Yes, it’s correct to view Wall Street’s September 2008 near-collapse as a firm reminder that improved risk management techniques go hand in hand with risky innovation, but if anyone thinks that investment banking will disappear as a financial function in either the U.S. or the global economy as a result of this latest, quite nasty correction, they’re dreaming. Financial system perturbations are part and parcel of globalization’s current expansion and maturation, just as they were with America’s similar consolidation period of the late nineteenth century. It is a truism of market economics that there is no creation that is not simultaneously destructive. Indeed, rather than a narrowing of investment capital choices, globalization seems to be triggering the opposite—its democratization, with so-called angel investors becoming the superempowered individuals of our financial age.
As senior managing director of a rapidly growing high-tech company that was—until quite recently—overwhelmingly dependent on angel investors, I can readily attest to the joys of last-second financial liquidity (“You’ll get your paycheck!”). When ordinary individuals accumulate wealth and can invest as they please, good things happen to ambitious entrepreneurs and their start-ups. Call it the wisdom of greedy crowds. The same principle holds for the global economy, especially when some market or currency is seriously out of whack, like the dollar was until recently. Thus our pain equals somebody else’s buying opportunity. More generally, when the system is flush with cash and bursting with investors properly incentivized to spread it around, globalization tends to accelerate. When money is tight, that’s historically when trade protectionism kicks in, along with anti-immigrant sentiment. So here’s the thing the neo-Marxists never get: Rising income is a gift that keeps on giving, primarily because investment risk is more easily discounted. The more money I’ve got, the greater my appetite for risky business. Good things may come to those who wait, but even greater sums accrue to aggressive investors.
In many ways, sovereign wealth funds, globalization’s new buzz phrase for state-controlled investment entities armed with significant pools of currency reserves, represent P2P loans within the global economy (“You got a major bank that’s hurting? I’ve got all these billions sitting around needing some useful investment!”). These reserves are accumulated through trade surpluses: goods and services in the case of Asian economies, energy exports for Russia and Persian Gulf states. Naturally, the rise of SWFs has many in the West concerned.
It’s one thing to practice state-guided or oligarchic capitalism in your own backyard, but it’s quite another to use the proceeds for state-directed investments in my free-market economy. First, there’s the simple matter of fair competition. When China sets aside some fraction of its roughly $2 trillion in U.S. currency reserves for overseas investment by a government-sponsored entity, it instantly creates a financial King Kong able to place frighteningly large bets. That brings us to a second concern: the competency of those making the bets. Just because formerly Communist China and Russia have come into a lot of cash recently doesn’t make them Wall Street wizards. SWFs could just end up flooding global financial hubs with lots of foolish, impatient money that creates more trouble than it’s worth. Finally, there’s the fear that SWFs will be manipulated by their source governments to further those states’ national interests in ways that harm our own, such as gaining controlling shares of strategic sectors like energy, infrastructure, or national security.
In China’s case, this is a classic example of one-thing-leads-to-another amid globalization’s rapid advance. Remember the currency crises of the 1990s, like the Asian Flu of 1997 or when Russia suffered sovereign bankruptcy in 1998? Well, a lot of emerging markets took a very important lesson from those events: You can never have enough foreign reserves on hand to defend yourself from a run on your national currency. But strangely enough, it turns out that you can. When China, for example, stockpiled foreign reserves—primarily American dollars—over the subsequent decade, it amassed holdings far beyond any perceivable requirement for defending its economy from outside speculation. As confidence grew and oil prices rose, governments like China inevitably grew dissatisfied with the low returns they could obtain from safe U.S. Treasury bills. Then there was the additional pressure of watching the dollar fall and seeing the value of their reserves decline as a result.
Since emerging economies typically face demographic pressures over the long haul, as urbanization and industrialization inevitably reduce fertility and thus rapidly age their populations, there is the added urgency to generate higher yields from these reserves to finance rapid economic advance while the worker-to-retiree ratio remains strong. This is especially true for China, which has hundreds of millions still living below the poverty line just as its elder population is set to skyrocket over a generation’s time, as well as the Middle East, which needs to generate about 100 million jobs over the next two decades to absorb all those workers coming into the mix. So what began for some as a much-needed fix for the 1990s version of globalization is quickly becoming a powerful new tool for extending its march in coming years—like it or not. In my mind, SWFs are a great development, because they keep money on the table, and when money’s on the table, globalization tends to expand into riskier markets.
Will there be busts along with booms? Most definitely, and each round of instability will generate new global rule sets to regulate the behavior of sovereign wealth funds, along with the proliferating universe of investing instruments. But logically over time, the greatest pressure to tame these behemoths will arise from inside the source countries themselves, as ordinary citizens demand greater accountability and transparency from these state-directed funds. Managers of sovereign wealth funds will learn with time that hell hath no fury like a pensioner scammed or a young professional denied a career. One of the reasons resource-rich oligarchic regimes can maintain their grip on power is that they don’t need to tax their own people, thus denying citizens the natural desire to oversee how their money is publicly spent. To the extent that the rise of SWFs encourages the equivalent of shareholder interest in such countries (as during last year’s financial crash), it is a welcome development.
