This
is Not a G-20 World:
The
New Economic Club Will Produce Conflict, Not Cooperation
A
G-Zero World
By
Ian Bremmer and Nouriel Roubini
Foreing Affairs, March/April 2011
This
is not a G-20 world. Over the past several months, the
expanded group of leading economies has gone from a would-be
concert of nations to a cacophony of competing voices as the
urgency of the financial crisis has waned and the diversity
of political and economic values within the group has
asserted itself. Nor is there a viable G-2 -- a U.S.-Chinese
solution for pressing transnational problems -- because
Beijing has no interest in accepting the burdens that come
with international leadership. Nor is there a G-3
alternative, a grouping of the United States, Europe, and
Japan that might ride to the rescue.
Today,
the United States lacks the resources to continue as the
primary provider of global public goods. Europe is fully
occupied for the moment with saving the eurozone. Japan is
likewise tied down with complex political and economic
problems at home. None of these powers’ governments has
the time, resources, or domestic political capital needed
for a new bout of international heavy lifting. Meanwhile,
there are no credible answers to transnational challenges
without the direct involvement of emerging powers such as
Brazil, China, and India. Yet these countries are far too
focused on domestic development to welcome the burdens that
come with new responsibilities abroad.
We
are now living in a G-Zero world, one in which no single
country or bloc of countries has the political and economic
leverage -- or the will -- to drive a truly international
agenda. The result will be intensified conflict on the
international stage over vitally important issues, such as
international macroeconomic coordination, financial
regulatory reform, trade policy, and climate change. This
new order has far-reaching implications for the global
economy, as companies around the world sit on enormous
stockpiles of cash, waiting for the current era of political
and economic uncertainty to pass. Many of them can expect an
extended wait.
The
Old Boys’ Club
Until
the mid-1990s, the G-7 was the international bargaining
table of greatest importance. Its members shared a common
set of values and a faith that democracy and market-driven
capitalism were the systems most likely to generate lasting
peace and prosperity.
In
1997, the U.S.-dominated G-7 became the U.S.-dominated G-8,
as U.S. and European policymakers pulled Russia into the
club. This change did not reflect a shift in the world’s
balance of power. It was simply an effort to bolster Russia’s
fragile democracy and help prevent the country from sliding
back into communism or nationalist militarism. The
transition from the G-7 to the G-8 did not challenge
assumptions about the virtues of representative government
or the dangers of extensive state management of economic
growth.
The
recent financial crisis and global market meltdown have sent
a much larger shock wave through the international system
than anything that followed the collapse of the Soviet bloc.
In September 2008, fears that the global economy stood on
the brink of catastrophe hastened the inevitable transition
to the G-20, an organization that includes the world’s
largest and most important emerging-market states. The first
gatherings of the club -- in Washington in November 2008 and
London in April 2009 -- produced an agreement on joint
monetary and fiscal expansion, increased funding for the
International Monetary Fund (IMF), and new rules for
financial institutions. These successes came mainly because
all the members felt threatened by the same plagues at the
same time.
But
as the economic recovery began, the sense of crisis abated
in some countries. It became clear that China and other
large developing economies had suffered less damage and
would recover faster than the world’s wealthiest countries.
Chinese and Indian banks had been less exposed than Western
ones to the contagion effects from the meltdown of U.S. and
European banks. Moreover, China’s foreign reserves had
protected its government and banks from the liquidity panic
that took hold in the West. Beijing’s ability to direct
state spending toward infrastructure projects quickly
generated new jobs, easing fears that the decline in U.S.
and European consumer demand might trigger large-scale
unemployment and civil unrest in China.
As
China and other emerging countries rebounded, the West’s
fear and frustration grew more intense. In the United States,
stubbornly high unemployment and fears of a double-dip
recession fueled a rise in antigovernment activism and
shifted power to the Republicans. Governments fell out of
favor in France and Germany -- and lost elections in Japan
and the United Kingdom. Fiscal crises provoked intense
public anger from Greece to Ireland and the Baltic states to
Spain.
Meanwhile,
Brazil, China, India, Turkey, and other developing countries
moved forward as the developed world remained stuck in an
anemic recovery. (Ironically, the only major developing
country that has struggled to recover is the petrostate
Russia, the first state welcomed into the G-7 club.) As the
wealthy and the developing states’ needs and interests
began to diverge, the G-20 and other international
institutions lost the sense of urgency they needed to
produce coordinated and coherent multilateral policy
responses.
