Tom Pepinsky

Category: Asia

  • What Happens When Evergrande Collapses?

    The markets are watching closely for what seems to be the inevitable collapse of Evergrande, a massive Chinese property developer that is almost certainly unable to service its debts. A default would have tremendous repercussions for the Chinese financial system–and with it, the Chinese economy and the global economy as well. All the immediate focus is on the financial implications of a massive default of a highly-connected property firm, both for China and for the rest of the world. But the political implications of Evergrande’s collapse are no less interesting.

    So what happens to Chinese politics when Evergrande collapses? About five years ago, Jeremy Wallace and I asked a question like this in a paper called “Hard Landings and Political Change in Nondemocracies” (PDF). This paper was never published (and Jeremy and I tried valiantly to place it), probably because the paper is nonstandard in the way that it tries to answer the question using qualitative and quantitative evidence and the fact that China is different.* But our argument rests on the premise that we can learn from the experiences of things like the collapse of Evergrande, even those that don’t happen in China, to develop some insights about what would happen in this specific case.

    So what will follow politically from the collapse of Evergrande? One place to look is East and Southeast Asia, and to the political upheavals that followed from the serial collapse of the exchange rates of Thailand, Indonesia, Malaysia, and South Korea during the Asian Financial Crisis. These financial crises became political crises for the simple reason that politics shapes financial markets, and the financial turmoil affected economic actors with political power.

    What we learned during 1997 was just how financially interconnected these economies were, just how many politically powerful individuals and groups were using preferential access to credit as a cash machine, and just how liquidity-constrained these actors were when their cash machines quit spitting out bahts, won, rupiah, and ringgit. What might have been just a property crisis in Bangkok or an exchange rate crisis in Jakarta turned out to be a financial meltdown that affected everyone. And the very same political actors who had happily supported the incumbent governments at the time started demanding that these governments do something–anything!–to get the cash machines back up and running.

    And when it turned out that governments could not help them, even as they tried, these powerful actors began to look for new governments who could.

    Now, the specifics of the Asian Financial Crisis differ from whatever crisis Evergrande’s default may create. Thailand, Indonesia, Malaysia, and South Korea suffered from having open capital accounts and fixed exchange rates, coupled with enormous amounts of unhedged foreign currency debt. The details differ across the four cases, but at the end of the day the problem was how to stabilize currencies and keep interest rates low at the same time.

    China does not face this problem; and in fact, one reason why it doesn’t face this problem right now is because it looked to the south and east in 1997 and said “no thanks” to an open capital account. So the financial crisis management problem that China faces will be different; if Evergrande defaults, it will need to unjam the credit markets that will seize up in response. And it will need money to do that. And there will be some powerful economic actors who do not want to spend that money, as well as some who will be desperate to spend that money.

    The Xi regime will, in turn, need to find a way to placate both set of actors, or crush one. From an outsider’s perspective, it will not look politically contentious, because the regime will suppress any mention of dissent or discord. But behind the facade, there will be intense disagreement, and we will not be able to know just how precarious the situation is until it is too late. If the Xi regime cannot find a way to either placate those powerful actors who demand protection, or to crush them entirely, we will see these actors start to abandon the Xi regime altogether.**

    One response might be that China’s institutions are different: they are so strong, the party so unified and hierarchical, and so pervasive within Chinese society that a political crisis like this is impossible. I couldn’t rule it out. But one lesson that studying financial crises hammers home is that time and again, people vastly overestimate how much durable political loyalty institutions create when the going gets tough. China’s political institutions created enormously powerful and wealthy people, but those people are not loyal to those institutions, they are loyal to their wealth and power.

    This script was written long ago, and the actors have changed over the years. It is the story of how an authoritarian juggernaut turns into the “sick man” of its part of the world. It happens quickly, and in retrospect it seems inevitable. But it’s still a waiting game right now; we won’t know, and foreign observers like me have predicted at least twenty out of the last zero Chinese economic and political crises since Tiananmen. But it remains the case that after, say, just five more sleeps we may wake up to an entirely different kind of Chinese politics.

    NOTES

    * Read the last three words in that sentence in a grumpy comparativist voice.

    ** My prediction, if it gets this far, is that in at least one public statement Xi will describe those who are demanding policy change as “rats.” You know the crisis is serious when the rat talk starts (see Indonesia and Mexico, among others).