Americans feel down right now, distrusting globalization—our historical gift to the world—more than ever. Instead of feeling that it’s our universe to master with ease, we increasingly feel like we’re just one large competitor among many—you know, like we need to pick ourselves up, dust ourselves off, and get competitive all over again. But that’s hard to do, and so, in our popular imagination, we prefer to spot looming catastrophes around every corner, with each new sci-fi movie seemingly resulting in New York City’s destruction. But citing bigger disasters, like global warming, as an excuse for somehow pulling back from the global economy is deeply misguided. Globalization has simply gotten too big for America to get angry and pick up its ball and go home, because if we do, the game will simply be played more dangerously without us. In that way, globalization is a lot like global warming: There’s no stopping it, only adapting ourselves to its forces and seeking to mitigate its worst effects slowly over time.
Contrary to the predictions of the neo-Marxists, we enjoy a wonderfully resilient global economy that’s processed numerous financial panics (e.g., Asian flu, Internet bubble) and significant slowdowns by major players (Japan, Europe) over the past two decades while consistently growing. As a result, poverty has been dramatically reduced around the planet and we’ve got twice as many fast-growing economies right now as we did during the go-go eighties and nineties. Yes, it stings having Arab sovereign wealth funds vying to bail out Wall Street firms in the subprime crisis, but as a method of reinjecting liquidity and confidence into our markets, it sure beat U.S. government-sponsored bailouts in terms of cost and embarrassment. Anyway, by entering at bargain prices (not in 2007, mind you, but after the crash), these oil-rich regimes are simply doing what we’ve long advised: diversifying holdings and connecting their economies more broadly to globalization. It sure beats the alte
rnative of white-elephant projects or military buildups.
Not surprisingly, given Wall Street’s latest meltdown, Americans are polling glum, even if the rest of the world isn’t. Global opinion trends over the past half-decade portray a rising tide of human happiness among nations that have opened up to globalization and thus enjoyed increasing per capita income. Across the Islamic world, we also see a broad decline in popular support for terrorism and, in particular, al Qaeda’s brutality. We’re losing old allies over Iraq, but Osama bin Laden is losing the future.
As for recent fears that China will soon rule the world, go slow on that one. The World Bank recently recalculated the purchasing power of China’s economy and found it to be about 40 percent smaller than we imagined. China won’t be overtaking the U.S. economy anytime soon, if ever. Moreover, while we may fret over Beijing’s dollar reserves, you have to remember that China’s rapid industrialization has been built on a very shaky environmental and demographic foundation, meaning most of the economy’s vast liabilities have been pushed into the future on a scale that makes our Social Security overhang look modest by comparison. China will grow old before it gets rich, and it’ll become increasingly unhealthy before it superfunds its environmental cleanup.
Rather than complain about rising multipolarity in our global financial order, like the rise of the euro as an alternative reserve currency, why not be grateful that the enterprise no longer depends solely on the spendthrift American consumer? Frankly, we all knew we were living beyond our collective means these past few years, and deep down, we were hoping somebody would apply some discipline to this unsustainable dynamic. Given that our political system didn’t seem up to the task, I say thank God for those whiz kids on Wall Street—you know, the ones who seem to come up with some new, dazzlingly complex risk-management scheme every ten years or so, like junk bonds in the 1980s or the rise of financial derivatives in the 1990s. I’m not being facetious. It’s that type of edgy innovation that keeps the United States the most competitive economy in the world, triggering not just our booms but also the necessary corrections—to wit, our pressing need for a global Securities & Exchange Commission. If Wall Street’s recent series of financial crises proved one thing, it’s that globalization’s interdependency has reached the point where the forces of both contagion and correction have gone global, meaning there is no such thing as significant “decoupling,” nor the unique discrediting of any economic model. We all feel one another’s pain now because we all seek to mitigate collective risks—globalization as one giant credit-default-swapping network. So for all of you who’ve long dreamed of the day when America wouldn’t have to run the world by itself, the good news is, that day has come.
Tougher times are ahead, but we mustn’t get vindictive. Sovereign wealth funds represent one chance to do so, as do attempts by foreign state-owned firms to buy American companies (e.g., China National Offshore Oil Corporation trying to buy Unocal, only to be scared off by a congressional uproar) or to win choice operating contracts (Dubai Ports World, similarly rejected). Having said all that, there’s no good reason for Western democracies not to continue pestering state-guided capitalist economies for more transparency in their legislative, executive, and judicial decision-making systems, in addition to their financial markets and whatever sovereign wealth funds they operate. God knows, they’ll press us right back. Such prodding is in the best interest of everybody, especially if the lack of transparency encourages trade-protectionist sentiments within our more open political systems.
