The "Rise of the Rest"

 April 17, 2012

In an intelligent and highly readable essay, Fareed Zakaria, a close Obama adviser, analyses the fundamental changes in the distribution of power in international affairs, away from US dominance. He claims that what we are witnessing today is one of geopolitics’ “tectonic power shifts”, the third in the last five hundred years in order of magnitude. The first such power shift started in the 15th century, propelling the western world to global dominance. During the period, which peaked in the 18th century, the modern world was shaped by the agricultural and industrial revolutions.

The second power shift occurred at the end of the 19th century, with the rise of the United States of America. For 120 years, Zakaria writes, the US economy enjoyed an almost constant 25 percent share of the world’s GDP. The country’s political, military, economic and cultural predominance peaked between 1945 and 1975, remaining to this day the dominant political and military power globally.

The third and latest major shift in geopolitics is currently underway, being labelled by Zakaria as “the rise of the rest” (Japan, China, India, Brazil). As a result of this, the economic and financial power is moving away from the US, even if technically speaking the world is still being dominated politically and militarily by it. This veritable “imperial decline” of the United States is squarely blamed by Zakaria on a dysfunctional political system, one that is unable to correct the malfunctions affecting the US’ economy. Still, he is optimistic that “the US will remain a vital, vibrant economy, at the forefront of the next revolutions in science, technology and industry”.

From an international relations point of view, the problem left unsolved by “the rise of the rest” is the reallocation of political and military power among the main protagonists of the new age. The danger inherent in the current situation is that the new economic superpowers might in turn join the ranks of the EU, as the political dwarves and military worms of our time.

If during the 18th century the world’s affairs were dealt with by “the concert of European powers”, in a multipolar fashion, during the 20th century leadership in global affairs was exercised in a bi-polar manner by the US and the USSR. Since the USSR’s implosion, we continue to live in a unipolar world, although efforts are being made to suggest a variety of new leadership formulae, from G2 to G3 to G20. For IR specialists, politicians and geopoliticians alike, the challenge is to select the best possible leadership arrangement, one which would reflect – from a military and political point of view – the new shifts in economic and financial power that have taken place over the past two decades. Failing this, global governance could remain the sole preserve of the United States, which in turn could generate significantly increased international tensions and anti-American sentiment.

Is the EU Ready for a G3 World ?

 April 10, 2012

One of the key issues in IR & geopolitics is that of hegemonic transition. In the space of only thirty years, the world as we knew it has gone from bi-polar (international affairs dominated by the USA and the USSR) to unipolar (with the US as the only superpower left), to what is now a disorganised and anarchic state of affairs most commonly known under the label of G-zero.

As much as we would like to see a multi-polar world order emerging, the most touted options in IR to date are that of a G-2 order (“Chimerica”), or a G-3 world with the USA, China and the European Union in charge of global governance.

The G-2 formula was first advanced in US academic circles in 2006 by Jimmy Carter’s former national security adviser Zbigniew Brzezinski. In his view – and that of many IR specialists or diplomats like Henry Kissinger – the US and China should cooperate in order to reduce the threat of nuclear proliferation and to address together global problems such as trade surpluses, world hunger or climate change. The idea of a G-2 world order, however, has left both Washington and Beijing unimpressed. Its echoes were found only within some EU policy-making circles.

Thus in 2009, during a Sino-EU summit in Prague, the Chinese premier Wen Jiabao has stated that

“it is totally ungrounded and wrong to talk about the dominance of two countries in international affairs”. Indeed, as professor Jian Junbo from Shanghai comments in an article on this issue, “the responsibility of a G-2 member to jointly shape the world’s economy and international affairs is too far beyond China’s ability and ambitions”.

As he rightly points out, China is still a developing country with huge under-development problems, low per capita income and inferior military strength if compared to that of the United States.

China’s refusal to endorse a G-2 formula does not mean, according to ECFR specialists, that it would be adverse to the emergence of a G-3 order which would include the EU as well. As Mark Leonard and Parag Khanna argue in an article originally published in the New York Times, we are already living in a G-3 world,

“one that combines US military power and consumption, Chinese capital and labour and European rules and technology. The United States, the European Union and China are the three largest actors in the world, together representing approximately 60 percent of the world economy – with the EU being the largest of the three”.

