Leaderless World

The G-Zero World

I agree on every single word:

We live in a crisis-prone age. In the past 44 months, we’ve endured the dips and gyrations of an international financial crisis, the worst economic slowdown since the 1930s, a wave of turmoil across North Africa and the Middle East, and Europe’s worst crisis of confidence since the Second World War. Unfortunately, we can’t expect smoother sailing in years to come because, for the first time in seven decades, we now live in a world without global leadership.


So we’ve entered a period of transition. The old order, call it a U.S.-led G7 world, no longer reflects the true international balance of power. But there is not yet a new order to take its place. That’s why global markets are in for an extended (and tumultuous) period of transition, one that’s especially vulnerable to crises that appear suddenly and from unexpected directions. It’s a G-Zero world.

(mon emphase) — Ian Bremmer on the Harvard Business Review Blog

John Maynard Keynes

Sovereign Wealth = Sovereign Power? (2/2)

Second and final part of a short essay I wrote in 2009 (but still relevant in many aspects). Here you can find the first part and all the details.

A new world order (continued)

The rise of emerging economies (China, India and Russia on all) emphasizes the fact that in a growing proportion of the world economy, the state governance plays a fundamental role in allocating resources for international investment. In the last twenty years, the political leaders of Western countries have followed the dictates of Ronald Reagan and Margaret Thatcher, trying to subtract as much as possible the influence of the government from economic life. Markets should be working (only) on three key principles: Privatisation, Liberalisation and Deregulation. However, the problems faced by the financial markets since the end of 2006 following the outbreak of the subprime mortgage bubble, have brought black clouds on the “market-only approach” to modern capitalism. After the near collapse of the U.S. and EZ banking system and the serious problems posed by the world credit crunch, on the horizon is looming the return to state governance crucially more involved in international economic and financial affairs.

In other words, we are finally beginning to understand that the dichotomy that opposes the “more government, less market” to “more market, less government” is false, and that the historic changes set in motion by globalization and technological revolution require much more complex response of the old-fashioned statism or of a liberism preaching the “laissez-faire capitalism”. Probably, the answer can be found in the scheme “more government, more market”, meaning for “more government” not necessarily a stronger presence of public money, but certainly a stronger ability to determine policies, indicating the strategic guidelines to move the productive forces, and for “more market” a set of simple rules that should ensure the greatest possible transparency to the dynamics of profit.

Somebody may wonder if that could mean a return to a Keynesian economic system. In my humble opinion, the theory of John Maynard Keynes cannot be proposed “as is”. Instead, if returning to Keynesianism means the rediscovery of the need to definitively overcome the dichotomy liberalism – statism, and recovering the role of public policies in the market, then it is useful and appropriate to return to speak of the man who is rightly considered the father of modern macroeconomics. With his theories, Keynes argued the need for regulatory intervention by the state, primarily by using the instruments of monetary policy and credit. His thinking is certainly useful when reasoning about the future of globalization: there is no doubt, in fact, that we have entered a sort of “phase two” of the process of integration of global economies and markets, and this season should not be characterized from a return to protectionism, but from the definition of common rules and new world organizations that go beyond technical ones, such as IMF and World Bank, and political ones, such as various G7-G20 .

Here is a very convincing statement of Dani Rodrik of Harvard University [click for reference]

The first three decades after 1945 were governed by the Bretton Woods consensus — a shallow multilateralism that permitted policymakers to focus on domestic social and employment needs while enabling global trade to recover and flourish. This regime was superseded in the 1980s and 1990s by an agenda of deeper liberalisation and economic integration. That model, we have learned, is unsustainable. If globalisation is to survive, it will need a new intellectual consensus to underpin it. The world economy desperately awaits its new Keynes.


Sovereign Wealth = Sovereign Power? (1/2)

In 2009 I wrote some papers for the department of social sciences at the University of Florence. Among these, the main study was on the Sovereign Wealth Funds “phenomenon”. The field I was approaching was History of International Economic Relations. Rereading my work, I realized that I still think the same about the possible answers to the questions posed by the (supposed?) new world order. Here’s what.

