Peer reviewed analysis from world leading experts

The economics of Asian geo-political stability

Reading Time: 4 mins

In Brief

What can economics tell you about the geo-political challenges in Asia? Many strategic thinkers focus on defence capabilities, ideology, politics, environmental threats or history to envisage strategic futures. Economics provides a lens to focus on the fundamental drivers of regional power relations. National income limits a country’s capacity to mobilise resources for power projection, and hence influence the regional security order.


  • A
  • A
  • A


  • A
  • A
  • A

For example, North Korea may be a security nuisance, but its pockets simply aren’t deep enough to be more than a bit player.

Australian Treasury’s long term international GDP projections are therefore a good starting point to considering strategic futures. They rely on slow moving variables, such as labour force and institutional capability, to project regional economic growth out for decades. The results are startling – Asia overtakes the traditionally ‘advanced’ economies on a PPP basis around 2020. This is led by China, which by 2030 could be producing a quarter of the world’s output. For comparison the United States at the end of the cold war produced 23 per cent of global output.

Some commentators disagree, pointing to the United States’ continued edge in technology. But ideas are easily copied and modern technology and international education means ‘catch up’ is getting faster. Others believe that GDP at market exchange rates is more relevant than ‘purchasing power parity’ for projecting power — to buy guns you need foreign currency, not bowls of rice. Using that measure, China doesn’t overtake the US until 2025, just a decade away. But market exchange rates are subject to market fluctuations, and PPP provides a better indicator or an economy’s underlying potential. Finally, other commentators note that the US will still have double China’s GDP on a capita basis by 2050. But this is much less relevant for geopolitics than raw command over resources; Singapore and Brunei both have per capita GDP higher than the United States or China. But they won’t decide the regional security order.

China has had consistently impressive growth record since starting reform and opening up in 1978. But current reforms to financial and capital markets are far more risky and ambitious than shifting workers from agriculture to industry. Continued economic growth requires increased reliance on markets to allocate capital. However, the effects of the Asian Financial Crisis on Indonesia, and more recently the wash-up of the Global Financial Crisis on Greece, have made the Chinese authorities well aware of the political risks of ceding control.

So what does this mean for Australian economic diplomacy? It’s hard to over-state Australia’s interest in drawing newcomers in to the open, rules based system. Both Australian commercial and strategic interests should be to see China integrate into world markets and regional institutions.

A little discussed role for Australian economic diplomacy is engaging its friends and allies on ways to bring China voluntarily into the self-constraining rules based market system. Part of this is advocating institutions that maintain an open trading and investment environment (such as the IMF) to become more inclusive of emerging countries’ interests. It also means prioritising institutions for the next fifty years, rather than those which consolidate cold war alliances. This means prioritising RCEP negotiations (which includes India and China) over TPP (which does not).

Another thing economics teaches us is that competition, not cartels, delivers the best value. Upsetting business as usual for the ADB (traditionally led by Japan) or the World Bank (headquartered in Washington DC) isn’t a good argument for shunning China’s first big multilateral initiative in the Asian Infrastructure Investment Bank.

At the highest level, it means encouraging the United States towards a regional trade and investment system where it realises its own interests are served through peaceably sharing regional leadership with China. Where possible, we should politely, but firmly, rebut US denials of China’s economic rise.

The projections also show that countries which might help balance China’s growth in the region, particularly Indonesia and India, are lagging their potential. Australia should be doing all it can to build the institutions of economic governance needed for a prosperous and coherent ASEAN. By contrast, Japan is more of a demonstrative footnote, given its precipitate decline. We should help a fellow democracy to grow old gracefully, not expect a great power renaissance.

Changing economic fortunes need not cause conflict; but misperceptions of national strengths and objectives do. Australia’s geo-political challenge is not just that for the first time its key strategic ally is different from its principal trading partner. It is that the key players in our region have different interpretations of the economic writing on the wall and haven’t yet realised that it’s in Chinese.

