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A G-Zero World

The New Economic Club W ill Produce Conflict, Not Cooperation

Ian Bremmer and Nouriel Roubini

I AN BREMMER is President of

Market

Roubini Global Economics

T his is not a G-20 w orld. Over the past several months, the expanded group of leading economies has gone from a

w ould-be concert of nations to a cacophony of competing voices as the urgency of the financial crisis has w aned and the

diversity of political and economic values w ithin 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 w ith

international leadership. Nor is there a G-3 alternative, a grouping of the United States, Europe, and Japan that might

ride to the rescue.

T oday, the United States lacks the resources to continue as the primary provider of global public goods. Europe is fully

occupied for the moment w ith saving the eurozone. Japan is likew ise tied dow n w ith complex political and economic

problems at home. None of these pow ers’ governments has the time, resources, or domestic political capital needed for

a new bout of international heavy lifting. Meanw hile, there are no credible answ ers to transnational challenges w ithout

the direct involvement of emerging pow ers such as Brazil, China, and I ndia. Y et these countries are far too focused on

domestic development to w elcome the burdens that come w ith new responsibilities abroad.

We are now living in a G-Zero w orld, one in w hich no single country or bloc of countries has the political and economic

leverage -- or the w ill -- to drive a truly international agenda. T he result w ill be intensified conflict on the international

stage over vitally important issues, such as international macroeconomic coordination, financial regulatory reform, trade

policy, and climate change. T his new order has far-reaching implications for the global economy, as companies around

the w orld sit on enormous stockpiles of cash, w aiting for the current era of political and economic uncertainty to pass.

Many of them can expect an extended w ait.

T HE OLD BOY S’ CLUB

Until the mid-1990s, the G-7 w as the international bargaining table of greatest importance. I ts members shared a

common set of values and a faith that democracy and market-driven capitalism w ere the systems most likely to generate

lasting peace and prosperity.

I n 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. T his change did not reflect a shift in the w orld’s balance of pow er. I t w as simply an effort to bolster Russia’s

fragile democracy and help prevent the country from sliding back into communism or nationalist militarism. T he

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 grow th.

T he recent financial crisis and global market meltdow n have sent a much larger shock w ave through the international

system than anything that follow ed the collapse of the Soviet bloc. I n 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

w orld’s largest and most important emerging-market states. T he 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 I nternational Monetary Fund (I MF), and new rules for financial institutions. T hese 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. I t became clear that China and other

large developing economies had suffered less damage and w ould recover faster than the w orld’s w ealthiest countries.

Chinese and I ndian banks had been less exposed than Western ones to the contagion effects from the meltdow n 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 tow ard 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. I n the United

States, stubbornly high unemployment and fears of a double-dip recession fueled a rise in antigovernment activism and

shifted pow er 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 I reland and the Baltic states to Spain.

Meanw hile, Brazil, China, I ndia, T urkey, and other developing countries moved forw ard as the developed w orld remained

stuck in an anemic recovery. (I ronically, the only major developing country that has struggled to recover is the

petrostate Russia, the first state w elcomed into the G-7 club.) As the w ealthy 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 law makers in Washington

become more serious about taking action against Chinese trade and currency policies that they say are unfair. I n the

past three years, there has been a sharp spike in the number of domestic trade and World T rade Organization cases that

China and the United States have filed against each other. Meanw hile, the G-20 has gone from a modestly effective

international institution to an active arena of conflict.

T HE EMPT Y DRI VER’S SEAT

T here is nothing new about this bickering and inaction. Four decades after the Nuclear Nonproliferation T reaty, for

example, the major pow ers still have not agreed on how to build and maintain an effective nonproliferation regime that

can halt the spread of the w orld’s most dangerous w eapons and technologies. I n fact, global defense policy has alw ays

been essentially a zero-sum game, as one country or bloc of countries w orks to maximize its defense capabilities in

w ays that (deliberately or indirectly) challenge the military preeminence of its rivals.

I nternational commerce is a different game; trade can benefit all players. But the divergence of economic interests in

the w ake of the financial crisis has undermined global economic cooperation, throw ing a w rench into the gears of

globalization. I n 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 tw entieth century -- to create the security framew ork 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 betw een developed and developing states and betw een

the United States and Europe -- has created a vacuum of international leadership just at the moment w hen it is most

needed.

For the past 20 years, w hatever their differences on security issues, governments of the w orld’s major developed and

developing states have had common economic goals. T he grow th of China and I ndia provided Western consumers w ith

access to the w orld’s fastest-grow ing markets and helped U.S. and European policymakers manage inflation through the

import of inexpensively produced goods and services. T he 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. T he Doha Round is as dead as the dodo, and

the World T rade Organization cannot manage the surge of protectionist pressures that has emerged w ith the global

slow dow n.

Conflicts over trade liberalization have recently pitted the United States, the European Union, Brazil, China, I ndia, and

other emerging economies against one another as each government looks to protect its ow n w orkers and industries,

often at the expense of outsiders. Officials in many European countries have complained that I reland’s corporate tax

rate is too low and last year pushed the I rish government to accept a bailout it needed but did not w ant. German voters

are grousing about the need to bail out poorer European countries, and the citizens of southern European nations are

attacking their governments’ unw illingness to continue spending beyond their means.

