An Arms Race Gets Into Gear and Other Predictions for Asia in 2014

Just like 2013, the new year promises to be one of enormous dynamism and change in Asia. The region is not only the biggest engine of global growth but also the center of multilateral free-trade negotiations, the real heart of a democracy “spring” in developing nations—and the home of the rawest, most dangerous power politics in the world. After all, only in Asia do great powers with great stocks of nuclear weapons still face each other down, Cold War-style.

Here, then, are seven events to watch out for in 2014 across Asia:

1. China Plays Nice Again (to a Point) …
Over the past four years, China has increasingly alienated most of its neighbors in South, Southeast, and Northeast Asia. After embarking upon a strategy of soothing engagement with the rest of Asia in the early and mid-2000s, a strategy that helped China sign new free-trade deals and build partnerships with many countries, in the early 2010s the country has mostly flushed away the points it won. Its vast claims in the disputed waters of the South China Sea and East China Sea and its nationalist rhetoric have fostered a reaction in the region that’s exactly the opposite of what the government desired. Countries from the Philippines to South Korea to Myanmar have welcomed greater U.S. military and diplomatic involvement in Asia, largely as a counterweight to a rising China.

But the end of 2013 contained signs that, at the highest levels, the administration of new Chinese President Xi Jinping understands the need to return to playing a bit nicer in Asia—at least on the surface—to eventually become the region’s dominant power. Without making concessions on the South China Sea, China will in 2014 stop openly antagonizing other claimants like Vietnam or the Philippines, while stepping up efforts to promote its own regional free-trade deal and continuing to woo Russia, India, and Central Asian nations.

2. … But That Won’t Stop an Arms Race
East Asia already is the site of the world’s fiercest arms race: China is modernizing its military, Southeast Asian nations are buying up submarines and other weapons to defend disputed waters, South Korea and Japan are making preparations to protect against China and crazy North Korea, and the U.S. is pursuing its “pivot” of military assets to the Pacific. Although global military spending fell last year for the first time in decades, according to the Stockholm Peace Research Institute, that drop was largely because of the Pentagon’s budget cuts. In Asia, however, military spending rose last year, and 2014 should see an even sharper rise in Asian arms spending.

3. Japan Disappoints—Again
In 2013, Japanese Prime Minister Shinzō Abe initially thrilled markets and many Japanese business executives with his bold “Abenomics” plans: huge monetary stimulus combined with fiscal and economic policies designed to rapidly boost domestic investment. For the first time in years, Japan’s animal spirits seemed ready to roar. The Tokyo stock market boomed, and Japan grew by nearly 4 percent in the second quarter of 2013, the high point of the year.

But the optimism, like other minibooms Japan has enjoyed since the early 1990s, will fade in 2014. Abe never instituted serious structural reforms, and this year will see Japan implement a new consumption tax that will slow growth even as monetary stimulus eases. The prime minister will increasingly alienate important trading partners such as South Korea and China with his retrograde paeans to Japan’s WWII-era politics. Japan may even fall back into a technical recession by the middle of 2014.

4. China’s Reforms Prove Illusive
Chinese President Xi Jinping appeared in 2013 to have launched landmark, market-friendly economic reforms, promising to boost private investment in many industries and loosen property rights, among other changes. In 2014, Leviathan will push back, as China’s powerful state-owned enterprises, which dominate the list of largest companies in the country, defy, water down, and work around Xi’s proposed reforms. Expect to see SOEs use their links to China’s big state banks to freeze out potential private competitors, lobby Xi to label more sectors as “strategic” and thus necessarily controlled by the government, and call in favors to protect their tax breaks, land giveaways, and other advantages.

The state-owned giants survived the last major attempts at state enterprise reform in the late 1990s, and the SOEs could well win again this time, which would be good for them but bad for investors and growth.

5. Kim Jong Un Becomes Even Scarier
North Korean leader Kim Jong Un celebrated the 2013 holiday season, usually considered a time for family, by ordering the public execution of his uncle and top aide, Jang Song Thaek, who was accused by state media of such crimes as “half-heartedly clapping” for his nephew. In reality, Jang probably was executed because the young Kim wants to leave no rivals for his throne alive. (Kim followed up with purges of most of Jang’s allies throughout the North Korean regime.) Although Jang was hardly a nice guy, he reportedly had been pushing for Chinese-style economic reforms, which is one reason Chinese officials are so worried about his demise. Without such a voice for reform, North Korea’s nascent economic changes easily could stall, making the country even more desperate and its leadership more unpredictable.

Worse, although Kim probably eliminated Jang to strengthen his regime, that he did so publicly suggests the young dictator remains very insecure about his grip on power. To bolster his nationalist credentials and rally North Koreans around him, Kim in 2014 well could test another nuclear weapon or launch an attack on South Korean sailors or planes, a tactic employed by the government in the past during times of internal turmoil.

6. Thailand Melts Down
At the end of 2013, Thailand, which has swung from one political crisis to the next for nearly a decade, went from its normal simmer to an all-out boil. Anti-government demonstrators, mostly hailing from Bangkok’s elite and middle classes, jammed the streets of the Thai capital. They took over government ministries, clashed with police, and called for a pause—or even an end, period—to Thailand’s democratic politics, which have consistently resulted in populist elected governments supported by the poor and despised by Bangkokians. In some ways the Thai demonstrators signified a broader, global middle class frustrated with democracy, which often cut into urbanites’ power. Yet while similar protests in Ukraine and Turkey seem to be quieting down, Thailand’s unrest will only get worse this year.

The Thai protesters and the primary opposition in Parliament, the Democrat Party, are boycotting the national elections scheduled for February, and the demonstrators and police, who generally support the populist government, have tired of nonviolent tactics. Groups within the protesters will by February launch tougher attacks on property, police, and even bystanders. Expect the riot police to hit back harder and harder. Eventually the unrest could spark another coup, which would be the 20th in Thailand’s modern history.

7. Jokowi Elected Indonesia’s President, and No One Is Elected in India
Two of Asia’s biggest nations, Indonesia and India, will have national elections in Asia. Only one will deliver a clear result. In India, the decline of the Congress Party, the rise of small and regional parties, and the growing voter alienation of middle class Indians probably will result in an election in which no one party wins anywhere near a majority. Whichever party does get the most seats will have to form a broad, weak, and unstable coalition in Parliament, a coalition that might not last through 2014.

In Indonesia, it will be a different story. Jakarta Governor Joko Widodo, popularly known as Jokowi, is in many ways a new type of Indonesian politician: he doesn’t hail from a longstanding political dynasty, and he who abhors the traditional aloof, almost royal Indonesian political style for walk-the-streets populist approach. Yet Jokowi is hardly a political naïf. He knows exactly how to manage his image, how to project the regular-guy appeal that, in a country that has never known such a politician, has proven enormously popular. Although Jokowi has not yet formally declared his candidacy, nearly all his allies and advisers say he is running for president this year. And in the 2014 presidential elections, he will rely upon not only his own charisma and innate political instincts but also the powerful machine of former president Megawati Sukarnoputri’s Indonesian Democratic Party-Struggle, or PDI-P.

Some political forecasters say Megawati, who has considered running for president again, will never step aside for a politician as young as Jokowi, these prognosticators badly underestimate how badly Megawati wants her party, which has been away from the president’s office for a decade, to win power again. No other presidential contenders will even come close to Jokowi in what will be the most lopsided presidential election in the young democracy’s history.

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