by Parag Khanna
But is the G-20 the new “steering committee for the world”? It certainly surmounts the inherent inflexibility of the United Nations. It has no secretariat, and chairmanship rotates each year, sometimes pairing one old and one new member to ensure a balanced agenda. In this sense, the G-20 embodies the latest in thinking about decentralized management: It has “twenty hubs and no HQ.”1
Yet the G-20 is already in danger of becoming a victim of its own success. The 2009 Pittsburgh summit resembled a new diplomatic Woodstock with hordes of media, lobbyists, and protestors swarming in to give free advice, point fingers, and trash the city’s downtown. Also, just because the G-20 is legitimate, it doesn’t mean that Indonesia, Mexico, and South Africa are states strong or competent enough to be considered world leaders. Indeed, the G-20 has proven not to be a global regulatory mechanism but at best a semi-global one, including both those with the resources and will to regulate and those who just enjoy the spotlight. It can coordinate financial regulation to prevent a repeat of this crisis, but what about preventing the next one?
Still, the G-20 model ensures that diverse perspectives are aired quickly and policies are coordinated efficiently. The G-20 itself should stick to what it knows best—fiscal and monetary policy—but there should be more networks of Sherpas—lots more—across North and South, East and West, coordinating activity on climate change and failed states. Perhaps the G-20 will ultimately fail since, after all, so much of the world’s geopolitical tension is among G-20 members themselves, not least America and China. Or maybe a new and more exclusive G-8 will form, kicking marginal members, such as Argentina and Italy, out of the larger group. Still, as we experiment with the G-20 and push leading nations to focus on coordination rather than communiqués, the global diplomatic system will evolve—and so will we.
Who Has the Money Makes the Rules
At the World Economic Forum’s 2009 Davos meeting, Chinese premier Wen Jiabao succinctly articulated what became the dominant narrative of the global financial crisis, claiming it had its roots in an “unsustainable model of development characterized by prolonged low savings and high consumption” and the “blind pursuit of profits.” What part of that do Washington and Wall Street not understand as they continue to demand higher consumption from Asians? Privatization and price liberalization—tenets of the Washington Consensus—have been steadily controlled by Asian governments ever since their late 1990s financial crisis. Indeed, the “global imbalances” that we constantly hear about are as much ideological as fiscal and monetary. The United States wants Asians to reverse an innate savings culture and more than a decade of insuring themselves against economic volatility by suddenly becoming voracious consumers. But Asians have heard enough hypocrisy from the high priests of Western finance. As America has gone from the lender of last resort to the world’s leading debtor, they won’t listen to its leaders’ denunciation of high savings rates and their suspicion of sovereign wealth funds—which they quietly begged for bailouts when corporate America tanked.
Importantly, at the same Davos meeting, both American and Chinese leaders confessed they are looking to continental Europe for inspiration on how to manage a balance between economic growth and social security. For decades, Europe has been building world-class infrastructure and generous welfare systems, and reducing inequality while merging into the world’s largest trading block. In the words of one prominent academic observing the discussions, “When the world’s biggest economy and the world’s biggest emerging economy look for lessons in the same place at the same time, you know something is up. We are seeing a paradigm shift toward a more European state.”
America represents a late-twentieth-century role model for managing political-economic modernity, but the future will reveal an increasing number of variants and formulas. The more universal the acceptance of capitalism becomes, the more its many shades of gray are revealed, most notably between what was once American laissez-faire capitalism and the surging Asian state capitalism. Within that spectrum, only two real criteria separate winners from losers among models of entrepreneurial capitalism: those that enforce contracts and attract innovation and those that don’t.
In other words, we are in an up-for-grabs era of economic management, one in which mixed models compete to pull their countries ahead and, in doing so, set examples that others will follow. The response to the financial crisis has looked more Chinese and European than American. The Beijing government controls its currency value to keep exports cheap, maintains strong oversight of the financial sector to avoid external control and overexposure to toxic assets, restricts procurement policies to benefit national suppliers, guides research and development to benefit national innovation, and selectively curbs imports of goods to maintain high domestic employment. In this way, semi-open economies from Brazil to India fared best in the financial crisis. Eventually, America wound up pursuing much the same course. Even George Soros has remarked that he is impressed by the China model, or what some are already calling the “Beijing Consensus.” There is something to be said for a system that peacefully transitions more than one billion people from revolutionary communism to Confucian capitalism.
Westerners have complacently forgotten one of the eternal axioms of world affairs: Who has the money makes the rules. Today the head of the People’s Bank of China, who sits atop $2 trillion and more of foreign exchange reserves, is a far more significant player in global finance than any head of the International Monetary Fund (IMF). Eight of the ten largest currency reserve holders are Asian countries. Their capital, companies, and contracts are already reshaping the way economies are run and business gets done worldwide. Americans who cynically ask what a world led by Asia would look like should get out of their chairs and go there. Good luck finding the border between state and market.
