The known unknowns of the economic crisis

I was less impressed than Steve Walt with Roger Altman’s Foreign Affairs essay on the geopolitics of the financial crisis. 

Altman’s tick-tock on the whys of the crisis is fine.  Saying that China will benefit and the free market model is in peril is, as Walt points out, "obvious."  It’s the non-obvious stuff that we need to puzzle out. 

To be fair to Altman, I suspect that he handed in his essay in early November; the extent to which the crisis would affect the BRIC economies was still to be determined.  Still, this paragraph seems way off:

Beijing will be in a position to assist other nations financially and make key investments in, for example, natural resources at a time when the West cannot. At the same time, this crisis may lead to a closer relationship between the United States and China. Trade-related flashpoints are diminishing, which may soften protectionist stances in the U.S. Congress. And it is likely that, with Washington less distracted by the war in Iraq, the new administration of President Obama will see more clearly than its predecessor that the U.S.-Chinese relationship is becoming the United States’ most important bilateral relationship. The Obama administration could lead efforts to bring China into the G-8 (the group of highly industrialized states) and expand China’s shareholding position in the International Monetary Fund. China, in turn, could lead an effort to enlarge the capital base of the IMF.

Where to begin.  First, China has taken a pass on bailing out key allies. 

Second, trade-related flashpoints are not diminishing.  The crisis has prompted China increase its export tax rebates and let the yuan fall against the dollar.  This will increase rather than decrease bilateral trade tensions.  On the U.S. side, there are many reasons to be pessimistic of the trade-friendliness of the Obama administration.  And none of this mentions the toxic combination of fiscal stimuli and protectionism. 

Third, the problem for the past few years has not been getting the U.S. on board with bringing China into the G-8 — it’s been China’s reluctance to join. 

So, what are the non-obvious geopolitical implications of the global financial crisis?  I suspect the biggest one will be that the "decoupling" of the global economy will begin in earnest.   

The tight coupling of the global economy caused export-dependent economies to face significant downturns because of the collapse in demand from the OECD nations.  These governments will respond to the current crisis by creating the trade equivalent of currency reserves – that is to say, creating a protected space of demand for national champions.  The most direct way to do this will be to boost domestic demand while restricting competition from foreign producers.  As states plan to expand their fiscal policy, it should be relatively easy – via procurement rules and concentrating expenditures on non-tradable goods – to target new government spending towards domestic firms.

This kind of decoupling would contribute to the unwinding of the macroeconomic imbalances caused by the Bretton Woods II arrangements.  It would also, however, be sure to reduce overall economic growth even further.  It would also reduce whatever constraints economic interdependence has placed on aggressive action in world politics. 

Beyond that, perhaps the best way to think about this is to consider the "known unknowns" of the current situation:

• Which great power will recover more quickly?  Altman thinks it’s China, and he may well be correct.  Still, in the past, the United States has rebounded more quickly than other countries in response to marco shocks like this one.  On the other hand, today’s employment report makes it clear that the U.S. is still on the downward slope. 
• Which weak state will implode?  Consider the past month or two.  Pakistan looks like it will crack up (of course, this isn’t anything new for Pakistan).  There are riots in Greece, and cholera in Zimbabwe.  Which government will collapse — and who will be expected to intervene?
• Which petrostate will get desperate?  As I wrote in November, a sharp fall in oil prices will have dramatic effects on Iran, Russia and Venezuela.  How will they respond?  Will they try to engage in diversionary conflicts to deflect domestic discontent? 

This just scratches the surface.  Readers are warmly encouraged to submit other possible "known unknowns" in the comments.