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    ASIAS RISE, THE WESTS FALL?

    Lionel Barber

    Editor, Financial Times

    Sydney, 17 November 2011

    Distinguished guests, ladies and gentlemen, it is a great honour to deliver

    this year's Lowy Lecture. This is my first visit to Australia. As an

    Englishman with an Irish grandfather who long dreamt of escaping Down

    Under, that's an embarrassing admission. A bit like the skipper being out

    for a golden duck. But I have already found so much to admire: the

    majestic architecture here in Sydney, the sulphur-crested cockatoos of

    Katoomba and the mystical beauty of Uluru. Truly this is the Lucky

    Country.

    Donald Horne's barbed tribute has a special resonance today. Resource-

    rich Australia is enjoying the fruits of an extraordinary regional economicboom. Luck plays a little part in this chains to riches story. But you are

    also reaping the rewards of politically courageous decisions to curb

    public deficits and inflation more than a decade ago.

    Australias good fortune is also to be part of an historic shift from West to

    East, driven largely by the rise of the once-poor countries of China andIndia. This shift in power, primarily economic power, has aroused much

    soul-searching in Europe and the US; even talk of an Asian century.

    Hence the mildly provocative title for my lecture tonight.

    Only last month, Jean-Claude Trichet, president of the European Central

    Bank, told the Financial Times in a farewell interview that there was a

    crisis in the West, in terms of business models and political decision-

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    making. Admiral Mike Mullen, former chairman of the Joint Chiefs of

    Staff, said earlier this year that the national debt posed the greatest threat

    to Americas national security.*

    The global financial crisis must bear much of the blame. It was

    manufactured in the West and exported to the rest of the world, wreaking

    havoc with the public finances of the US and much of Europe. Standard

    & Poors decision this summer to strip the US of its triple A credit rating

    appeared to confirm the superpowers steady slippage. Financial markets

    have challenged the creditworthiness not merely of Greece, Ireland,

    Portugal and Spain but also, crucially, Italy and the AAA status of

    France.

    Western leaders have failed to respond decisively. In early 2009, the

    newly formed Group of 20 countries did agree to recapitalise their banks

    and collectively pursue aggressive fiscal stimulus to revive their

    economies. But too often, they have been offered too little, too late.Western governments have either been held hostage by powerful interest

    groups or paralysed by ideological divisions.

    This is particularly true in the US. Democrats have adopted the language

    of European class warfare while Republicans cowed by the Tea Party

    are dedicated to the proposition of no new taxes under any circumstances.Not even what Ronald Reagan euphemistically used to call revenue

    enhancers.

    The paralysis of the West contrasts with activist leadership in the East,

    India being perhaps the exception. China, for example, has taken bold

    steps, first in 2008/9, to stimulate its economy. Beijing has followed with

    an ambitious five-year plan to transform the economy from export-

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    dependent, investment-led growth to a model more conducive to

    bolstering wages and domestic consumer demand.

    So will illiberal or authoritarian capitalism, at least in the short term,

    prove more effective than a deadlocked democratic system of checks and

    balances as practised in the US or indeed the makeshift efforts to

    resolve the euro crisis among a group of 27 nation states? Europe's

    questionable decision to pass round the begging bowl in Beijing offers a

    symbolic answer.

    Francis Fukuyama, champion of liberal democracy who is best known for

    his bookThe End of History and The Last Man, published at the end of

    the Cold War, seems to share the doubts: In many ways, Asian

    government, not just China, but Singapore and in an earlier day, Japan

    and South Korea, had governments that looked more like a corporate

    board of governanceYou run the whole country like a corporation, and

    I think that is one of their advantages at the moment. *

    Professor Fukuyama's corporatist model may not take sufficient account

    of democratic stirrings in, say, Singapore. But his point is well taken. Still,

    I would like tonight to tackle the proposition head-on: Is the West

    presently severely disadvantaged with regard to Asia, if not in relative

    decline? I also want to take a harder look at the sustainability of theChinese model of authoritarian capitalism. Finally, I would like to issue a

    friendly warning: if present trends prove durable, we are in the middle of

    an historic transition. And such transitions usually carry risks. Without

    accommodation, there is the risk of conflict, either through protectionism

    or, in the last resort, war. What can be done to prevent such a negative

    outcome?

