Former US Deputy Treasury Secretary Roger Altman has a piece in the new edition of Foreign Affairs on the Great Crash of 2008, which takes the following as its opening premise:
The financial and economic crash of 2008, the worst in over 75 years, is a major geopolitical setback for the United States and Europe. Over the medium term, Washington and European governments will have neither the resources nor the economic credibility to play the role in global affairs that they otherwise would have played. These weaknesses will eventually be repaired, but in the interim, they will accelerate trends that are shifting the world’s center of gravity away from the United States.
On the other hand, he argues that China will be a net beneficiary. True, it’s taking an economic hit, its exports are falling fast, urban real estate is falling, and growth is slowing rapidly. But its financial system is relatively unaffected by toxic assets, and in any case doesn’t play that big a role in its economy. Plus, it has a huge budget surplus and current account surplus, little government debt, and moumental foreign exchange reserves. So,
China’s global influence will thus increase, and Beijing will be able to undertake political and economic initiatives to increase it further. China and the Association of Southeast Asian Nations are just concluding an agreement that would create the world’s largest free-trade area, and Beijing could take additional steps toward Asian interdependence and play a stronger leadership role within the region.
China could also expand its diplomatic presence in the developing world, in order to further its model of capitalism and, in places such as Angola, Kazakhstan, and Sudan, satisfy its thirst for natural resources. In the midst of this crisis, it might also help finance emergency loans, either directly, through bilateral financing arrangements, or indirectly, by creating an additional facility at the IMF that could expand the organization’s available credit beyond what current quotas allow.
India, on the other hand, may also emerge relatively unscathed, but Altman thinks it lacks “the wealth or the internal cohesion of China”, noting that Manmohan Singh’s government only just avoided losing a confidence vote over its nuclear deal with the US. [I take Altman’s point about the wealth,but I’m not sure that India has lower internal cohesion than China – I suspect India would prove a good deal more socially resilient than China in the case of a worse downturn than he’s predicting in both countries.]
This historic crisis raises the question of whether a new global approach to controlling currencies and banking and financial systems is needed. Many economists and leaders are advocating such a reordering and calling for a Bretton Woods II. But creating a wholly new global financial order would be unworkable. Financial and currency markets are too large and too powerful to be contained; the days of managed exchange rates are over. Global financial regulation would probably cause more problems than it would solve, if only because the reforms needed in the West differ too much from those required elsewhere. A better approach is to focus on a few key measures.
Specifically, strengthening the IMF (enlarge the capital base, suspending conditionality, make China and other cash-rich states bigger shareholders); replace the “obsolete” G8 with the G20; and revise the Basel II guidelines on bank capitalisation.