East Asia

Expect the Unexpected: 10 Reasons North Korea Could Soon Change Course

1. Russia’s economy is currently in disarray as a result of falling natural resource prices, slow economic growth in Europe, and its rivalry with the United States. Russia has been an ally of North Korea because it sees North Korea as a counterweight to the Chinese, Japanese, and US-backed South Koreans, the other powers in Northeast Asia. If Russia’s economy does not bounce back, North Korea will need to adapt to the weakening of one of its only friends in the world.

2. Russia has been looking to export commodities to South Korea, as Russia worries that Europe and Japan will reduce their imports of Russian oil and gas as a result of the Ukraine conflict, the American fracking boom, the end of Western sanctions on Iran, and the possibility of Japan turning its nuclear power plants back on. Though Russia is obviously not thrilled about South Korea’s close relationship with the United States, it might nevertheless be happy to see a more united Korea serve as a counterweight to China and Japan in the Pacific.

In addition, the most direct way for Russia and South Korea to trade with one another is via the 800 km of North Korean territory that separates Seoul from Vladivostok. This is particularly true of gas exports, which travel cheapest through overland pipelines rather than by undersea pipelines or LNG ships. It is also true of many other types of goods, however. Politics aside, it would often make more sense to cross North Korea rather than to load and unload ships in order to sail the 600 km of sea between Russia and eastern South Korean ports (which are themselves 150 km or so from Seoul).

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3. The youngest generation of the North Korean leadership, embodied by 33-year old Kim Jong Un, was raised during the 1990s, after the Soviet Union had fallen, after China’s economic miracle had begun, and after the Internet and satellite television had become common. Kim Jong Un himself went to school in Switzerland, a stark contrast to his father Kim Jong Il who may have been educated in China during the Maoist era.

Today Kim must be looking at Bashar al-Assad with fear. Like Kim, Assad took over at a fairly young age from a father who had been a larger than life figure. Assad lasted for one decade before the Syrian Civil War got underway; Lil’ Kim is now in the middle of his fifth year in office. Meanwhile, the number of North Koreans living today who were alive during the reign of the first Kim, Il Sung, is quickly falling.

4. Unlike most other poor countries, North Korea’s population is not young. Its population pyramid has two main bulges: one between 40-50 years old, the other between 15-25 years old. A decade from now, then, much of the older bulge will have become too old for manual labour, while the number of young people entering the workforce for the first time will have begun to drop off. At this point, North Korea may be more inclined to move away from a labour-based economy, which in turn will require it to import capital from abroad, perhaps from the South Koreans.

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This aging also raises Korea’s family reunification issue: North Korea’s 40-50 year old cohort are in many cases the children of families who were divided by the peninsula’s split in the Korean War. The coming decade will be the last chance for many of these sundered families to get back in touch before their elderly parents pass away — and before this generation becomes old itself.

5. Back when China was run by committee, consensus, compromise, etc.,
it liked being compared to North Korea because it could say, in effect, “we may not have a liberal democratic political system, but at least we’re nothing like the government in North Korea”. Today, though, as China has been moving back in the direction of a more traditional persona-led dicatorship embodied by Xi Jinping, the last thing that the Chinese leadership wants is for Xi to be compared with Kim Jong Un.

Xi has yet to visit North Korea, even though Xi has been perhaps the most well-travelled leader in Chinese history, and the first ever to visit South Korea before North Korea. Kim Jong Un, in turn, has not yet travelled the 800 km from Pyongyang to Beijing. (In fact, Kim Jong Un has never officially left North Korea since taking over as its leader in 2012). This may soon change, however: Kim Jong Un may finally visit Beijing in the next few months.

6.  Japan could be coming back in a big way: Shinzo Abe’s revivalism – including the end of formal military pacifism and the symbolic 2020 Tokyo Olympics may just be the start. The Japanese economy is far less exposed to the Chinese economic slowdown than are those of South Korea and Taiwan. Japan might benefit more from Russia’s troubles than China will, given that China has often allied itself with Russia. Japan is also more dependent on energy imports than China, and so may be more likely to benefit from the fall in energy prices than China will.

Japan may benefit more than any other country from the coming era of robots, given its uniquely aged workforce and technological expertise — and given that robots might make China’s enormous human workforce less of an economic advantage over other countries than it is today. Whether Japan addresses its aging workforce dilemma by importing more energy to power robots or by continuing to outsource more of its industrial activity to countries like Thailand and Taiwan, however, it will have to become more active in the region, and thus potentially more aggressive in the region, in order to ensure its access to foreign markets.

If Japan’s reemergence causes the Chinese to want to create a rift in the US-Japan alliance, Korea is the best place for China to try to do so. The US loves its alliance with Korea, while Japan does not. The Japanese and Koreans have quite a tortured relationship, a legacy of Japan’s historical domination of the peninsula. The US would be thrilled by a more unified Korea, whereas the Japanese might be wary of one even in spite of their current rivalry with the North.

Consider the context for the Korean War (1950-1953): Japanese power had just been decimated in World War Two, so China helped to divide the Korean peninsula because it feared the American-allied unified Korea that had emerged at Beijing’s doorstep following the invasion of the North by America and the South. China did not have to consider using Korea to create a rift between the US and Japan, since Japan was not a player at the time. A somewhat similar situation occurred in 1990, when American power surged again as the Soviet Union fell and as Japan’s economy suddenly began its “lost decades” of slowing growth.

If Japanese power grows, however, China may want a more unified Korea as a buffer against the Japanese and as a prime way of splitting the American-Japanese alliance. Alternatively, if China and Japan can finally mend fences with one another politically, it may cause the United States (and/or Russia) to want a more unified Korea to serve as a counterweight to both China and Japan.

7. More so than during the 1990s,
when Russia and China were weaker than they are now and 9-11 had not yet occurred, the US has a lot to worry about today other than North Korea’s military programs. North Korea’s first nuclear tests were in 2005, possibly in order to win back American attention that had shifted to the Greater Middle East. Now, though, with the US still worried about the Muslim world and also concerned with Russia and China, there may be diminishing returns to this strategy of gaining aid and prestige by nuclear saber-rattling.

The move by North Korea in 2010 to kill 46 South Korean navy soldiers in the Cheonan ship attack, which was by far the most casualties the South’s military has experienced in decades, suggests that the North Korean leadership may be aware of these diminishing returns. More recently, so does the announcement by North Korea this past winter that it has successfully developed a hydrogen bomb.

8. South Korea’s economy is slowing because of China’s economic slowdown and because South Korea has now basically become a “developed” economy (its per capita income is estimated to be $28,000, in nominal terms). While South Korea does not want to pay the financial burden of resuscitating theNorth Korean economy, it could nevertheless see some opportunities for itself in engaging the North in trade.

North Korea, for example, has one of the world’s largest reserves of high-quality anthracite coal, while South Korea is one of the world’s leading importers of coal and of fossil fuels in general. And of course, North Korea has a cheap, Korean labour pool (and potential consumer base), at a time when South Korea’s workforce is no longer cheap or youthful by global standards.

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Trade figures, adjusted for overall GDP size

9. Coal prices have plunged of late in China and in most of the rest of the world. This could put a lot of pressure on the North Korean economy, which has become the third largest supplier of coal to China in recent years. China accounts for more than 90 percent of all North Korean international trade. According to Reuters, “last year, North Korean coal deliveries to China surged 26.9 percent, making North Korea China’s biggest supplier behind Australia and Indonesia. Coal deliveries from Australia plunged 25 percent, indicating the increase in [Korean] imports may have been to help support this”.