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    The rise and descent of the West

    By historical standards, the supremacy of the West is a relatively recent

    phenomenon; it may prove relatively short-lived too. Professor Ian Morris

    of Stanford has identified two poles of civilisation: the West, the

    civilisations that descended from the agricultural revolution in the so-

    called fertile crescent in todays Middle East, and the East, the

    civilisations that emerged from an independent revolution in a part of

    what is now China. Until the fall of the Western Roman Empire, the West

    was slightly ahead. It subsequently fell behind until the 18th century

    when it edged ahead. Now (even allowing for vagaries of state-sponsored

    statistics,) the West looks once more to be lagging.*

    For the first three quarters of the nineteenth century, it was Britain that

    appeared as a colossus astride the world. Charles Darwin, visiting the

    thriving port of Sydney, wrote in January, 1836: My first feeling was tocongratulate myself that I was born an Englishman. Darwin contrasted

    Sydneys bustling prosperity with the sedate former Spanish and

    Portuguese colonies which he had just visited. These colonies, he

    concluded, had barely advanced over the past 300 years.*

    Britains ascendancy was based on the native inventiveness of its people,the linked growth of manufacturing industry and naval supremacy which

    guaranteed access to markets and made the countrys military a force to

    be reckoned with. In the same vein, the rise of America as an imperial

    power may be traced back to February 1909 with the return of the Great

    White Fleet, the sixteen first-class battleships that President Theodore

    Roosevelt had dispatched on a 45,000 mile cruise around the world as a

    show of American power.*

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    Americas intervention in two world wars supported by the Australian

    Imperial Force rescued Europe from the demons of nationalism and

    fascism. The US was also present at the creation of a new world order

    after 1945 based on liberal democracy, political reconciliation between

    France and Germany, and a new rules-based international system for

    diplomatic, monetary and trade affairs. This system was anchored by new

    institutions such as the International Monetary Fund, the World Bank, the

    General Agreement of Trade and Tariffs and the United Nations.

    The make-up of these new institutions naturally reflected the

    preponderance of US power. To the victors of World War II went the

    spoils: the allocation to Britain, France, the US, the Soviet Union and

    China of permanent veto-wielding seats in the United Nations Security

    Council; and a cosy carve-up between the Europe and US of the top jobs

    at the IMF and the World Bank respectively.

    Today, the post-World War II settlement is manifestly anachronistic. It no

    longer reflects the balance of economic power in the world. Europe, for

    example, is grossly over-represented. That does not mean that Britain or

    France will relinquish anytime soon their status as members of the Perm

    Five at the UN; but the economic (as opposed to the political) imbalancehas at least been partially recognised by a reweighting of voting power at

    the IMF as well as the creation of new international forums.

    The most notable of course is the Group of Twenty which brings in the

    rising powers of Brazil as well as important regional players such as

    Indonesia, Mexico, Saudi Arabia, South Africa, Turkey, and, yes,

    Australia. This adjustment is long overdue. While the G20 remains a

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    fledgling body, it has the potential to enhance its legitimacy and

    strengthen its capacity as a new institution of global governance. The

    pressing question for the West is how to maintain influence and power in

    an international system where power is ebbing to new players. This

    question is particularly acute for Europe.

    Europe and the euro: the doctors dilemma:

    It was Charles de Gaulle who once remarked of La France: How can you

    govern a country with 246 varieties of cheese? Imagine how much harder

    it is to govern a Union of 27 different countries, many more types of

    cheeses, and a monetary union with fundamental flaws.

    Le