China Continues Rise to Regional Dominance

By LOREN B. THOMPSON

It was a year of peace, but little prosperity, in the Western Pacific, and, militarily, 1998 was largely uneventful. Except for some civil unrest in Indonesia and low-level insurgencies elsewhere in Southeast Asia, the region enjoyed one of the quietest moments in a tumultuous century. But 1998 also witnessed the worst economic downturn Asia has experienced in two generations. Throughout the vast arc of littoral nations stretching from Australasia to Russia's Pacific maritime provinces, production declined, trade stagnated, and financial systems were on the verge of collapse. It seemed, as one long-time observer put it, as though Asia's economic powerhouses had been transformed into dominoes almost overnight.

Against that backdrop, several patterns affecting the Western Pacific's future security became increasingly apparent. The most obvious was the primacy of economics over politics and military assets in determining the internal stability and external influence of regional powers. Another important pattern was the continuing proliferation of advanced military technologies, including those relevant to the development of weapons of mass destruction--a trend accelerated by the seeming willingness of China, Russia, and North Korea to sell anything to anyone with hard currency. A third pattern was the nearly universal acknowledgment of America's central role as arbiter and influencer of regional rivalries.

Many observers thought they also detected one more pattern, with major implications for the long-term stability of the region: the continuing economic and political decline of Japan, more or less in tandem with the rise of a resurgent China. Here, too, the role of America as provider of markets, capital, and technology was hard to miss--at year's end, China had sold to the United States about $60 billion more than it had bought, a trade imbalance roughly equal to the entire gross domestic product of New Zealand.

When U.S. Secretary of the Treasury Robert Rubin commented at a mid-year Sino-American summit that China is an "island of stability" deserving "a great deal of respect"--but that Japan still "must solve its problems"--it seemed that even Washington was admitting China's ascendancy and Japan's decline.

East Asian political leaders spent much of the year trying to regain control of their suddenly downward-spiraling economies--or, in the case of China and Taiwan, trying to avoid being sucked into the regional maelstrom. U.S. policymakers worked hard to find a formula for averting further erosion, but the World Bank reported at year's end that the Clinton administration and the International Monetary Fund actually had made the situation worse by urging Asian central banks to raise interest rates when the crisis first erupted in 1997.

A longer-term economic (and security) issue for which the administration seemed to lack a clear game plan last year was the increasing possibility that China would one day regain the status it lost in the late 19th century as the world's largest economy. That day was still far away at the end of 1998 (one expert projection suggested 2015, another 2020). But as China's economy continued to grow rapidly even in the midst of regional recession, it looked soon enough to merit more serious attention in Washington--particularly in terms of how China's greater economic power might translate into enhanced political influence and military capabilities.

The Once and Future Middle Kingdom?

For much of the 20th century it has been the specter of Japanese power--first military, then economic--that overshadowed political developments in the Western Pacific. Not any more. Japan is about to enter its second decade of an economic stagnation so profound that even the government is warning against despair. As American equity markets flirted with historic highs in 1998, Tokyo's Nikkei index languished for most of the year at less than half its 1990 peak. In China, meanwhile, an economic expansion nearly unprecedented in human experience continued to unfold. 1998 marked the 20th anniversary of Chinese leader Deng Xiaoping's prediction that his country's economy would quadruple in size before the end of the century. Deng's remark was widely dismissed at the time as communist bombast, but during the intervening two decades it has come true: an annual growth rate of 9 percent--one of the highest in the world--has quadrupled average income.

The World Bank estimates that, in terms of purchasing power, China already has passed Germany, to become the globe's third largest economy, and C. Fred Bergsten of the Institute for International Economics projects that, if current trends continue, China could overtake Japan's faltering economy late in the next decade.

That would represent a stunning reversal of fortunes for the two historic rivals, but it would not come as a complete surprise to students of economic history. Bergsten contends that China was the world's largest economy "throughout most of recorded history," and only began to lose standing with the spread of the Industrial Revolution in the early 19th century.

Once the erosion began, though, it persisted for a very long time. Angus Maddison of the Organization for Economic Cooperation and Development (OECD) calculates that, between 1820 and the communist consolidation of power on the mainland after World War II, China's share of global GDP fell from one-third to one-twentieth. In the process, per-capita income declined from rough parity with the global average to a mere quarter thereof.