Since China favors state capitalism to unbridled laissez-faire, that is how it will be. In the thirteenth century, the Chinese state already played a strong but invisible hand in partnership with its merchants. Today, as Shanghai joins Hong Kong—what some call “Shangkong”—as a world financial hub, corporate rules are bending the Chinese way. Among China’s more than one hundred thousand state-owned enterprises are the Industrial and Commercial Bank of China and the China Construction Bank, the two largest banks in the world by market capitalization. China’s method of listing state-owned companies on stock exchanges and strictly regulating currency value and capital outflow are not only fair game today but are being widely emulated.
The integration of the China model within a greater Asian co-prosperity sphere holds the greatest potential to force a rethinking of the basic geographic and economic building blocks of global order. Asia now follows Europe’s lead in building an integrated regional market in which the majority of trade is within its borders rather than outside it. Led by China and Japan, Asians have rapidly increased their currency swap lines and pool of reserves in the Asian Monetary Fund, while also doubling their contributions to the Asian Development Bank. With the three pillars of regional self-reliance in place—a free-trade zone, a development bank, and a monetary fund—eastern Asia can make its own rules. More than half the world’s population falls within this increasingly self-reliant system. An Asian economic zone with global hubs including Shanghai, Hong Kong, Taipei, Tokyo, Seoul, Singapore, and Sydney doesn’t need its talented and experienced managers to stay awake to listen to what bankers in New York want. Indeed, what London most has going for it today besides its legacy as a global financial capital is its time zone: Its bankers can conveniently talk to Tokyo and San Francisco in the same day.
China is undoubtedly Asia’s biggest global spender, pressing ahead with explicit loan-for-resource agreements valued at $10 billion to $30 billion with oil and mineral giants Russia, Kazakhstan, and Brazil. China can afford to bail out its own banks, invest massively in domestic stimulus, reinforce regional institutions, and increase its global influence through international buying binges—all at the same time. The China Investmen
t Corporation spent as much per month in late 2009 as it did in all of 2008—but now it focuses on American mortgages and real estate rather than treasuries. When Treasury Secretary Timothy Geithner went to China and told an audience that their holdings of U.S. bonds were safe, they laughed. The United States wants a “Buy American” policy, and China is buying America.
Soon America will be borrowing just to pay the interest on its debt, hardly in tune with its officials’ frequent touting of their responsibility in managing the world’s main reserve currency. China is leading the charge toward the next monetary order with calls for a stable neutral currency dominated by no one nation. Some believe the IMF should manage this most delicate transition—and even become something of a Global Central Bank. During the past decade’s commodities boom, the IMF’s role was reduced to that of a lifeguard watching an empty pool, but in the aftermath of the 2008 financial crisis, its funds were tripled by G-20 countries. Still, rearranging chairs and shares at the IMF’s headquarters can’t change the fact that no central body is running the global monetary show. Instead, the IMF is evidence of how going local is the only way to stay relevant. Rather than commanding from afar, the IMF has learned to take its services to the root of problems. It has begun to lend to any country with low inflation, current account deficits, and public debt, and it has opened new technical assistance centers in Central America and central Asia, and two in Africa. If it doesn’t back up the priorities of Asians and Africans, they will get the money they need from powerful new friends such as China, India, and Brazil. Indeed, even as G-20 countries have reinforced the IMF’s liquidity, they are also buying allies through well-timed loans and increasingly trading in their own currencies. They will still make their own rules.
Public and Private
French president Nicolas Sarkozy has made a habit of claiming that the global financial crisis was not a crisis in globalization, but a crisis of globalization. That is nonsense. In the long run, globalization is additive: It survives pandemics, financial crises, and world wars. Even though the world economy shrank in 2008 for the first time since 1945, in the intervening half century world exports in merchandise increased from $58 billion to almost $14 trillion, and global foreign direct investment (FDI) rose from less than $100 billion to more than $1.8 trillion.2 And yet globalization’s reach has always been underestimated: After 9/11, many feared it would reverse, yet instead the world experienced an economic boom with trade volume jumping a further 70 percent. The stability of global currency markets today reminds us how important integration can be. Countries, companies, and consumers have chosen: Globalization is not optional. For America, Hollywood, high-tech, and higher education are all earning as much abroad as at home.
Of course, globalization means mutual vulnerability as much as it brings mutual gain. The nearly simultaneous food, fuel, and financial crises of 2008 spread faster and more globally than any before. Leaders are now asking themselves: How much globalization is too much? Yet even as each country struggles to protect itself from the whims of unfettered globalization, all still seek a place in a global economy that will continue to widen and deepen.
But this is not the time to pretend that a grand “new consensus” is in the offing. The symptoms of instability haven’t been removed; they’ve just been shifted. To save the balance sheets of companies, countries have harmed their credit ratings. The global economy is very much still in uncharted territory: The state has an uncertain role, a precarious imbalance exists between savers and consumers, global trade reform is a stalled process, and the role of international financial institutions is unclear. Even as economies recover, they face huge public deficits that can be redressed only through default, inflation, higher taxes, or tighter spending—all politically volatile options. From banking regulations to reserve currencies, building the next global architecture won’t happen through grand design but rather, in the words of financial journalist Moisés Naím, by “focusing on the plumbing and wiring.”