10. With China and the wider Northeast Asian economy struggling after years of rapid expansion, ending North Korea’s isolation could be a good last-ditch attempt to stimulate regional growth. China, for instance, could try to use its position as the North Korea whisperer in order to gain economic favours from the United States. China also has an incentive to engage North Korea — and to have South Korea engage North Korea — because the last thing the Chinese want to deal with right now is a refugee crisis emerging on their border with North Korea in the unlikely but not impossible event of a state collapse occuring there. A few million Koreans already live in China near the North Korean border.

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Finally, North Korea could benefit the regional economy by serving as a land route between China and South Korea. Seoul is just 500-600 km from significant Chinese cities like Shenyang and Dalian by way of the North, and 1150 km from Beijing. In the longer-term, the North Korean trade route could become even more commercially important if fixed links are built across the Yellow Sea between North Korea and China, across the Gulf of Bohai between the Chinese provinces of Liaoning and Shandong, or across the Korea Strait from Japan to the Korean peninsula.

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So, could the era of extreme North Korean isolation from the world be reaching its final days? Certainly, from the US point of view, North Korea is something of a last man standing these days: of the six countries that the Bush government named as the “axis of evil” – Iraq, Iran, Syria, Libya, Cuba, and North Korea – Kim is now the only leader not to have been either toppled (Iraq and Libya), besieged (Syria), or moving towards warmer relations with the US (Cuba and Iran). Given the changes occurring all around it in Asia and the world, North Korea’s position no longer seems like an easily sustainable one. Reunification with the South or not, it still makes sense to guess that North Korea under Kim Jong Un will end up being very different from that of his father.

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East Asia

China’s Hidden Regionacracy, part 1: China’s Borderlands

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How can one measure China’s economic stability? In the West, it is common to look to Hong Kong and Tibet as litmus tests of the strength of the central Chinese government. While it is true that both Hong Kong and Tibet are very important places, their combined populations do not account for even one percent of China’s overall inhabitants.

To get a better sense of China’s stability, then, one must also examine the other areas of China where the dictates of the central government are most likely to be resisted. Arguably, these include the following six regions: Southwestern China (namely, the provinces of Yunnan and Guizhou, plus the “Autonomous Region” of Guangxi), Southeastern China (the provinces of Guangdong, Fujian, and Hainan), Northeastern China (the provinces of Heilongxiang and Jilin), the Sichuan plateau (the province of Sichuan and “Direct-controlled Municipality” of Chongqing), and the “Autonomous Regions” of Xinjiang and Inner Mongolia.

These regions have a total population of over half a billion. They are home to a majority of China’s 120 million or so ethnic minorities, 300-400 million speakers of languages other than Mandarin, tens of millions of speakers of dialects of Mandarin that are relatively dissimilar to the Beijing-based standardized version of Mandarin, 20-30 million Muslims, 50-100 million recent adopters of Christianity, and tens of millions of family members of the vast worldwide Chinese diaspora.

Together, these regions form a cordon around the flat, triangle-shaped Chinese heartland that extends for more than a thousand kilometres from Beijing to Shanghai, where most of the rest of China’s population lives. Several other provinces, meanwhile, such as Shanxi, Gansu, Hunan, and the Hui Muslim “Autonomous Region” of Ningxia, arguably fall somewhere in between China’s central and peripheral territories, from both a geographical and political perspective.

Along with the high-altitude Tibetan(-Qinghai) Plateau and the Chinese Himalayas, these six peripheral regions possess by far the most rugged, expansive, and insular terrain within China. Their territories consist either of:

  • subtropical hills and mountains (throughout most of Southeastern and Southwestern China)
  • vast semi-desert plateaus (in Xinjiang and Inner Mongolia)
  • enormous mountains (in Xinjiang, where mountains cover an area larger than England and regularly reach heights higher than the highest Rockies)
  • mountainous or hilly islands (within the archipelagic coastal waters of Southeastern China, in places like Hong Kong, Macau, Hainan province, Xiamen, Zhoushan, Pingtan County, and nearby Taiwan)
  • mountain-enclosed riverlands (in Sichuan and Northeastern China)

Not surprisingly, Chinese central governments, whether they are controlled by ethnic Han Chinese as is the case today, or else by outside invaders like the Manchu or Japanese as was the case for most of the past half-millenium, have almost always had trouble subduing most or all of these areas.

Indeed, China’s peripheral regions contain all of China’s land borders, which are the longest in the world, more than two thousand kilometres longer than all of Russia’s land borders and well over double the length of the continental United States’. These borders remain almost impossible for the Chinese government to fully control, not only because of their incredible length and difficult terrain, but also because they are located an average of between one and a half thousand and three thousand kilometers away from the Chinese heartland. Only two significant railway lines cross the western half of this enormous distance as of yet.

Complicating matters further, China’s borders are shared with fourteen different countries, nearly all of which possess either ethnolinguistic or religious ties with the areas of China they are adjacent to. These include:

  • the long Himalayan border that separates Tibet from India, Nepal, and Bhutan, across which the exiled Tibetan Buddhist leadership resides
  • the even longer border that seperates Inner Mongolia (where more than one-fifth of the population are ethnic Mongols) and Xinjiang from the country of Mongolia (which in turn shares a three and a half thousand kilometer-long border with Russia)
  • the Manchurian-Korean border, where China is terrified of millions of refugees flowing in from North Korea in the event of a disaster there, and where nearly two million people living in the Manchurian provinces of Heilongxiang and Jilin are already Korean
  • the twin Siberian borders with Xinjiang, Inner Mongolia and Manchuria; Xinjiang’s borders with Khazakstan, Kyrgystan, Afghanistan, Pakistan, and Kashmir, where, as in Xinjiang, a plurality of the population is Muslim and/or ethnolinguistically Turkic
  • the southeastern and southwestern Chinese borders with Southeast Asia, throughout which there is a diaspora of tens of millions of southern Chinese, and where ethnic minority populations span both sides of China’s borders with countries like Myanmar and Vietnam.

As the economies of these peripheral Chinese regions as well as China’s neighbouring countries emerge, as in recent years many have begun to do at a faster pace than the Chinese economy has as a whole, they may deepen this array of cross-border relationships, and in turn could undermine efforts by China’s central government to enforce national unity within the huge Chinese economic and political system. The Chinese have certainly been worried about their neighbours within the relatively recent past: China sacrificed hundreds of thousands of its citizens during the Korean War in the 1950’s and then thousands during the Sino-Vietnam War in 1979, which, as a point of comparison, may be more casualties than the United States has suffered in all of the wars it has ever fought put together.

Since the 1980’s, however, as the China-US alliance took root and the Chinese economy began rapidly expanding, and as the economic growth of most of China’s neighbours collapsed in the early 1990’s (Japan and the Soviet Union), late 1990’s (South Korea, Taiwan, Southeast Asia, and British-era Hong Kong), or during the the 2008 global recession (Russia, Japan, Taiwan, Europe, and North America), while around the same time the power of China’s English-speaking rivals became preoccupied with Afghanistan and Iraq throughout the 2000’s, China has not had to worry about its borderlands nearly so much.

This is not to say that these regions were problem-free during this period. The Chinese government has in fact been concerned with many of them, including, for example:

Yet all such risks proved to be manageable ones, eased as they were by the amazing Chinese economic boom that was then still in full swing, and by the fact that China, which until 2010 still had an economy thought to be smaller than Japan’s, had not yet attracted the full attention of other powers intent on containing it.

Lately, in contrast, just as the United States has been disengaging from Afghanistan and Iraq and the economies of the US and Britain have begun speeding up again following their multi-year post-recession slog, and just as Japan, which continues to have the third largest economy in the world by a large margin, has finally begun to rebuild its will to implement an aggressive economic stimulus program and outwardly post-pacifistic foreign policy, many of China’s peripheral provinces and most of the countries surrounding China either grew or accelerated their economies at a faster pace than did the overall Chinese economy, which has slowed significantly in recent years.

