Over the weekend, the Bush administration announced that it intended to organize a global summit to tackle the global financial crisis. This in and of itself would be unremarkable, except that this wasn't originally Bush's idea. He decided to suggest it at the urging of French President Nicolas Sarkozy and European Commission President Jose Manuel Barroso.
The contrast with a decade ago is sharp. Ten years ago, when the Asian financial crisis was in full bloom, both Europe and Japan proposed some tweaks to global governance. Japan floated the idea of an Asian Monetary Fund, and France suggested the creation of an Economic Security Council. And the United States politely ignored both suggestions. When an American president with a penchant for unilateralism starts following the lead of the French, you know that times have changed. Has the crisis revealed a shift in the economic balance of power?
When capital becomes scarce, the countries that are sitting on large reserves could be seen as having all the leverage. In a new Council on Foreign Relations report, Brad Setser argues that increasing external indebtedness will give America's creditors increasing leverage over U.S. foreign policy. Indeed, a key reason for the timing of the Treasury Department's takeover of Fannie Mae and Freddie Mac was pressure from the sovereign holders of their debt. And the New York Times' Keith Bradsher reported on Monday that Washington was tolerating China's continued efforts to prevent the yuan from appreciating because, "with the United States heavily dependent on China to buy the Treasury bonds needed to finance a bailout of the American financial system, the Bush administration has stopped criticizing China's trade and currency policies."
The financial crisis has also led to some strange bedfellows-or at least some serious flirting between polar opposites. As Iceland tottered on the brink of bankruptcy, it started to court Russia as a source of emergency funding. Pakistan's new democratic president shuttled to China in order to seek a $4 billion injection of capital. Are these entreaties the harbinger of a shift in financial power?
There's enough panic to go around right now without worrying about a radical shift in financial power. The past few weeks have certainly revealed that financial interdependence forces the United States to listen to its creditors. However, this interdependence cuts both ways. Because of its slowing growth, China has no choice but to continue purchasing dollar-denominated debt in order to goose its export earnings. As for Russia, $500 billion in reserves has not prevented the crash of its own equity markets.
Indeed, despite their entreaties to Moscow and Beijing, Iceland and Pakistan have been rebuffed. These countries have had little choice but to go to the International Monetary Fund for emergency financing.
This does not mean that shifts in financial power are not occurring. Lost amid the financial chaos of the past six weeks was the revelation that China's State Administration of Foreign Exchange used a $300 million purchase of government bonds and a $150 million grant to Costa Rica in return for that country's decision to sever diplomatic ties with Taiwan after sixty-three years and recognize the People's Republic of China.
Being able to offer big carrots to small countries is a very handy tool in great-power foreign policy. And the current crisis suggests that the United States is not the only country that can proffer such carrots.
Daniel W. Drezner is a professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University and a senior editor at The National Interest.