The Rise of the Rest

The current economic crisis has claimed many victims, but what has changed most is the way that the United States is viewed, perhaps permanently. That isn't ideology; it isn't declinism; it's a fact. For all the talk in past year about the shifting balance of power globally, until now it has been just that -- talk. Saying that the emerging world of China, India, Brazil and the rest have assumed a new place is like saying that a new army is well-equipped with sharp uniforms and cutting-edge weapons. That doesn't mean it can fight. Until tested in battle, it's just a guess. The economic crisis of the past two months has been such a test, and the results are clear: talk of the emerging world as the wave of the future isn't just speculation; it's a permanent reality.

The United States is still the world's largest economy ($14 trillion) but is also the biggest debtor. Its ability to keep spending is due largely to the largess of China, the world's largest creditor, with $2 trillion in reserves and a continued willingness to hold T-bills in order to prop up its biggest customer.

While the financial crisis has affected almost all countries, lines can now be drawn between those who have cash and reserves, and those that don't. The ones that do -- China, Russia, Brazil, Saudi Arabia, Japan, Norway -- are in the catbird's seat. Those that don't -- ranging from tiny Iceland to the United States -- are facing the constraints of being debtor nations.

But while the structural reality of the world has changed dramatically, the cognitive reality hadn't -- until now.

If you had followed the coverage of the summit of the world's leading economies (the so-called "G20") held in Washington on November 15, you could be excused for thinking that the meeting was a flop. Other than vague promises on the part of the collected leaders to do something about the world financial system, there was no bold plan announced, no specific solutions to the world's problems. The coverage in the United States treated the summit as a non-event that amounted to a photo-op for world leaders and a lame-duck American president.

In fact, however, the G20 summit and the subsequent meetings in Peru of Asian leaders revealed a developing world brimming with confidence about its ability to solve current problems and a developed world lost in the mist. In Peru, the group declared: "We are convinced that we can overcome this crisis in a period of 18 months. We have taken urgent and extraordinary steps to stabilize our financial sectors and strengthen economic growth." Sometimes rhetoric matters, and the fact that most affirmative statement of confidence in the ability to solve the current credit crisis came not from New York, Washington, or London speaks volumes to the world as it now is.

Today, the rest of the world is forging new links with one another in recognition of the fact that they will have a central role in shaping the future. That is why outside of the United States, images of President Hu of China speaking candidly with President Lula of Brazil, or both huddling in serious discussion with Singh of India and Medvedev of Russia matter. For years, these countries looked to the United States as either an adversary or a bulwark, and assumed that in the end, action by the United States would determine outcomes for better or worse. No longer. The contrast between the Washington summit, where the U.S. leader was mute and ineffectual, and the summit a week later in Peru where the tenor was "yes we can!" rather than "how can we?" was stark.

For sure, banks in many parts of the developing world have taken hits, as they were exposed to the same toxic assets that have brought the credit system to its knees. Yet banks in many of the emerging countries are not as vital to the system, especially in places like China or parts of the Persian Gulf, where government spending and state-capitalism are the major source of economic activity. 50% of China economic activity is spending by the state.

The developing world is now helping bail out the financial system of the developed world, with cash injection (Abu Dhabi into Barclays; Prince Alwaleed of Saudi Arabia in Citigroup, and soon perhaps China into AIG) and developed world governments are abandoning the model of bank-led capitalism and taking a much larger role in the economy. "Their" model of strong state intervention in the economy is now the one becoming universal, not "ours."

The crisis has radically shifted the way that the emerging world views its role. To borrow from psychology, the implosion of the western financial system has created that cognitive break, and rather than finding themselves brought low, emerging nations have been able to weather the storms. They have faced no strong outcry domestically and if anything have gained in stature by swift and strong action to address root causes and fix what's broken. China's vast $600 billion dollar stimulus package is one example; Abu Dhabi guaranteeing the debts of Dubai is another; and President Lula of Brazil declaring an end to the developing world's dependency on finance from the developed world yet another.

Having been forced to abandon the psychological dependency on the United States, they are taking responsibility for shaping the world around them. In the past week, there have been major meetings between Russia and Brazil, between China and Brazil, between China and multiple countries. Many say that the lesson is no longer to treat the United States as wiser and stronger economically, and not to look to Washington for lasting solutions. The crisis is their wake-up call about their own importance, and they are seizing the moment.

