Friday, December 28, 2007
Balance of power is continuing to shift from the US
(Lithograph by Honoré Daumier(1808-1879)
Business Times - 28 Dec 2007
Events in 2007 and in 2008 accentuating the trend
By LEON HADAR
THERE was a time - many years ago - when Time magazine was considered to be an American and international 'institution'. That explained why the world's movers and shakers paid a lot of attention to the individual that the founder Henry Luce and his successors picked as the magazine's Man of the Year.
That choice - basically announcing who was the persona that had the power to change the world - reflected the wisdom prevailing then among the political and corporate elites, located mostly in New York and Washington.
But gradually, Time magazine was transformed from that institution into the older and serious brother of People magazine, and now it has become, for all practical purposes, the Lenin Mausoleum of American journalism, an institutional corpse that is being preserved for some reason (prestige?) while People magazine, HBO and other media outlets keep the parent company in business.
Which leads one to ask: who really cares who or what Time selects as their person or 'thing' of the year? I certainly don't. But I'm nevertheless curious. Last year, the magazine opted for 'You' as the Person of the Year, rejecting the 'Great Man' theory of history according to which the powerful and the famous are the ones who shape our collective destiny as a species, and suggesting that instead in this age of globalisation it's 'You' - the individual consumer of information - that was taking control of political and economic events.
This year, Time, perhaps disappointed by the impact that 'You' seemed to have on our lives, decided to adopt a the traditional approach, and has selected a real person as its annual shaper of destiny - Russian President Vladimir Putin.
So we seem to be regressing to the reactionary 'Great Man' theory of history. Mr Putin is expected to evoke the memories of such Russian historical giants as Peter the Great and Comrade Joseph Stalin.
Personally, I'm not as impressed with the new tough-talking man in the Kremlin. Yes, Russia with its huge energy resources and large territory and population is reasserting its influence as one of the world's great powers.
But it is not emerging as a major economic and military 'threat' to the US and it is certainly not posing an ideological challenge to the West as the Soviet Union did.
No, we are not about to enter a new Cold War, as Time seems to imply. The new assertiveness of Russia is just another sign that we are gradually moving towards a multi-polar international system - although we are not there yet.
In fact, if I had to choose the 'Thing' of the Year, I would have selected the move by the Government of Singapore Investment Corporation and the 'unidentified Middle East investor' to inject a few billion dollars into the financially troubled Switzerland-based UBS, the fourth-largest European bank, as a clear sign that the balance of global economic power is changing in a very dramatic way.
The vast pool of financial wealth in East Asia and the Middle East - represented among other things by the Sovereign Wealth Funds (SWFs) is being poured into the world's largest financial institutions.
It all reads like a chapter from a volume of Alternate History: China Investment Corporation acquiring a 10 per cent stake in Morgan Stanley. The Abu Dhabi Investment Authority bailing out Citicorp. A Chinese government-controlled bank making a huge cross-investment in Bear Stearns and investing US$3 billion in the Blackstone Group, a private equity fund.
At the same time, Middle Eastern companies have been establishing a financial foothold in global financial centres like the Nasdaq and the London Stock Exchange as well in non-financial empires like Sony.
It's very difficult to make sense of these and other developments taking place in the global economic arena and to try to figure out if and how China and other emerging economies are going to translate their growing financial power into global political influence.
That the domestic political-social balance of power in these nation-states remain fragile and that their long-term economic development is uncertain, explain why one cannot promote with much confidence Welcome-into-the-China-Century grand forecasts.
While China, the Middle Eastern oil-producing countries and other emerging economies in East Asia and the Middle East, as well as in Latin America (Venezuela) may be challenging American global supremacy, the United States remains central to the global economic and military infrastructure, and there are no signs that any of the rising powers, including the European Union (EU) is ready to replace Washington in the driver's seat.
That is not to deny that America continued to experience serious economic and military setbacks in 2007. In addition to pushing the US economy towards a recession, the housing market crisis and the credit crunch - by exposing the dark side of the interaction between policymaking and business in the US - have raised serious questions about the notion promoted by Washington that the American liberal economic system should serve as a model for the economies of Latin America and the Pacific rim.
Moreover, economists are debating now whether the problems facing the US economy are cyclical or structural, whether the eroding power of the US dollar is just a part of the process of rebalancing the global financial system, which will make it possible to cut America's trade and current-account deficit, or whether the weakening US currency is a reflection of a long-term deterioration of its economic fundamentals.
It's doubtful that we will find out an answer to these question in 2008. More likely, as the US continues to print more dollars, the American economy will continue to muddle through.
Similarly, the US military 'surge' in Iraq, coupled with the growing expectations that America is not going to attack Iran in 2008 and that the Israeli-Palestinian peace will continue to 'process', will allow the Bush Administration will sit out most of next year without igniting a major explosion in the region that could put even more downward pressure on the US geo-strategic position and bring about a massive increase in energy prices, unless that is, Israel decides to attack Iran.
But if the financial crisis at home has accentuated US geo-economic weakness in the form of massive deficits, a weak dollar and rising oil prices, the mess in Iraq and the continuing tension with Iran and other global military diplomatic problems like North Korea expose the erosion in US geo-strategic power.