The outlook for the average Chinese did not brighten noticeably until 1978, when Deng declared the shift from ideology to pragmatism in economic policy. In retrospect, this was the final triumph of the experts in what had come to be known as the "red versus expert" debate during the turbulent tenure of revolutionary leader Mao Zedong. In the past two decades, China has become one of the world's 10 biggest trading nations, its per-capita income has climbed to half the international average, and its share of global output has passed the 10 percent mark.

Chinese leaders have proven surprisingly adept at managing a more open economy--for example, by imposing tighter fiscal and monetary policies in the early 1990s, when double-digit growth threatened to spawn hyperinflation. Those initiatives produced a "soft landing" for the economy that had tamed inflation while avoiding mass unemployment. But in the wake of East Asia's recent economic meltdown Beijing policymakers now face the opposite problem: deflation and growing overcapacity as demand shrinks in many export markets.

They have reacted with characteristic pragmatism, imposing price controls, tightening restrictions on the movement of currency, directing the substitution of indigenous products for imports, slowing the privatization of state-owned businesses, and rapidly increasing government spending on infrastructure to supplement the flagging private-sector demand.

Chinese apologists for this sudden resurgence of state intervention in the economy have compared it with the New Deal policies of the Roosevelt administration during the Great Depression. Craig S. Smith of the Wall Street Journal probably came closer to the truth when he described the recent measures as "Stalinist Keynesianism."

Whichever description fits better, the bottom line on China's economic policies is that they have become the very antithesis of ideology--Beijing will try anything that works.

Because continued growth is critical to the Chinese government's political legitimacy, and to its ability to modernize a largely obsolete military establishment, economic trends have important security implications. Western observers are deeply divided over the outlook for the Chinese economy. On the one hand there are pessimists such as The Economist of London, which asserted in a 24 October analysis that "China's structural problems may now be too deep-seated for the government to be able to deliver on promises of continued growth." The respected weekly argued that Chinese citizens--most of whom are still rural peasants--have grown so apprehensive over recurrent social and economic dislocations that they "are becoming afraid to spend--just as they have in Japan." If that is so, it will be very bad news for a government that has staked its claim to legitimacy on providing ever-greater prosperity.

Even if a near-term recession can be averted, the pessimists say, over the longer run no communist dictatorship can be expected to liberalize its economy or political structure to the point where it can reap the full benefits of market forces. To do so would raise the specter of the Communist Party losing power, an outcome Beijing's leaders have never seriously entertained--as the latest roundup of political dissidents in December underscored.

The pessimists also note that the decline of the Chinese birthrate--from over 40 babies per 1,000 citizens annually in the early 1960s to less than 20 today (due largely to the government's draconian population-control policies)--will result in an accelerated aging of the Chinese work force. That trend will act as a drag on productivity gains early in the next century by giving China, in the World Bank's words, "a high-income economy's old-age burden with a middle-income economy's resources."

But optimism about China's economy abounds in other quarters. The Wall Street Journal reported on 24 November that "at its current pace, China's economy--and market--will be at least 20 percent larger by 2001, when economies in the rest of Asia will likely be, at best, not much bigger than they are today."

Angus Maddison of the OECD projected, moreover, that even at a reduced growth rate (of 5.5 percent annually) the sheer size of China's economy could overtake that of the United States by 2015. C. Fred Bergsten foresees such a development becoming plausible by the third decade of the next century. If that in fact occurs, it would radically transform all political relationships in the Western Pacific. Beijing already is providing clear signals of how it might use this new-found affluence to bolster the other dimensions of regional power.

Mounting Pressure on Taiwan

With a growth rate of about 5 percent, the Republic of China (ROC) on Taiwan was the only country in East Asia other than the People's Republic that managed to turn in a strong economic performance in 1998. Even Hong Kong, the showplace of laissez-faire economics that recently reverted to Beijing's control, saw its economy shrink by 5 percent during the year. Like Hong Kong, Taiwan was until late in the 19th century a part of China, and Beijing's leaders have focused much of their regional diplomacy since coming to power on regaining sovereignty over both of its "lost provinces." Aside from its stewardship of the economy, the commitment to recover lost provinces may be the most prominent feature of the Beijing government's claim to political legitimacy.