In some of these areas, for instance on both sides of the border between south-western China and northern and eastern India, growth in 2014 accelerated at a much faster pace than in China as a whole. While China’s overall economic growth nevertheless remains quite strong compared to most of the rest of Asia and the world – at least, according to Beijing’s own official estimates, which admittedly are dubious – this constellation of recent trends does not bode well for its central government going forward.

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East Asia

Internal Chinese Geopolitics, part 1

How can one measure China’s stability? In the West, it is common to look to Hong Kong and Tibet as litmus tests of the strength of the central Chinese government. While it is true that Hong Kong and Tibet are important places — Hong Kong because it one of China’s major financial and service centres, Tibet because it encompasses around 15 percent of China’s territory and contains the headwaters of China’s, India’s, and Southeast Asia’s most important rivers — the inhabitants of Hong Kong and Tibet do not even account for 1 percent of China’s overall population.

To get a better sense of China’s political stability, then, one must also examine the other areas of China where the dictates of the central government in Beijing are most likely to be resisted. Arguably, these include the following seven areas: the Sichuan basin, Southwestern China, Southeastern China, Northeastern China (formerly known as Manchuria), the Shanghai Municipality, and the “Autonomous Regions” of Xinjiang and Inner Mongolia.

With the exception of Shanghai, not a single person born in any of these areas has become the ruling General Secretary of the Communist Party of China or the Premier of the People’s Republic of China. And yet, taken together, these areas have a population of almost 600 million people – close to half of China’s total population. So, let’s take a brief look at each one of them:

The Sichuan Basin –  Population: 111 million

See that red circle in the centre of China’s population density map (pictured below), and the greenish-yellow circle in the centre of China’s physical topography map (pictured below that)? That is the Sichuan basin, which consists of the province of Sichuan (population 81 million) and the city-state of Chongqing (population 30 million).

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Close up topography of the Sichuan basin and surrounding areas: 

Physical map of Sichuan.

To the west of the Sichuan basin is the sparsely populated Tibetan plateau, which is more than 4000 metres higher above sea level than Sichuan is (to put that into context, the tallest building in Manhattan is only 540 metres tall). South and southeast of Sichuan there are mountains and plateaus that are about 1000 metres higher than Sichuan. To the east there are also mountains, which separate Sichuan from the middle reaches of the Yangtze River valley, where the elevation is about 350 meters below that of Sichuan. And to the north there are a series of high mountain ranges and narrow valleys that have historically helped to insulate Sichuan from the northeastern coastal plain where most Chinese people live.

The Sichuan basin’s geographic insularity and large population (larger than any single Chinese province) have historically made it one of China’s more independent-minded regions. In the 3rd century AD, for instance, during China’s famous Three Kingdoms era, a state basically corresponding to modern-day Sichuan was one of China’s three independent political entities (see left map below). A somewhat similar thing occurred in the 10th century AD (see right map below).

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More recently, Sichuan played a significant role during the Xinhai Revolution just prior to WW1, which overthrew China’s last emperor, and during the “Warlord Era” which followed it. Sichuan then became a critical component of the Communist Party’s rebellion against the ruling Chinese Nationalists during the Chinese Civil War from 1927 – 1950. Mao’s infamous “Long March” went through the outskirts of Sichuan province, for example, and one of the two largest original Communist armies during the Civil War, led by Mao’s rival Zhuang Guotao, was based there as well. Finally, after the Communists turned the tables on the Nationalists, gaining the upper hand in the Civil War, Sichuan ended up becoming the last base of the Chinese Nationalist leadership prior to its retreat to the island of Taiwan in 1949.

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Sichuan, in other words, often became a centre of resistance against whichever group, whether Chinese or foreign, happened to be ruling China at the time. Indeed, when the Japanese controlled much of China during WW2, Chongqing even became the official capital city of the parts of China that were still free of Japanese control (see map above). Much more recently, during the protests of 1989, there were actually two, rather than just one, major government crackdowns: one in Beijing’s Tiananmen Square, which most people in the West have heard of, and the other in Sichuan’s capital city of Chengdu, which very few people have heard of.

While it is difficult to speculate on the extent to which the Sichuan region may become a nuisance for China’s central government in the future, there have arguably been some troubling signs of late. Most notably, the two most prominent “purges” of high-ranking Communist Party leaders in recent times were both from the Sichuan basin.

The first was Bo Xiliai, the leader of Chongqing, who many had thought might become China’s next top leader, but instead was exiled from the Communist Party and given a life sentence in prison on a corruption charge in 2012, following a curious, alleged incident involving his wife, the Chongqing chief of police, and the murder of a British businessman.

The second was Zhou Yongkang, the former leader of Sichuan province, who was arrested on corruption charges in late 2014, only a few months ago, becoming the first member of China’s seven-person Politburo Standing Committee (the top leadership of the entire country) to be expelled from the Party since the 1980s. Many of Sichuan’s other top leaders have recently been targeted by the central government on corruption investigations as well, because of their associations with Zhou. Of course, the fact that Bo and Zhou were both the most powerful modern leaders the Sichuan basin has seen might just be a coincidence, having more to do with personal politics within the Communist Party than regional geopolitics within China as a whole. But it is somewhat suspicious nonetheless.

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Politically, in spite of the region’s large population, not one person born in Sichuan or Chongqing currently holds a position in any of the 43 positions in the Communist Party’s Politburo, Secretariat, or Central Military Commission, at or around the top levels of China’s political hierarchy.

And yet, all of the previous recent Communist Party leaders of Chongqing (none of whom were actually born in the region) have gone on to some of the top jobs in the entire country. Three of the past four have even become members in China’s Politburo Standing Committee, the 7-man group which de facto holds the highest Party positions of all. And before them, Deng Xiaoping, by far the most infamous post-WW2 Chinese leader apart from Mao, served as Mayor of Chongqing, and was born in one of its suburbs. (Though in Deng’s day Chongqing was more important in China than it is today, since its insular location had allowed it to serve as the capital city of “Free China” during the Japanese occupation of eastern China in WW2).

The promotion of former party chiefs of Chongqing (but not Sichuan, even though Sichuan is much larger) to top positions in the central government in Beijing might also be just a coincidence. It does, however, seem suspiciously like a divide and conquer tactic the government has been using to keep Sichuan and Chongqing apart, by winning Chongqing’s favour. Chongqing holds a particularly strategic position, as it is the spot where the Yangtze River flows out of the mountain-enclosed Sichuan basin, entering into the rest of central China and eventually reaching Shanghai on the Pacific.

Indeed, the reason Chongqing was even made a city-state to begin with — one of only four city-states within mainland China, the others being Beijing, Shanghai, and Beijing’s port city of Tianjin — may be because China’s leaders were worried about having to deal with a politically united Sichuan basin, which prior to Chongqing’s independence from Sichuan in 1997 had been China’s most populous province. This is probably also why the “Municipality” of Chongqing, unlike those of Shanghai, Beijing, or Tianjin, is the only one to have been given large rural areas around it to govern, so that it controls a population of 30 million even though its urban areas are home to around just 10 million.

