The economic crisis and world power

Moments in history when the world power balance has shifted decisively – or when the result of a slowly accumulating shift has been revealed to general view – have usually been related to war, economic crisis, or both in tandem. Is today’s combination of economic crunch and the wars in Iraq and Afghanistan such a moment for the US? And if so, who gains – China?

Before the credit crunch started to crunch us, and therefore well before the global recession began, world power watchers started discussing what some saw as the revival of the autocratic powers, meaning the rise of China and Russia. It was all about how the rise of a liberal democratic world order, which some commentators seemed to think was a foregone conclusion with the end of the Cold War at the turn of the 1990s – the end of history and all that – had been stymied by, primarily, a resurgent Russia and a steadily growing China. Hard-nosed realists wanted hard-nosed policies to confront the autocrats: less reliance on the strengthening web of treaties and laws in the international system, more emphasis on alliances of states with congruent interests and compatible ideologies. And with this they tended to want less emphasis on influence and leadership in an all-inclusive world system and more resort to good old-fashioned power – not necessarily military action as a knee-jerk, but political pressure based on economic weight and, if necessary, military might as a last resort. With the idea that US foreign policy could foreground a League of Democracies, John McCain’s presidential campaign was part of this kind of thinking which, while it is traditionally close to the heart of US foreign policy-making, had to some degree been pushed to the margins not only under the Clinton presidency in the 1990s but also by Bush’s go-it-alone style.

The discussion about the balance of advantage in the global power game is never-ending. Hardly surprisingly, it is now taking in the effects of the global economic crunch. And not surprisingly, China is some commentators’ favourite to come out of the crisis as the big winner. An article by Roger Altman in the Jan/Feb issue of Foreign Affairs gives a good taste of how one version of the argument goes. In another article in the same issue, Daniel Deudney and John Ikenberry comment critically on the autocratic revival theory.

Discussing this, we need to bear in mind the complexity and elusiveness of power and the slowness and above all unevenness with which it moves (see my post of 16 January for more on this). It is surprisingly difficult to pin down who gains, who loses, and how – though we recognise the long-term results when we see them. Nonetheless, an economic crisis like this one might either trigger a step-change in the world power balance or reveal a change that has already slowly built up.

Another reservation is that the view that there has been an autocratic revival looks like an effort to produce a long-term explanation for what was in part a short-term phenomenon. The Bush administration was so astonishingly incompetent in so many aspects of foreign policy that it often made its rivals look good. By contrast, looking at what happened to Tony Blair and Britain’s standing in the world, Bush had a great talent for making his closest allies look awful.

To be fair to Bush, some sort of recovery by Russia from the depths to which it was sinking in the mid-1990s was inevitable. And in President Putin, Russia had a leader who was tough-minded, tactically nimble and strategically focused. He was able to get Russia’s fractious elite into line behind his policies because the costs of being out of line became unfeasibly high. Part of what seemed to some American commentators like a systemic revival of autocracy was actually just evidence that Putin could normally out-manoeuvre Bush. But then, so could Ahmedinejad and Chavez who, as well as having tactical smarts like Putin, also had the benefit of rising oil income – until prices crashed.

Combined with these conjunctural, short-term challenges to America, there was the long-term rise of China. This is real. It is largely based on sustained and fast economic growth over the past three decades that has put China on track to be the world’s second largest economy in the not very distant future. Stellar growth rates have given China economic clout, which it has utilised with mostly quiet and mostly effective diplomacy. This takes its direction in part from a desire in the Chinese political, mangerial and intellectual elite to get as far as possible away from the weakness and humiliation in which the country spent the century up until the Communist revolution in 1949. But while this suggests a raw power motivation, and though China has modernised its armed forces and brandishes them at Taiwan every so often, military strength is not the basis of its much enhanced world standing in the past decade nor is it the core of its foreign policy.