Unfortunately, the EU’s strengths – the largest trade bloc, foreign investor and aid donor in the world – are constantly being undermined by an irresolute common foreign policy, or as former UK foreign secretary David Miliband put it, “confused messages, patchy coordination and relationships with global powers that lacked clarity, strategy or purpose”. (sources: Asia Times, Financial Times, Foreign Affairs, NYT)

Towards Bretton Woods III

 November 9, 2010

The US Federal Reserve’s second round of quantitative easing has prompted near-universal condemnation by the financial leaders of Germany, China, Brazil, the ASEAN and the EU. From The People’s Daily to Der Spiegel, newspapers are full of criticism and dire predictions of an impending international currency war, which is bound to result from the flooding of the American banking system with largely un-needed liquidities. On the positive side, however, the Fed ‘s move has also accelerated calls for the replacement of the current international monetary system, also known as Bretton Woods II, with a less volatile one, which for convenience’s sake we might call Bretton Woods III.

Under the original Bretton Woods, the fixed exchange rates mechanism was anchored to the US dollar, which in turn was tied to the price of gold. In 1971, the gold standard was abandoned and exchange rates were allowed to float, an arrangement known as Bretton Woods II. The US dollar remained the world’s reserve currency. Floating exchange rates provided ample opportunity to speculators to bet against the fluctuations in the values of different curencies, or – as it happened in 1998 during the Asian financial crisis, to attack weaker currencies like the Thai baht or the South Korean won, halving their value.

The wisdom of having only one reserve currency underpinning the value of all other currencies, and floating exchange rates based on one currency alone has first been challenged by EU countries through the adoption of the euro. Its introduction has immediately lowered interest rates and eliminated the possibility of speculating the euro’s exchange rate in member countries, thus largely undermining the concept of the float.

The 2007-2008 financial crisis and two rounds of quantitative easing by the Federal Reserve have accelerated moves towards the demise of the current dollar-based international monetary system. Indeed, with only 25 percent of the world’s GDP, the US economy is already hard-pressed to provide enough reserve assets, mainly US treasury bonds, to finance world trade. According to the IMF’s projections, if current trends are any guide, the ratio of issued reserve assets, currently at 60 %, would increase in 10 years’ time to 200 % of the US’ GDP, which would greatly increase the risk for major holders of US assets, such as China, Japan or the ASEAN countries.

Floating exchange rates, on the other hand, beside generating volatility, have led to the hoarding of US assets, especially in the wake of the Asian financial crisis. Thus Asian countries hold in excess of 6 trillion US dollars and treasury bonds, which they feel they need for open-market operations aimed at stabilising the exchange rates of their currencies and safeguarding their exporters. The current crisis has proved them right, as countries like China and Brazil have fared better than countries with less adequate US dollar-denominated reserves.

The Chinese central bankers would like to see the dollar replaced with an artificial asset created in the post-WWII era, the SDR (special drawing rights), whose administrator is the IMF. The Economist has even suggested the possibility of replacing the dollar with the euro as the world’s reserve currency, taking as a guide the way in which the British pound was replaced by the American dollar in the 20th century.

Finally, Robert Zoellick, the director of the World Bank, has lobbied in The Financial Times for the replacement of Bretton Woods II with a multiple currency system (the dollar, the euro, the yen and possibly the yuan, if and when it becomes fully convertible) to be based on the price of gold. Gold, as Zoellick points out, has already become a parallel reserve asset as a result of exchange rate volatility. In other words, the new international monetary system will have, in broad terms, the essential features of Bretton Woods I.

As the value of dollar-denominated assets worldwide stands to be heavily diminished by the Fed’s easy money policy, and as the floating currency system generates asset bubbles and financial instability for many nations, there is an urgent need to replace the current system with one more credible, more stable and less crisis-prone. Already, during last week’s talks in Paris, Presidents Sarkozy and Hu Jintao have agreed to put the reform of the international monetary system at the top of the agenda at the upcoming Seoul summit.

It seems that in future no one country will have the privilege of issuing reserve assets to back the world’s currencies. The new system will most likely be based on the assets issued by a group of economically powerful countries and will feature managed, as opposed to floating, exchange rates. (sources: Le Monde, Deutsche Welle, Financial Times, Reuters, The Economist)

Author : Spotlight on Geopolitics
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