot predict events: they, rightly, demand some strategic warning from their intelligence and policy advisors.

But in the post-Cold War world we are largely in unchartered waters. This new strategic era (which we do not even have a name for) is characterised by complexity and uncertainty, by new types of threat and, in Asia, by a new geopolitics which is being fashioned by astounding economic growth and its collapse, by authoritarianism and democracy in different parts of the region, and by rapid military modernisation in some countries and military weakness in others. We would do well then to examine a series of credible alternative strategic futures, rather than the one strategic world that we saw with such confidence in the long decades of the Cold War.1

I want to begin with China, which is the great question of our time, then I will sketch in some alternative strategic futures for the Asia-Pacific region. The second half of my address will focus on the main theme of this conference: what does all this suggest for America’s future engagement and military presence in Asia?

China and the Asian crisis

After the Asian economic crisis struck like a tidal wave in mid-1997, washing away decades of social and economic progress in Thailand, Indonesia, and South Korea, and threatening even those shining lights of free market commerce, Hong Kong and Singapore, the big question for the future of Asia was - would China be next?

For almost two years, the Chinese - much to their credit - have held firm, refusing, for the long term stability of the region (and, of course, their own regional influence) to devalue their currency in order not to undermine an export led recovery in the battered Asian economies.

Instead we saw Russia and, to some extent, Japan, as the next casualties of the economic crisis. Rather than increase concern about the Chinese economy, however, the financial trauma amongst China’s neighbours merely strengthened the myth, as The Economist pointed out, that China would never unravel.

And at present - using simple straight line analysis - there is every sign that China’s economy will remain largely unaffected and that China’s influence in Asia will continue to grow.

An alternative future for China

But I want to challenge the use of such comfortable straight line extrapolations, already shown to have failed completely as far as predicting the onset of the Asian economic crisis is concerned. In my view, too many Western governments (and Australia is no exception, but I think this can be said equally about the United States) have relied on this type of analysis - in the strategic as well as the economic spheres.

What concerns me is that even after the dramatic and profound changes in Asia since mid-1997, the straight line view still prevails - the predominant opinion is that the line has dropped somewhat, but its basic orientation remains towards a rather prompt return for the region to economic growth and political stability.

A different, and in my opinion, more hard-headed and realistic approach - one which we have been encouraging in Australia - is the need to prepare for "alternative strategic futures".

Having well thought through policy approaches prepared for the more negative regional possibilities which might arise from the Asian crisis would in itself greatly reduce their impact. While it might indeed ultimately be the case with the current crisis that "all will be for the best in the best of all possible worlds", clearly no responsible government can afford to plan on this basis.

When I went to China late last year to lead Australia’s one and a half track security dialogue with Chinese officials and academics, I was impressed by the ability of the Chinese side to take a long term strategic view of the region.

But this is not to say that they find the strategic perspective from Beijing reassuring.

In addition to the pressures from the Asian crisis, China must now deal with its neighbour and great strategic rival Russia in a state of serious economic and, increasingly, political decay.

The Chinese are gravely concerned at the possible future direction of events in a Russia where central authority is in freefall but where the ability remains to develop and deploy the latest military technology, including the full range of weapons of mass destruction, not least, of course, a vast nuclear arsenal.

While the calamitous events of WWII saw the Soviet Union lose two thirds of its GDP, the current economic crisis has already seen the GDP of Russia decline by more than half compared to 1991.

It is not possible to overstate the seriousness with which China views the potential failure of post-communist Russian society.

The other major event in the last twelve months of particular importance to China is India’s new nuclear assertiveness. The Chinese are well aware of India’s prickliness about being seen (or not being seen) as a global power.

With much justification, the Chinese see India’s open demonstration of its nuclear weapons capability not primarily as a security response to Pakistan, but as a proclamation of India’s ability to match China’s global standing in this field.

If that were not enough for one nation to contend with, North Korea is - as I hardly need remind this audience - yet another serious issue on China’s borders.

In the midst of famine and economic disaster, this "rogue nation" appears determined to push ahead with a highly risky nuclear adventure. That the world has averted a second Korean war for almost fifty years does not mean we have not been close to the brink on several occasions (with the risk of the use of nuclear weapons on both sides, renewed war on the Korean peninsula is one of the most frightening regional scenarios). China’s role in averting crisis on the Korean peninsula has been critical.