Politicians
in Western countries, battered by criticism that they have
failed to produce a robust recovery, have blamed scapegoats
overseas. U.S.-Chinese political tensions have risen
significantly over the past several months. China continues
to defy calls from Washington to allow the value of its
currency to rise substantially. Policymakers in Beijing
insist that they must protect their country during a
delicate moment in its development, as lawmakers in
Washington become more serious about taking action against
Chinese trade and currency policies that they say are unfair.
In the past three years, there has been a sharp spike in the
number of domestic trade and World Trade Organization cases
that China and the United States have filed against each
other. Meanwhile, the G-20 has gone from a modestly
effective international institution to an active arena of
conflict.
The
Empty Driver’s Seat
There
is nothing new about this bickering and inaction. Four
decades after the Nuclear Nonproliferation Treaty, for
example, the major powers still have not agreed on how to
build and maintain an effective nonproliferation regime that
can halt the spread of the world’s most dangerous weapons
and technologies. In fact, global defense policy has always
been essentially a zero-sum game, as one country or bloc of
countries works to maximize its defense capabilities in ways
that (deliberately or indirectly) challenge the military
preeminence of its rivals.
International
commerce is a different game; trade can benefit all players.
But the divergence of economic interests in the wake of the
financial crisis has undermined global economic cooperation,
throwing a wrench into the gears of globalization. In the
past, the global economy has relied on a hegemon -- the
United Kingdom in the eighteenth and nineteenth centuries
and the United States in the twentieth century -- to create
the security framework necessary for free markets, free
trade, and capital mobility. But the combination of
Washington’s declining international clout, on the one
hand, and sharp policy disagreements, on the other -- both
between developed and developing states and between the
United States and Europe -- has created a vacuum of
international leadership just at the moment when it is most
needed.
For
the past 20 years, whatever their differences on security
issues, governments of the world’s major developed and
developing states have had common economic goals. The growth
of China and India provided Western consumers with access to
the world’s fastest-growing markets and helped U.S. and
European policymakers manage inflation through the import of
inexpensively produced goods and services. The United States,
Europe, and Japan have helped developing economies create
jobs by buying huge volumes of their exports and by
maintaining relative stability in international politics.
But
for the next 20 years, negotiations on economic and trade
issues are likely to be driven by competition just as much
as recent debates over nuclear nonproliferation and climate
change have. The Doha Round is as dead as the dodo, and the
World Trade Organization cannot manage the surge of
protectionist pressures that has emerged with the global
slowdown.
Conflicts
over trade liberalization have recently pitted the United
States, the European Union, Brazil, China, India, and other
emerging economies against one another as each government
looks to protect its own workers and industries, often at
the expense of outsiders. Officials in many European
countries have complained that Ireland’s corporate tax
rate is too low and last year pushed the Irish government to
accept a bailout it needed but did not want. German voters
are grousing about the need to bail out poorer European
countries, and the citizens of southern European nations are
attacking their governments’ unwillingness to continue
spending beyond their means.
Before
last November’s G-20 summit in Seoul, Brazilian and Indian
officials joined their U.S. and European counterparts to
complain that China manipulates the value of its currency.
Yet when the Americans raised the issue during the forum
itself, Brazil’s finance minister complained that the U.S.
policy of “quantitative easing” amounted to much the
same unfair practice, and Germany’s foreign minister
described U.S. policy as “clueless.”
Other
intractable disagreements include debates over subsidies for
farmers in the United States and Europe, the protection of
intellectual property rights, and the imposition of
antidumping measures and countervailing duties. Concerns
over the behavior of sovereign wealth funds have restricted
the ability of some of them to take controlling positions in
Western companies, particularly in the United States. And
China’s rush to lock down reliable long-term access to
natural resources -- which has led Beijing to aggressively
buy commodities in Africa, Latin America, and other emerging
markets -- is further stoking conflict with Washington.
Asset
and financial protectionism are on the rise, too. A Chinese
state-owned oil company attempted to purchase the U.S.
energy firm Unocal in 2005, and a year later, the
state-owned Dubai Ports World tried to purchase a company
that would allow it to operate several U.S. ports: both
ignited a political furor in Washington. This was simply the
precursor to similar acts of investment protectionism in
Europe and Asia. In fact, there are few established
international guidelines for foreign direct investment --
defining what qualifies as “critical infrastructure,”
for example -- and this is precisely the sort of politically
charged problem that will not be addressed successfully
anytime soon on the international stage.
The
most important source of international conflict may well
come from debates over how best to ensure that an
international economic meltdown never happens again. Future
global monetary and financial stability will require much
greater international coordination on the regulation and
supervision of the financial system. Eventually, they may
even require a global super-regulator, given that capital is
mobile while regulatory policies remain national. But
disagreements on these issues run deep. The governments of
many developing countries fear that the creation of tighter
international rules for financial firms would bind them more
tightly to the financial systems of the very Western
economies that they blame for creating the recent crisis.
