The Fourth Wave

Can the world avoid a fresh crisis?

The global economy looks to be headed toward what Mohamed El-Erian has called a "new normal" after the market meltdown and financial upheaval of the last two years. But along the way, we're in for a bumpy ride.

So far, the crisis has come in the form of waves repeatedly testing the ability and willingness of the world's established powers and rising stars to build a cooperative approach to our largest transnational problems. The bad news is that the men and women who gathered to save the world in Washington in late 2008 and London in 2009 have turned their attention to pressing problems at home. The worse news is that some of those problems have now given rise to a third wave, one which will ensure a new round of conflict in the international arena.

The first wave began with Lehman Brothers' collapse in September 2008 and continued through the meetings of the G-20 in London in April 2009, when political leaders in both the developed and developing worlds, persuaded that the global financial system was in mortal danger, came together to take action. They proved that something like international consensus is possible, at least on those rare occasions when everyone seems to face the same threat at the same time. World leaders and their governments moved into high gear with stimulus spending, austerity plans, and assorted other drastic remedies, while heads of state gathered to work toward global agreements. For once, the need for some form of collective action was clear, and the major powers sang from the same choir book as they seemed to open up to the rising powers clamoring for an enhanced role in the new G-20 era.

The second wave arguably began with the December 2009 declaration from White House economic advisor Larry Summers that America's recession was over. Technically, he was right: The U.S. economy had resumed growing, albeit slowly. But politically, he created something like a "Mission Accomplished" moment for President Barack Obama's administration, a problem exacerbated by his comment that "most professional forecasters are now looking for a return to job growth by spring" of 2010. His announcement soothed the fears of those who were listening to the dire predictions from my friend, economist Nouriel Roubini, and others who warned -- and are still warning -- that the recession might not yet have hit bottom. The easing of fears, however, reduced the need for unity on the international stage.

This year, when it became clear that developed economies were not going to bounce back quickly, voters began turning on their leaders. The Japanese electorate, which dismissed the Liberal Democratic Party in 2009 after more than a half-century of nearly uninterrupted rule, began punishing the party that took its place. Emergency steps by the European Union and International Monetary Fund pulled Greece, Spain, and other shaky European economies back from the brink of insolvency, but at a high political cost: In May, the British electorate dispensed with Prime Minister Gordon Brown, and voters in Germany's most populous state defeated Chancellor Angela Merkel's Christian Democrats. In the United States, Democrats, who control the White House and held large majorities in both houses of Congress, faced a tsunami of public anger in this year's midterm elections.

At the same time, emerging markets rebounded, further scrambling the world's political order. China is leading the way, but a relatively sunny economic outlook in India, Indonesia, Brazil, Turkey, and other new heavyweights has contributed to the sense that the balance of power in international politics has shifted away from the old G-7 countries. That doesn't mean the G-20 will emerge as an uncontested new center of global governance; if anything, it has become clearer this year that consensus might now be even more elusive.

Differences within the expanded group over the proper role for government in an economy have come to the fore with American pundits like New York Times columnist Paul Krugman pushing for new stimulus as Europeans commit themselves to weather the political storms following their austerity measures and China, Russia, and the Persian Gulf's Arab monarchies forge ahead with a state-directed form of capitalism. World leaders have seen their interests diverge as different countries emerge from the crisis at different speeds and with different tools. One big result is that proposals to address transnational problems like climate change and the need to create a new international financial architecture are now as dead as the Doha global trade round, stuck in limbo since 2001.

The third wave of the crisis hit this fall when IMF Managing Director Dominique Strauss-Kahn used the fund's annual meeting to sound the alarm that governments are beginning to deploy their currencies as weapons, while World Bank President Robert Zoellick warned that a self-defeating round of tit-for-tat protectionism could return the world to the misery of the 1930s. U.S. and European leaders have begun pressing the Chinese leadership on the value of China's currency, and Beijing has responded with the diplomatic equivalent of "mind your own (failing) business." Although the risk might be overstated, economists like Raghuram Rajan are right to caution of the dangers of a currency war, as exporters compete to undercut overseas competition with lower currency values. And El-Erian is surely correct that we're headed for a "new normal" in the United States, not a return to the heady days of the 1990s. Whether we're in for the "lost decade" that he and others have warned about remains to be seen.