But, unlike Hong Kong, Taiwan is an island 100 miles off the Chinese coast that has been ruled since the revolution by nationalists vehemently opposed to communism. In recent years the nationalist party, known as the Kuomintang, has presided over a comprehensive democratization of the island's political system. Because only 14 percent of Taiwan's population is ethnic Chinese and recent polls show that fewer than one in seven Taiwanese support eventual reunification with the mainland, democratization is not likely to suit Beijing's plans. In fact, in 1995 and 1996, when Taiwan held the first democratic legislative and presidential elections in 5,000 years of Chinese history, the Beijing leadership signaled its displeasure by launching several medium-range ballistic missiles that landed close to the island. Beijing repeatedly has said that any attempt by Taiwan to formally declare itself independent would be a cause for war.

All of which has presented the Clinton administration with the most sensitive issue in its relations with the People's Republic. Under the Taiwan Relations Act of 1979 the United States is committed to selling Taiwan whatever weapons it needs for its defense, and even if this guarantee were not enshrined in law, the Republican majorities in both chambers of Congress would not tolerate any weakening of the U.S. commitment to Taiwan's security.

But the confrontation between the United States and China during the recent elections on the island--symbolized by the dispatch of two U.S. aircraft-carrier battle groups to the waters off Taiwan--proved to be a turning point in Sino-American relations. During 1997 and 1998, the Clinton administration demonstrated a steady determination to build closer ties to Beijing, even at the price of creating apprehensions in Taipei and other regional capitals.

The most visible manifestation of this new relationship--which senior administration officials have taken to describing as a "strategic partnership"--was the Sino-U.S. summit in China during the early summer of 1998. At the summit, Clinton enunciated a position on Taiwan popularly known as "the three noes": Washington would not support: (a) Taiwanese independence; or (b) the notion that there are two Chinas; or (c) the membership of Taiwan in any international body implying statehood. The Clinton statementpleased Beijing and infuriated Taipei, but it did nothing to resolve the tension between Washington's official policy on Taiwan and the reality that the island already is an independent state.

Because China's People's Liberation Army lacks the wherewithal to successfully occupy Taiwan, the policy area in which the contradictions in U.S. policy are most likely to assert themselves is arms sales. The United States has sold Taiwan $10 billion worth of arms in the 20 years since passage of the Taiwan Relations Act, all of them ostensibly defensive (the biggest deal was President Bush's sale of 150 F-16 fighters in 1992). Beijing has complained bitterly about such sales and compared them with its own arms sales to Iran and Pakistan--a sore point with U.S. representatives, who as recently as November were in the Chinese capital lodging their own complaints about China selling ballistic-missile technology to the two Muslim nations.

The problem that Washington faces is that, as Chinese economic and military might grows, Taiwan will need increasingly sophisticated weapons to defend itself. The Taipei government has funded development of an indigenous arms industry, but there are some items for which it will undoubtedly have to continue to look to Washington. The most obvious examples are missile defenses to counter China's growing arsenal of ballistic weapons and modern submarines to cope with Chinese submarines and surface combatants. Without such weapons--which other nations either cannot or will not supply--Taiwan's ability to defend itself against blockade and/or invasion will probably decline over time.

In December the Washington Post reported that Taipei was negotiating with the Clinton administration about the possible purchase of four Arleigh Burke-class guided-missile destroyers, advanced warships equipped with a powerful Aegis air-defense system capable of countering both air-breathing and ballistic threats.

Tang Pei, the Taiwanese chief of staff, earlier had disclosed that Taipei was evaluating both the Aegis ships and Patriot air-defense systems as a basis for the island's first missile-defense network. Beijing predictably was outraged at the possibility that such sales might receive U.S. government approval. There has been little public discussion of whether the United States would under any circumstances help Taiwan meet its stated requirement for 10 modern attack submarines, but with Beijing embarked on a plan to buy at least four very quiet Kilo-class diesel-electric submarines from Russia, and with every other potential submarine supplier declining to do business with Taipei, the United States looks like the ROC's only possible source of submarines. Whether it is even remotely feasible to reconcile Taiwan's defensive needs with China's irredentist passions for its lost province of Formosa remains to be seen.