The current Party chiefs of Chongqing and Sichuan are two of the youngest in the entire country. They are 51 and 58 years old, respectively; most other provincial party chiefs in China are in their sixties or seventies, and the 51-year-old Chongqing leader is actually the youngest of all 25 current members in the country’s Communist Party Politburo. Having the youngest provincial party chiefs or governors is usually not a good sign, since Beijing tends to pick the youngest, most ambitious governors for areas it is most concerned with, the idea being that such governors will be willing to do whatever is necessary in order to maintain order, so that they can later be promoted to one of the Communist Party’s highest offices. Hu Jintao, for instance, had served as the party chief of Tibet prior to becoming a major political figure. Indeed, we will continue to see the pattern of relatively young and ambitious party chiefs and governors in the other potentially trouble-making regions we will discuss in this article.

Finally, also notable is the Sichuan Earthquake of 2008. The earthquake, the epicentre of which was only about 80 km from Sichuan province’s main city of Chengdu (population 14 million), killed an estimated 80,000-90,000 people and caused an enormous amount of physical injury and property damage, leaving 5 – 15 million people homeless. It is one of the deadliest natural disasters in the world in modern times, and the deadliest in China in over three decades. By comparison, that is about 20,00 more casualties than the United States experienced in Iraq, Afghanistan, and Vietnam combined.

The Sichuan earthquake was mostly overlooked by people in the West, not only because it took place deep within the unknown Chinese interior, but also because it was overshadowed by a flurry of notable world events that took place during the months immediately following its occurrence, such as the global financial crisis, the first Obama election, the Beijing Olympics, the Russian invasion of Georgia, the first Israeli war against Hamas in Gaza, and the Mumbai terrorist attacks. The same week as the earthquake, in fact, California became the second US state to legalize same-sex marriage, and the debate discussion of this decision even got much more American news coverage than the disaster in Sichuan did.

The earthquake was, however, obviously an event of huge importance within China, and it is still quite fresh in some people’s minds. Its tenth anniversary will be approaching in 2017, the same year as China’s once-a-decade top leadership changeover. Crucially, many Chinese people believe that the central government are at least partly to blame for the earthquake (though it is difficult to know how many people believe this, given Chinese censorship). This is because the government created the gigantic nearby Three Gorges Dam, which finished being constructed just prior to 2008, and many think the weight of the dam – which can produce almost twice the electricity of any other dam in the world – and the reservoir of water it created was the catalyst for the earthquake. (Even before the earthquake, the Dam crushed the previous record for people displaced from their homes by a hydroelectric plant: the number of displaced Chinese was estimated at more than 1.2 million people, most of them from the province of Hubei, which directly borders the Sichuan basin).

And the thing about earthquakes is, of course, that you never fully know when another one is going to happen. If a second large one were to occur and affect Sichuan, it could bring back the memory of 2008 – and potential Sichuanese anger with the central government  – along with it. In fact, this may have already happened to a certain extent: China’s highest-magnitude earthquake since the Big One in 2008 occurred again in Sichuan, in 2013, only about 115 km from Chengdu. It killed an estimated 200 people (according to the Chinese government) and injured more than 10,000.

Southeastern China —  Population 154 million

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In a previous article, we discussed a large number of differences between southern China, where nearly all of the country’s tens of millions of ethnic minorities and hundreds of millions of linguistic minorities live, and northern China, where most of the country’s enormous majority of ethnic Chinese and Mandarin speakers live. So we will try to repeat only some of the basic facts of the region that were discussed there, and then focus specifically on why this part of China could potentially become the most problematic region for the Chinese central government to handle.

Southeastern China consists basically of three provinces: the province of Guangdong (population 107 million), which has the largest population and economy of any Chinese province, and which is the only province which borders Hong Kong; the province of Fujian (population 38 million), which is located directly across the 180 km long Taiwan Straits from Taiwan, speaks the same dialect of Chinese as is spoken in Taiwan, and, in spite of having less than 3 percent of China’s total population, accounts for perhaps 15 percent of all China’s trade with Taiwan (and China trades roughly 40 percent as much with Taiwan alone as it does with the entire US); and finally the province of Hainan (population 9 million), which is the only island province in China. The first bridge linking Hainan to the Chinese mainland (specifically, to Guangdong), is supposed to be finished between 2016 and 2020, and is likely increase Guangdong’s level of influence on the island.

As you can see from the population density map below, southeastern China is very different from northern China, in that its population centres are almost entirely situated on the country’s Pacific coast. The reason for this is that southern China, unlike northern China, has a very difficult climate and topography to deal with – it is extremely hilly, mountainous, often forested, and sub-tropical (see the other two maps below) – so that its population has moved to the only places where economic development was not extremely difficult to achieve, namely the narrow coastal flatlands that sit next to its numerous natural harbours.

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or, for a different perspective of the topographic differences between southeastern China and central-eastern China:

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Because southern China’s challenging geography has tended to impede internal movement of people and goods – especially in the past, but to a decent extent also in the present – southeastern Chinese coastal cities have also become relatively close to, and dependent on trade with, the outside world, with foreign economies like Japan, the United States, Canada, and Europe, as well as with Taiwan. The relationship between Hong Kong (population 7.2 million) and Britain is of course the most obvious and significant example of this, but it is not the only one. Macau (population 600,000), for instance, on the borders of Guangdong, is a former Portuguese territory that is China’s only “Special Administrative Region” apart from Hong Kong. Macau is also by far the wealthiest of any political subdivision within China, with a per capita nominal income of more than $90,000.

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According to the Economist, Guangdong and Fujian alone account for 30-40 percent of all Chinese exports. Most of China’s gigantic global diaspora – which is 50 million strong, perhaps, and is located all over the world, but particularly in places like North America, Australia, Peru, and especially Southeast Asia – is also from Southeastern China. In fact, it has been estimated that one out of every seven Chinese Americans have their roots in the Guangdong area of Taishan, even though Taishan itself only has around 1 million inhabitants today. More recently, in the 1980s, emigrants from Taiwan and Hong Kong came to countries like the US and Canada in very large numbers. If, therefore, globalization forces continue to deepen, and if the economies of Southeast Asia and Taiwan continue to emerge, it could have a huge influence on this part of China, in a sense pulling it away from the rest of China.

Southeast Asia alone is home to an estimated 27 million Chinese people (though admittedly, these statistics vary widely depending on which numbers you trust, and on which criteria you use to define who is and is not “Chinese”, since many have been living in Southeast Asia for many generations now). Southeastern China also directly borders a potentially rapid-growing Vietnamese economy, the capital city of which, Hanoi, is only about 100 -150 km from the southeastern Chinese border, only 400 km from Guangdong’s enormous capital city Guangzhou and Hong Kong, and only 250 km from the Chinese island province of Hainan.

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Along with the adjacent provinces of Hunan, Jiangxi, and Zheijang, Southeastern China also has by far the most intra-Chinese linguistic diversity in the country. In it, non-Mandarin Chinese languages are spoken by an estimated 300 million people (though increasingly, most people are also able to speak the standardized, Beijing-region dialect of Mandarin) — see map below. Like Sichuan, this region has also been politically disenfranchised to a certain extent, with not a single one of China’s 43 positions in the Party’s Politburo, Secretariat, or Central Military Commission held by someone born in Guangdong or Hainan, and only one held by someone born in Fujian. Currently Beijing has also given Guangdong the second youngest party chief (aka party secretary) in the country, a 51-year-old who has spent most of his career working in Tibet.

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Recently, this region has also been slowing economically as a result of the effect that Europe’s and Japan’s stagnant economies have had on demand for its exports. As a result, and also given the recent (and perhaps ongoing) protests in neighbouring Hong Kong, the province of Guangdong should be watched very closely at this time.