A new world order

Towards the end of the nineteenth century, the borders of Britain’s financial empire went well beyond politics. The dependence of a country from English economic power was ahead, more or less formally, to the submission to political power. When the Egyptian Khedive had the need to raise cash to cover his personal debt in respect of some British private banks, he could do nothing but sell its shareholding in the Suez Canal Company. The Khedive certainly did not act better when it came to managing the Egyptian public debt: the difficulty in honouring it brought England and France to take control of the Egyptian Treasury, and finally, in 1882, Egypt was put under military occupation. [click for reference]

In 1956, the decision of Egyptian President Gamal Abdel Nasser to nationalize the Suez Canal Company (owned by an Anglo-French coalition) provided to UK and France a justification for organizing a joint military operation against Egypt, which led to the occupation of the Channel from England (along with France and Israel, with the latter having joined the conflict on the side of the European powers). The financial status of the UK, however, was no longer that of the previous century: Britain had indeed a small current account surplus, but in 1956-57 the pound sterling had become subject to speculative pressures. The Bank of England made extensive use of its dollar reserves to support the exchange rate existing between the pound and the dollar, but came to a point where the threat of a forced devaluation or a change to a flexible exchange rate system was real. The United States, then the largest single creditor of Great Britain, declared that their intention to continue to provide direct financial support to England and to participate in an IMF loan for the United Kingdom, would depend to the compliance by British government with a UN General Assembly resolution calling on the United Kingdom, France and Israel to withdraw from the Suez Canal. [click for reference]

The American ultimatum forced Britain to reconsider its position. Anthony Eden, then British prime minister, explained that:

We were therefore faced with the alternatives, a run on sterling and the loss of gold and dollar reserves till they fell well below the safety margin […] or make the best we could of UN takeover and salvage what we could. [click for reference]

The lesson which follows from the the Suez crisis should be, especially for the United States, rather obvious: political strength is (almost always) related to financial strength. For example, the capabilities of a debtor country to carry out military actions depend largely on the support provided by creditor countries. Militarily, the United States are stronger today than it was Great Britain in the ’50s and are also not obliged to keep the dollar exchange rate to a predetermined level. However, in other respects, US financial position is more precarious than English one at the time of the Suez crisis. Indeed, while in 1956 the English had even a small current account surplus, the United States, at the end of 2010, had a current account deficit of about $ 120 billion, i.e. -3.2% of their GDP. Furthermore, Britain’s main creditors were British political and military allies (the United States on all) while, on the other side, U.S. debt, is not funded by “allies”: without investments in U.S. government securities made by China, Russia and the Gulf countries, the dollar would suffer a substantial depreciation, boosting U.S. interest rates. This would be difficult to sustain for the United States, because it would put entirely on the shoulders of the domestic economy the cost of maintaining their international role.

After all, it seems that the U.S. have the ability to borrow huge amounts of money at very favourable rates. Their dependence on foreign financing could be considered not as vulnerability, but as a sign of strength on the international scene: simply, the American economy could be too big to fail.

Actually, one could suggest the opposite, namely that the growing U.S. current account deficit represents a strategic (read: political) understated vulnerability. The willingness of central banks in emerging countries to accumulate dollar reserves has provided a stable source of debt financing. The problem is that these central banks already hold far more reserves than they need, so that they can also be used to finance new investment vehicles (Sovereign Wealth Funds, in fact). True, central banks still have an interest in maintaining the dollar relatively strong, but the U.S. may have more to lose than to gain from a possible “showdown” with the monetary authorities in creditor countries. In a nutshell: the more the U.S. will continue to base their economy on deficit financed by the investment vehicles in emerging countries (central banks and sovereign wealth funds), the more they will reduce their strength on the international stage.

In addition to that, it can be observed that the economic weight of China, India, Russia, Brazil, Arab States of the Gulf and other emerging economies will increase in the twenty-first century. Also if China’s growth were to grow at a slower pace than the current, it is likely that China, over the next twenty-five years, will displace the U.S. as the largest economy in the world. [click for reference]

This step alone would involve substantial changes to the world economy and to institutions which are responsible for the global governance. At the moment, however, the increase in the relative economic importance of these new actors is accompanied by another dramatic change: the emerging economies have become creditors of the industrialized countries.

This flow of state capital appears more and more as the consequence of political choices rather than the natural evolution of the global economy. Indeed, the size of Chinese population suggests that China should be the first economy in the world and not the largest creditor of the West! Moreover, the weight of the U.S. foreign debt, concentrated in a limited number of counterparties – many of which do not share the Western democratic values – undeniably represents a strategic vulnerability. This certainly does not mean that these creditors will improperly use their “bargaining power”, but the United States should act to avoid the possibility that a foreign country, for example, could suddenly reduce its dollar investments as a response to a foreign policy dispute. Given the magnitude of the american debt position, this could cause a shock to the U.S. economy no less severe than that following the subprime credit crisis. (… here is the second part)