Given the despair and confusion in the developed world, this is a good thing. The global system is too big for any one country to sustain it, and while it's a painful time, it might just lead to greater balance and stability going forward. The new leaders recognize that no one of them can create that world alone. With the new Obama administration in Washington, and Hillary Clinton as secretary of state, they might find a partner who understands that as well.

Comments

[darthdarcy]

I don't think we will ever fully recover from this pending economic collapse, and we haven't seen the worst of it yet by far...

[KillTheMessenger]

OK, how about this: a crisis that was decades in the making will take decades to undo?

You can trace the problems today back to consumerism and short term thinking that has been with the baby boomers for most of their lives. The boomers are now in their fifties and sixties. How likely is it that they will learn? Old people don't learn, they just take their mistakes with them to the retirement home. So it will take a new generation to pick up the tab and pay for the bill the boomers have run up.

We will recover, but it will take us the rest of our lives to undo the poor decisions of our parents.

[DuganS1]

We'll recover when the excesses are purged from the system and the businesses that need to fail actually fail so new investment can begin. The excesses include the mortgage backed securities which should be written off and destroyed and the consumer debt which needs to be expunged, and the businesses include those that are over-leveraged (not that many luckily), inefficient (see GM), and those in sectors with overcapacity (retailers, financial services). I think the purge could happen quickly if govt lets it happen.

[DuganS1]

I like how the author lists Japan as in the "catbird's seat" when they have a much larger debt to gdp than the United States. I also like how the author overlooks the fact that the economies of Russia and Saudi Arabia rely almost solely on commodity prices and those prices have collapsed 65-80% on average as of today and are headed further down. Russia, in fact, has been burning it's cash reserves to prop up their currency, and the Russian stock market has fallen over 75% from it's peak from earlier this year. So much for being in the catbird's seat. The China economy has also disintegrated as their manufacturing pmi numbers have plummeted and their govt just put through a stimulus package bigger than the package being proposed here in the US......

[KillTheMessenger]

Dugan, I take it that you don't do sports. In sports one of the major lesson is that a team can't win by hoping that everyone other team is losing. But that is exactly what you are proposing here.

[bigfro]

I guess you missed the Olympics. Everyone did because you couldn't see it through all of the smog.

China is a dying country with money. Soon they will need to be rescued with green technology. The US will rebirth our manufacturing.

Look what a culture of socialism and handouts did to our corporations. The same will happen to china.

[Sundialsvc4]

The Internet is based upon the concept of "redundancy." During the 1980's and beyond, lots of otherwise smart economists and accountants basically forgot about the very-fundamental need of EVERY country that is trading ... to be, and to remain, largely autonomous. In other words, "redundant."

America decided that her financiers could suddenly produce an unlimited supply of "money," and since the whole world had pledged to buy and sell a real asset (petroleum) using only their "money," the illogical conclusion was that America was now a leprechaun. This is why, today, the Treasury and the Congress think nothing about "creating" (say...) $5 trillion (that's with a "T") to "bail out" this-or-that.

This is also why it's not working.

You won't read about that in the papers for a few more months, perhaps, but: it's not working, because it can't.

Sorry, but it DOES all come down to THINGS. The factories that make shoes and the hundred other nearby factories that make shoe-parts. The thousands of people (all wearing shoes, and other nice things) who work there.

It's been less than one generation since we forgot this lesson, but the infrastructure and the will is still there. "We can do it!"

[KillTheMessenger]

We can do what? Make shoes? I doubt it. Most people in the US hardly know how to flip a burger or stack shelves. In comparison to that making shoes is actually hard.

[DuganS1]

Most shoe production left the US in the 1960s and 1970s. It's a low margin business. The same is true with apparel. Warren Buffet knew textiles were a terrible business just a few months after buying Berkshire Hathaway in the mid-1960s. Making something just for the sake of making something is not going to help our economy.

[ChangeNow]

Their economies, particularly China and India, are entirely dependent on the US and Europe importing products and exporting jobs. If the western economies stop buying, the emerging economies are in big trouble due to the lack of a viable alternative consumer. If we fall, and we will for a little while, China and India will be in deep trouble. We will more than likely impart trade restrictions, tariffs, and measures to limit outsourcing as a means to get back on our feet. By us doing so, their economic formula will fall apart.

