May 28, 3009: Dr. William H. Overholt

(Click to Enlarge) Dr. William H. Overholt discusses the effect of the global financial crisis on Asia

China, Asia, and the Global Financial Crisis: Implications for U.S. Foreign Policy

(Washington D.C.) May 28– China will be the first economy to recover from the global financial crisis and may become a more important partner to the United States in the future. In an East-West Center in Washington Asia Pacific Political Economy Seminar, Dr. William H. Overholt of Harvard University’s Kennedy School discussed the impact of the global financial crisis on the major economies in Asia and the implications for future U.S. foreign policy in the region.

Asia has been hard hit by the global financial crisis, with the economies of major countries such as Taiwan, Thailand, Japan, and Singapore experiencing economic decline due to massive decreases in demand for their exports. While China and Hong Kong have been less damaged than many of their neighbors, they, too, are feeling the brunt of the crisis. Dr. Overholt noted that not only do Asian countries suffer the consequences of the crisis, they also share in the blame for its cause. The current crisis, he explained, was brought about by regulatory deficiencies, poor corporate governance and, most notably, high liquidity, or ‘cheap’ money, encouraging frivolous investment. The abundance of this ‘cheap’ money, he noted, was partially the result of near-zero interest rates in Japan coupled with the availability of inexpensive goods from China, which kept inflation and interest rates low in the West.

China, however, is likely to be the first country to recover from the world-wide slump. According to Dr. Overholt, this is because the two common and contradictory perceptions of the Chinese economy, that it is either isolated and therefore immune from global trends or that it is overly dependent on exports and therefore vulnerable to outside stress, are incorrect. Instead, Dr. Overholt argued that China is well connected to international markets, but that the driver of its growth is primarily domestic. The decline in exports therefore has not affected China to the same extent as its neighbors. However, as a result of a combination of the crisis and changes to labor laws made just before world economies were hit, China is now facing unemployment and new economic challenges. Dr. Overholt suggested that this crisis will prompt changes in Chinese economic and regulatory practices which may be of benefit later. Additionally, since China will recover quicker than other economies, it will be in a key position to assist in the recovery of the world and to implement the international changes necessary to prevent such a crisis from happening again.

Other countries, Dr. Overholt argued, do not have as bright a future to look forward to. He pointed to Russia, a country that many analysts argue is resurgent but which is in his opinion actually declining. He explained that a combination of poor economic policies, including those that discourage foreign direct investment (FDI) and competition, will lead Russia in the opposite direction from China. Russia, he argues, is transforming its economy into a resource-driven model not unlike that seen in the third world.

Japan, too, is facing problems due to what Dr. Overholt called its addiction to “cheap” money. Since the country has long had interest rates close to zero, it was easy for the Japanese to make investments that they might not otherwise engage in. National debt is high, and the rising yen is killing Japan’s large export market. Japan’s economy is also less open to FDI than many of its neighbors, most notably China, which will make it that much harder for Japan to recover from the crisis. Dr. Overholt argued that the prospect of China recovering more quickly from this crisis than Japan may have tremendous geopolitical consequences.

From the standpoint of U.S. policy toward Asia, the consequences of China’s relative strength means that China will become an increasingly important partner to the United States on a myriad of issues. Dr. Overholt argued that China should become the United States’ primary partner in Asia. He explained that embracing a new relationship with China could lead to potential breakthroughs on issues such as Taiwan’s position in Asia and the world, the North Korean nuclear crisis, global warming and other environmental issues, and African development. While he suggested that a G-2 bilateral relationship was perhaps too strong an idea, Dr. Overholt noted that at the end of the crisis, China and the United States will be the only two world economies large enough and strong enough to influence changes in the world economy, and it would benefit both nations to work together on common economic and diplomatic challenges.

William H. Overholt is senior research fellow in the Harvard University Kennedy School of Government and is Principal of AsiaStat LLC, a consulting firm. He is also a visiting professor at Shanghai Jiotung University. Previously he held the Asia Policy Distinguished Research Chair at RAND’s Center for Asia Pacific Policy and was Director of that Center. In 2002 Dr. Overholt was joint senior fellow at Harvard University and distinguished visiting professor at Yonsei University in South Korea. During 21 years in investment banking, he served as head of strategy and economics at Nomura’s regional headquarters in Hong Kong (1998 to 2001), and as managing director and head of research at Bank Boston's regional headquarters in Singapore. During 18 years at Bankers Trust, he ran a country risk team in New York (1980 to 1984), and was regional strategist and Asia research head based in Hong Kong (1985 to 1998). Dr. Overholt is the author of six books, including Asia, America and the Transformation of Geopolitics (Cambridge University Press and RAND, 2007). Others include The Rise of China (W.W. Norton, 1993); Political Risk (Euromoney, 1982); and (with William Ascher) Strategic Planning and Forecasting (John Wiley, 1983). He is principal co-author of: Asia's Nuclear Futur e (Westview Press, 1976) and The Future of Brazil (Westview Press, 1978). With Zbigniew Brzezinski, he founded the semi-annual Global Assessment in 1976 and edited it until 1988.