Deep down, what I think really galls us is this sense that authoritarian capitalism (state-guided like China, oligarchic like the oil-rich Persian Gulf states) is somehow eating our lunch, thanks in no small part recently to higher oil prices and our unquenchable thirst for low-cost imports. The so-called Washington Consensus of the 1990s was really nothing more than a polling of economic experts, in which they were asked, in effect, to describe the most important characteristics of the American economic system as a guide for emerging economies that naturally wanted to emulate our success of that era. It was a great guide for managing the American System at its full maturity, but not surprisingly, given the snapshot nature of the list, it’s a rotten guide for managing a less diverse and less networked economy just trying to catch up. The China model is a better guide for closing the Gap. It accurately captures the Hamilton-Clay consensus of early-1800s America even as it needs to move—quickly—into the vicinity of Roosevelt-Taft-Wilson progressivism. Not surprisingly, what would be good for China right now—along with much of Wall Street—would also be good for the global economy. All are in dire need of a “shaming and taming” period akin to America’s Progressive Era.
In many ways, then, the so-called Beijing Consensus attached to China’s model is nothing more than the Communist Party’s soft-pedaled translation of Theodore Roosevelt’s “big stick” in national security policy and a nakedly self-serving version of TR’s and Root’s arbitrationism in diplomacy, as reflected in China’s never-ending “consultative” approach. In its intense fear that national growth will be hemmed in by a lack of access to raw materials, China refuses to take any definitive stands on the many bad practices of its Gap trading partners. They merely “consult” (“And how does that make you feel, Mr. Mugabe?”) and leave it to the Americans to try to round up a coalition of the willing to deal with the problem they desperately hope won’t interrupt whatsoever the flow of raw materials and energy. In effect, the Beijing Consensus amounts to China saying, “I’m with stupid!” To which I say, “Welcome to the club.”
But more to the point, the Beijing Consensus is simply China’s admission that their leaders don’t feel that it’s in their best interests to get out ahead of any inevitable enforcement of global norms. Better to let those crazy Americans get bogged down in their “global war on terror,” leaving China a long list of rogues whose natural resources they can access with less competition from the West. If TR played peacemaker among Europe’s aggressive imperial powers, then China does the same today—just with a cynical ineptness bordering on immorality—between globalization’s Leviathan and its many potential targets.
Some globalization experts, such as Parag Khanna in his 2008 book The Second World, argue that Beijing’s consultative style represents a distinct third-pole perspective that contrasts with America’s coalitional approach and the European Union’s consensus-style rule. It does in a tactical sense but not in terms of an alternative grand strategy for the poorly integrated Gap. To the extent that China rests the future security of its globalization-dependent economy on the assumption that America will always be there to bail it out of any truly scary situation and that anything less scary can be handled with consultations and bribery, it is merely free-riding on America’s military footprint and exploiting the liberal trade order that we set in motion. The more successful it becomes, the more it will need help in managing the unstable regions of the world upon which it is increasingly dependent. Europe has no real ambitions there; it merely absorbs adjacent states out of the fear that keeping them on the outside looking in is more dangerous. This is nothing more than my “shrink the Gap” strategy pursued on a regional basis. I applaud the logic and the willingness to employ it, but I realize that Europe’s perspective does not stretch much beyond the Mediterranean littoral. As for America, we have specific progress in mind for the Gap. In general, this is not where our economy is going to make most of its money in coming decades. But we do want these Gap countries reasonably absorbed into larger economic and security schemes, logically clustered around the largest, most stable economies in any given region, so that they’re no longer a source of mass violence (largely perpetrated internally) or transnational terrorism (especially any terrorists capable of bringing their game to the Core).
So in the end, the Beijing Consensus is nothing more than a grand strategy placeholder for the Chinese. It works for countries that reject the implausible economic demands of the Washington Consensus and it’s
a comforting alternative to America’s myopic focus on terrorism. China’s leaders know their economic model is not easily replicated, primarily because China itself blocks much entry into globalization’s low-end manufacturing right now, and they know they’re quite a way from fielding a military capable of defending their global economic footprint. So for now, Beijing bides its time by avoiding any more global responsibility than it can manage, but it hardly wishes for America’s collapse as either its crucial trade partner or the ultimate guarantor of global security.
In a grand strategic sense, we again see the essential mismatch: Europe is willing to shrink the Gap, but only on its borders; China must deal with the Gap economically, but refuses any responsibility on security or good governance (as if it could teach that); and so America, which would much prefer to merely teach good governance to the Gap and link such change to improved economic policies (the essence of the Millennium Challenge Account’s vision for change), gets stuck holding the bag on mass violence, terror, and rogue regimes inside the Gap’s many hot spots. Having so long shaped this global order, we simply feel an overriding responsibility to keep it relatively stable, and since neither Europe nor China aspires to become the Gap’s Leviathan, they’re more than happy to finance our playing that role. They just want more of a say in that decision-making process after eight years of “Bring it on!” “Who’s next?” and “Are you looking at me? Because I’m the only military superpower on the planet!”
Great Powers Page 23
