The World in Recession

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By Parag Khanna

The global financial crisis and economic slowdown proves that there is no such thing as foreign policy anymore, only global policy. Everything is everyone's problem. America no longer defines the global agenda, and our task is to identify which issues should be on the radar and what innovative mechanisms can be deployed to solve them.

First of all, this complex global order cannot be captured through trite phrases like "East replaces the West," "Pacific replaces the Atlantic," "China displaces America," and other clichés. All of these powers and zones will be dynamically interactive. To understand geopolitical patterns we should think in terms of planets (the great powers), comets (the lesser powers), and constellations (regional and multilateral institutions), but also not neglect the cosmic dust (terrorists, pandemics, financial panics) which can cause serious atmospheric disturbances. Each problem we face has repercussions throughout the system, and requires unique but systemic responses. Cognitive inertia leads many of us to believe that Obama's America can restore the country's leadership role, but America's diminished stature is structural, not personality-driven. Our solar system no longer has a sun. The most systemic of challenges remains the global financial crisis. With most Western economies in recession, America's debt-exploding fiscal stimulus and the G-20s collective commitment to boost global credit availability through the IMF are meant as an antidote to America's recent draining of global liquidity. Moving forward, the Chinese Central Bank, which now holds approximately $2 trillion in foreign exchange reserves, has spoken out through its governor that the world must switch to a basket-oriented reserve currency of dollars, Euro, yen, and Sterling. This should be taken very seriously, not only for the health of those holding depreciating dollars, but also so that dozens of emerging markets will have expanded access to IMF credit lines in the future without the risk of mature markets siphoning off liquidity. If the financial crisis hints at a new world order emerging, then it is important to think about who has first-mover advantage. At present, it is widely projected that Asian demand will recover more quickly than the U.S. or Euro-zone. China's massive stimulus package of almost $600 billion (and much more in PPP terms) should not only insulate China from domestic upheaval, but since the Asian financial crisis a decade ago, it has so intimately networked itself with the region's economies such that it could buttress the recoveries of Korea and Southeast Asian nations as well. Once staunch American allies like Australia have been cushioned precisely because of China's massive demand for its natural gas and iron ore. We can well imagine the Asian monetary system and development banks accelerate their deepening regionalism in the aftermath of this crisis as well. An "Asia for Asians" is emerging both out of mistrust in the West but also confidence in their own solutions. The financial crisis has most definitely underscored and accelerated the global strategic shift towards a geopolitical marketplace. China can more confidently pursue its mix of neo-mercantilist trade and investment policies in Central Asia and Africa, while oil and commodities exporters will welcome continued demand from China and India as Western consumers scale back. This will surely translate into growing Chinese leverage over the situations from the Korean peninsula to Russian power-plays for energy security to Iran. Diplomatic resolutions continue to declare that a nuclear Iran is unacceptable to the West, yet Iran is not becoming any less nuclear. Chinese and Russian investments into Iran continue despite calls for more broad-based sanctions, and Obama's potential outreach to Iran might only validate the engagement strategy in which Europe and China already lead. We can expect that in the coming year this alternative strategy of opening to Iran in the hopes of undermining the regime from within will gain steam-even if the hardliners take the June elections in Tehran. Iraq is part of the reason this will be necessary, particularly for America. Does the U.S. want no transparency into Iran's plans for Iraq, even as American forces accelerate their withdrawal? A key emerging element is the Saudi card: warning Iran that if its meddling in Iraq accelerates proportionate to America's drawdown, Iran will find a more aggressive Sunni adversary stepping up to contain it. Indeed, even the Bush administration's recent overtures to Iran promising recognition of its greater regional role rankles Saudis and other Arabs who already feel threatened by Iran's build-up of influence from Lebanon and through the Persian Gulf. Containing Iran in Iraq is a crucial lever to ensure that Iran doesn't automatically view itself as having the advantage of time on its side in the nuclear negotiations. But rather than leap from crisis to crisis, the only region that lacks a security institution ought to gain one as soon as