US elections usually produce a brief euphoria; the public sense of renewal, of future possibilities, acts as a shot of adrenaline. This year, however, the palpable relief and celebration will be tempered by the widely shared sense that all is not well in the US.
The economic data are almost uniformly bleak and will not improve soon, and while national security issues appear less pressing because of the financial crisis, they have hardly disappeared, given the tenuous situation in Afghanistan and Pakistan and the unresolved problems in Iraq, Iran and North Korea. Moreover, the power of the US presidency and of the US has undergone dramatic shifts in recent years, making our era unlike earlier periods when the world was in flux and a new US president faced deep challenges.
Until recently, it was possible to speak of “the rise of the rest” without forecasting a decrease in US power. Now, with the US military at its limit in Iraq and Afghanistan and the US fiscal position weakening, the US is confronted with stark choices. That is an unfamiliar position for a new US president. Even in the dark years after Vietnam in the late 1970s and early 1980s, there was a sense that the US could still make its economic choices without much reference to the wider world. That was the privilege of having the largest, most dynamic economy — and one that acted as a world creditor. No more.
There is no small irony in the fact that on Nov. 15, the US’ lame-duck president, the unilateralist George W. Bush, is hosting a multilateral conference to discuss reshaping the global economic system. It also speaks to the US’ relative position that even the less-than-organized ministers of the EU acted more quickly to create a floor for the financial crisis than did the US president and congress. And it speaks volumes to the changing world that, as panic recedes and the wreckage is revealed, Asia in general and China in particular are emerging as clear winners.
The credit crisis exposed the flimsy foundations of the sustained growth that the US and Europe enjoyed during the past four to five years. While many had noted the extraordinary wealth transfer to oil-producing states and China, the implications of this were not fully appreciated. It is not just that the US has become a debtor nation; it is that large pools of capital and liquidity now reside in places like the Gulf region and China, with no sign of that trend reversing. In fact, the current crisis has even put Japan, which has spent nearly two decades in the doldrums, in a position of relative strength, given its large currency reserves and the clean-up of its major banks’ balance sheets.
There was a brief period in the 1970s when a similar transfer took place. But, unlike then, the countries that are accumulating the capital today are not spending it on consumption — remember the endless pictures of Saudi princes buying up real estate on the French Riviera — but on investment, infrastructure and education.
Yes, there are bubbles here and there, whether it is real estate in Shanghai and Dubai or stocks in Mumbai, but there has also been serious long-range planning that is likely to give these countries a strong position for years to come. Even China, which is trying to shift its economy more toward consumption to reduce its dependence on capital spending, has put in place an infrastructure of roads, power grids, ports and railways that will serve its domestic economy for decades. Meanwhile, it can use its US$2 trillion in reserves as a cushion when the US and global economy sags. China’s economic growth may slow as its exports to the US and Europe weaken, but it is less dependent on these markets than most people assume.
The talk now is of a global recession that will be steep and prolonged. Perhaps, but the more likely scenario is continued stagnation in the US and Europe and a more accelerated shift in economic power toward Asia.
Few parts of Asia are structurally exposed to the credit implosion, and the balance sheets of Asian banks and companies are on the whole cleaner than their counterparts elsewhere. Yes, many companies took on too much debt, and some countries, such as South Korea, are more compromised than others. But China, which is Asia’s anchor, is not, and in a world where everyone else is falling down, the one left standing is that much taller.
The US will remain a powerful part of the global system, but the task of the next president is to recognize lasting strengths and accept new limits. President-elect Barack Obama has shown pragmatism and realism and seems to understand that accepting limitations is not weakness; refusal to acknowledge reality is.
Zachary Karabell is president of River Twice Research and an associate fellow at the Asia Society.
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