The US is in the process of learning that the "free market" is harmful to first world economies over the long term. China and India need to rapidly develop their domestic markets if they are to have any hope of survival.

[DuganS1]

I see what you're saying but consumer spending in China has been rising substantially over the last few years. It is probably slowing because of the slowdown in their export sector, but with their large stimulus package and large investments domestic spending could continue to grow. As for tariffs or other trade restrictions, I find that extremely unlikely in the US as that could be very damaging to the world economy, including ours, and result in a second collapse of the financial system (now being the first). Trying to prop up dying businesses and sectors in the US with trade restrictions is not a path to prosperity.

[jeffrey678]

These countries all export products or people to the United States. If US trade and immigration laws were enforced, they would not be so confident.

[kapo]

Defeat is a character builder. The US was lulled into complacency after the Second World War when competitors were devastated and it thought its systems were superior. Its supremacy was more a measure of the temporary weakness of its competitors. Perhaps George Bush was a blessing in disguise as the catastrophe he initiated provides an opportunity for a reassessment of the available options.

[kristycu]

i think your right, sometimes you need a shake up to make you see

[William1950]

So what we need to do, is abandon all military spending except what is needed for defense. Use that money for education, science, technology, medicine, science, technology... you get the picture. Then we could truly realize the american dream of a better world.. god, what a dreamer am i.

[pup sydney]

I am not an economist but
1) we went after China for business. Ping pong diplomacy was with us not France or Germany. Nixon first went there not De Gaulle.
2) We make nothing that China needs except weapons and spying stuff at least for now
3) we had friends, the Euroepans, but we treated and treat them with disdain, arrogance, petulance from the lowness of our pervasive communal ignorance (that they -envy envy- do not have). We are left with Berlusconi that uses the USA reationship as is Viagra but has nothing behind his idiotic smile.
From all this appaling record and behavior Dyspalyed by the US I deduce that:
the economical decisions of this nation are made not for the common good but for the good of some and we, the Americans not in the room, are just economic fodder used to push a Ponzi scheme after another, a fad after another, and we have to shut up in the process too. Prove me wrong, i beg you.

[KillTheMessenger]

Nah, you are kind of on the money here.

:-)

[KillTheMessenger]

Wait... if you didn't realize until know that we had a problem you know nothing about business. To all of us who could judge the quality of products from China and other emerging countries it was painfully obvious that we were fighting a losing battle.

[KillTheMessenger]

Opps.. .that was supposed to be "until now", of course.

What strikes me as really weird is that we have been here, before. The very same thing happened with Japan which originally competed on cheap, manual labor and soon thereafter began to modernize, automate and out-design the US. How comes so few people can see that the same is happening now? China virtually owns the electronics manufacturing industry and maybe a dozen others. It is steadily expanding into high tech, the aerospace industry and now life sciences. The country is increasing its investment in education and science as we struggle to keep ours constant. Instead of focusing on military might it emphasizes economic dominance.

We better get prepared for the 21st century because they will own it and if we can't deal with that (psychologically, not militarily) we will look like England after it lost its Empire. And what a sad sight that was...

[Montanagramma]

And, if we don't find a better way provide higher education to our bright but economically challenged youth, other than the needed wealth to attend college, we will never again be competitive.

[SisterAnn]

Our government and business leaders sent our jobs overseas so they could pay cheaper labor. They taught the other countries how to make our products and how to ship them. Whatever they needed to do their work, our businesses made sure they had.

Now America is broke and other countries are moving on up. What did they expect?

[DuganS1]

The manufacturing may be done in China, but the design work is mostly done here. The area of electronics that China is involved in is a very low margin business. A lot of PC assembly work is done in China as well. IBM sold that part of their business to China years ago because it became a commodity low margin business. As for military spending, China has increased it dramatically over the past five years. About education, the US has increased education spending dramatically over the past 10 years. Much of the problem, however, can not be solved with spending more money on schools and programs.

[sonoffestus]

I think we are about where the UK was in 1918 -1920. Yup, better get used to it. Not Vegimite though, yuck!