Historically, to be sure, Southeastern China has been a huge pain for Chinese central governments. From roughly 200 AD to 500 AD and from 1000 AD to 1200 AD, for example, there was a general north-south political divide in China (see maps below).

china 900 china 200

In modern times, during the anti-emperor Xinhai Revolution prior to WW1, Guangdong and Fujian were two of the original centres of the revolution. Later, in 1925, the Chinese Nationalists (the Kuomintang) set up an alternative Chinese capital city in Guangzhou, Guangdong, and from it successfully led a campaign to overthrow the government in Beijing, at which point the Chinese capital was moved to Nanjing (next to Shanghai).

Only a few years after that, in 1930, there was a very deadly civil war within China, the Central Plains War, which among other things pitted Nationalist leader Chiang Kai-Shek, who was ruling out of Nanjing, against Hu Hanmin, who had the support of the Nationalists across Guangdong and the rest of southern China. This rivlary had in fact been presaged by an earlier one in 1922, when the top Nationalist leader at the time, Sun Yat Sen, was forced to flee Guangdong from a different, more regional-minded Nationalist leader, Chen Jiongmin.

Around the same time, the Guangdong capital of Guangzhou was also one of the main bases of the Communist movement in China. The Communists were gaining momentum across various parts of southern China: in 1933, just to give one example, an alliance between a portion of the Communist movement and a portion of the Nationalist movement emerged, leading to the Fujian Rebellion: the creation a self-governing leadership in Fujian province that aimed to overthrow the Nationalist Chinese government of Chiang Kai-Shek. The provinces of Hunan and Jiangxi, directly on the border of Guangdong, also became very important for the Communists.

Finally, when the Communists took over and were about to win the Chinese Civil War, Guangdong became the final base – along with Sichuan – of the Nationalists prior to their retreat to Taiwan.

While it is probably unwise to make generalizations about Chinese history, there does seem to be a bit of a pattern here: Guangdong, or more broadly southern China, tends to resist centralized Chinese leadership. It has always seemed to lead the anti-government movements in the country, whether it be the anti-imperial uprising against the Qing Dynasty at the begining of the 20th century, the Nationalist move to overthrow the Beiyang government (which had replaced the Qing) in the Northern Expedition, the attempt by regional leaders within the Nationalist movement to get rid of the Nationalist central government of Chiang Kai-Shek that ruled out of Nanjing, the emergence of Communist movements opposed to the ruling Nationalists (with whom they had previously been allied), or, finally, the retreat and resistance of the Nationalists in the face of the ruling Communists.

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The thing which makes southeastern China so potentially difficult for the central Chinese government, however, is not so much its history as it is its wealth. If you take Guangdong and Fujian, and add in neighbouring Taiwan, Hong Kong, Zheijang, and the Municipality of Shanghai (and we will discuss Shanghai later in part two of this article), you get a coastal region with a GDP that, as recently as 2009, was approximately 80 percent as large as the rest of all of mainland China’s other provinces put together.

Such wealth not only gives southeastern China economic influence, but has also made its internal politics complicated – and potentially dangerous – through the creation of divisions between the native inhabitants of the region’s cities, and the migrants from its rural areas and from the rural areas of poorer Chinese provinces, who are in search of work in its cities. Guangdong alone has an estimated 27 percent of China’s inter-provincial migrant population. And in China, “rural-urban” is not only a geographic or demographic distinction, but also a legal designation with significant  financial and social implications. Rural Chinese populations, even when they have moved to urban areas, are generally denied many of the social services, such as subsidized housing or education, which are provided for the native urban populations.

Finally, parts of central-eastern and southeastern China in recent years seem to have become the main centres of China’s potentially enormous transition toward Christianity. Today, according to the Economist, arguably more than 100 million people in China are Christian, up from perhaps as few as 15 million as recently as the 1990’s. If these numbers are accurate, then the growth of Christianity within China during the past two decades represents one of the largest religious adoptions in all of human history. The Economist more recently argued that the relationship between Christianity and the Communist Party in China has been becoming much more tense  in the past year.

Neighbouring Hong Kong has long had a significant Christian population, meanwhile, and remains around 10-15 percent Christian today. A number of the Hong Kong protest organizers were practicing Christians, in fact. And, notably, the Chinese government may have begun to crack down on parts of this growing Christian religion within China during the past year or so.

Southwestern China Population: 120 million

Southwestern China (containing the provinces of Yunnan, Guizhou, and the “Autonomous Region” of Guangxi, one of only two Autonomous Regions apart from Tibet, Xinjiang, and Inner Mongolia) is by far the most mountainous of any populous Chinese region. Partly as a result of this, it also has by far the most ethnic diversity in the country, with a regional population that contains tens of millions of non-Chinese peoples (most notably the 15 million or so Zhuang ethnic group), some of whose homelands extend across the Chinese border with Southeast Asian countries like Myanmar. Like the other regions discussed so far, southwestern China has historically been a challenge for Chinese central governments. During the 1950’s, for instance, in the largest southwestern province, Yunnan, an anti-Communist Islamic guerrilla insurgency took place, orchestrated in part by the Nationalists who were ruling Taiwan. Today, as in Guangdong or Sichuan, not one person who was born in southwestern China is currently serving within the highest echelons of the Chinese government.

se-asia-map_ethnicgroup

Southwestern China is the only part of China to border most of Southeast Asia. It could in the future become particularly close with the northern part of Vietnam, which is nearby, populous, and can serve as an alternative route for southwestern Chinese goods to reach the Pacific. It could also become close with Myanmar, which can serve as a direct route for it to reach the Indian Ocean via the commercially navigable Irrawaddy River (see map below), or to reach India and Bangladesh overland without having to cross the virtually impassable Himalayan Mountains and Tibetan Plateau (see other map below). Notably, Vietnam and Myanmar have seen a great deal of economic growth in recent years, and Myanmar has politically been re-opening itself to the West after decades of isolation. Economic interaction between Southwestern China and these potentially emerging countries could present some challenges for the Chinese central government.

mapasia

In addition, and also potentially troubling for the Chinese central government, the region of southwestern china also has ties to southeastern China via the Pearl River, which is by far China’s longest commercially navigable river apart from the Yangtze, and which meets the Pacific at the place where Hong Kong and Guangdong’s capital city of Guangzhou are located (see map below). Southwestern China also directly borders both Sichuan and Tibet.

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(In the graph above: Kunming, Guiyang, and Nanning are the capital cities of Southwestern China’s provinces. The Greater Guangzhou-Hong Kong area in Southeastern China, which has a total population of perhaps more than 50 million, is arguably the most populous urban area in the entire world)

In part two of this article we will take a look at Shanghai, Xinjiang, the former Manchuria, and Inner Mongolia. 

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East Asia

The Physics of Japanese Economics

With the downward revision of Japan’s GDP growth figures last month, the Japanese economy is technically back in recession, projected to shrink by a slight amount during the year as a whole. Even though most analysts had previously forecast Japan’s economy to expand at a rate of 2 percent in 2014, nobody was too surprised by the news that is contracting instead. The recession is the country’s fifth since 1997, and its third since the global credit crisis of 2008. While some might see a silver lining in this – namely, that Japan’s economic growth going forward could not possibly get any slower than it has already been – many economists do in fact view the country’s problems as likely to grow more rather than less acute during the years ahead.

Unlike in recent decades, Japan must now grapple with an empowered China, with slowing economic growth among key trading partners like South Korea, Taiwan, coastal Chinese provinces, and Europe, with net government debt that has risen from 80 to 145 percent of GDP over the past decade, and with a Baby Boom generation that has reached between 65 and 70 years old on average (about a decade older than those of Europe or America). These trends arguably provide the backdrop to Japan’s current slowdown, even as the catalyst for the recession has been viewed as a rise in the country’s consumption tax, from five percent to eight percent, which came into effect earlier in the year.