And there are significant disagreements even among advanced
economies on how to reform the system of regulation and
supervision of financial institutions.
Global
trade imbalances remain wide and are getting even wider,
increasing the risk of currency wars -- not only between the
United States and China but also among other emerging
economies. There is nothing new about these sorts of
disagreements. But the still fragile state of the global
economy makes the need to resolve them much more urgent, and
the vacuum of international leadership will make their
resolution profoundly difficult to achieve.
Who
Needs to Dollar?
Following
previous crises in emerging markets, such as the Asian
financial meltdown of the late 1990s, policymakers in those
economies committed themselves to maintaining weak
currencies, running current account surpluses, and
self-insuring against liquidity runs by accumulating huge
foreign exchange reserves. This strategy grew in part from a
mistrust that the IMF could be counted on to act as the
lender of last resort. Deficit countries, such as the United
States, see such accumulations of reserves as a form of
trade mercantilism that prevents undervalued currencies from
appreciating. Emerging-market economies, in turn, complain
that U.S. fiscal and current account deficits could
eventually cause the collapse of the U.S. dollar, even as
these deficits help build up the dollar assets demanded by
those countries accumulating reserves. This is a rerun of
the old Triffin dilemma, an economic observation of what
happens when the country that produces the reserve currency
must run deficits to provide international liquidity,
deficits that eventually debase the currency’s value as a
stable international reserve.
Meanwhile,
debates over alternatives to the U.S. dollar, including that
of giving a greater role to Special Drawing Rights (an
international reserve asset based on a basket of five
national currencies created by the IMF to supplement gold
and dollar reserves), as China has recommended, are going
nowhere, largely because Washington has no interest in any
move that would undermine the central role of the dollar.
Nor is it likely that China’s yuan will soon supplant the
dollar as a major reserve currency, because for the yuan to
do so, Beijing would have to allow its exchange rate to
fluctuate, reduce its controls on capital inflows and
outflows, liberalize its domestic capital markets, and
create markets for yuan-denominated debt. That is a
long-term process that would present many near-term threats
to China’s political and economic stability.
In
addition, energy producers are resisting policies aimed at
stabilizing price volatility through a more flexible energy
supply. Meanwhile, net energy exporters, especially Russia,
continue to use threats to halt the flow of gas as a primary
foreign policy weapon against neighboring states. Net energy
consumers, for their part, are resisting policies, such as
carbon taxes, that would reduce their dependency on fossil
fuels. Similar tensions derive from the sharply rising
prices of food and other commodities. Conflicts over these
issues come at a time when economic anxiety is high and no
single country or bloc of countries has the clout to help
drive a truly international approach to resolving them.
From
1945 until 1990, the global balance of power was defined
primarily by relative differences in military capability. It
was not market-moving innovation or cultural dynamism that
bolstered the Soviet bloc’s prominence within a bipolar
international system. It was raw military power. Today, it
is the centrality of China and other emerging powers to the
future of the global economy, not the numbers of their
citizens under arms or the weapons at their disposal, that
make their choices crucial for the United States’ future.
This
is the core of the G-Zero dilemma. The phrase “collective
security” conjures up NATO and its importance for peace
and prosperity across Europe. But as the eurozone crisis
vividly demonstrates, there is no collective economic
security in a globalized economy. Whereas Europe’s
interest rates once converged based on the assumption that
southern European countries were immune to default risks and
eastern European states were lined up to join the euro, now
there is fear of a contagion within the walls that might one
day bring down the entire eurozone enterprise.
Beyond
Europe, those who make policy, whether in a market-based
democracy such as the United States or an authoritarian
capitalist state such as China, must worry first and
foremost about growth and jobs at home. Ambitions to bolster
the global economy are a distant second. There is no longer
a Washington consensus, but nor will there ever be a Beijing
consensus, because Chinese-style state capitalism is
designed to meet China’s unique needs. It is that rare
product that China has no interest in exporting.
Indeed,
because each government must work to build domestic security
and prosperity to fit its own unique political, economic,
geographic, cultural, and historical circumstances, state
capitalism is a system that must be unique to every country
that practices it. This is why, despite pledges recorded in
G-20 communiqués to “avoid the mistakes of the past,”
protectionism is alive and well. It is why the process of
creating a new international financial architecture is
unlikely to create a structure that complies with any
credible building code. And it is why the G-Zero era is more
likely to produce protracted conflict than anything
resembling a new Bretton Woods.
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