But China now has little influence over North Korea. Unlike his father, Kim Jong Il pays no deference to Beijing.

From China’s perspective there are other problem areas to worry about. There is Japan and its prolonged economic downturn; the probability of further military tension over Taiwan - again likely to involve the United States - and as a direct result of the economic crisis, the renewed persecution of Chinese minorities in Southeast Asia.

Fortunately, China’s relations with Vietnam seem to be in one of their occasional upswings, and the Hong Kong takeover has arguably gone as smoothly as anyone could have hoped (although Beijing’s recent intervention in Hong Kong’s judicial system is a worrying portent of what may be to come).

But clearly there are more than enough major security issues surrounding China, any one of which if not managed adroitly could lead to a crisis which would truly shake global stability.

Add to all of this the Asian economic crisis - which in my judgement is the defining event of the post-Cold War era for the Asia-Pacific - and the view from Beijing looks downright alarming.

The big strategic question for the United States and for the region is, what if the economic crisis does hit China in these circumstances?

In its latest report on the economic outlook for the Asia-Pacific, the global market forecaster BIS Shrapnel warns that if another economy in Asia fails, it could be China.

Its assessment compares China’s economy unfavourably with that of Korea. Given the dramatic collapse of the Korean economy, this should seriously worry those who believe in straight line predictions of the inevitable rise and rise of China.

As the report says,

[The Chinese] economy is dominated by large state-owned enterprises which are far more indebted and less competitive than the Korean chaebol ever were, and the banking system is in worse shape than any in Asia....There is a significant risk of collapse which cannot be ignored.2

If severe economic and financial difficulties do ultimately hit China, there would be substantial hope - with the current Chinese leadership - of a controlled, measured response.

But as with other Asian countries, a major economic downturn, not to mention economic collapse, would inevitably produce a political crisis in China.

And it needs to be remembered that the history of China since 1949 is one of vast and sudden shifts in policy - not frequent, but very dramatic when they do occur.

Would not a China faced with the Asian economic, political and social meltdown, and on top of all this an economic crisis of its own, be very susceptible to a fundamental shift in national policy?

And what effect would that then have on Japan, Russia, India, China’s Southeast Asian neighbours, the US, Europe and the world?

Now, I am not predicting this will happen. Indeed, in China’s case there is significant cause for optimism. But my point is that governments, and the strategic analysts who advise them, can not assume things will turn out well. We need to prepare now for plausible alternative futures such as the grim scenario I’ve just described for China and its Asian neighbours.

Rather than relying merely on comfortable straight line extrapolations which assert that the Asian crisis is a temporary hiccup in the world’s steady progress to eternal economic and strategic good fortune - the type of analysis which is designed I think essentially to keep our political masters happy - we (ie nations whose interests may be affected) need to consider and prepare for this type of far less positive but credible alternative future for the region.

Alternative futures for Asia

So if we apply this approach to the security implications of the Asian economic crisis for the region as a whole, we could look at three alternative futures for how the shape of Asia’s geopolitics might evolve over the next decade or so.

1) In the optimistic scenario, Asia in 2010 returns to its previous fundamental strengths based on its undoubted attributes of hard work, high investment propensity and a relatively young and increasingly well-educated workforce.

In this scenario, Japan will return to growth, albeit at a low but sustainable level, and it will provide a modicum of regional leadership. China will have become unalterably intertwined in the international market-place, state-owned enterprises will not exist, and China will give greater priority to its economic progress above any temptation to challenge the regional strategic order.


South Korea and the ASEAN countries, even perhaps Indonesia, will be back to high rates of economic growth of between 5 to 6 per cent.

This Asia will have moved firmly down the path of multilateral cooperation, including in the area of security. A web of military confidence-building measures and even some conflict-resolution mechanisms will be in place. The region will be economically sound, politically stable (the Korean peninsula will probably have unified by then), and at peace. The US alliance system may well have become much less important during this prolonged period of benign strategic developments.

This might be termed a coherent geopolitical structure for Asia.

2) In the muddle-through scenario, Asia a decade from now will have neither collapsed nor made it back to the golden economic years of the 1980s and early to mid-1990s. It will be a mixed picture of lessons learned and not learned, of internationalism intertwined with some important nationalist (and even protectionist) features.