Before last November’s G-20 summit in Seoul, Brazilian and I ndian officials joined their U.S. and European counterparts

to complain that China manipulates the value of its currency. Y et w hen 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 w ealth 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 dow n reliable long-term

access to natural resources -- w hich has led Beijing to aggressively buy commodities in Africa, Latin America, and other

emerging markets -- is further stoking conflict w ith Washington.

Asset and financial protectionism are on the rise, too. A Chinese state-ow ned oil company attempted to purchase the

U.S. energy firm Unocal in 2005, and a year later, the state-ow ned Dubai Ports World tried to purchase a company that

w ould allow it to operate several U.S. ports: both ignited a political furor in Washington. T his w as simply the precursor

to similar acts of investment protectionism in Europe and Asia. I n fact, there are few established international

guidelines for foreign direct investment -- defining w hat qualifies as “critical infrastructure,” for example -- and this is

precisely the sort of politically charged problem that w ill not be addressed successfully anytime soon on the

international stage.

T he most important source of international conflict may w ell come from debates over how best to ensure that an

international economic meltdow n never happens again. Future global monetary and financial stability w ill 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 w hile regulatory policies remain national. But

disagreements on these issues run deep. T he governments of many developing countries fear that the creation of tighter

international rules for financial firms w ould 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 w ide and are getting even w ider, increasing the risk of currency w ars -- not only

betw een the United States and China but also among other emerging economies. T here 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 w ill make their resolution profoundly difficult to achieve.

WHO NEEDS T O DOLLAR?

Follow ing previous crises in emerging markets, such as the Asian financial meltdow n of the late 1990s, policymakers in

those economies committed themselves to maintaining w eak currencies, running current account surpluses, and selfinsuring

against liquidity runs by accumulating huge foreign exchange reserves. T his strategy grew in part from a

mistrust that the I MF 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. T his is a rerun of the old T riffin dilemma, an economic observation of w hat happens w hen 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.

Meanw hile, debates over alternatives to the U.S. dollar, including that of giving a greater role to Special Draw ing Rights

(an international reserve asset based on a basket of five national currencies created by the I MF to supplement gold and

dollar reserves), as China has recommended, are going now here, largely because Washington has no interest in any

move that w ould undermine the central role of the dollar. Nor is it likely that China’s yuan w ill soon supplant the dollar

as a major reserve currency, because for the yuan to do so, Beijing w ould have to allow its exchange rate to fluctuate,

reduce its controls on capital inflow s and outflow s, liberalize its domestic capital markets, and create markets for yuandenominated

debt. T hat is a long-term process that w ould present many near-term threats to China’s political and

economic stability.

I n addition, energy producers are resisting policies aimed at stabilizing price volatility through a more flexible energy

supply. Meanw hile, net energy exporters, especially Russia, continue to use threats to halt the flow of gas as a primary

foreign policy w eapon against neighboring states. Net energy consumers, for their part, are resisting policies, such as

carbon taxes, that w ould 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 w hen 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 pow er w as defined primarily by relative differences in military capability. I t

w as not market-moving innovation or cultural dynamism that bolstered the Soviet bloc’s prominence w ithin a bipolar

international system. I t w as raw military pow er. T oday, it is the centrality of China and other emerging pow ers to the

future of the global economy, not the numbers of their citizens under arms or the w eapons at their disposal, that make

their choices crucial for the United States’ future.

T his is the core of the G-Zero dilemma. T he phrase “collective security” conjures up NAT O 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 w ere immune to default risks and eastern European states w ere lined up to join the euro, now there is fear of

a contagion w ithin the w alls that might one day bring dow n the entire eurozone enterprise.

Beyond Europe, those w ho make policy, w hether in a market-based democracy such as the United States or an

authoritarian capitalist state such as China, must w orry first and foremost about grow th and jobs at home. Ambitions to

bolster the global economy are a distant second. T here is no longer a Washington consensus, but nor w ill there ever be

a Beijing consensus, because Chinese-style state capitalism is designed to meet China’s unique needs. I t is that rare

product that China has no interest in exporting.

I ndeed, because each government must w ork to build domestic security and prosperity to fit its ow n unique political,

economic, geographic, cultural, and historical circumstances, state capitalism is a system that must be unique to every

country that practices it. T his is w hy, despite pledges recorded in G-20 communiqués to “avoid the mistakes of the

past,” protectionism is alive and w ell. I t is w hy the process of creating a new international financial architecture is

unlikely to create a structure that complies w ith any credible building code. And it is w hy the G-Zero era is more likely to

produce protracted conflict than anything resembling a new Bretton Woods.

Eurasia Group [1], the political risk consulting firm, and the author of T he End of the Free[2]. NOURI EL ROUBI NI is Professor of Economics at New Y ork University’s Stern School of Business, Chair of[3], and a co-author of Crisis Economics [4].

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