What might be more surprising than the recession itself is that investors in Japan’s stock market seem basically unperturbed by the news of it. The Nikkei 225 index is actually higher now than it was before the recession become public knowledge; it continues to trade at around a seven-year high, virtually double the price it averaged between 2008 and 2013. Admittedly, this is a far cry from the Nikkei’s all-time highs in 1992, when it was worth well over double what it is today. In fact it does not even match the highs of 2000, 1997, 1994, and several other years going back all the way, astoundingly, to 1986. That’s right: Japanese stocks were worth more 29 years ago than they are today. Still, a seven-year high amidst the onset of an economic recession is something that is difficult to ignore.

Of course, the rise in the Nikkei may simply reflect the fact that investors have become so accustomed to seeing Japan’s economy shrink that they built in the risk of a recession to the price of Japanese stocks ahead of time, which meant that those prices did not require much revising when the recession actually arrived. The Nikkei’s rise may also reflect the fact that investors have faith in prime minister Shinzo Abe, who has loudly promised to stimulate the Japanese economy and revive Japanese prestige, and who is already using the recession as an excuse to call a snap election intended to extend his party’s leadership by an additional two years, from 2016 (when parliamentary elections would have otherwise been held) to 2018. [update: the elections have now happened. Abe’s party won a two-thirds majority, though with the lowest voter turnout since WW2].

Or it may be that investors have so little faith in Europe, China, and commodity-exporting economies like Brazil or Australia, and see US equities as being too expensive now that the S&P 500 has again reached all-time highs in recent days, that they have been forced into Japan’s stock market almost by default. Finally, and most intriguingly, the Nikkei’s performance may reflect the possibility that the potential of Japan to achieve a renewed, meaningful pace of economic growth is actually more promising than most Japanese themselves recognize.

With Japan’s stock market and GDP indicators pointing, almost paradoxically, in far-opposing directions, Japan’s economy now resembles Schrodinger’s infamous Cat: its true health is in a state of uncertainty, the resolution of which seems to depend on the specific approach at which it is observed. Of course, unlike the Cat itself, Japan’s economy is a paradox that we know can probably be resolved. All we need to do is take a look underneath the lid, so to speak, at the underlying fundamentals of the country’s medium-term (say, within the next decade or two) economic prospects. What are those underlying fundamentals? It turns out that the originator of the Cat query, Albert Einstein, might be of some use here as well:

General Economic Relativity 

One of the most fundamental theories of conventional economic forecasting is the idea that, in general, countries that are relatively poor will grow at a faster pace than those that are relatively rich. This is, of course, why a country like India disappointed investors when it grew at 6.5% in 2011 and 5% in 2013, whereas even 2% growth in the European Union or 3% growth in the United States would be a widely celebrated event.

In the case of Japan, the extremely high income levels the country had two decades ago might have limited its economy’s ability to grow. According to the IMF, in 1995 Japan’s per capita income was 1.5 times higher than that of the next wealthiest large developed economy (the United States), 2 times higher than that of the next wealthiest large economy in the western Pacific (Australia), and 3.3 times higher than that of the next wealthiest economy in Northeast Asia (Taiwan). As a result of being so wealthly at the time, Japan’s room to expand its economy further may have been somewhat constrained.

Today could scarcely be any more different. If the idea that relatively poor countries are in general likely to grow relatively quickly (i.e., the theory of general economic relativity) is to be believed, Japan is now in a much more favourable position where its growth potential is concerned. The country has become much poorer than other developed economies in terms of its per capita income, especially in comparison to regional counterparts like Australia, New Zealand, and Singapore, which have grown rapidly since the mid-1990’s. Japan’s lead over developing East Asian economies is also not nearly as large as it used to be (see charts below), as a result of the emergence of China and the strong rebound of other East Asian economies following their financial crises in 1997 and 2008. Arguably, this comparatively low level of nominal wealth bodes well for the Japanese economy going forward, relative to how it has performed during the past two decades.

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Special Economic Relativity 

Another fundamental principle of economics is that of “comparative advantage”, the idea that economies will tend to construct themselves in ways that reflect their greatest advantages (or smallest disadvantages) in relation to other economies. This begs the question: what makes Japan special, relative to other countries? More to the point: is what makes Japan special likely to help its economy grow at a decent pace during the years ahead?

One of the main qualities that makes Japan special is its “economic mass”. This does not only refer to its economic size — Japan’s economy is the third largest in the world, 1.7 times larger than fourth-place Germany and just 1.6 times smaller than second-place China, according to the World Bank — but, just as important, refers also to Japan’s internal unity and compactness. Unlike in other major economies like the US or China, Japan’s population is not spread out over a vast territory, but is instead crammed into an area that is only about the size of Montana. Japan’s economic activity is even more highly concentrated: the Greater Tokyo Area alone accounts for an estimated 40 percent of Japanese GDP, and the island of Honshu (in which Tokyo is located) for upwards of 80 percent of Japanese GDP.

Japan is also socially cohesive. Its income inequality is relatively low (unlike the US, China, or Brazil, where income inequality is extremely high), and its unemployment rate is the lowest of any developed nation apart from Switzerland. Japan also possesses no major ethnic, linguistic, or religious divisions. An estimated 98 percent of Japan’s population is ethn0-linguistically Japanese, and, religiously, less than 2 percent is Christian. By comparison, Japan’s neighbour China is home to an estimated 23 million Muslims (mainly living in the country’s northwest), more than 100 million non-Muslim ethnic minorities (mainly in the southwest), 250-300 million native speakers of a variety of non-Mandarin Chinese languages (mainly in the southeast), and perhaps as many as 100 million evangelical Protestants.

Even Japan’s developed-economy competitors cannot compare to it in terms of internal unity. In the German economies, there has been a slowly (re)emerging commercial divide between eastern Germany, Austria, and Bavaria on the one hand and western Germany on the other, reflecting the fact that Eastern Europe has been growing quickly while Western Europe has been lodged in a seven-year economic funk. Within both France and Italy, meanwhile, northern regions have been growing while southern regions have been virtually in depression. And in Britain and Spain, secessionist movements like those of the Scots and Catalans have been growing in prominence of late.

Even in the United States there has been a growing divide between the Northeast and the South/West, a result of the fact that Texas alone has accounted for more than one-fifth of US economic growth since 2007, and that globalization and demographic shifts have had the effect of integrating states like Texas, California, and Florida more closely with Latin America than ever before, and states like California, Oregon, and Washington more closely to the rest of the Pacific world than ever before. (In Canada a similar trend has been occurring). All of these developed countries remain internally cohesive, of course; just not as potentially cohesive as Japan. Indeed, many of the above trends may be likely to continue in in the years ahead, which could make Japan’s internal unity even more distinctive.

Japan’s unique combination of economic size and internal unity may become increasingly significant during the years ahead, as it may allow the Japanese to throw their weight around in a world economy that, cliches of globalization notwithstanding, is in many ways still becoming rapidly smaller and smaller. The continuation of the Internet Revolution will probably be the most significant near-term driver of such globalization, but further leaps in conventional transport — by air, sea, or land — cannot be ruled out either. If rapid globalization does continue, and if large, internally cohesive economies like Japan are among its beneficiaries, economics may increasingly resemble Einstein’s actual theory of special relativity, with an economy’s mass beginning to directly correlate with its economic momentum.

Commercial Entanglement

Another characteristic that makes Japan special is its relative level of isolation from the rest of the global economy. According to the World Bank, the value of Japan’s international trade of goods and services is equal to just 30 percent of its GDP, a lower share than any other large developed economy apart from the US, and much lower than Japan’s most notable neighbours, China (50%), South Korea (103%), and Australia (41%). Indeed, many East Asian economies, such as Thailand, Vietnam, Malaysia, and Singapore, are among the most trade-dependent economies in the entire world. Japan, by comparison, is not only not dependent on trade in general, but is also not dependent on either imports or exports in particular.