This Asia will have returned to significant, if only modest, economic health and it will be a major market. It will retain some of the multilateral institutions of the late 1990s, but ASEAN, if it still exists, will be a shadow of its former self, badly damaged by the slowness of Indonesia’s return to economic growth and political stability.

Key US alliances will still be in place, though the US military presence may have dwindled to less than half its current size (ie about 50,000). A unified Korea will be preoccupied with the burdens of reunification, but Japan will still rely on the US presence to maintain an uneasy relationship with a China that is a significant military power but still no match for the United States.

There will be a mixture of powers in this scenario, with some that are quite well armed and others that are not, of confident great powers (such as China) and anxious middle and smaller powers.

This might be termed an asymmetric geopolitical structure for Asia.

3) In the pessimistic scenario, parts of Asia will have collapsed economically by the early years of the new millenium. A prolonged recession in Japan and a large retaliatory devaluation in China will have brought about economic and political turmoil in several Southeast Asian countries.

A wave of nationalism, xenophobia and economic protectionism will ripple through the region. Some of America’s alliances - for example with South Korea and Thailand - will have collapsed.

And although the US-Japan alliance will still be intact, there will be no US military presence in that country. The United States military centre of gravity will be focused on Hawaii and the US west coast and its military posture will depend much more on power projection than on overseas basing.

This Asia will have seen the demise of multilateral organisations such as APEC, the ARF and ASEAN. The absence of such cooperative structures and the weakening of traditional alliances will make this Asia much less stable and more prone to conflict. Nationalism in Japan and China could lead to outright strategic competition and the alignment of middle powers with one or the other.

Although economically depressed, Asian nations in this scenario will be arming themselves, including some with weapons of mass destruction and ballistic missiles.

This more hostile scenario might be termed a dysfunctional geopolitical structure, leading perhaps to hostility and conflict.

US Strategic Presence

As you can see, based on these alternative futures, we can make some educated guesses on the theme of this Symposium - the future size and shape of US strategic engagement in East Asia.

Each of these scenarios assumes the reunification of the Korean peninsula. This may occur sooner than some think - after all, who predicted the reunification of Germany? And when it does, the justification for 36,000 US troops in South Korea will be gone. There will be nationalist assertion in Korea, and domestic expectations in the United States, about a quick withdrawal of US ground forces.

More problematic is the prospect of tension in the US-Japan alliance causing the withdrawal of US forces from that country. One should never underestimate the power of nationalism, certainly not in a country with such proud traditions and achievements as Japan.

Already the United States has had to fight hard against local resentment to preserve its presence on Okinawa. More can be expected. Local pressure is not going to decrease, especially when a major justification for the US presence - a dangerous North Korea - is removed as a factor in the strategic equation in North Asia.

Add to this the considerable resentment in Japan over US pressure for financial reform, plus the powerful peace movement, with its strong nationalist undertones. And as well - on the other side of the Pacific - growing domestic annoyance in the United States about Japan’s trade surplus.

The potential threat to the US military presence in Japan, if not to the US-Japan alliance itself, is clear.

Most significantly, US analysts and policy makers should note that it is the worst case scenario, involving the failure of regionalism and the rise of competing nationalisms, which would not only bring with it the highest risk of regional hostility and conflict, but also - because of these same factors - would make it hardest for the United States to maintain an effective military presence in East Asia.

A region which has rejected collective security and is characterised by nationalist demands for the exclusion of foreign influence would not welcome a US military presence.

Until, that is, something goes wrong.

The US as Global Policeman

Which brings me to the role of the United States as global policeman.

In the post-Cold War world there is only one nation with the power to enforce security across the globe that we could dare trust with that role.

The checks and balances of the American political system provide the best assurance we can realistically hope for that this power will be used responsibly.

But that is far from saying that the global military reach of the United States will be used perfectly on all occasions. The United States will always be a less than perfect global policeman.

No reasonable person would expect anything else. No reasonable government could expect the United States to be a perfect arbiter and enforcer of world security.

What national security planners in East Asia have a duty to take into account, are the consequences of this inevitably less than perfect global policeman role, especially in a scenario where the US military presence on the ground in East Asia has been diminished.


Imperfect Response


Firstly, the United States carries out its global policeman duties in most cases only after the event, after armed conflict has broken out and has continued for a period of time.


The Gulf War is the obvious example. But we might point also to Bosnia (where US intervention came only after serious conflict raged for several years), and perhaps now to Kosovo too.