Chinese Military Investments

Nothing more clearly reflects the growing proliferation of advanced military technologies in the Western Pacific than China's sale of ballistic-missile technology to Iran and Pakistan--at the same time that China is modernizing its own conventional forces with the latest Russian weapon systems. The Russian government has drawn the line at selling China long-range weapons of mass destruction--weapons that might one day be used against Russia itself, given the long history of animosities between the two countries--but no one knows for sure what Russia's freelance arms merchants may be selling the PLA behind the scenes, and Moscow has shown a willingness to sell the Chinese virtually any form of conventional weaponry. Beijing has taken advantage of this bazaar-like atmosphere to buy about a billion dollars in weapons and platforms from Russia every year since 1994--fully one-quarter of all of the trade between the two nations during that period. In the process, China has become Russia's number two arms customer, after India.

Because Russia does not sell strategic arms to China, and the Chinese ground forces have a relatively low modernization priority, most Russian military imports have gone to the conventional formations of the People's Liberation Army Navy (PLAN) and People's Liberation Army Air Force (PLAAF). The most noteworthy Air Force acquisitions have been 48 Russian Su-27 fighters equipped with AA-10 and AA-11 air-to-air missiles; Beijing has signed a licensing agreement to build 200 more of the fighters domestically. The PLAAF is said also to be eyeing the Su-30 fighter-bomber. In addition, it has acquired 14 Il-47 transport aircraft, which probably will be used to bolster the mobility of the Chinese rapid-reaction units under the command of the Air Force. The Chinese recently have put increased emphasis on building up their rapid-reaction forces for responding to contingencies on the country's periphery (to date, though, those forces have been used exclusively to deal with internal security threats).

The Chinese Navy has been a big beneficiary of military imports from Russia. In addition to ordering four Kilo-class attack submarines superior to the other undersea warships in the Chinese fleet--the first was delivered in 1997, the second and third in 1998--the PLAN recently completed negotiations to purchase two Sovremennyy-class destroyers. The Sovremennyys, which are expected to be delivered in 2000, were developed during the Soviet era to counter U.S. Aegis-type guided-missile surface combatants. They are equipped with supersonic, sea-skimming S-N-22 Sunbird antiship cruise missiles, with ranges of 75 miles, and thus may pose a major threat to the U.S. Seventh Fleet.

Now that the PLAN has deferred serious consideration of an aircraft carrier until after 2000, the Sovremennyy destroyers seem destined to be the most powerful surface warships in the Chinese fleet for many years to come. In combination with the indigenous Luhai class of destroyers, the first of which is now under construction, the Sovremennyys signal that the Chinese surface fleet is likely to become more than a mere coastal defense force. When that possibility is considered in conjunction with other PLAN investments--in the Kilos, for example, and the indigenous Song-class of conventional attack submarines that recently began sea trials--it is apparent that the long-range Chinese intent is to become a world-class naval power in the early decades of the next century.

However, the magnitude and momentum of Chinese military investments should not be exaggerated. Beijing's leaders clearly prefer an incremental, selective approach to military modernization that slowly assimilates advanced foreign technologies into a large but relatively backward military establishment. Lt. Col. Dennis J. Blasko, USA (Ret.), a recent American military attache in Beijing, wrote in Joint Force Quarterly in early 1998 that the Chinese purchase of Russian equipment "reflects lack of confidence in Chinese weapons and [in] the ability of domestic industries to produce modern systems necessary to equip PLA forces to effectively project their capabilities."

In April 1998, Beijing reorganized administration of the Chinese defense industry in a series of moves that seem to confirm Blasko's interpretation.

Chinese leaders have good reason to doubt the effectiveness of their forces. Not only is it hampered by obsolete equipment, the PLA has had little experience with fighting wars in recent decades. Chinese ground forces last saw combat 20 years ago, against Vietnam, and their performance was not impressive. The PLAN has not engaged an adversary since skirmishes in the South China Sea in the mid-1970s. And the PLAAF has not faced hostile aircraft since the Taiwan Strait crisis in the late 1950s. To make matters worse, the Chinese military has become so heavily involved in its far-flung business enterprises that many personnel seem to have little time or inclination for training.

