One year can make a big difference. In January 2009, global unemployment was soaring, the international financial system was in near-meltdown, world trade was in free fall, and economists were warning that a turnaround was not in sight. Governments faced the prospect of widespread social instability and popular unrest, and historians were recalling that the Great Depression set the stage for World War II. In February, the director of national intelligence, Dennis Blair, told the U.S. Congress that the global economic crisis had replaced terrorism as "the primary near-term security concern of the United States."
Since then, international stock markets have rebounded, unemployment rates have leveled off, world trade has picked up and the global economy is growing again. On Christmas Day, an apparent al-Qaida attempt to blow up a Northwest Airlines jet in flight reminded Americans that terrorist attacks were still a danger. Intelligence officials are no longer describing global economic problems as the paramount U.S. security concern.
Economic recovery, however, has been anemic in many countries, and the global recession has had repercussions that are likely to be felt for a long time. The events of the past year and a half have reshaped the world economy, left governments and bankers with new worries and altered the geopolitical landscape. The once-dominant Group of 7 industrial countries, including the United States, Japan and European powers, has largely been eclipsed, with emerging economies now poised to play leadership roles that were unimaginable just a few years ago.
The big winner in 2009 was clearly China, with its global economic position actually strengthening as a result of the crisis. Spurred by an early and bold government stimulus program, the Chinese economy was growing at nearly a 9 percent annual rate by the end of the third quarter, with the prospect of even faster growth ahead. The State Council for Development Research Center, a government think tank in Beijing, has just predicted a 9.5 percent growth rate for 2010. At that rate, China could soon have the second-biggest national economy in the world, replacing Japan, which is still struggling in its return to growth.
Brazil has also become a superstar performer, with stock values there surging more than 80 percent in 2009. European countries, meanwhile, have lagged far behind. Germany is prospering, but Portugal, Italy, Ireland, Greece and Spain share such severe problems that they have been given a new name: They now constitute the "PIIGS." Even Britain, a pillar of the European economy, was still in recession at the end of the third quarter.
"The old distinction between safe and unsafe markets has been turned on its head," says David Gordon, head of global research for the Eurasia Group. "The mature markets have for years been seen as less risky than emerging markets. But the big problems in the European countries are reversing that."
The political consequences of the economic shift could be far-reaching. One lesson of the climate change conference in Copenhagen was that China now outweighs Europe in diplomatic clout. But its rising economic power could prompt governments to take a harder line with Beijing in regard to trade, investment and exchange rate issues, with the prospect of increasing conflict rather than growing cooperation.
One example: the U.S. International Trade Commission in December sided with U.S. steelmakers and imposed new duties on imports of subsidized Chinese steel.
Brazil, meanwhile, is moving toward a more nationalist stance in the protection of its abundant energy resources.
New Economic Challenges Still Emerging
The development of a more multipolar world could lead to greater international collaboration if it is accompanied by the strengthening of international institutions such as the United Nations, the World Bank and the International Monetary Fund. So far, however, the record is mixed. While the IMF has taken a bigger role in the management of the global economy, the United Nations and the World Bank, if anything, saw their prestige diminished with the failure of the Copenhagen conference to produce a binding climate agreement.
Finally, while the global financial crisis has abated, new economic challenges are still emerging. One concern is the growing seriousness of sovereign debt, which is debt owed by governments rather than private companies or financial institutions. Banks have traditionally seen government bonds as essentially risk-free, meaning that the prospect of defaulting on repayment has been considered remote. But Dubai frightened investors with its failure to meet a debt payment in November, and the Greek government recently saw its bond rating slip as a result of its severe fiscal problems. One consequence may be that banks will need to set aside larger capital reserves to protect against the risk of government default, and that could adversely affect private lending and jeopardize growth.
Still, the big economic story of the past year may be what did not happen. The Great Recession of 2008-2009 did not lead to another Great Depression. Arvind Subramanian, a senior fellow at the Peterson Institute of International Economics in Washington, wrote recently in the Financial Times newspaper that governments in 2009 showed that they had learned what would not work: overly tight monetary or fiscal policies and beggar-thy-neighbor protectionist measures. "The impact of this global financial crisis has been significantly limited," Subramanian wrote, "because on each of these scores, the policy mistakes of the past were strenuously and knowingly avoided."
International economic developments are still being closely monitored by U.S. intelligence analysts, but the worries that propelled the global economy to the forefront of U.S. security concerns just a year ago do seem to have diminished.