Again, no reasonable person could expect anything more. Perhaps some individual decisions in response to these crises might have been made differently and sooner. We can always say that with hindsight.

But the general point is that we cannot expect the United States to have the foresight, let alone the resources - even as a global policeman - to fortify the Kuwait border before the event against Saddam or to place a ring of troops around Serbia to stop that other megalomaniac wreaking havoc in the Balkans.

This has major consequences for countries in East Asia which expect the United States to maintain regional peace and security.

In all likelihood, the US will not be there at the moment when conflict breaks out. It may - depending on the degree of strategic interest for the United States and the nature of domestic US reaction - turn up later. And it might ultimately restore the status quo.

But for nations which have had their territory challenged and their lives destroyed in the meantime this will be little comfort.

In addition, the manner in which the United States may respond is strongly driven by domestic considerations. Again, it would be unreasonable to expect otherwise.

But it is significant for future East Asian security planners that the United States will seek to respond to an armed conflict in the most domestically acceptable way, in other words, with airpower. The number of bodybags the US public can expect with the use of an air strike capability is considerably less than with the deployment of ground troops. 3

The problem is that in the more likely East Asian scenarios - such as Korea and Taiwan - a ground force response will be essential for restoring the status quo.

What this emphasises is the fundamental importance of effective defence self-reliance for regional countries.

The Huntington thesis

Which leads me to the Huntington thesis.

I was disappointed with those who argued before the economic crisis erupted in mid-1997 that Asia’s economic growth must inevitably pose a strategic threat because of the modernisation of the region’s military capacity. 4

This, of course, was merely an extension of Samuel Huntington’s Clash of Civilisations thesis, in which he claimed that

the Asia of economic sunshine will generate an Asia of political shadows, an Asia of instability and conflict.5

The current Asian crisis enables a straightforward question to be put to Huntington and others who were afraid of Asia’s economic development. What would they prefer? The economically weak and destabilised region that has suddenly been thrust upon us, with major Asian countries unable to provide for their own security, and hence unable to fill the gap between the outbreak of an armed conflict and a possible decision by the United States to intervene?

Or the relatively stable, prosperous Asia we saw until mid-1997, with many social and political shortcomings still to be tackled, but increasingly confident in its ability to handle its own affairs, including its own regional security?

Whatever its other effects, the economic crisis will at least put the lie to Huntington’s assertion that economic growth in Asia is by its very nature destabilising and a threat to global order. As the crisis shows, an economically weak Asia with many nations now unable to afford defence self-reliance causes far greater strategic anxiety.6

Imperfect policy analysis

Secondly, while it is unreasonable to expect a more perfect US response to the outbreak of armed conflict in another part of the world, it is not unreasonable to expect a better performance in policy analysis and policy response before armed conflict occurs.

This is the other side of the United States’ global policeman role in which it could do better.

Again, we need only look to the covert support the United States gave (with Britain and others I hasten to add) to Saddam Hussein in the war against Iran. That it has required such a massive military effort by Western nations, led by the US, to attempt now to eradicate Saddam’s military infrastructure owes a great deal to the misguided support those same countries gave him in the 1980s. This must surely rank as one of the great ironies of the twentieth century.

This support was based on narrow minded analysis of US strategic interests. Playing the balance of power game between two such hostile enemies of the US as Iraq and Iran inevitably had to be a high-risk strategy.

US response to the Asian crisis

Unfortunately, we have seen some parallels in the US response to the Asian economic crisis.

The failure of Asia’s multilateral institutions - APEC, the ARF, ASEAN - to play any kind of leading role, indeed any role at all, in addressing the crisis, shows that regional stability - economic and strategic - still depends heavily on the policies and initiatives of major individual players.7

The United States retains a key role in this respect: the crisis clearly demonstrates its continuing economic and strategic dominance in world affairs.

This means the welfare of the Asian region is critically dependent on the depth of strategic understanding in Washington. But there is considerable room for improvement here.

In the case of South Korea’s economic collapse, the patent strategic significance for the United States of an economic crisis on the Korean peninsula prompted very timely remedial action.

In contrast, the inability of the US system to comprehend properly the strategic significance of economic and social collapse in Indonesia has seriously delayed a solution to the Southeast Asian side of the crisis.