Paul Hubbard is a doctoral candidate at the Crawford School of Public Policy, The Australian National University. He is currently on leave from the Australian Treasury as a Sir Roland Wilson Scholar, and is former Fulbright Scholar in international relations. The views in this paper do not reflect those of the Australian Treasury.

8 responses to “The economics of Asian geo-political stability”

  1. Thank you for your informative article.

    However, dismissing North Korea as no more than a “security nuisance” underestimates the threat. Although North Korea may or may not launch a nuclear-tipped missile at America or its allies, nevertheless NK may sell fissile material to terrorists around the world who could then fashion and detonate a “dirty bomb.” North Korea’s enabling role in this nightmare scenario makes North Korea more than a mere “security nuisance.” Not to mention the real possibility that through misadventure or miscalculation North Korea could start a devastating shooting war on the peninsula. Either of these scenarios could draw China and the United States into the maelstrom.

    While North Korea is clearly no more than a “bit player” and basket case from a purely economic standpoint, it still wields considerable power to do harm. Although Bosnia was only a bit player in 1914, a Bosnian nationalist triggered events in Bosnia that started WW I.

  2. Thanks for your comments. I accept your point that some countries (or even actors within countries) can do damage that is out of proportion to their economic footprint. I’d respond by noting your own observation that the impact of a seemingly small actor would be to draw in the US or China, in the same way that a small incident in the Balkans drew in Russia, Germany and England into war a century ago. That is, whatever the proximate cause, it is the actions of the big powers that are consequential. A dirty bomb is more than a nuisance, but the nature of peace in Asia this century won’t be decided in Pyongyang.

  3. The 17th century French soldier and writer, Compte DeBussy-Rabutin, famously wrote that “God is generally on the side of the big squadrons against the small ones.”

    This is not a bad starting point, as the author points out, when assessing a nation’s potential geopolitical power. Such calculations should have been on the radar of Australia’s defence planners for the last 25 years. Not only have our Asian neighbours outpaced us in GDP growth, but many of them have seen their populations rise faster as well.

    However, the important point is that GDP, in whatever guise, is only a guide to potential geopolitical power. Other factors are just as important, if not more so. Relevant considerations here include national will to use economic resources to project power; the extent to which the state is already able to provide for the other needs of its population, such as welfare; the existence of a military tradition; and, multipliers of geopolitical effectiveness, such as technology, geography, access to commodities, etc.

    • Well put William, that is the reason I expressed GDP as a limit on power projection, and why the post war economic growth of Japan under a pacifist constitution was less alarming to Western strategists than the re-emergence of China today. GDP is an enabler of whatever strategic intent a country may have. Without the ability to command resources though, I’d argue that other factors become much less consequential.

    • Thanks William. That’s a good way to explain things, and is what I mean by GDP being a limit on power projection.

      If GDP is equal between two countries, then things like ideology or militarism really matter when assessing geopolitical power. Economic size is an enabler of those other things you talk about – it gives the means to pursue the motive.

      But without it, there’s a limit to what you can do.

  4. Just a small point

    Given the various arms embargoes against China and a preference for domestic produced capabilities, most military procurement is from domestic sources.

    So most Chinese weapons are not purchased abroad in foreign currency.

    And remember that the majority of military spending in any country comprises personnel and operating costs, which are is in local currency.

  5. Good logical proposal. While economics is not a zero sum game, no country can grow economically to any significant degree without the implied consent of other nations. To hold down China also holds down those many nations who exercised their power of freedom to choose whom they do business with. The BRICS Development Bank is a clear sign, Asia feels the West is resisting its’ development.

    • Thanks Ray for your comment – good point. One reason why economists and strategists don’t engage more often is that economists typically think in terms of positive sum (if we can both be better off, for example, through voluntary trade, that is great!) while strategists need to think in terms of zero sum (if trade makes me become a bit stronger, but you become a lot stronger, then I’m in a relatively weaker position).

Support Quality Analysis

The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (

Copyright ©2024 East Asia Forum. All rights reserved.