The Forgotten Battleground - Markets are supposed to be smart. So what are they trying to tell us?

The Forgotten Battleground - Markets are supposed to be smart. So what are they trying to tell us?
By Fareed Zakaria
© 2006 Newsweek, Inc.
Nov. 27, 2006 issue - President Bush flew halfway around the globe last week, but in a sense he visited another world. Bush is preoccupied almost entirely by Iraq, Iran, Israel, Lebanon, North Korea and, if he has time enough in a day, by Venezuela and Russia. His counterparts in Asia are focused primarily on something quite different: their own economic growth. And while roadside bombs may be what makes the daily headlines, it's ultimately economics that's likely to determine the international balance of power.

Consider a paradox: over the past five years, political turmoil has swept the world. It began with the attacks of 9/11, followed by bombings in Bali, Casablanca, Istanbul, Madrid and London. There have been two major American-led wars, in Afghanistan and Iraq, which are ongoing, protracted, expensive and increasingly destabilizing. Add to this the war between Israel and Lebanon, deadlock in Palestine, Iran's bid for regional supremacy, North Korea's nuclear test and Russia's growing clashes with some of its neighbors.

During this same period, the world economy has experienced its fastest five-year growth spurt in more than three decades. In fact, per capita GDP growth during these stormy years has been 3.2 percent, which is higher than any comparable period in recorded history.

Remember how terrified Israel was during its war with Hizbullah this summer—a war many Israelis say they lost? Well, both Israel's stock market and its currency, the shekel, were higher on the last day of the war than on its first day. This year Thailand had an old-fashioned coup, complete with a military takeover, tanks on the streets and a media blackout. The country's currency, the baht, barely dipped.

Markets are supposed to be smart. What are they telling us? That the current era of globalization is more powerful, widespread and resilient than many people realize. Today we are living through something practically unique—simultaneous growth worldwide. The United States, Europe and Japan are all doing well, but so are China, India, Brazil, Turkey and a whole slew of former Third World countries. Their rise is powering the new global order. Emerging markets now account for 30 percent of the world economy and for 50 percent of global growth last year. One important benefit has been that advanced industrial nations have maintained extremely low interest rates for almost two decades, enabling some countries—such as the United States—to grow faster than many experts predicted. This could not have happened without two global deflation machines, China and India, which keep prices low in goods and services, respectively.

If this sounds as if everything will work out fairy-tale style, it won't. Global growth has its own complications. Demand for raw materials and energy is high and will keep rising. Countries that possess such resources—Iran, Russia, Venezuela, Saudi Arabia—become islands of exception to the very rules of markets and trade that are sweeping the world. Thus global capitalism produces its own well-funded anti-capitalists.

Growth is also producing environmental degradation on a colossal scale. For those who worry about the United States' not signing the Kyoto accords, keep in mind that China and India are already constructing 650 coal-fired power plants, whose combined CO2 emissions will be five times the total savings envisioned by the Kyoto accords.

For the industrialized world, the new global economy produces new stresses and strains. With hundreds of millions, if not billions of new entrants to global markets, Western workers fear for their wages. With new players in the global economy, industries of all kinds face new competitors.

There is no way to turn off this global economy, nor should one try. Every previous expansion of global capitalism has led to greater prosperity across the world. The story of the past 100 years is one of an ever-expanding pie. But this is a massive, complex process and requires enormous focus and attention. And while other nations around the world, from China to Chile, are playing to win, the United States as a government has barely focused on any of the major challenges or opportunities that it presents. We're too busy settling disputes between Sunnis and Shiites in downtown Baghdad.

A century ago, another great global power was similarly occupied halfway across its world, fighting a war and organizing the constitutional arrangements of Dutch farmers in the Southern Transvaal. Great Britain eventually won the Boer War, but it lost its focus on the economic challenges it faced. And finally it lost something else: its standing as one of the great global powers.

Correction: An earlier version of this column incorrectly stated that the British lost the Boer War.