Human nature is hard to regulate. Not just greed but other equally human traits such as creativity were in play to bring about the massive privatized gains and socialized losses that Western economies experienced in the financial crisis. Regulators can limit capital leverage ratios and break up banks, but regulations without monitoring and enforcement will be toothless.
Even strong G-20 states such as the United States and China have not suddenly brought the market under control—it is still a mutually exploitative relationship. The global economy is a highly complex system, one that can only be managed if the public and private sectors see each other as partners, not competitors. Gordon Brown’s proposal for a “B-20” group of business leaders to help the G-20 design financial sector reform is just one example of the new public-private diplomacy shaping the global economy moving forward. Indeed, the U.S. Treasury hasn’t so much bailed out banks as created a Public-Private Investment Program (PPIP) and invited major asset management firms to step in and help clean up and restructure toxic balance sheets. And to keep short-term loans flowing to corporate America, the Fed turned to PIMCO, a private bond-trading firm, to revive credit markets.
By and large, the companies that earn our dollars are still in many ways more accountable than the governments that get our votes (and dollars). As Gordon Brown argued in London, “The key is for the practices of most of the private sector to be followed by all of the private sector.” Even when it comes to complex derivatives, the solution is fairly simple: require banks offering high-risk products to buy appropriate amounts of insurance for them as well. Instead of squashing the ambitions of hedge funds and pension funds, more of them can be encouraged to think beyond profit the way Warren Buffett does. There is plenty of lending left to be done without fake derivatives: Main Street is still waiting.
Capitalism can again become more social without being socialized. Medieval guilds were professional associations that trained their members from apprenticeship to master craftsmen. After the Industrial Revolution in the United States and the United Kingdom, it became a privilege for charted companies to build railroads in the service of the nation. The American Bar Association is today’s equivalent of a guild, with membership requirements, ethical standards, and internal policing and accountability. Rather than overbearing regulation that backfires, companies and their industry associations can wear a public hat as well as a private one so that investment bankers, derivatives traders, and other financial, consulting, and accounting professionals undertake more internal controls over their behavior. This means stronger associations of independent regulators such as the Financial Industry Regulatory Authority—maybe even with government funding. Catching ethical lapses has to happen at the source before it’s too late. Making laws to catch up with ethics is a half solution—constant monitoring is much better.
Can any country—even the United States—afford interminable public-private hostility when its overall competitiveness is at risk from rising powers? Rather than speaking of boundaries between public and private, with both sides accusing the other of short-term thinking, we should assume the need for a hybrid middle ground. Companies have always been part of “governance”: Governments alter their investment laws and other policies to become more attractive to business. Even though governments can temporarily bail out their economies, much of what the economy does—create jobs and innovate—cannot be done by governments. All emergent sectors of the twenty-first-century manufacturing and services economy—clean technology, health care, education—require sensible public and private synergy to spur job creation and growth. Business and government can’t forever point to each other’s leaks. If the boat sinks, everyone is a victim.
*With the inclusion of the European Union and eventually Russia, G-7 has actually been more a G-9; it is also referred to as the G-8.
*The G-20 actually first convened in 1999 after the Asian financial crisis, but it did not gain momentum until 2008. The G-20 members are Argentina, Australia, Brazil, Canada, China, the E
uropean Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.
Part Two
SAVING US FROM OURSELVES
Chapter Four
Peace Without War
Diplomacy without power is like an orchestra without a score.
—FREDERICK THE GREAT
Diplomacy is the art of saying “Nice doggie” until you can find a rock.
—WILL ROGERS
During the Cold War, nuclear bipolarity and third world proxy wars were two pillars of a truly global security order. The unipolar world resulting from the Soviet collapse hardly felt like a stable substitute as civil wars erupted and states fragmented from the Balkans to Africa to the Caucasus. Twenty years on, there is no such thing as “global security.” Grand international bodies such as the UN Security Council, and even powerful alliances like NATO, are frail and fraying. How can power be subordinated to norms when no one agrees on those norms? Does the lack of a single global leader or master plan mean the world is collapsing onto itself?
Paradoxically, the more we allow political autonomy to spread, the more peaceful the world can be. Much as in the Middle Ages, the world is organizing itself into discrete regional systems with their own sets of rules. This should be encouraged. Restoring any sense of global stability begins with regional stability. And within each region, the greatest single step that can be taken to advance mutual security is to redraw the most unstable boundaries. Medieval borders were fluid as thousands of political and economic entities navigated an increasingly open world. Today that will be possible only if we remap parts of Africa, the Middle East, and southern Asia, where colonial borders have been nothing but trouble, and allow new regional organizations to take responsibility for them. Freelance diplomats have emerged from the bottom up to rectify history’s many cartographic mistakes and injustices one by one—while companies build the cross-border roads, railways, and pipelines that can eventually make those borders irrelevant.
