Published July 09, 2009
As President Obama attends his first G8 summit we can't afford to ignore the global actors who are not present at the closed-door meetings in Italy.
The global stage may appear complex but, as I've said before, there are really just two kinds of players on it in 2009: creditor nations and debtor nations. Who are they? They are oil-rich Islamic states such as Saudi Arabia and Kuwait and resource-rich, autocratic states such as China and Russia who have developed huge holdings in Western currency, debt, and industries. And they are Western governments who have slipped deeper and deeper into debt. Though Saudi Arabia, Kuwait, China, Russia are not richer than the United States or other Western nations, they are now the creditors of those nations. And that means the balance of power, all over the world, is shifting. A new relationship is emerging, one that no longer favors the nations of the G8 (with Russia, perhaps, being the exception).
The West's own poor fiscal discipline and failed economic policies have allowed this to happen. The economic power of these rising nations began with their central banks purchasing excess reserves of dollars and Euros and, later, U.S. and European debt. More recently, many countries have established new financial vehicles called "Sovereign Wealth Funds" to make direct investments in global companies and industries, thereby extending their nation's financial influence. Guided by the best and brightest from Wall Street while making more and more sophisticated investments in our economy, these foreign governments are aiming for greater returns, both economic and political, from their investments.
Given their growing economic might, the new "creditor nations" will have the power to further their geopolitical ambitions by using a weapon of international diplomacy and warfare that hasn't been seen in centuries: economic statecraft. When a country uses the strength of its economic relationship to influence a weaker country's foreign and domestic policies, alliances and actions, economic statecraft is at work. Just like the rules of traditional warfare, the fact that the weaker state would suffer much greater harm than the stronger state if the relationship changes, leaves the weaker state vulnerable -- and allows the stronger state to gain concessions. Traditional wars will not disappear, but how they start and how they finish will primarily be determined by economic rather than military might.
This is already being felt on the world stage where non-Western creditor nations are beginning to occupy the favorable higher ground. China, Saudi Arabia, and the United Arab Emirates are joining global economic discussions for the first time, even if they are not members of the G8 (although China's leader had to head home early from Italy due to ethnic unrest). In fact, the larger G20 group may even supplant the European-dominated G-8 as the most important global economic meeting of leaders--the G20's larger, more diverse forum seems well positioned to grow in importance given the shift in economic power away from the United States and Europe.
Like it or not, the United States is now a debtor nation, with a national debt of over $11 trillion dollars, much of that held abroad. China alone holds well over a trillion dollars of our debt and is slowing its purchases of U.S. government bonds. Some Chinese officials are also calling for a new global reserve currency to replace the dollar. No longer "too big to fail," role in the world order is changing. The impact is not only economic -- it is also political and geopolitical. The creditor nations are generally autocracies -- in many cases, they have been able to focus on amassing huge international reserves at the expense of improving the lives of their people. In contrast, their debtors are democracies.
In the past, the United States would have worked to either neutralize or even bring these autocracies into pro-American alliances. But now our position as a debtor nation will make it increasingly difficult for the United States or its allies to assert influence over any of the nations who are our creditors.
For instance, whether in response to direct pressure or merely in deference to its creditors, the UK government recently decided to recognize the legitimacy of Beijing's direct rule over Tibet. And in February, Secretary Clinton claimed that while the U.S. would still press China on human rights issues, "our pressing on these issues can't interfere on the global economic crisis, the global climate change crisis and the security crisis," she told reporters. The new world order also extends to Congress: "Pelosi Mum On Rights Before Trip to China" said The Washington Post recently. In 1989, after the Tiananmen Massacre, Speaker Pelosi was one of the foremost advocates for Chinese dissidents and Chinese human rights. Twenty years later, the economic situation has changed and so have the political realities -- her once-strong voice for human rights has fallen silent.
We will see more and more headlines like these unless the leaders in Italy take the right steps to stabilize the global economy, to reduce our massive public debt, recognize the promises we cannot keep and reduce our dependence on China, the Gulf States, and other countries that are now our creditors. This subject should be at the top of the agenda in L'Aquila.
Mallory Factor is the co-chairman and co-founder of the Monday Meeting, an influential meeting of economic conservatives, journalists and corporate leaders in New York City. Mr. Factor is a well-known merchant banker and speaks and writes frequently on economic and fiscal topics for news stations, leading newspapers and other print and online publications.