Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, has declared that the US presidential election "may be the most undemocratic in the world." As grounds for this assertion, he notes that only 126 million Americans vote, while the results affect all 6.6 billion people in the world. ("If the World Could Vote," Newsweek, January 14).
The process of globalization, which has moved ahead with the United States at the center, has created a new level of integration in the international community. In the past, empires integrated the lands under their control, but unlike the imperial system, globalization has given rise to ties of interdependence. To give a simple example, Japan has supported the US economy, which is structurally dependent on borrowed funds, by purchasing some $600 billion (¥70 trillion) in US treasury bonds. This may make Japanese ask why they have no voice in the process of electing the US president. Conversely, Americans may note their country's tremendous contribution to Japan's security. In other words, Japan and the United States depend on each other. More generally, a change of government in one country can have an immediate and major impact on the lives of people elsewhere in the world. What sort of democracy is appropriate for this sort of globalized international community? Mahbubani's article calls our attention to this question.
Though the United States is the main source of power for globalization, many Americans seem to want to turn their backs on this process. This is the warning sounded by Princeton University Professor Alan Blinder, a former vice-chairman of the Federal Reserve Board, in an article titled "Stop the World (and Avoid Reality)" (New York Times, January 6).
With the situation in Iraq having quieted down somewhat, the focus in the presidential campaign is shifting to domestic issues, such as the economy and health insurance. In this context, Blinder suggests that Americans are embracing the sentiment expressed in the title of a 1960s musical: "Stop the World, I Want to Get Off." Democrats call for protectionist moves, while Republicans push for measures to exclude immigrants. People in the United States seem to want to "stop the world" and take their leave of the globalized international community.
Globalization is a tide that cannot be turned, and it is also an opportunity. The inability of Americans to recognize this, according to Blinder, is due not to external problems but to problems within the United States. In order to cope with the changes in the structure of industry, he calls for measures like better job retraining, universal health insurance, and guaranteed pension portability, suggesting that this is the way to get Americans to regain their optimism as participants in the globalized economy.
Global issues and the US election campaign
The issue of immigration, which is related to globalization, has become one of the focal points of the US presidential election. The Economist looked at the topic of migration in a special report titled "Open Up" (January 5). Globalization has promoted a sharp increase in cross-border movements of people, as well as of goods and funds. It is estimated that there are some 200 million migrants, both legal and illegal, in the world today. Foreign-born residents now total 13% of the US population, close to the record level of 15% set just before World War I, in the last great age of migration. Now countries like Ireland and Greece, which formerly supplied emigrants to other countries, are now receiving their own inflows of people from abroad.Because of the aging of their populations, the developed countries could not get by without immigration. Also, they have come to rely on migrants to handle some of their "dirty" jobs. Migrants are not just heading to rich countries; two-fifths of them have moved from one developing country to another. According to the World Bank, migrant workers from the developing world remitted over $300 billion (¥30-plus trillion) to their home countries in 2006. This is equivalent to the gross domestic product of Greece. In the West African country of Guinea-Bissau remittances account for almost half of GDP.
In both European countries and the United States, the rise in legal and illegal immigration accompanying globalization is seen as a threat; people fear that migrants will "steal" domestic jobs and see them as contributing to increased crime. In the United States, one Internet group of anti-immigration activists that had just 3,000 members in 2001 now has 490,000.
The Economist, which supports free trade, is in favor of open borders. It cites one study that estimated the size of the world economy would double if the flow of labor were freed completely. We cannot be sure if that is so, but what we do know is that globalization means cross-border flows of goods (trade), of funds (investment), and also of people (migration). The key issue is to control the underside of these flows, as seen in the forms of smuggling, illegal remittances, and trafficking in humans, as well as links to terrorism.
Sovereign wealth funds and the supbrime crisis
Alongside the problem of the increasing numbers of migrants, another issue that has been attracting much attention relates to cross-border flows of money, namely, the emergence of sovereign wealth funds. In an article that appeared in Canada's Financial Post on January 9 ) titled "No Role for IMF," James Dean, professor emeritus at Simon Fraser University, cited three financial crises that could potentially rock the world: "a credit crunch triggered by subprime U.S. mortgage lending, the 'collapse' of the U.S. dollar against the euro, and dire political consequences of 'Sovereign wealth funds.'"SWFs operated by countries in East Asia and the Middle East have been bailing out major financial institutions in the West that have suffered huge losses from the subprime mortgage meltdown. Announced equity infusions by government-managed funds from those regions into such institutions—including Citigroup, Merrill Lynch, Morgan Stanley, and UBS, Switzerland's biggest bank—have totaled a massive $25 billion (about ¥3 trillion). Dean notes the irony of the fact that the financial giants of the countries that funded the rescue of countries in Asia hit by the financial crisis there a decade ago are now being rescued by Asian SWFs. He also notes the concern felt in the developed countries that the SWF investments from China, Russia, and the Middle East might be used for strategic political purposes.
When the finance ministers and central bank governors of the Group of Seven met in Washington last October, they issued a statement calling for improved "transparency" in the operation of SWFs. At present, it is not clear whether the funds are making their investment decisions on the basis of political considerations separate from market principles.