In July, President Jiang Zemin ordered the military to begin relinquishing its 25,000 to 30,000 profit-making enterprises and concentrate on becoming a more professional fighting force. Western observers have speculated that one of Jiang's motives for realigning the military was to establish greater political control by putting more of his proteges in key positions. But there is little question that the Chinese military has become excessively preoccupied with making money--and in the process has lost much of its more important war-fighting edge, not to mention its accountability to civilian authority.

The area of Chinese military capability that remains largely shrouded in mystery is the PRC's strategic nuclear forces. It is known that China maintains a minimal strategic force of about 20 intercontinental ballistic missiles, with a dozen sea-launched ballistic missiles on a single submarine. Neither the targeting priorities nor the operational readiness of this force are known in the West with any certainty, however. U.S. intelligence agencies believe that the Chinese are developing two new solid-fuel, road-mobile missiles to replace their aging liquid-fuel, silo-based ICBMs. The new missiles, designated Dong Feng 31 (DF-31) and Dong Feng 41 (DF-41), are expected to have ranges of 8,000 and 12,000 kilometers, respectively, and may be deployed early in the next decade if flight testing is successful. A new submarine-launched ballistic missile will probably be deployed on the PLAN's next-generation strategic submarine when it becomes operational around 2010.

In the meantime, much of the People's Republic nuclear deterrent will continue to reside on shorter-range systems such as the DF-3 and DF-21 intermediate-range ballistic missiles (about 50 of which are currently operational). These missiles cannot reach the United States, but they can target most of China's neighbors, including those hosting American military forces. They are a potent capability that no other regional power besides Russia currently possesses--although North Korea certainly seems to be trying.

The Waning of Japan

Impressive as China's recent economic performance has been, its rise to regional dominance also has been, partially, at least, because of its rivals' misfortunes. In the case of Russia, the decline has been spectacular; since the dissolution of the Soviet Union in the early 1990s the Russian economy has contracted by an estimated 40 percent. It shrank another 3 percent in 1998 and, according to the Economics Ministry, will decline again in 1999 (by about 5 percent). The suffering caused by this collapse has been felt most severely in those areas, such as Siberia and the Pacific maritime region, most distant from Moscow. Some observers believe that further deterioration could spawn a secessionist movement in the maritime provinces.

China's other major rival in Northeast Asia, Japan, is enduring a different kind of crisis. A formula for export-driven growth that seemed to work well during the early post-war period has produced economic stagnation throughout the 1990s. The decade began with a series of massive sell-offs in Japanese equity markets that cut the 225-stock Nikkei index from nearly 40,000 points in early 1990 to 15,000 in mid-1992. At the time, the sell-offs seemed like the cyclical collapse of an overheated "bubble" economy, but it now is apparent that Japan's decline is more secular in nature. During the third quarter of 1998, the Nikkei fell to its lowest point in a dozen years, and the overall economy registered a fourth consecutive quarter of contraction for the first time since the government began tracking economic statistics in 1955. These trends prompted Bear, Stearns & Company Vice Chairman Denis Bovin, an expert on global security, to comment that "the continuous divergence between Chinese and Japanese economic performance must eventually have important political and security consequences for both countries."

The International Monetary Fund estimates that the Japanese economy shrank 3 percent in 1998, and few observers expect 1999 to be much better. In fact, the respected Japan Center for Economic Research predicted late in the year that--because of weak domestic demand, depressed export markets, and the huge burden of debt weighing down financial markets--the Japanese economy would continue contracting until 2003. The accumulated load of bad loans made by private banks is now so massive that the banks are reluctant to undertake new lending on any terms; as a result, even though interest rates have effectively fallen to zero for some types of loans, no wave of borrowing activity has occurred. In the case of public treasuries, efforts to supplement the weak private-sector demand have escalated the government deficit from 3.7 percent in March 1996 (the end of the Japanese fiscal year) to 6.3 percent a year later, and to 9.8 percent in 1998--a higher deficit in percentage terms than that recorded by Brazil. In 1998, the accumulated debt of the Japanese government exceeded GDP for the first time.