  • Colonial Imprints: English, French, and Dutch Compared

    I woke up this morning to see this interesting question on Twitter:

    This is the type of idle question that has no simple answer, but someone thought I might have some ideas, and so here they are.

    I’ll preface this with two caveats. First: I, too, have only visited one of these three countries, so my answers are based entirely on impressionistic secondary evidence and arguments made at a distance. Second: this question is ethically and politically fraught, and might be read as presupposing that we evaluate colonized countries by their relationship to their main colonial power. That is not my intention, but the question is nevertheless a valid and thought-provoking one.

    With that aside, here is my brief answer. It is probably not true that the “imprint” of Dutch colonialism on Indonesia is “lighter” than the French in Algeria or the English in India. But it seems that way to many Western and former colonial observers because the place of the Netherlands and the role of the Dutch is comparatively minor in contemporary discourses about colonialism and post-colonialism more generally.

    In one specific sense, it is possible to argue that Dutch rule left a lighter imprint on Indonesia than the others. That is the linguistic sense: only a tiny number of very elderly Indonesians retain Dutch even as a second language.* Indonesians learn Bahasa Indonesia. Contrast this with the continuing contemporary importance of English in India and French in Algeria.

    But this argument is nevertheless still tenuous. Dutch left its imprint all over Bahasa Indonesia. And many Indonesians did speak Dutch during the colonial period. The difference was that another lingua franca, Malay, was already in use to facilitate communication throughout the archipelago when the Dutch arrived (this “trade Malay,” in fact, is what is today Bahasa Indonesia). Dutch administrators would learn a bit of Malay and this would allow them to work throughout much of the archipelago. It is interesting to think about the role of Dutch colonialism and economic and social change in the spread and eventual standardization of Malay into Indonesian.**

    If we are to look beyond this linguistic contrast, the differences in the “depth” of colonial imprint are harder to discern. The territory that is today Indonesia corresponds roughly to a couple of old pre-colonial empires, most notably to Mahapahit. But it corresponds exactly to the territory formally colonized by the Netherlands by the beginning of the 20th century. Indonesia is the part of maritime Southeast Asia colonized by the Dutch. No more, and no less. That is certainly an imprint of some import.

    The social and economic legacies of Dutch colonialism are no less consequential today. They can be seen throughout Indonesian society, for example, in the ways that ethnic groups relate to one another; in the production of commodities like sugar and coffee and tea and rubber; and in the nature of the Indonesian state itself (see e.g. McVey on “The Beamtenstaat in Indonesia” [PDF]).

    None of this should be read to say that Indonesia has no autonomous history. Of course it does. Indonesia must not be reduced to Dutch colonialism. But the imprints are clear; so clear that we often fail to remark upon them, like the fish who does not think about water.

    So circling back: I suspect that the reason why we often have the impression the Dutch influence on Indonesia is light is because to the extent that any non-Indonesian/non-Dutch person knows anything about that relationship, what they know is that Indonesians don’t speak Dutch. But this is a matter of attention. Most people do not dive seriously into the history of the Netherlands, or think about Indonesia’s colonial past much at all. By contrast, the English language discourse about colonialism and its legacies is dominated by discussions of the British Empire and its legacies, and secondarily by discussions of the French empire and its legacies.***

    Learning about modern French social thought (for example), or about modern British history (for example), means learning about colonialism and its legacies both on the colony and the metropole. If anyone outside of the Netherlands were to read, say, Max Havelaar as part of their introduction to colonialism and its legacies, as a part of a course on modern European history, we would be encouraged to do the same. Or if we stopped to ask why every Dutch restaurant in the Netherlands offers kip sate or soto. But since it is the British and the French experiences that have long dominated the global discourse on what Europe is and what colonialism meant, that is why we just don’t think about the deep legacies of Dutch (and Portuguese, and German, etc…****) colonialism.

    NOTE

    * I only know one Indonesian who grew up speaking Dutch at home: Thee Kian Wie.

    ** Observe the role of “one language” in the Youth Pledge of the late 1920s nationalist movement.

    *** When’s the last time you heard any serious discussion about the nature, practices, and consequences of Portuguese colonialism, in Africa or anywhere else?

    **** I’ve not even mentioned Spanish colonial legacies, which are quite apparent, but largely discussed with reference to the Western Hemisphere.