Terra Firma

CHINA WILL LEAD THE WAY

Among the major states likely to prove most resilient, China tops the list. Beijing has responded to the slowdown with a massive state spending spree and holds the resources to do plenty more. In addition, China’s vertical power structure ensures that the money can be spent more quickly and efficiently than is the case in states constrained by institutional checks and balances. As a result, China’s economic dip will be shallower and its recovery more robust than the recovery we can expect in the US – and certainly those in Europe or Japan. In addition, once China resumes its former pace, its large supply of low-cost labour and growing capacity for innovation in higher value-added manufacturing sectors will still be there.

There are other political factors in China’s resilience. Three decades of double-digit economic growth has earned the Communist Party leadership considerable stores of domestic political capital. Despite the social turmoil provoked by growing gaps between rich and poor, severe environmental damage in many areas, endemic local-level corruption and many other chronic problems, hundreds of millions of Chinese citizens are freer today than they’ve ever been to decide how and where to live. The leadership has proven a major beneficiary of this recent wave of national pride.

Finally, even before the global recession began to slow its economy, Beijing was preparing to shift the balance in its growth model from heavy reliance on exports to the European Union, the US and other developed world consumer markets to a mix that includes greater emphasis on domestic consumption. Finding new ways to increase the purchasing power of a growing middle class will make China less vulnerable to the next slowdown in Western markets. The country and its government face enormous long-term problems, challenges that will one day reorder Chinese society. But for the moment, the country’s political leadership is well equipped to continue the expansion of China’s political and economic power.

GULF ARAB STATES REMAIN FINANCIALLY STRONG

The next set of likeliest early re-emerging markets can be found in the Persian Gulf. Major Arab energy producers like Saudi Arabia, the United Arab Emirates (thanks to Abu Dhabi, not Dubai), and Qatar are successfully managing today’s economic challenges, despite the steep drop in energy prices of the past several months. For the most part, Gulf banks avoided exposure to the financial products that wreaked so much havoc within their American and European counterparts, leaving the region’s financial sector in relatively good shape.

As importantly, in contrast to previous boom cycles, fiscal planners in Gulf Arab states made relatively conservative assumptions about crude oil prices. This bit of wisdom sets them apart from fellow OPEC members Iran and Venezuela, which have factored much more favourable assumptions into state budget projections.

Among the main beneficiaries of the largest-ever transfer of wealth from one set of countries to another over the previous several years of rising energy prices, the Gulf states have more-than-ample foreign exchange reserves to cushion any short-term decline in government revenue. In other words, these governments, particularly Saudi Arabia’s, see the crisis as an opportunity and will emerge from the current slowdown with a solidified standing among the world’s most important creditor nations. As energy prices begin to rise within the next few years, the influence that these governments wield in global financial and monetary matters will grow still further.

LULA’S LARGE STORE OF DOMESTIC POLITICAL CAPITAL

Like China, Brazil will re-emerge from the financial crisis just as it entered: as an emerging market powerhouse. The country’s increasingly world-class agricultural, manufacturing and service sectors make a difference. Its enormous recent offshore oil discovery renders its abundant natural resource base still more impressive. Most importantly, President Luiz Inacio Lula da Silva has helped forge a consensus in favour of responsible macroeconomic policy that spans most of Brazil’s political spectrum. His still formidable public approval ratings suggest his government will ride out the current crisis with its market-friendly reputation intact.

India has proven a resilient engine of growth despite the effects of the slowdown on its domestic economy – and the political horse-trading that always seems to define its election-year political dynamics. There are several factors limiting political risk in the country. The most important of these is the decentralisation of power that ensures that, though reform often proves a (very) slow process, Delhi’s enormous state bureaucracy can no longer easily obstruct the entrepreneurial talents and energies that have transformed the country over the past two decades.

IS CHINA FOR THE ROLE OF SUPERPOWER?

What will it mean in strategic terms when these rising powers lead the way out of recession? China’s underlying strength could drive a global economic rebound – perhaps even yielding the V-shaped slowdown and recovery hoped for around the world. But there’s a risk here, as well. During the recent G-20 summit in London, there was much talk of a ‘G-2,’ though no such power partnership yet exists between Beijing and Washington. It is natural for some around the world to want to boost China to superpower status; no one else wants to shoulder the burdens that come with it.

Yet, Beijing is not ready for such a role – particularly given the considerable domestic challenges it must meet in years to come. In addition, US and Chinese diplomats and policymakers will have plenty of work to do during their soon-to-be-annual Strategic and Economic Dialogue before they begin to genuinely address competing assumptions about the role of government in markets – at least during ‘normal’ economic times.

Ready or not for a larger international role, Beijing will have disagreements with Washington that trigger competition – and perhaps conflict. We can already observe the outlines of future great power dynamics in the evolution of Beijing’s rhetoric about its place in the world. In recent years, senior Chinese officials have regularly described their country as a ‘peacefully rising power.’ In the past year, references to China’s ‘shared responsibility’ for international leadership have become more frequent. The practical effect of this shift became evident in the run-up to the recent G-20 summit, when China made clear it would help expand the IMF’s capitalisation only if it were granted greater voting power within the Fund.

INCREASED ABILITY TO DEMAND LESS INTERFERENCE FROM THE WEST

Assuming that China emerges from the global slowdown before the US does, the already established trend toward greater Chinese assertiveness in international affairs will accelerate. Given its domestic focus, Beijing is unlikely to directly challenge US primacy. But it will be more willing to resist when Washington proposes economic and foreign policies it doesn’t like – and to advance an alternative vision for global capitalism and international relations. This alternative, already apparent in its embrace of state capitalism, will place less emphasis on incremental democratisation than on state sovereignty, as a defence against foreign interference in its internal affairs. These developments will almost certainly make the US-China relationship more difficult for US officials to manage.

Gulf Arab states, among the world’s leading energy exporters, are already building commercial ties with Beijing, the world’s fastest growing energy consumer. Together, China and Gulf Arab oil and gas producers will exert considerable influence on the reordering of the international financial order as dollar hegemony erodes.

The durable democracies of Brazil and India are strong defenders of the sovereign rights of developing countries. They will prove natural partners as China promotes a more substantial role for emerging market leaders in rewriting rules of the road on global finance, trade and investment – and in demanding less interference by Western institutions in their domestic political and economic affairs.

FIRST EMERGING MARKETS WILL ELEVATE STATE CAPITALISM

For the past several decades, the increasingly free flow of people, ideas, information, money, goods and services across international borders has helped lift hundreds of millions from poverty and into participation in the global economy. But the financial crisis and global recession have discredited US-style capitalism for a new generation of free market skeptics, and if the first states to emerge from the slowdown are among the most successful practitioners of state capitalism, they will have a newly compelling case to make in favour of an attractive alternative model for growth. That model will be more likely than before to win new adherents around the world.

This is why the coming shift in the global balance of power will likely extend beyond reform of key economic institutions and newly robust rules of the road for twenty-first century trade and investment. Instead, we are likely to see greater government manipulation of markets via the further empowerment of national champions and other state-owned enterprises, more state secrecy, including the use of sovereign wealth funds, and a general trend toward economic nationalism. For believers in free market capitalism, that is a risk worth worrying about.