What this means is that Japan might be able to manage a regional or global economic slowdown more easily than most other economies can. During the past few decades this ability has not mattered much, since global growth, and particularly East Asian growth, has been so formidable. Going forward, however, Japan may find itself able to manage persistently slower growth in places like China and Europe more easily than most other countries around the world will be able to.

A slowdown in China, for instance, would hurt Japanese neighbours like South Korea, Taiwan, and Australia, countries in which 30-40 percent of exports go to China and exports in general are equal to 20-60 percent of GDP, far more than it would hurt Japan, which sends just 23 percent of its exports to China (including Hong Kong) and where exports in general are equal to just 15 percent of GDP. This ability to withstand external sluggishness could be a major advantage for Japan. It has certainly been helpful for the US, where a low dependence on exports is currently shielding the American economy from simultaneous recessions in most of Europe and Japan.

Crucially, even as Japan’s trade patterns might shield its economy from the full brunt of external crises, Japan also has the potential to benefit from becoming a more vigorous trading nation in the future. In the past, Japan’s ability to access global markets has been limited by its lack of proximity to the Atlantic world, where most of the globe’s economic and consumer activity is located. As a result, Japan is likely to benefit from the expansion of the Panama Canal, which is finally set to be completed in 2016, with significant consequences for inter-oceanic shipping. (In fact, arguably the most important consequence of the canal expansion is that it will allow 80% of LNG tankers to use it — currently none do — which will benefit Japan specifically, since Japan accounts for nearly 40% of the world’s LNG imports, and since, on the opposite side of the canal, Texas, Lousisiana, and Latin America may account for much of the world’s LNG export growth in the years ahead). Similarly, Japan could benefit from the continued growth of the East Asian and Indian consumer markets, as well as from more efficient cargo shipping worldwide, by air or by sea.

Finally, Japan might benefit from being able to use the Trans-Siberian railway to directly access European markets. This may finally occur because: a) the Russians increasingly need Japan as an ally because of their growing concerns with both China and the West; b) Russia’s rail network is becoming less crowded as a result of falling commodity prices and falling European demand for coal (since coal accounts for one-third of Russian rail freight, and commodities in general account for two-thirds of Russian rail freight); and c) because technology may make it cheaper and faster to maintain and operate railways and to load and unload cargo containers, which on the Japan-Russia-Europe route you expensively have to do twice: once at the seaports on Russia’s Pacific coast, and a second time in Eastern Europe because Russia’s and Europe’s rail networks use different gauges.

In addition to its foreign trade, Japan’s global investment position looks to be relatively strong. Japan has the highest NIIP in the world (NIIP = Net International Investment Position; basically, this is the amount of money a country’s government, businesses, and people are owed after you take into account the amount of money they owe to other countries). Though trustworthy, up-to-date NIIP statistics are notoriously difficult to come by (which is why people often focus instead on public and private debt-to-GDP ratios, which can be misleading because they only take into account a country’s foreign liabilities, while ignoring its foreign assets), as recently as 2010 Japan’s NIIP was estimated to be the same as those of China and Germany – which are the world’s next two largest creditor economies – combined. Indeed, while in America the media tends to obsess over Chinese ownership of US government debt, Japan owns just 3 percent of US debt less than mainland China does, and only 13 percent less than mainland China plus Hong Kong. Japan may have lots of assets with which it can potentially revive itself, in other words.

Energy Matters 

Does the inertia of a body depend upon its energy content? In economics, the answer to this famous question of Einstein’s appears to be yes. Developed countries in which energy imports account for a high share of GDP, such as Japan, Spain, Italy, Greece, and Portugal, have suffered some of the worst growth rates in recent years, when oil and gas prices have been very high. Developed economies that are major energy exporters, on the other hand, like Canada, Australia, and Norway, or that are relatively energy neutral, like the US, Sweden, or Denmark, have generally performed much better.

Developed Economies Energy and oil imports

With oil prices having reached a five-year low, falling by well over 50 percent since just the beginning of October, countries like Japan may now be better positioned for success than they have generally been in the recent years. In fact, it is not only lower energy prices that will have a positive impact on the Japanese economy, but lower prices for other commodities as well, which to varying extents are often correlated with energy prices. Japan, to be sure, is the world’s largest importer of tin, the second largest importer of iron ore, aluminum, copper, nickel, and silver, the largest food importer among developed economies, and by far the largest spender on coffee imports apart from the US.

Of course, a developed, energy-efficient economy like Japan is not going to benefit nearly as much from falling energy prices as an energy-intensive, import-dependent emerging market like India, Pakistan, Thailand, the Philippines, or, on the wealthier side of the emerging market spectrum, South Korea or Taiwan (see graph). Even China, which only imports an estimated 13 percent of its energy (compared to 94 percent for Japan), will probably benefit much more from falling energy prices than Japan will, since the Chinese use about 5 times as much energy per dollar of GDP than the Japanese, are enormously dependent on importing commodities in general, and may be able to reduce some of their domestic pollution by replacing coal production with oil and gas imports.

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But in this way too Japan stands to gain, relative to most other developed economies. This is because most of the main buyers of Japanese exports are energy-intensive emerging Asian economies, many of which are among the greatest beneficiaries of falling energy prices. Indeed, more than 40 percent of Japanese exports go just to China, South Korea, Thailand, or Taiwan, whereas no energy-exporting country receives more than 2.5 percent of Japan’s exports. In contrast, the US sends 25 percent of its exports to Mexico or Canada, both of which are substantial oil exporters. The Europeans, meanwhile, trade mainly among themselves, and include enormous energy exporters like Norway and Russia.

Japan is also in a unique position where alternative energy sources are concerned. It has far and away the most nuclear energy potential in the world, since it has the world’s third highest nuclear energy-generating capacity (virtually double that of fourth-place Russia), but has not been running any of its nuclear plants since the Fukushima incident in 2011 soured public support for them. Japan could, and might, turn many of them back on in a fairly short period of time.

Japan also has the fourth highest hydroelectric energy generation among developed countries (double that of fifth-place Spain), the third highest biomass/waste energy generation among developed countries (more than 50% higher than fourth-place Britain), the third highest geothermal energy production among developed countries, and the third highest solar energy generation of any country in the world (50% higher than fourth-place US). In addition, because of the growing possibility of using industrial machines to run manufacturing plants overnight, Japan may no longer be forced to waste much of the energy produced by hydroelectric, nuclear, geothermal, and wind, which unlike oil or gas cannot be shut off at night.

Finally, Japan may be able to get more commodities from Pacific Russia. First, as mentioned above, Russia is increasingly in need of allies outside of China or the West, and Japan is the obvious choice in this regard (South Korea is also an obvious choice, but South Korea is very closely embedded into the economies of both China and the West, and it is also much smaller than Japan). Second, as technology may continue to make resource-extraction much less dependent on labour, the commodity-producing potential of the Russian Far East could perhaps finally be realized in spite of the region’s tiny population of just around five million (less than one million of whom live in the gigantic territory to the north and east of Lake Baykal). Sakhalin island and the Kamchatka peninsula, both of which are relatively inhabited, rich in natural resources, and particularly accessible to Japanese influence, could be two interesting places to watch in this regard.