The only significant result from all of the deficit spending was a negative one: Japan lost its top credit rating last November. Despite huge government tax cuts and spending increases, Japan remains in what Yoichi Funabashi, chief diplomatic correspondent of Asahi Shimbun, calls a "deep funk." Writing in a recent issue of Foreign Affairs, Funabashi asserted that the Japanese people "genuinely fear for the future," and warned that "unless the psychological slump reverses, Japan's deflationary cycle will cripple Asian hopes for recovery and destabilize the global economy."

That fear is a legitimate one, if only because, notwithstanding its humbled circumstances, Japan still accounts for most of East Asia's economic output. But the exodus of Japan from the global economy--and regional political influence--seems already to have begun. The New York Times reported in November that Japanese banks were selling off their U.S. operations "at a rate approaching desperation."

Japan's economic decline may not end for a long time, moreover, because a combination of the world's highest life expectancy (83 for women, 77 for men) and lowest birthrate (1.39 children per couple) is producing a very old population. The U.S. Census Bureau projects that in the year 2010 over 20 percent of the Japanese population will be 65 or older, compared to 8 percent in China, 9 percent in South Korea, and 13 percent in the United States. Today, 16 percent of the Japanese population is already over 65, and the high propensity of the elderly to save rather than consume is widely cited as a cause of weak domestic demand. Older Japanese also have a higher propensity to vote than younger age groups, which probably reinforces the conservatism of a political system frequently assailed for lacking bold economic leadership.

Against such a bleak economic background, it is not surprising that regional political and military developments often seem to be an afterthought. The International Institute for Strategic Studies summarized the situation in the 1998-1999 edition of The Military Balance when it simply noted that, "Japan's military capabilities are essentially unchanged from 1997."

The same could not be said of Tokyo's defense budget, though, which in nominal yen terms declined for the first time since the Japan Defense Agency was established in 1954. In constant dollar terms, though, the budget had declined 16 percent--to the lowest level since the early 1990s. The only bright side to this dismal picture is that declining resources seem to be encouraging the defense agency to seek more competitive terms from the nation's surprisingly inefficient military suppliers.

Although trade concerns largely dominated Japan's external relations in 1998, two security issues of some significance did arise: (1) a perceived fading of U.S. interest in its long-term alliance with Japan; and (2) North Korea's launch of its new Taepo Dong -1 ballistic missile--on a trajectory that carried it across the Japanese home islands during an August test flight. The Taepo Dong-1 launch sparked renewed Japanese interest in acquiring some sort of defense against theater ballistic missiles, and also led the Diet to consider proposals for an indigenous satellite reconnaissance capability that would make Japan less dependent on U.S. overhead assets. China has long opposed Japanese development of missile defenses, but at year's end it seemed likely that Tokyo would increase its research funding in the technologies essential to missile defense.

The more generalized sense of waning U.S. interest in its security ties with Japan was symbolized by the mid-year Sino-American summit, during which leaders from both countries criticized Japanese economic policies--probably the first such joint criticism of Japan since the Communists came to power in Beijing in 1949.

Obviously, with the Soviet Union now gone and China run by technocrats rather than revolutionaries, the United States has less incentive to maintain close security ties with Japan. The Clinton administration seems to many observers to be tilting toward Beijing and away from Tokyo in its diplomatic interactions. However, the current frictions in U.S.-Japanese relations have little to do with the security concerns of the two countries and everything to do with their resentment of each other's economic policies. Because little is likely to change on that front in 1999, the frictions will probably continue.

One further indication of the primacy of economics in regional diplomatic and political interactions was provided by the defeat of Okinawa's incumbent governor, a long-time critic of U.S. bases, in the November elections. The winning candidate repeatedly reminded voters that the 29,000 U.S. military personnel on the island were an important source of both jobs and money. With Okinawa's unemployment rate standing above 9 percent, the voters decided they could live with the bases.