It is less likely that the Americans will be able to fight two major wars around the world at the same time. To put it differently, the US has less of the kind of economic and military leverage it used to employ in the past in order to affect the global balance of power.
That not only means that Washington will have to place on the backburner its global democratic crusade. It will be more difficult for the Americans to energetically promote the liberalisation of the global trade agenda. It also points to the need for America's military and trade partners, as well as the rising powers of China, India and Russia to try to fill the vacuum created by the overstretching of US economic and military power.
The hope is that the next person in the White House after 2008 will be more inclined to work together with the rest of the world in trying to defuse global military tensions, especially in the Middle East and continue the process of economic globalisation.
But the growing anti-globalisation sentiment and anti-immigration mood in the United States in the form of political pressure in support of protectionism and isolationism suggest that the adjusting of US interests and policies to the changing realities of weakening American economic and military power will not be easy.
Copyright © 2007 Singapore Press Holdings Ltd. All rights reserved.
And read this (from the guy who once thought the US was becoming the British Empire:
An Ottoman warning for indebted America
By Niall Ferguson
Published: January 1 2008 18:37 | Last updated: January 2 2008 08:07
Future historians will look back on the current decade as a turning point comparable with that of the Seventies. No, not the 1970s. This is not going to be another piece pointing out the coincidence of an unpopular Republican president, soaring oil prices, a sagging dollar and an unwinnable faraway war. I am talking about the 1870s.
At first sight, the resemblances across 130 years may not seem obvious. The 1870s were a time when conservative leaders such as Benjamin Disraeli, British prime minister, were powerful and popular. It was a time of falling commodity prices, after the financial crash of 1873 and the opening up of the American plains to agriculture. And it was an era of currency stability, as one country after another followed the British lead by pegging to gold.
Yet, on closer inspection, we are indeed living through a global shift in the balance of power very similar to that which occurred in the 1870s. This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman empire. Today it is the US.
In the aftermath of the Crimean war, both the sultan in Constantinople and his Egyptian vassal, the khedive, had begun to accumulate huge domestic and foreign debts. Between 1855 and 1875, the Ottoman debt increased by a factor of 28. As a percentage of expenditure, interest payments and amortisation rose from 15 per cent in 1860 to 50 per cent in 1875. The Egyptian case was similar: between 1862 and 1876, the total public debt rose from E£3.3m to E£76m. The 1876 budget showed debt charges accounting for more than half of all expenditure.
The loans had been made for both military and economic reasons: to support the Ottoman military position during and after the Crimean war and to finance railway and canal construction, including the building of the Suez canal, which had opened in 1869. But a dangerously high proportion of the proceeds had been squandered on conspicuous consumption, symbolised by Sultan Abdul Mejid’s luxurious Dolmabahçe palace and the spectacular world premiere of Aïda at the Cairo Opera House in 1871. In the wake of the financial crisis that struck the European and American stock markets in 1873, a Middle Eastern debt crisis was inevitable. In October 1875 the Ottoman government declared bankruptcy.
The crisis had two distinct financial consequences: the sale of the khedive’s shares in the Suez canal to the British government (for £4m, famously advanced to Disraeli by the Rothschilds) and the hypothecation of certain Ottoman tax revenues for debt service under the auspices of an international Administration of the Ottoman Public Debt, on which European bondholders were represented. The critical point is that the debt crisis necessitated the sale or transfer of Middle Eastern revenue streams to Europeans.
The US debt crisis has taken a different form, to be sure. External liabilities have been run up by a combination of government and household dis-saving. It is not the public sector that is defaulting but subprime mortgage borrowers.
As in the 1870s, though, the upshot of this debt crisis is the sale of assets and revenue streams to foreign creditors. This time, however, creditors are buying bank shares not canal shares. And the resulting shift of power is from west to east.
Since September, Middle Eastern and east Asian sovereign wealth funds have made a succession of investments in four US banks: Bear Stearns, Citigroup, Morgan Stanley and Merrill Lynch. Most commentators have been inclined to welcome this global bail-out : better to bring in foreign capital than to shrink balance sheets by reducing lending. Yet we need to recognise that these “capital injections” represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace.
In other words, as in the 1870s the balance of financial power is shifting. Then, the move was from the ancient oriental empires (not only the Ottoman but also the Persian and Chinese) to western Europe. Today the shift is from the US – and other western financial centres – to the autocracies of the Middle East and east Asia.
In Disraeli’s day, the debt crisis turned out to have political as well as financial implications, presaging a reduction not just in income but also in sovereignty.
In the case of Egypt, what began with asset sales continued with the creation of a foreign commission to manage the public debt, the installation of an “international” government and finally, in 1882, to British military intervention and the country’s transformation into a de facto colony. In the case of Turkey, the debt crisis was followed by the sultan’s abdication and Russian military intervention, which dealt a lethal blow to the Ottoman position in the Balkans.
It remains to be seen how quickly today’s financial shift will be followed by a comparable geopolitical shift in favour of the new export and energy empires of the east. Suffice to say that the historical analogy does not bode well for America’s quasi-imperial network of bases and allies across the Middle East and Asia. Debtor empires sooner or later have to do more than just sell shares to satisfy their creditors.
The writer is a professor at Harvard University and Harvard Business School and a senior fellow of the Hoover Institution, Stanford
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