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Demographic Entropy

Analysts who are bearish on Japan ultimately tend to focus on one factor above all others: Japan’s aging population. This is certainly not an unreasonable concern; Japan’s population is the oldest in the entire world, with a large Baby Boom generation that is on the cusp of old age, a large Echo Boom population that is on the cusp of middle age, and a population of seniors (above 65 years old) that accounts for 26 percent of Japan’s total population, compared to only 14 percent in the US, 17-18 percent in Britain, France, and Spain, and 20 percent in Germany. This is, really, the main reason the Nikkei 225 index has been trading at prices that are just 13.9 times its earnings and just 1.3 times its “book value”, compared to a 19 price-to-earnings ratio and 2.8 price-to-book ratio for the S&P 500 in the US, or 15-19 price-to-earnings ratios and 1.8-2.1 price-to-book ratios in France, Britain, and Germany, where populations are more youthful.

While it would be unwise to ignore Japanese demographics, or try to spin them somehow as being an economic advantage rather than a disadvantage, it may nevertheless be useful to play devil’s advocate here for a bit, and explore the possible reasons why Japan’s aging population may not end up being even close to as bad for its economy as it is generally expected to be.

Reason 1: Japan’s retiring population means that it alone among countries in the developed world may not be negatively affect by the one-two punch of outsourcing and automation, which could rapidly lead to unemployment and income inequality crises in other countries. This could further increase Japan’s internal unity compared to other nations, giving it even more of an edge in terms of its economic “mass”.

Reason 2: Japan’s economy is not a closed system: it can decrease its demographic entropy by way of immigration. While it has become common for journalists to point out the fact that Japanese culture is not accustomed to dealing with immigration, the truth is that Japan has historically been able to adapt its mode of behaviour in very short periods of time, so it would not really be such a surprise if the Japanese were to begin bringing in lots of immigrants in the future, breaking with tradition. Certainly Japan’s high standard of living and proximity to Asia means that it can probably attract immigrants if it wants to. Japan has not needed immigrants in the past, but if and when it does, it may turn out that it doesn’t have such an affliction to them after all.

In fact, one way of looking at the fact that foreign-born individuals only account for an estimated 1.9 percent of Japan’s population (compared to 12 percent for Germany, France, and Britain, 14 percent for the US, 21 percent for Canada, and 28 percent for Australia) is that Japan still has a lot of room to increase the share of its total population that immigrants account for. Japan could actually bring in millions of immigrants and still have them account, for example, for less than one-fifth of its population, whereas a country like Germany or even the US would perhaps start feeling uncomfortable with immigration if immigrants were to make up more than a quarter or a half of their total populations.

Reason 3: Another way to look at Japan’s population of seniors is as the first wave in an enormous global demographic shift, with the aging populations of the developed world (particularly Europe and Canada) and the former Soviet Union only about a decade behind the Japanese, and with China not too far behind them. What this means is that many of the age-related issues that Japanese populations have already been dealing with for a while may now be coming to much of the rest of the world. This might actually help the Japanese economy, if it finds some of the goods and services it has been focusing on — among them robotics, health care, pharmaceuticals, and age-related consumer products — in demand from other countries.

In other words, Japan may be able to export some of its expertise and products to aging Western, Russian, Korean, and Chinese populations who are dealing with their own increases in age-related illnesses. In fact, because of the pollution in China, the coming decade may see an enormous increase in certain types of environment-related illnesses in China, even though China’s population is still somewhat younger than most Western populations. Many wealthier Chinese may even go to Japan to receive health care. The aging of China and the West is obviously not the happiest of prospects to contemplate, but it may nevertheless be something the Japanese economy is relatively well-positioned to benefit from.

Reason 4: Even if Japan’s aging population is a long-term problem, it may not be such a burden for its economy during the next decade or so. Japan’s Boomer population is only around 65-70 today, and is still extraordinarily healthy for its age. Because of the Internet, Japanese seniors  may also be able to keep their productivity and consumption up more than people of the same age have historically been able to do. Japan’s Echo Boomers, meanwhile, are still just around 40-45 years old. Because Japanese have so few children (13 percent of Japan’s population is below the age of 15, compared to 19 percent for the US, Britain, France, and Australia), they have more time and money to spend on other things, whether work-related or leisure, which can be economically stimulative. Spending time and money on children may be great for an economy over the long term, but in the short term it can arguably hold an economy back.

Alternate Dimensions 

Economists have historically tended to view wealth as being derived from a combination of three “inputs”: capital, labour, and land. Japan is very well endowed in the capital and labour departments, but it has been held back to a certain extent by its scarcity of land. Excluding mountainous regions, which constitute an estimated 75 percent of Japanese territory, Japan is only about the size of Michigan. Even including its mountains, Japan’s population density is 1.5 times higher than Germany’s and ten times higher than in the US. Among significant economies, only India, South Korea, and the Netherlands are more densely populated than Japan (and none of them by much).

Japan has paid a steep price for its density: according to the Economist, between 1980 and 2000 Japanese property prices were consistently the highest in the world, both in real terms and in relation to average income levels. Japan’s lower property prices today are simply a reflection of its slow pace of population and economic growth; if the economy of Japan is to rebound, it will need to find a way to make due without much physical space. Indeed, even today, following two decades of deflation, Tokyo is the fifth most expensive city in the developed world and the eighth most expensive city in the entire world to buy an apartment in.

Can technology finally allow Japan to overcome its lack of space? To a certain degree the answer may be yes. Japan’s vast multitude of mountain valleys, for instance, are no longer nearly as isolated as they were even just five years ago. Today, with the modern Internet, their inhabitants can access national markets and social networks, and can increasingly bargain collectively for goods and services. Over the next decade they may become even less isolated, as technology is likely to sharply reduce traffic on the country’s crowded road network (which will also free up plenty of room in Japan’s large cities), gasoline prices may remain lower than they have been in recent years, and elderly and retired Japanese may travel less frequently than Japanese populations have done in the past.

Japan’s mountain regions may also be aided by technologies like the Aeroscraft, an airship the length of a football field that is currently being developed in the US as a response to the difficulties its military has faced in mountainous landlocked Afghanistan. The Aeroscraft could allow non-bulk goods to be shipped efficiently in mountain valleys where there is not enough cheap land available for significant airports, and where the need to take-off and land in each individual valley makes ordinary airplanes (which have extremely high take-off costs) highly inefficient. While it is impossible to know for sure, it seems possible that Aersocraft airships will be ready for regular use within five to ten years. In addition to helping Japan’s mountainous territories better participate in the Japanese economy, they could potentially also help Japan access markets in nearby economies like South Korea and northern China more quickly than can be done by ship.

Another way to overcome a lack of conventional space is to construct high-rise apartment buildings. Japanese cities have already done this, of course, yet they have been somewhat limited in their efforts to do so by the high cost of construction. Going forward, however, such costs may decline. As Japanese workers retire en masse, for example, and as many white-collar jobs in Japan begin to be automated or outsourced while more work can be done from home offices because of the Internet, Japan is likely to see a large number of its commercial high-rises transformed into residential buildings. While this transformation is not inexpensive, it can be done at a tiny fraction of the price of building a high-rise from scratch.

In addition, if commodity prices remain low, and if China’s enormous construction frenzy finally ends, Japan will find it much cheaper to import building materials. It might even be able to import some skilled Chinese engineers, or Chinese-built apartment modules. Indeed, modular construction might might significantly reduce both the costs and the required labour and time of high-rise construction. This could be a huge help for a country as incredibly compact and mountainous as Japan.

In Search of a Unified Theory 

How will Japan’s real estate, demographic, commodity, commercial, sociopolitical, and income factors combine in the years ahead? It is not clear. What is clear, though, is that ignoring Japanese stocks remains something that cannot be done lightly. Japan’s economy continues to have Potential. With the Nikkei still relatively cheap on a price-to-earnings and price-to-book basis, then, it is not surprising that the recession has not led to a market drop. The cat may yet be alive.

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