From Bad to Worse On the Korean Peninsula

The Korean Peninsula was the only place in the Western Pacific during 1998 where a truly grave security threat persisted throughout the year. That threat originated in the bellicose and beleaguered Democratic People's Republic of Korea, whose cult-like government is led by Kim Jong Il, son of the deceased national founder, Kim Il Sung. 1998 was yet another year of widespread suffering in North Korea as the combination of poor harvests, government mismanagement, and economic sanctions as old as the Korean War combined to produce food shortages in many areas. The United Nations reportedly estimates that about a third of North Korean children under the age of two are malnourished as a result of several straight years of famine, and two-thirds of all of the country's children are physically stunted. Some observers believe there have been over a million starvation-related deaths in North Korea since 1995.

Faced with such severe hardship, most governments would throw themselves on the mercy of the international community. Not North Korea. Instead, the unreconstructed Stalinists in Pyongyang have become increasingly belligerent, warning repeatedly of imminent war. With an army of a million soldiers, most of them deployed close to the border with South Korea, that is no idle threat. Such behavior has not, however, stopped the government of South Korean President Kim Dae Jung from pursuing a policy of engagement with the North, but it has thoroughly alienated every other country in the region.

During 1998 there were two particularly outrageous new instances of Pyongyang's recklessness in its dealing with the outside world. The first came in mid-August, when it was disclosed that U.S. intelligence had detected a vast underground complex being constructed 25 miles north of the mothballed nuclear-weapons facility at Yongbyon. In 1994, only weeks before his death, North Korean dictator Kim Il Sung had agreed, in return for Western aid, to suspend his nation's nuclear-weapons program. An "agreed framework" was established under which the United States, Japan, and other nations would provide North Korea with $4.6 billion in assistance, including two commercial nuclear reactors. However, the U.S. government has determined that the underground complex north of Yongbyon is almost certainly a new nuclear weapons development center--a clear violation of Pyongyang's commitments under the agreed framework. When the United States insisted that inspectors be allowed access to the complex, North Korea indignantly refused, jeopardizing the framework.

A second North Korean provocation came in late August with the launch of a two-stage Taepo Dong-1 missile on a 1,500-kilometer trajectory over Japan. The new missile was no great technological achievement, apparently consisting of a Nodong medium-range ballistic missile as its first stage and a Scud as its second. However, the possibility that North Korea had mastered the numerous intricacies involved in the launch of multistage missiles raised the specter of longer-range systems that might be able to reach U.S. territory. North Korea is believed to be developing a three-stage Taepo Dong-2 missile with a range of 4,000 to 6,000 kilometers, a capability that could jeopardize both Alaska and Hawaii. That is a disturbing possibility, particularly given the credible possibility that North Korea may already possess at least a few nuclear weapons (but they may be too big to mount on the missiles).

In October, Congress passed legislation limiting most forms of aid to North Korea unless the president first certifies that Pyongyang has provided an acceptable explanation of the reasons for building the underground complex, has ceased developing nuclear weapons, and has stopped selling ballistic-missile technologies to rogue countries, such as Iran--which in July launched a "Shahab 3" variant of North Korea's Nodong--that support terrorist organizations. North Korea is not expected to provide assurances on any of those matters. Indeed, the DPRK's exports of ballistic-missile technology to countries such as Iran and Pakistan may now be its main source of hard currency.

The stage is thus set for a collapse of outside efforts to get along with the North Korean regime. South Korean leader Kim Dae Jung probably will continue his efforts at rapprochement, but Pyongyang seldom misses an opportunity to brand South Korea's government as an American puppet.

Kim has other problems, though. South Korea's economy, weathering its worst downturn in two generations, contracted about 5 percent in 1998--quite a change for the only East Asian country that has managed to match China's growth rate over the past 20 years. A number of major military investments have been deferred, including the planned purchase of AWACS surveillance aircraft. But, despite a run on its currency that nearly bankrupted the treasury in late 1997, South Korea now looks poised to resume modest growth in 1999. What the new year will bring from the increasingly unpredictable police state to the north, though, is anyone's guess.

Signs of Recovery In Southeast Asia

The economic crisis devastating the nations of the Western Pacific over the last year began in Southeast Asia in the summer of 1997, so it is fitting that signs of recovery also appeared there first, beginning in the second half of 1998. In truth, the impact of the downturn on the nine members of the Association of Southeast Asian Nations (ASEAN) was far from uniform during the year: Indonesia saw its economy contract by 15 percent in 1998, Thailand 7 percent, Malaysia 4 percent, and the Philippines 1 percent.

