The Rise of the Rest

Compare Russia and China with where they were 35 years ago. At the time both (particularly Russia) were great power threats, actively conspiring against the United States, arming guerrilla movement across the globe, funding insurgencies and civil wars, blocking every American plan in the United Nations. Now they are more integrated into the global economy and society than at any point in at least 100 years. They occupy an uncomfortable gray zone, neither friends nor foes, cooperating with the United States and the West on some issues, obstructing others. But how large is their potential for trouble? Russia's military spending is $35 billion, or 1/20th of the Pentagon's. China has about 20 nuclear missiles that can reach the United States. We have 830 missiles, most with multiple warheads, that can reach China. Who should be worried about whom? Other rising autocracies like Saudi Arabia and the Gulf states are close U.S. allies that shelter under America's military protection, buy its weapons, invest in its companies, and follow many of its diktats. With Iran's ambitions growing in the region, these countries are likely to become even closer allies, unless America gratuitously alienates them.

II. The Good News
In July 2006, I spoke with a senior member of the Israeli government, a few days after Israel's war with Hezbollah had ended. He was genuinely worried about his country's physical security. Hezbollah's rockets had reached farther into Israel than people had believed possible. The military response had clearly been ineffectual: Hezbollah launched as many rockets on the last day of the war as on the first. Then I asked him about the economy—the area in which he worked. His response was striking. "That's puzzled all of us," he said. "The stock market was higher on the last day of the war than on the first! The same with the shekel." The government was spooked, but the market wasn't.

Or consider the Iraq War, which has produced deep, lasting chaos and dysfunction in that country. Over two million refugees have crowded into neighboring lands. That would seem to be the kind of political crisis guaranteed to spill over. But as I've traveled in the Middle East over the last few years, I've been struck by how little Iraq's troubles have destabilized the region. Everywhere you go, people angrily denounce American foreign policy. But most Middle Eastern countries are booming. Iraq's neighbors—Turkey, Jordan, and Saudi Arabia—are enjoying unprecedented prosperity. The Gulf states are busy modernizing their economies and societies, asking the Louvre, New York University, and Cornell Medical School to set up remote branches in the desert. There's little evidence of chaos, instability, and rampant Islamic fundamentalism.

The underlying reality across the globe is of enormous vitality. For the first time ever, most countries around the world are practicing sensible economics. Consider inflation. Over the past 20 years hyperinflation, a problem that used to bedevil large swaths of the world from Turkey to Brazil to Indonesia, has largely vanished, tamed by successful fiscal and monetary policies. The results are clear and stunning. The share of people living on $1 a day has plummeted from 40 percent in 1981 to 18 percent in 2004 and is estimated to drop to 12 percent by 2015. Poverty is falling in countries that house 80 percent of the world's population. There remains real poverty in the world—most worryingly in 50 basket-case countries that contain 1 billion people—but the overall trend has never been more encouraging. The global economy has more than doubled in size over the last 15 years and is now approaching $54 trillion! Global trade has grown by 133 percent in the same period. The expansion of the global economic pie has been so large, with so many countries participating, that it has become the dominating force of the current era. Wars, terrorism, and civil strife cause disruptions temporarily but eventually they are overwhelmed by the waves of globalization. These circumstances may not last, but it is worth understanding what the world has looked like for the past few decades.

III. A New Nationalism
Of course, global growth is also responsible for some of the biggest problems in the world right now. It has produced tons of money—what businesspeople call liquidity—that moves around the world. The combination of low inflation and lots of cash has meant low interest rates, which in turn have made people act greedily and/or stupidly. So we have witnessed over the last two decades a series of bubbles—in East Asian countries, technology stocks, housing, subprime mortgages, and emerging market equities. Growth also explains one of the signature events of our times—soaring commodity prices. $100 oil is just the tip of the barrel. Almost all commodities are at 200-year highs. Food, only a few decades ago in danger of price collapse, is now in the midst of a scary rise. None of this is due to dramatic fall-offs in supply. It is demand, growing global demand, that is fueling these prices. The effect of more and more people eating, drinking, washing, driving, and consuming will have seismic effects on the global system. These may be high-quality problems, but they are deep problems nonetheless.

The most immediate effect of global growth is the appearance of new economic powerhouses on the scene. It is an accident of history that for the last several centuries, the richest countries in the world have all been very small in terms of population. Denmark has 5.5 million people, the Netherlands has 16.6 million. The United States is the biggest of the bunch and has dominated the advanced industrial world. But the real giants—China, India, Brazil—have been sleeping, unable or unwilling to join the world of functioning economies. Now they are on the move and naturally, given their size, they will have a large footprint on the map of the future. Even if people in these countries remain relatively poor, as nations their total wealth will be massive. Or to put it another way, any number, no matter how small, when multiplied by 2.5 billion becomes a very big number. (2.5 billion is the population of China plus India.)