Financial crisis ushers in global change

PUBLISHED : Tuesday, 15 September, 2009, 12:00am
UPDATED : Tuesday, 15 September, 2009, 12:00am

Exactly a year ago, the collapse of Lehman Brothers triggered worldwide shock and panic that sent the global financial system into convulsion. The Great Crash of 2008 marked the most dangerous and terrifying phase of a global crisis that began with the collapse of the US housing market. Because much of it involved arcane finance, regulatory oversight, and accounting standards, attention has mostly been focused on the financial and economic issues. But, like the Great Depression, what is arguably the greatest crisis of global finance capitalism has already caused a fundamental realignment in the relationships between nations, and the balance of power among them. When the financial crisis is over, its political fallout may stay with us for much longer.

This crisis has seriously weakened the free-market ideology that has dominated economic discourse, development strategies and trade relationships since the collapse of the Soviet Union. It has lent impetus to state capitalism and intervention, a mode of government championed by many developing countries, most notably by China.

From the most advanced capitalist economies to poor developing countries, much of the world has seen the state becoming the dominant economic actor. Washington, rather than New York, is now the financial capital of the US; Whitehall, rather than the City of London, is where the major financial decisions are made. There is no doubt that governments in the West only intervened to ease the damage from the crisis and have every intention to exit the private sector expeditiously. But free-market capitalism is not supposed to work like this. Western government bailouts - committed at taxpayer expense - are the polar opposite of the belt-tightening that countries in Asia were told they must undergo during the Asian financial crisis a decade ago because of their profligacy, irresponsibility and underdeveloped markets. This does not mean Anglo-American capitalism has failed, but its attraction and persuasive power have been greatly diminished. For some, Western-style liberal democracy has also been tainted through its close association with the markets. There is a danger that more developing countries will slow down, or even reject, necessary market and political reforms that have done much to pull so many of their citizens out of extreme poverty and make their governments more accountable.

By contrast, countries such as China and Russia are happy to play a dominant role in their own economies. Beijing, for example, is reversing privatisation championed by the late Deng Xiaoping as state-run enterprises increasingly dominate the private sector and take over privately held companies. Unlike Western governments, it may have no intention to exit the private market. With US$2 trillion in foreign reserves, China will also be able to expand influence and investment in regions strategic to its national interests, such as resource-rich Africa. This is not necessarily a bad thing, as many critics claim; China's phenomenal economic growth can offer valuable lessons for other developing nations. China may be unique in being able to reap comparative advantages out of the current crisis due to the decline of all the rest. But for its long-term success, it should return to the market reforms Deng initiated.

The world economy has become far too complicated and interconnected, but China can help rewrite its rules as part of a multilateral effort to make it less prone to crises. The financial crisis has given the nation an opportunity to become a responsible but powerful global player. This is a moment to exploit wisely, rather than becoming overconfident.