The bustling city-state of Singapore barely lost ground, on the other hand, and the oil-rich sultanate of Brunei escaped the crisis with only minor bruises. Vietnam and the other Indochinese economies continued to face daunting challenges, but these had less to do with the regional economic crisis than with the peculiar structural problems of those countries.

The worst damage by far was seen in Indonesia, at 200 million people the most populous nation in Southeast Asia--also the world's biggest Muslim country (87 percent of the population is Muslim). The combination of a 15 percent contraction in output, a 40 percent currency devaluation against the dollar, and inflation in excess of 50 percent threatened to return a generation of Indonesians to the poverty from which their parents had so recently emerged. In May, the 32-year reign of General Suharto, only the country's second leader since independence, came to an end amidst civil unrest and economic collapse. Suharto was replaced by his long-time protege, B.J. Habibie, who has promised new legislative elections in mid-1999 and presidential elections by year's end. Considering the absence of a strong democratic tradition and the mass violence that surrounded Suharto's replacement of his predecessor in the 1960s, it is not surprising that many Indonesians believe that an orderly transition to the post-Suharto period will prove difficult to achieve. Recurrent communal rioting throughout 1998 underscored this fear.

The Indonesian military has been widely blamed for helping to instigate the violence that killed over a thousand Indonesians in the capital and four other cities at the time of Suharto's departure, but it remains a key factor in the country's political stability. Indeed, the mostly secular Army is the main counterweight to the sectarian appeal of Muslim activists within the shaky coalition supporting Habibie's rule. But with most of the nation focused on internal economic and political problems, the Indonesian military has had little time to think about external threats. It has "postponed indefinitely" plans to acquire five second-hand diesel-electric submarines from Germany, and also has ended efforts to acquire Su-30 fighter-bombers and Mi-17 helicopters from Russia. Whether the economic crisis will undercut the military's ability to cope with several insurgencies under way on four of the archipelago's larger islands is not yet clear, but the resurgence of piracy during 1998 suggests that the Indonesian Navy, at least, was stretched perilously thin.

The Philippine government continues to face a sporadic insurgency on its southern island of Mindanao, but that does not seem to present a serious threat to the recently elected government of President Joseph Estrada, who has proved surprisingly adept at navigating his country's economy through the regional economic crisis. The Philippines has scaled back plans to acquire multirole fighters and a variety of maritime patrol aircraft and vessels, but it continues its overall military modernization (at a moderate pace). The same is true of Singapore, which recently took delivery of the first of 29 F-16 C/D fighters and also continues with plans to strengthen its maritime-patrol, undersea-warfare, and amphibious-assault capabilities.

Thailand's economy has started to stabilize, but a 40 percent decline in its currency relative to the dollar has forced cancellation of the planned purchase of F/A-18 Hornet fighters. Thailand also has limited its naval/military training exercises with neighboring nations, and largely confined its new 11,000-ton aircraft carrier to port.

Similar measures have been taken in Malaysia, where plans to match Singapore's recent purchase of Swedish conventional submarines have now been deferred indefinitely. In addition, according to a report last August in Jane's Intelligence Review, the Malaysian military's budget for ammunition, flight training, and joint exercises has been cut in half.

Because the growing military power of the ASEAN nations in recent years was largely a secondary consequence of their new-found prosperity rather than a response to overt (or covert) threats, military spending is unlikely to revive until local economies do. The same dynamic does not apply in Australia and New Zealand, however, which escaped the regional economic crisis with minimal damage. They continue to modernize their naval fleets with Anzac-class frigates and, in the case of Australia, Collins-class conventional submarines.

Australia also is set to become one of the first overseas recipients of the U.S.-built C-130J Hercules transport aircraft, a valuable mobility asset in a continent-sized country. Australia and New Zealand both continue to enjoy their reputations as stable and reliable allies of the United States, qualities that make them seem even more important to Washington in the wake of the turbulent past year in the Western Pacific.

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LOREN B. THOMPSON is chief operating officer of the Lexington Institute.