<nettime> Roubini-Bremmer: A G-Zero World

[Brian Holmes <bhcontinentaldrift@gmail.com>]

Last month we had a strong debate on Nettime about the nature and 
meaning of the Arab Spring. The nature of it is up to the participants 
to say, but in my view the fall of authoritarian regimes in North Africa 
represents at least a partial collapse of one of the pillars on which 
the transnational state-form of the present was founded, way back in the 
late seventies-early eighties when Trilaterlaism (or "Triad Power") 
first got off the ground, on the backs of workers in the Arab world, in 
Latin America, and then increasingly in China. Now the rise of the BRIC 
countries and the development of the Gulf has entirely overtaken that 
old hegemony.

In this paper by Nouriel Roubini and his wunderkind sidekick Ian 
Bremmer, the ineffectiveness of the present G-20 becomes the signal of 
chaos in the world system. Far from an abstract fancy hatched among the 
students of Immanuel Wallerstein, world hegemony is a daâily concern of 
the corporate classes because of its provision of so-called "global 
public goods" (mostly security, a sordid boon). Roubini and Bremmer 
don't see anyone delivering the goods in the near future.

I'm sending the article because it nails the central point on which my 
analysis of the Arab Spring is based: the collapse of the Trilateral 
system that was perfectly represented by the members of the G-7. 
However, the paper was written before the events in Egypt and anyway, 
it's not certain these guys can look beyond the sagging values of 
economic growth. What I see in the future is a wide-open world where 
everyone can make a difference amidst the most unexpected circumstances. 
For the moment at least this is an incredibly light period, a time for 
escaping gravity. It's a time for invention. Learn some new moves in a 
zero-G world.

ciao, BH

***

Foreign Affairs, January 31, 2011

âA G-Zero Worldâ

The New Economic Club Will Produce Conflict, Not Cooperation

Ian Bremmer and Nouriel Roubini

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 powersâ 
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 BOYSâ 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 worldâs balance of power. It was simply an 
effort to bolster Russiaâs 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 
worldâs 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 
worldâs 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, Chinaâs foreign reserves had 
protected its government and banks from the liquidity panic that took 
hold in the West. Beijingâs 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 Westâs 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 statesâ 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 froma modestly effective international institution to an active 
arena of conflict.

THE EMPTY DRIVERâS 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 worldâs 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 Washingtonâs 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 worldâs major developed and developing states have 
had common economic goals. The growth of China and India provided 
Western consumers with access to the worldâs 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 Irelandâs 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 governmentsâ unwillingness to 
continue spending beyond their means.

Before last Novemberâs 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, Brazilâs finance minister 
complained that the U.S. policy of âquantitative easingâ amounted to 
much the same unfair practice, and Germanyâs foreign minister described 
U.S. policy as âclueless.â

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 
Chinaâs 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 âcritical 
infrastructure,â 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, policy makers 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 currencyâs 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 Chinaâs 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 Chinaâs 
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 blocâs 
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 Statesâ future.

This is the core of the G-Zero dilemma. The phrase âcollective securityâ 
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 Europeâs 
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 Chinaâs 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 communiquÃs to âavoid the mistakes of 
the past,â 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.

***

IAN BREMMER is President of Eurasia Group[1], the political risk 
consulting firm, and the author of The End of  the Free Market [2].
NOURIEL ROUBINI is Professor of Economics at New York Universityâs Stern 
School of Business,Chair of Roubini Global Economics[3], and a co-author 
of Crisis Economics[4].

Links:

[1] http://www.eurasiagroup.net/
[2] http://www.amazon.com/End-Free-Market-Between-Corporations/dp/1591843014
[3] http://www.roubini.com/
[4] 
http://www.amazon.com/Crisis-Economics-Course-Future-Finance/dp/1594202508


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