The shift towards a more multipolar order has created new tensions. And the major challenges now facing the international community require innovative, multinational solutions. Four interlocking forces in 2015 underscored the need for power-sharing, cooperation and adaptation: geopolitics, geo-finance, technology and climate change.
At the geo-political level, the US pivot policy to the Asia Pacific in 2011 opened up the South China Sea as a new front of tension, even before the United States has managed to complete a stable withdrawal from the Middle East. Managing competing interests in the South China Sea, even as China projects its peripheral power, will be a major challenge into the future.
Finance in the region in 2015 was driven by two events, which underlined the need for greater cooperation. The first was China’s announcement of the Asian Infrastructure Investment Bank as an alternative channel of finance to the Bretton Wood institutions. The bank’s creation came ostensibly after the US Congress refused to ratify the 2009 G20 agreement to widen the voting rights distribution of the IMF. By the end of 2015, the consensus on multipolarism was patched up when the IMF agreed to include the renminbi (RMB) in the Special Drawing Rights basket. By doing so, the Chinese agreed in turn to a stable RMB and avoided a messy currency war.
The second event was a divergence in quantitative easing between the US Federal Reserve, which begun to reverse easing, and the European Central Bank and Japan, which are still committed to further easing. This divergence in monetary policy between the major reserve currency countries has opened up prospects of a phase of dollar strengthening. But, as the Bank of International Settlements has pointed out, the Latin American debt crises of the 1980s and the Asian Financial Crisis of the 1990s were both associated with periods of dollar strengthening.
A strong dollar — particularly when the US economy is no longer the import engine of the past — creates huge tensions for emerging markets. Capital outflows back to advanced markets put deflationary pressure on domestic asset bubbles. As Brazil learnt to its cost, defending against capital outflows with lower exchange rates can promote stagflation — higher inflation with slower growth. Emerging markets will face a tough 2016 with lower commodity prices, higher unemployment and the threat of asset price implosion. Asian emerging markets will not escape this dollar trap.
Another key force shaping 2015 was technological advances. Technological disruption has proved more pervasive and destructive of traditional economies than was anticipated because it diffused power to new hubs and weakened incumbents. Asian and Middle Eastern oil-producers’ wealth are being cut by innovations in shale oil and solar technology. As robotisation reduces the need for cheap and unskilled labour, governments around the world are finding it difficult to generate new jobs for growing populations of unemployed youth. At the same time, non-state players are using social technology to create disruption and conflict that cannot be dealt with by the Great Powers with conventional tools.
Climate change was also responsible for major social upheavals, resulting in a high pressure year for global governance institutions. As water stresses, air pollution and El Nino effects became marked across the world, global opinion swung enough to help the Paris COP21 negotiations on climate change reach consensus in December. While agreement revolved around broad principles rather than strict commitments, the conference lay testament to the urgency of consensus and cooperation in the war on pollution and climate change.
These events can only be understood within the framework of East Asia’s rocky road to multipolarism. The rise of regional powers means geo-political tussles with higher stakes, as in the South China Sea. The potential for regional economic crisis, widespread technological shifts and climate change are three pressing issues that can no longer be solved by a declining hegemonic power alone, but require cooperation between affected states.
In the East Asian neighbourhood, the good news is that the South China Sea tensions did not breakout into a major conflict. And the ASEAN Economic Community is taking form even as the Trans-Pacific Partnership was signed. The economic imperatives for cooperation have become as important as shifting political alliances.
In the middle of the second decade of the 21st century, the risk is that the international community is still looking at 21st-century problems with 20th-century mindsets. Those who act decisively to reform their economic and political structures to strengthen their domestic position, while recognising the new multipolar realities, will be the big winners. Those in denial of these profound changes will be swept into the margins of history.
Andrew Sheng is Distinguished Fellow of the Asia Global Institute, University of Hong Kong and Adjunct Professor at Tsinghua University and University of Malaya.
This article is part of an EAF special feature series on 2015 in review and the year ahead.