In July, I spoke at a London conference with the gloomy title "Darkest Before the Dawn." That darkness hung over the meeting, as economists and strategists, both behind the podium and in the audience, detailed the growing international anxiety over America's financial crisis and its potential impact on global markets. Nevertheless, most of them seemed convinced that better days are coming.
As a political scientist, I fear the dawn may be farther behind the horizon than some expect, as four emerging trends pose broader and deeper challenges to the international order than we've seen in several decades.
The first of these drivers of long-term change involves energy. In 1990, the world consumed about 66 million barrels of crude oil per day. By 2007, that number had climbed to 86 million. The U.S. Energy Information Administration projects that by 2030, daily demand will soar to 118 million barrels. As energy consumption soars in developing countries like China and India, supply is struggling to keep pace.
The problem is not that the world is running out of oil. It's that future supplies will come increasingly from politically less stable parts of the world—the broader Middle East, the Caspian Sea basin, and West Africa. These regions are especially vulnerable to political turmoil, terrorist and insurgent attacks, war, government collapse, and other serious threats.
And, of course, the sixfold increase in oil prices since 2002 has empowered the governments of some oil- and gas-exporting states to use their newfound market leverage as a political weapon. Political leaders in Russia, Iran, Venezuela, and others already use their hydrocarbon wealth to pick political fights. High prices allow even marginal energy exporters like Sudan and Burma to resist international pressure for political reform.
Finally, as energy becomes an ever more precious commodity, the governments of developing states are micromanaging their energy policies by investing in national energy champions, state-owned companies that give government officials near-complete control of the country's most valuable natural resources.
The largest energy companies in the world today are state-owned firms like Saudi Aramco, Gazprom (Russia), CNPC (China), NIOC (Iran), PDVSA (Venezuela), Petrobras (Brazil), and Petronas (Malaysia). The leading multinationals—Exxon Mobil, Chevron, BP, and Royal Dutch Shell—produce about 10 percent of the world's oil and gas and hold just 3 percent of its reserves.
Collectively, national oil companies now own more than three-quarters of all crude oil reserves. The men who run them answer to political bureaucrats, not shareholders. That's a big problem for supply growth, because some of these state officials divert profits toward political projects (or line their own pockets) instead of reinvesting them in efforts to find new reserves and to build the pipelines needed to bring them to market.
The effects of all these risks can increase the prices that consumers pay for energy, weighing on growth in America, Europe, and Japan. They can embolden governments like Iran's to pursue high-risk political strategies—like aggressive development of a nuclear program—secure in the knowledge that energy exports will generate plenty of cash and help the country resist international pressure for change. Few governments around the world want a nuclear Iran. But the country's energy customers won't support sanctions that might cost them access to badly needed oil and gas supplies.
The second shift in the international balance of power is a related one. The growth of state capitalism, particularly in China and the Middle East, gives authoritarian governments with opaque political systems and large amounts of cash unprecedented levels of political and economic influence.
With the end of the Cold War, the dynamism and market power of the United States, Western Europe, and Japan—fueled by private wealth, private investment, and private enterprise—seemed to have established the dominance of the liberal economic model. But public wealth, public investment, and public enterprise have returned with a vengeance. An era of state capitalism has dawned, one in which governments are again directing huge flows of capital—even across the borders of capitalist democracies. The trend has important implications for free markets and international politics. Best recent estimates are that sovereign wealth funds, state-controlled pools of capital fueled by large reserves of foreign currencies, already account for about 12 percent of international investment—double their share of five years ago. Some credible forecasts suggest their assets could grow 500 percent by 2015. Twelve new funds have been established since 2005. More than 20 countries now have sovereign wealth funds, and several more have indicated an interest in creating them.
Yet despite the fast-growing market power of these sovereign wealth funds, we still don't know much about them. "Very few of them publish information about their assets, liabilities, or investment strategies," warns the International Monetary Fund. Some fear the states that control them will use these funds to gain political leverage inside other states.
This shift in the international balance of market power is generating considerable anxiety among U.S. and European policymakers, who fear that emerging-market-based national oil companies, state-owned enterprises, and sovereign wealth funds threaten the economic stability and national security of other countries. Whatever the political motivations for creating them, state-run companies and investment funds are burdened with the same bureaucracy, waste, and political cronyism that plague the (often authoritarian) governments that control them.
The third important geopolitical shift flows from technological advances that arm ambitious and aggressive governments, organizations, and even individuals with powerful new weapons. The tools of the information age help citizens connect and collaborate with one another and with the world outside. In recent years, we've witnessed the birth of a truly global talent pool—and have seen what it can do to generate prosperity in several countries at once. At the same time, weapons technologies—missile-guidance systems, chemical and biological agents, and nuclear know-how—are also cheaper and more widely available than at any time in history. In the past 10 years, India, Pakistan, and North Korea have officially joined the nuclear club, and the trend toward proliferation will likely intensify over the next decade.
The fourth and broadest shift in the international order flows from the transition from a U.S.-dominated system toward a nonpolar world, one in which the leading political and economic institutions no longer reflect the true balance of global power.
As U.S. hegemony gradually fades, the international leadership vacuum will grow. Other states, profiting from America's troubles or at least not wanting to share in them, will resist taking on new international responsibilities that come with costs and risks. All this comes at a historical moment in which the usefulness and legitimacy of the United Nations, World Bank, and International Monetary Fund are already open to question. On a variety of transnational issues—nuclear nonproliferation, counterterrorism, and public health and environmental worries—this trend means that problems can easily become crises.
So much for the darkness; where's the dawn? As rising energy prices create political problems for the governments of countries that depend on oil-supply growth, we'll see a surge in investment in new energy technologies and infrastructure. That process, still in its infancy, is already moving forward.
State capitalism will threaten the performance of global markets until the demands of the marketplace push a range of authoritarian states toward the fundamental political reforms that bring greater transparency. Addressing the diffusion of dangerous technologies will require, among other things, a new and more effective nonproliferation regime. But as more countries develop an interest in preserving a profitable status quo, we're likely to see more movement in that direction.
None of these transformations is right around the corner. Lifting the darkness will take more than a new business cycle, a new oil find, or a new American president. Without fundamental changes in the global system, none of these challenges can be met. The good news is that necessity remains the mother of invention, and that almost everyone appreciates a beautiful sunrise. As a greater number of governments and citizens own a stake in global economic growth, more people than ever will be looking for ways to coax the sun from behind the horizon.