Today, Russia looks a less daunting rival for the USA. Four reasons can be adduced for this. First, the war with Georgia crystallised growing worries among foreign investors about Russia’s reliability in long-term business partnerships and the Russian stock market took a serious hit. Second, the economic crunch and especially the fall in oil prices have hit Russia hard. Third, there has been a change in leadership and, with Putin no longer President but very much on the scene as Prime Minister, the inevitable appears to have happened – faction-fighting in the Kremlin. Fourth, the US now has an administration of, at least initially, incomparably greater competence in foreign policy, which is not only mending relations with allies but also with adversaries including Russia. While this may be temporary, Russia does not today look a likely candidate to exploit the economic crisis and gain a great increment in power. There’s nobody I have read or heard of who thinks Europe will enhance its power, and why would they? So that leaves China.

Let’s take a step back to take a look at this. The question is whether the economic crisis could give US power such a hard knock that, as it reels backwards, a space is left into which another great power steps. Reasons for thinking that this could occur basically swing on the importance of finance in the US, the importance of US finance in the world, and the centrality of finance in the current world economic crisis. In Fixing Global Finance,* Martin Wolf writes, “Finance is the brain of the market economy.” America has long dominated that brain. In 2005, US financial assets, after accounting for debts, were worth a little under 40 per cent of the global total, with just over 40 owned by the Eurozone countries, Japan and UK combined; all other countries together owned only half the US total. But within this wealth and the power it generated lay a core weakness. The US became the world’s largest borrower, importing capital on a vast scale. This was the key global financial imbalance that paved the way to the credit crunch and then recession.

America had the advantage of repaying debts in its own currency, unlike many countries that have been hard hit as their currency collapsed and their debts accordingly soared. But, as now seems obvious but was not recognised so clearly at the time, the American debt system could not last for long. While it did last, it was not only the American elite and middle class who benefitted; the gains were actually very widespread.

American indebtedness is now castigated as irresponsible but for a time it actually helped stabilise the world economy – but only for a time. Ideally, a new stability would have been found by a gentle easing down of US borrowing, balanced in the global picture by major exporting states running smaller trade surpluses. China was constantly being asked to do this but it didn’t happen. So when the position in the US began to unravel because the sub-prime loans market was unsustainable and too many banks were making too many ill-considered loans and investments that offered only short-term returns, the whole world system was knocked out of kilter. Of course, the US was not the only country where banks were behaving like this, but it mattered much for the world when this happened in the US because of its enormous scale.

So now take a look at what comes out of this thumbnail sketch. China is in a position of greater internal financial stability than the US because it has not been borrowing madly. However, in other respects it is not so well off because so much of its industrial activity is geared to exports.  It could be a source of capital loans and investment in many countries but also needs the resources it has husbanded over the years of growth to see it through the low period. In the longer run, it could boost domestic demand, import more, run smaller surpluses but today it does not really look as if it is in a position to step forward and assume a commanding global politico-economic role and lead the world out of recession.

Meanwhile, the US may indeed be knocked backwards by the economic crunch if the new administration’s first and second stimulus packages don’t work, and if the G-20 summit in London in April doesn’t generate a unified economic recovery plan. In such an event, if the US leaves a space that China does not fill, the world will look like the 1930s, when the UK stepped back and the US was not ready or able to step up: there will be no clear global regulation, little coordination of policy and not much stability in the world system. The world trading system needs reform, the finance sector needs reform, and decisive moves towards a low-carbon economy must be taken – but none of these things will be anywhere near being possible.

Since that scenario is clear to most people, it probably won’t come to pass and one or both of two other scenarios will materialise:

  • Either the Obama administration’s first or second stimulus packages will work and it will lead the way out of crisis. There is a good chance of this because the American internal market is bigger than any other country’s and since the 1930s has been robust, motoring early US recovery from a series of smaller crises and recessions.
  • Or the G-20 summit will generate a unified recovery plan.
  • Or both.
  • And regardless of whether the G-20 plan actually works, if everybody buys into it, that will be the only game on the planet, that will be the designated route out of crisis, and leading the way will be the Obama administration.

Did I imply above that China is the most likely candidate to emerge as the world’s major power after the recession? I was kidding – the US is.



*Yale University Press, 2008.

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