Why has attention suddenly focused on sovereign wealth funds? Government-managed funds of this sort were first set up in the period from the 1950s through the 1970s to invest some of the oil revenues generated by petroleum-exporting countries in the Middle East; the goal was to provide a buffer against sharp movements in the price of crude oil. Since the 1990s Norway and Russia have set up similar funds. In Asia, meanwhile, Singapore, South Korea, and China have established SWFs to achieve greater efficiency in managing the huge foreign currency reserves they have built up from their international trade, and Japan is now considering establishing one.
It is reported that there are now around 40 SWFs in existence around the world, managing some $2 trillion in assets. Given such factors as the high price of oil, it has been estimated that 10 years from now the figure will have grown to $15 trillion (Federal Reserve Bank of San Francisco Economic Letter, December 14).
A new option: The model of Russia and China
In the background of concerns about sovereign wealth funds lies the antagonism in Western countries' relations with Russia and China. One aspect of this is the topic of an article titled "Illiberal Capitalism: Russia and China Chart Their Own Course" by Gideon Rachman in the Financial Times, January 9. After the Cold War Russia and China moved toward free markets, and they seemed headed for political freedom as well. In fact, however, what has emerged in both is an authoritarian system in which the leaders of Communist Party of China and former Soviet officials in Russia control their respective countries' newly capitalist national economies.In China, Rachman observes, the CPC's stake in large profit-making state monopolies has turned it into what some call "the world's biggest holding company." In Russia, meanwhile, the giant oil and gas concerns are run by bureaucrats who have hung on since Soviet days. Freedom of the media is endangered in Russia—and nonexistent in China. In other words, political freedom in both countries is dubious. On the external front, meanwhile, they have formed the Shanghai Cooperation Organization, through which they cooperate with the authoritarian countries of Central Asia, and they have been resisting Western efforts to apply pressure on the repressive governments of countries like Iran and Sudan. Rachman quotes neoconservative commentator Robert Kagan's remark that "an informal league of dictators has emerged, sustained and protected by Moscow and Beijing." He also cites the observation by Tel Aviv University Professor Azar Gat that if Western democracies run into economic problems, the model of Russia and China—a "successful non-democratic Second World"—might look like "an attractive alternative to liberal democracy."
The SWFs of Russia, China, and the Islamic world, using their earnings from exports of resources and of goods produced by cheap labor, have been acquiring large stakes in major Western corporations. Is this a critical situation, or does it represent a step toward restraining East-West antagonism by putting both sides in the same boat, interdependent in a globalized economy? We may now be at a fork in the road.
James Fallows offers a masterful presentation about China's growing stakes in US businesses in "The $1.4 Trillion Question," an article in the January/ February issue of the Atlantic. The Chinese government, with huge reserves of foreign currency, has made two decisions: One is to control the exchange rate, so as to keep up the country's export boom. The other is not to use its surplus funds to address domestic needs. As a result of these decisions, Beijing finds itself sitting on a huge and growing pile of dollars, and it is looking all around the world for places to invest them. This has led to its acquisition of major equity stakes in the Blackstone Group, a US private-equity firm, and Morgan Stanley, a huge US investment bank. In 2005 the Chinese state oil firm sought to acquire Unocoal, a big American oil company, but it gave up in the face of strong opposition in the US Congress. It is possible that similar investment-related flaps will occur in the future. As Fallows observes, transparency on China's part regarding its investment intentions and goals is crucial.
Fallows notes that the United States depends on the steady inflow of funds from China—and that China cannot afford to stop "feeding dollars" to the United States, because doing so would devastate its own huge stock of dollar-denominated assets. He quotes former US Treasury Secretary Lawrence Summers as describing the current relationship between the two countries as "the balance of financial terror," likening it to the "mutually assured destruction" dynamic of US-Soviet relations during the Cold War. This is certainly an interesting perspective.
The return of mercantilism?
Robert Samuelson's column "The End of Free Trade," published in the Washington Post on December 26, offers an instructive supplement to the Financial Times analysis and the Fallows article cited above. He observes that the thread common to the recent behavior of Russia and China and the oil-fueled populism of Venezuela's President Hugo Chávez is mercantilism, that is, the adoption of trade policies aimed at enriching and strengthening the state. Behind this mercantilism lies nationalism, which has been on the rise even as countries become more interdependent economically. "It's an open question," he writes, "whether these conflicting forces—growing economic interdependence and rising nationalism—can coexist uneasily or are on a collision course." This looks like a fair assessment of the current situation.China is on the rise, but this does not necessarily mean that we will see a repeat of the historical pattern of replacement of one hegemon by another. Even if the relative position of United States declines, the liberal international system created after World War II can remain robust. This is the observation offered by Princeton University Professor G. John Ikenberry in "The Rise of China and the Future of the West," Foreign Affairs , January/February 2008. Even if China overtakes the United States in terms of economic clout, the West as a whole, centering on the United States, Europe, and Japan, can continue to dominate the world with its economic and military power. This depends on the continued existence of the rules and institutions of the carefully constructed liberal system, including the United Nations, the International Monetary Fund, the World Bank, and the World Trade Organization. China must be brought into this system; the issue for the United States is how to strengthen it. Ikenberry's argument is a cogent one.