What does the latest wave herald? To start, it's a sign of how far we've come from the initial emergency, when political leaders in both the developed and the developing worlds shared an interest in crafting a coherent emergency response. The last year has shown how temporary a moment that was. Now the international arena is becoming a conflict zone as competing interests pit one state against another, complicating efforts to build the sort of international consensus called for by Oxford University economist Paul Collier and others as a safeguard against precisely the sort of international strife we're already starting to see.

It's hard to overstate the importance of this latest shift. For better and for worse, globalization -- all the various processes by which ideas, information, people, money, goods, and services now cross international borders at unprecedented speed -- has been the primary geopolitical and economic trend of the past several decades. But the financial crisis and its aftermath have proven that no one has forgotten how walls are built, and this moment is in many ways more dangerous for the global economy's future than anything we experienced during the Cold War, threats of nuclear war notwithstanding. That's because of globalization's very success up until now; this level of global economic interdependence did not exist when the planet was divided into opposing ideological camps. A bad day over there is still a bad day over there. But now it's a bad day over here, too.

A return to the economic crisis, political polarization, and resulting violence of the 1930s is mercifully unlikely. Too many emerging players have too much to lose. These governments hope to profit from the global economy, not destroy it. But we are seeing the beginnings of increasingly nationalist, state-driven capital and trade policies from the world's largest economies. Along with them, expect a sharp spike in national security tensions, state-driven industrial espionage, and a more confrontational approach on all sorts of issues from climate change to currency policy to weapons proliferation.

So it's time for the big powers to step up. If they can't succeed in solving some of these conflicts, expect a fourth wave even worse than the ones we've already ridden.



Why I'm Building Palestine

Soon, the only obstacle in our way will be the occupation itself.

When we launched our state-building plan for Palestine in August 2009, many dismissed it as an exercise in eggheadedness, extraordinary optimism, a dream. But here we are, feeling exceptionally, extremely validated by the scorecard so far: We have completed more than 1,500 projects, including the establishment of dozens of new schools, clinics, and housing projects and the construction of new roads throughout Palestine.

Building a Palestinian state was never intended to replace the political process, but to reinforce, and benefit, from it. The idea was to impart a sense of possibility about what might happen, what we would want to see happen: an end to the Israeli occupation and an opportunity for Palestinians to be able to live as free people in a country of our own.

Much is wrong with the context in which we're operating. But if we can reduce our problems to just the continuation of the occupation, then we are much better positioned to end it. It's the power of ideas translated into facts on the ground -- taking Palestinian statehood from abstract concept to reality.

This is hugely political. Yes, it's about technocracy. It's about putting institutions together and getting them to coordinate their activities, getting them to be better able to provide services like medical care and security -- that's what statehood is about. But if we manage to create that kind of critical mass of positive change on the ground, I imagine it would be very difficult for anyone looking at us fairly to then still argue that Palestinians aren't capable of managing something that looks like a state.

Here is the paradox that is trapping us: Majorities on both sides favor a two-state solution. But there is not a majority on either side that believes a two-state solution will materialize. This is the natural result of 17 long years of the disruption of the political process since the Oslo Accords. It's not surprising that people are cynical. I'd argue that the strength of our program derives, at least in part, from its transformative potential, in the sense that it really begins to allow people to see a state in the making -- in a way that grows on them, not happens to them, or for them.

Often, people come to the conclusion that it's hopeless. I understand that. But they're thinking about things in a static way. The state-building program goes well beyond the world as it is now. You begin to move; you begin to act; you begin to create new realities; and that in itself provides a much better dynamic. All this, I believe, feeds into a sense of inevitability that undercuts the pervasive feeling of despair. And this is a state that's going to be founded on the basis of values that are universally shared: openness, tolerance, coexistence, equality, nondiscrimination, and full sensitivity to the rights, needs, and concerns of others.

We want to have lasting peace with Israel. But you can't get to that point if everything you do is unidirectionally negative; we must create positive facts on the ground, and a sense of real mutual respect must begin to develop. Our late poet Mahmoud Darwish once wrote: "When peace is made it will be made between equals." That's what inspires me.