Decision Making as Output and Bounded Rationality

  The classical economics theories proceed on the assumption of rational agents. Rationality implies the economic agents undertake actions or exercise choices based on the cost-benefit analysis they undertake. The assumption further posits that there exists no information asymmetry and thus the agent is aware of all the costs and benefits associated with the choice he or she has exercised. The behavioral school contested the decision stating the decisions in practice are often irrational. Implied there is a continuous departure from rationality. Rationality in the views of the behavioral school is more an exception to the norm rather a rule. The past posts have discussed the limitations of this view by the behavioral school. Economics has often posited rationality in the context in which the choices are exercised rather than theoretical abstract view of rational action. Rational action in theory seems to be grounded in zero restraint situation yet in practice, there are numerous restra

China-US Tensions, Taiwan and War

While the world is coming to some sort of a grip on the Wuhan flu, battle of words is heating up between the US and China. President Trump, given the election year, is unlikely to leave any stone unturned to bring China to accountability for the pandemic. Europe too is moving towards demanding accountability from China. They have found support from Japan, Australia, New Zealand, and Canada among others. India is still discreet on its stand. The WHO general assembly though curtailed is scheduled the coming week and the debate is expected to intensify. India, given its taking over the position in the Executive Board will be compelled to reveal its stand on China. However PM Modi in his address to G-20 had raised the issue of the reforms in WHO to ensure accountability and transparency. Statements from senior ministers and leaders of the ruling party indicate a perception of India’s belief in the unnatural origins of the virus. They might be a trial balloon but indicate a possible starting point for the India’s stand at WHO and other international fora.

 

Meanwhile China continues to remain unrepentant. Most of the aid it supplied to various countries was faulty. The test kits had low accuracy. Countries from Spain to Czechia to India to Netherlands to Tanzania all report defective kits imported from China. This seems to have angered China even more. Furthermore, China is flexing its muscles in the neighbourhood. It is seeking to intimidate Taiwan and prevent its entry as observer at WHO. The next week will perhaps see  more sparks flying between US, Japan, Europe etc. and China over the Taiwan issue. China has not ruled out some kind of military action against Taiwan though such statements are not unusual. China has been aggressively patrolling the South China Sea and has encroached the Malaysian Exclusive Economic Zone (EEZ). It has rammed into Vietnamese boats. Similar exercise of intimidation has been happening on the Himalayan borders both in Sikkim and Ladakh with India. Chinese vehicles have rammed into Indian army vehicles in Ladakh heating up the temperatures between the two sides. Its intimidation of Mongolia, Laos etc. have been pretty old. It has threatened Australia, Canada, New Zealand, and Britain among others with retaliation for their measures to curb Chinese economic influence in their countries. China is instigating Nepal to rake up an old unresolved boundary dispute with India. China is claiming territories currently under the control of Kazakhstan, Kyrgyzstan etc. It has gone ahead and claimed Mount Everest as its own. It might not be far off when China claims to own Hawaii. In all these intimidatory behaviour, the question is will China engage in a military adventure that will perhaps degenerate into an all-out war with the rest of the world.

 

Such fears might be unwarranted yet need an analysis. President Xi is facing pressure for his handling of the Wuhan flu. While a few months back President Xi was looking invincible but suddenly things have changed. They are no longer rosy for him. He does not seem to have the same kind of authoritative support within the party. There are reports of murmurs of discontent. Xi’s policy of aggressive stance globally has not gone well and is fraught with risks. It is at this juncture that one wonders whether Xi would take a risk of invading Taiwan. If there is trigger for war, it has to happen in Taiwan. Xi could come out a winner if Taiwan collapses in a few days and the US preoccupied with the Wuhan flu remains neutral militarily. It might do a lot of talking but if it doesn’t send in the armed forces, then China could come out with a big win and emerge as a superpower in its own right. Not many countries will take it head on and the US would have lost its face. Europe too would kowtow to China. Yet, such an occurrence is fraught with lot of both uncertainty and risk.

 

There is no guarantee that Taiwan would fold quickly. Any prolonging of the war would affect Xi politically within the country. At the time when the country is yet to recover from the pandemic its rulers unleashed, it would be double whammy and make Xi susceptible to pressures both within and without. His position would become untenable. Secondly, there is no guarantee that US will not intervene. It might give President Trump just the opportunity to show China its place and send in the forces with perhaps aid from Australia, New Zealand, Japan and Korea among other countries.

 

A US-China war would hardly be in anyone’s interest more so to Xi. He has very few friends who might be of substantial help. ASEAN member nations might be intimidated by China but domestic pressures might keep them neutral and least likely to help China. Furthermore, if China runs over Mongolia, it might aggravate its difficulties even further. China has no guarantee that India will not attack from the Western and Southern borders. Moreover India might use the opportunity to capture Gilgit and Baltistan cutting the Chinese link with Pakistan. Pakistan is susceptible to US pressures and thus might opt for neutrality. Central Asian republics too are unlikely to side with China and might oppose it or remain neutral. African countries and Latin American countries for all their colonising by China are too distant to make material impact on the conflict. Iran might be one of the few to side with China but its lack of border with China will deter it.

 

The most important dimension for China would be its ability to maintain the energy security. China is huge energy importer with most of the imports coming from the Persian Gulf through the Straits of Malacca to the Eastern Coast of China. This would be significantly disrupted. Given the base of US in the Indian Ocean, American submarines could harass Chinese tankers operating in the area. Further US could bring all its pressure on the Gulf countries to halt their oil exports to China. Iranian exports could be curbed by the neutrality of Central Asian republics besides the US submarines in the Indian Ocean.

 

To China, another critical factor could be the role of Russia. For all the professed friendship and virtually being a vassal, President Putin is unlikely to intervene in the war. He would be compelled to open a two front war with the European countries on the West and US led forces in the East. President Putin is hardly in the best of the times given the current pressures on corona and oil and thus might opt neutrality. His oilfields in the Sakhalin might be of help to China but subject to disruption by US and allied forces. Thus economic interests would perhaps dictate Putin’s decisions.

 

As Paul Kennedy argued, the results of the war rests on the relative economic prowess. It boils down to who survives economically for a longer period. Hitler’s invasion of Russia was essentially to capture its oil fields. Measured through the economic angle, China seems vulnerable given its deficiencies in the energy requirements. Therefore, unless China is absolutely certain of the stands of countries like US and Russia besides India, Japan and ASEAN is unlikely to engage in any misadventure. The current environment does not seem conducive for Chinese military plans.

 

Yet the hazards of guessing are too many. In 1910 or so, there were quite a few who were in the belief that the world was seeing an era of peace never seen before and the era of war was virtually over. It was the era of globalization 1.0 and Friedman’s of the era were busy suggesting that global interdependence would make war redundant and unsustainable. Yet within 35 years, the world saw two wars, the scale of which was never seen before. The destruction it was unfolded wiped a generation or two with hardly any country left out of the trail of the destruction it unleashed. As such only a small miscalculation or a small trigger is what is needed to degenerate into a war. The omens do not portend a war at the moment but we never know.

 

 


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