I continue to be amazed at the lack of significance which major Western countries - especially the United States - attach to the fact that the world’s fourth largest nation is a mere step away from complete economic, political and social collapse (with nearly 50% of Indonesia’s population now in poverty, many would say that has already occurred).

The slowness with which the United States organised a bank rescue plan for Indonesia contrasts with the speed with which this was done for South Korea. More generally the United States let the International Monetary Fund impose dangerously destabilising measures on Indonesia, including removal of the national subsidy on fuel and the Government’s monopoly on distribution of basic food commodities.8

In my view, policy makers in Washington still weigh strategic significance in Cold War terms. South Korea got quick and significant assistance because it faced a communist North armed with nuclear weapons. Indonesia did not because the Cold War is over - it is no longer useful to the United States as a bastion against communism, and the United States has not developed a replacement standard with which to measure the strategic significance of such countries.

If anything, it is the human rights agenda which dominates the US-Indonesia relationship today. This has an undeniable and important place in international diplomacy, but it is of little help at present to a vast nation such as Indonesia struggling to maintain its social and political cohesion.

My contacts at senior levels of the Indonesian Government say they do not know what is going to happen to their country - and they run the place!

If President Habibie manages things well, Indonesia will struggle through to elections in June this year and perhaps then muddle through. But if Habibie does not manage well, then the likelihood of any kind of cohesive and effective political coalition after the elections is slim.

For the sake of the stability of the whole of Southeast Asia (once so important to the United States: have we forgotten the Vietnam War already?), the United States needs to focus on the critical importance of Indonesian unity and cohesion.

The United States needs urgently to initiate some sensible, constructive policies for Indonesia, not merely echo the trendy economic rationalism of the IMF. Some in Australia, for example, have talked of a Marshall Plan for Indonesia.

The United States needs to take the lead on getting such a plan off the ground and in place. But it must be done soon - Indonesia is already on the brink.


In assessing the strategic implications of the Asian economic crisis, it is not enough, from a security planners point of view, to rely on assurances from the Pentagon - however sincere - that the United States will maintain 100,000 troops in East Asia for the foreseeable future. There are credible alternative scenarios which must be considered as part of responsible national security planning, in which the US military presence in the region may be much less in the coming decade. A deepening of Asia’s economic crisis would only serve to accelerate anti-American sentiment, which has already been exacerbated by the events of the last two years.

This then directly raises the issue of the effectiveness of the United States response to a regional military crisis. As grateful as the world should be for the global policeman role of the United States, no-one can expect this role to be carried out perfectly. Regional nations will have to provide, and must be encouraged and assisted to provide, for their own self-reliant defence. As a minimum, they must be able to defend their basic territorial integrity.

Where the United States can do much better is in its policy response to events such as the Asian economic crisis which have the potential to destabilise whole regions. The US must cease allocating its economic support on the basis of Cold War strategic values and devise new tenets for its strategic engagement policy in Asia.

Ten years after the fall of the Berlin Wall, it is time for Washington to develop a more refined process for assessing the strategic significance of events in the Asian region, and hence for deciding the weight to be given in its policy and economic responses to pivotal episodes which are determining the strategic and political future of the whole of East Asia, such as the current economic crisis.

About the author:  Professor Dibb is Head of the Strategic and Defense Studies Centre in the Research School of Pacific and Asian Studies at the Australian National University. His previous positions over the last twenty years in Australia include Deputy Secretary for Strategy and Intelligence in the Department of Defense, Director of the Joint Intelligence Organization, Ministerial Consultant to the Minister for Defense, Assistant Secretary for Strategic Policy, and Head of the National Assessments Staff of the National Intelligence Committee. As Deputy Secretary, he was responsible for managing Defense’s intelligence programs, strategic policy, and force structure decisions, and for programming new major capital equipment bids. He is the author of five books, including, The Soviet Union: The Incomplete Superpower (Macmillan Press Ltd, London 1986); The Review of Australia’s Defense Capabilities, Report to the Minister for Defense (Australian Government Publishing Service, Canberra, 1986). His more recent publications include Towards a New Balance of Power in Asia (Oxford University Press for the IISS, Oxford, 1995); The Revolution in Military Affairs and Asian Security (IISS, London, 1997); The Strategic Implications of Asia’s Economic Crisis (with David Hale, IISS, London, 1998). Professor Dibb has written over 70 other articles or monographs in academic publications.