In times of crisis, new global giants still look to US
America still dominates the business of managing the world's finances despite the wealth accumulation of emerging markets
Rosemary Righter: Economic view
The cataclysmic events on Wall Street have shelved, probably for some time to come, two fashionable topics of macroeconomic debate.
The first has been over not merely whether, but how fast, economic power would shift from the United States to the “new wealth-creators” - China and, down the line, India, Brazil and even resource-rich Russia and aspiring financial market newcomers, such as Dubai.
The second has been about “decoupling”, the theory that the leading emerging markets were becoming standalone success stories - meaning that, far from catching pneumonia if the US caught a cold, they were increasingly immunised against financial turmoil and recession in the world's biggest economy.
Twenty months ago at Davos - before the storm clouds over Western markets were visible - Angela Merkel had already concluded: “What we have is a completely new balance of power in the world today.”
She was talking about the migration of the world's savings southwards and eastwards, arguing that this gave developing and emerging economies, between them sitting on 70 per cent of the world's foreign exchange reserves, a collective power to move global markets.
You might think that the haemorrhage of value from the US financial sector had more than vindicated her point about the shifting of the financial tectonic plates.
Yet what we actually saw, as the American financial sector was engulfed this month by what most commentators view as the most perilous crisis since the Great Depression, was these new titans taking a tremendous hit, with investors fleeing emerging markets to take shelter in the “safe harbour” of the storm-tossed US.
Safe harbour? Where exactly on cloud nine must I be sitting? Yet, take a look.
Over the past three months, nearly $30 billion (£16.3 billion) has drained out of emerging market bond and equity funds, while over the same period about $50 billion flowed into US equity funds. Of the estimated $17 trillion wiped off global equities over the past year, the fall in US markets accounts for only about a fifth of the losses. Falls have been far steeper in the emerging markets.
China's Shanghai A shares index fell by 65 per cent from its 2007 peak (compared with 25 per cent in the Dow Jones index) before the Government took emergency steps last week, cutting interest rates and bank reserve ratios, removing the tax on share purchases and authorising China Investment Corporation, the sovereign wealth fund, to increase its already dominant stakes in three of China's biggest state-owned banks.
Russia has seen the biggest slide since the 1998 rouble crisis; by the time that trading had to be suspended, for three days in a row, last week, markets had fallen by 56 per cent in only four months.
Factors other than Wall Street are in play: the Kremlin's capricious meddling in both foreign ventures and domestic corporations, its march on Georgia and falling oil prices have combined to drain the Russian market of billions of foreign capital and to freeze up bank lending. Russia had thrown $130 billion at the problem by Friday, rallying the market; but its bulging state coffers are no substitute for investor confidence, not least in a market plagued by margin calls on heavily leveraged domestic investors.
But turbulence has driven down all emerging markets, including those that are far more respectful than Russia of market rules; even oil-rich Kuwait's stock exchange hit its lowest level for nine months last week.
These falls need to be kept in perspective - they by no means wipe out the remarkable growth in the Brazilian, Indian, Russian and Chinese markets over the past decade, nor probably do they presage a sharp fall-off of growth in these countries' “real economies”, even if that, as I wrote last month, is precisely what the Chinese are now worried about.
And all these countries, in stark contrast to the US and the UK, are amply supplied with reserves to cushion financial shocks. But the stock market turbulence does suggest that confidence in emerging markets is nowhere near strong enough to support the “decoupling” thesis, however stellar their economic performance.
What explains this? The short answer is that wealth does not automatically translate into economic power. The development of these countries' financial markets lags far behind the transformations in their economies.
They are accumulating wealth far faster than they have developed mechanisms for putting that wealth to work.
The global impact of America's financial markets crisis is so great because America still dominates the business of managing the world's savings.
The past week's brush with systemic failure cannot but damage the reputation of Anglo-Saxon capitalism, but there is, equally, no question that only the US could have begun to sort out the mess with the required boldness and speed.
By the same token, the world's cash-rich economies have the strongest of incentives to be part of the solution, because they have no real alternatives to holding on to their massive American investments.
The Bank of Japan's amount to about $860 billion, mostly in Treasury bonds but including $74.5 billion in Fannie Mae and Freddie Mac - where China has a still heftier $400 billion exposure.
Tellingly, Wang Qishan, the Chinese vice-premier, made an unscheduled call on Henry Paulson in Washington last week, seeking assurances that if China “encouraged” its companies to participate in the recapitalisation of American financial institutions, they would not run up against the congressional hostility that in 2005 derailed the $18 billion bid by the China National Offshore Corporation for Unocal, the California-based oil and gas company.
(Mr Paulson could have replied, but probably did not, that Americans are not alone in sometimes missing the point about globalised capital. Witness the current uproar in China over Coca-Cola's bid for the Huiyuan Juice Group, dubbed by protesting nationalists a “dragon head enterprise” that it would be “traitorous” to let pass into foreign ownership.)
The flaws in American capitalism have gripped and agonised the world this week. Its strengths - the flexibility, openness and sheer size of its economy, warts and all - remain exceptional. As John Lipsky, the IMF's first deputy managing director, summed it up last week, “emerging economies cannot defy gravity in an increasingly multipolar world”. Their fate is bound up with that of the mature industrialised economies. It's a lesson usefully learnt.