The Leadership Deficit

America’s international response to the financial crisis has been lackluster. If we don’t offer solutions, other countries might challenge our dominance of the global financial system.

Talk of the financial crisis and the stimulus package often involves furious debate about the deficits that caused it or those that are likely to result from it. There's discussion of current-account deficits, trade deficits and, of course, budget deficits. But there are other more global deficits created by this crisis that may prove even more central to the future of America's role in the world. They include deficits of capital, ideology, creativity and attention. How the United States addresses these issues will likely play a significant role in shaping the twenty-first century world order.

At its most basic, the current economic crisis has given rise to a deficit of capital. The sudden withdrawal of credit and investment available to countries, companies, banks and individuals around the world has resulted in a dramatic reduction in capital flows-especially into the developing world. This scarcity of capital is likely to worsen as current and proposed plans for stimulus packages and rescue programs in the United States, Europe, China and elsewhere soak up huge amounts of funding, thereby vastly reducing the amount of international capital available to these developing countries.

The inability to access capital through global markets will likely restrict many governments in their ability to fund basic domestic programs. And when a government experiences an imminent funding crisis that poses a risk of civil unrest or that threatens its survival, previously shunned sources of financing suddenly become worthy of serious consideration.

An example of this scenario was Iceland's response last October when its pleas for financial assistance went unanswered from many of its NATO allies. In desperation, Iceland commenced negotiations with Russia. Iceland's prime minister explained his actions at the time by noting that his country had not received support from its friends, so it was forced to look for new friends.

Could Iceland's experience be the tip of the iceberg? Consider these transactions over the past several weeks: Russia, in spite of falling share prices, a weakened currency and declining foreign reserves, provided a $2 billion loan to the government of Kyrgyzstan; a Chinese state-owned mining company provided almost $20 billion in emergency financing to a troubled Australian/British mining company; a Chinese state-owned bank agreed to lend $25 billion to Rosneft and Transneft, Russia's state-controlled energy giants; and the Libyan Central Bank bailed out one of Europe's most important banks.

A second shortfall created by this crisis is a deficit of ideology. While the fall of the Soviet Union represented a clear triumph of democracy and capitalism over communism, the current crisis has again raised questions in many parts of the world about what economic and political systems are most desirable and effective. Few, if any, are calling for a return to communism, but the current crisis has called into question several of the last century's generally accepted political and economic principles-including the benefits of Anglo-Saxon-style capitalism, American democracy and, more broadly, the ideological leadership of the United States.

Many countries in the developing world spent the last decade following the so-called Washington Consensus. They embraced tough fiscal policies, opened their markets, removed capital controls, built up reserves and embraced the global financial order. None of this protected them from the current downturn, which has hit them hard.

The financial crisis thus created an ideological deficit, where even our closest allies in Europe-not to mention other countries with whom our relationship is more complex, like Russia, China and the Gulf states-are once again exploring the right balance between social values and market-based economies. There is renewed consideration of political and economic systems like "state capitalism" and "authoritarian democracy." What were previously oxymorons are now ideological challengers to the status quo.

A third deficit raised by the crisis is one of creativity. As other nations rethink the ideological underpinnings of the international order, there remains an enormous yearning-as yet unfulfilled-for bold and creative solutions to the crisis on a global scale.

One of the unexpected consequences of the financial crisis has been the apparent establishment of the G-20 as the new forum at which many of the world's most pressing economic problems will be discussed and addressed. For the first time, many of the world's largest emerging market economies-not just the United States and Europe-have a seat at the head table, a table at which neither America nor anyone else has a veto. That means that the G-20 is likely to be a more competitive platform for creativity and intellectual leadership.

Thus far, Britain, France and the European Union have taken the intellectual lead in proposing and crafting the most creative solutions for reshaping the international financial system. On our end, although former-Federal Reserve Chairman Paul Volcker received widespread international praise for a report that included several bold and innovative proposals, he went out of his way to emphasize that his suggestions did not represent official U.S. policy. And it is not at all clear that the Obama administration subscribes to his recommendations.

This leads to my fear of a fourth deficit-a lack of attention from the United States on the global nature of this crisis and the strategic issues it compels us to address.