possible. Whether based on the OSCE or Asian Six-Party Framework, it will require that the key regional players, namely Saudi Arabia, Iran, Iraq, Israel, and Egypt, other Gulf and Levantine states, and also the U.S., EU, Russia, India and China form a standing organization to bring mutual transparency to their activities. If they do not build trust directly with each other, the region will become increasingly prone to Cold War-esque proxy skirmishes in the Straits of Hormuz, Gulf of Oman, or Arabian Sea. Both Bahrain and Qatar have expressed support for such a body, and it should be a global priority to convene its first meeting this year. Its agenda must go beyond regional nuclear concerns to include Palestine and Iraq's rehabilitation as well. On Iran's other border, in Afghanistan, the opportunities to engage Iran are better, though indeed very complicated. NATO countries have confirmed the current negotiations with Iran over transit routes from the Chabahar Port to Melak to reach the Indian-built Zaranj-Dilaram highway, which connects to Kandahar, NATO's headquarters for the anti-Taliban offensives planned for this Spring. In exchange for facilitating this access, Iran and India might want the U.S. to back off on blocking the Iran-Pakistan-India gas pipeline, which all parties are keen to implement within the next several years. So the arc of crisis stretching from Iraq to Pakistan also contains numerous opportunities, but taking advantage of them will require many micro-bargains and trade-offs between Western, Eastern, and the rising powers. It remains a major debate today whether Russia's return is a tremor or an earthquake. As Russia acknowledges the Obama administration's new tone on thorny issues such as missile defense, Russia's actions last year-from gas cut-offs to Ukraine to the invasion of Georgia-have prompted an accelerated European dialogue on energy security. But establishing a common gas market and pursuing new pipelines from North Africa is not enough. Russia itself must be the focus of sustained European pressure on a vast array of fronts: its banking system is in disarray and in need of European standardization, and as oil prices come down, its domestic investment has faltered and its dependence on Europe has grown. This kind of leverage must be exploited. The EU can still purchase-literally-Russian maturation towards a European future, a crucial step towards preventing the Sino-Russian block the Bush administration did more to advance than splinter. Such a move has enormous implications for European energy security, as it would ensure a more predictable supply of oil and gas from Kazakhstan and via Ukraine, with less Russian interference in new pipeline options via Turkey and the Balkans. New pipeline channels will become the pulsating veins which elevate these swing states into more stable partners. All of these maneuverings form the backdrop for a variety of new multilateral processes such as the G20. If 2009 does not yield significant gains in voice for second world powers in matters of financial regulation, trade negotiations, and climate change, the present diplomatic disarray will surely become even messier. This would be a great shame, as the main global issue of climate change does require the developed and developing countries to come together. In December 2009 the Copenhagen Climate Conference will take place. It represents both the first major environmental summit where energy security, climate change, development, and alternative energy will all be on the table, but also the last hope for a global breakthrough before the key players lose hope and go their separate ways. Success at Copenhagen will only come through diligent negotiation which reaches beyond governments and to the private sector innovators from Silicon Valley to Spain who can work to reduce the costs of solar and wind power for Asian societies. Neither the World Bank's Clean Development Mechanism nor emissions trading schemes are nearly sufficient to confront rising CO2 outputs and heavily polluting and inefficient energy consumption at the level of the masses. It will fall to public-private agreements between governments and technology firms to reach deeper into India, China, Indonesia and other emerging giants to make tangible headway. For all the caution being exercised by major powers with shaky foundations, the turbulence of global politics continues dangerously forward, more crisis management than strategic foresight. We cannot rely on the G20 alone to become the new diplomatic saviour, the end-all-be-all UN Security Council for the 21st century. Instead, ironically, we may see far more Bush-like "coalitions of the willing" forming around specific issues, competing to find solutions to deadlocks on global trade and reducing emissions. Despite the Bush analogy, this is healthy competition-we should not jump immediately to a new model of global governance without bold, persistent experimentation. The new world order will be populated by far more actors like NGOs and multi-national corporations than the UN or any one power can manage, as yet we have no formula for success. Link to article