Brad Setser

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Cross border flows, with a bit of macroeconomics

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The changing balance of global financial power

by Brad Setser
August 14, 2008

Not only do we live in a new “age of authoritarianism,” but we live in a world where autocratic governments increasingly finance democratic governments.

Consider a chart that shows the increase in the foreign assets of the world’s more authoritarian governments v the increase in the foreign assets of the world’s democratic government.


Right now, autocratic governments generally don’t finance other autocracies. China’s capital account is closed to Gulf sovereign funds (nearly) as tightly as it is closed to private hedge funds. China’s government is no more able to buy a stake in the Gulf’s national oil companies than private investors. China, Russia and the Gulf are all building up large financial claims on the United States and Europe far faster than they are building up financial claims on each other.

In the first chart, I included Russia and Venezuela alongside the world’s authoritarian governments. That can be debated. Both Putin and Chavez have authoritarian sides, but both have also put their governments up for a vote. But separating Russia and Venezuela out doesn’t change the story much. The rise in the foreign assets of the world’s less-than-perfectly-democratic government is driven overwhelmingly by the rise in the foreign assets of the People’s Republic of China and the Gulf monarchies.


Both graphs, incidentally, are drawn from a paper that I have been working on over the summer, so stay tuned. The graphs include estimates for new inflows into sovereign funds (and the increase in the foreign assets of Chinese state banks) as well as the growth in central bank reserves. And yes, they indicate that the increase in the foreign assets of the world’s governments – particularly governments in the emerging world — over the last four quarters has been truly extraordinary.

Earlier this week Gerald Seib noted — quite correctly — that high oil prices have increased the financial power of the world’s less-than-democratic oil exporters. Throw in the fact that high oil prices have yet to put a dent in China’s current account surplus or the accumulation of China’s foreign assets, and the shift in financial power away from from democratic governments is even more pronounced.

To me, one of the world’s greatest ironies is that US dependence on authoritarian governments for financing has soared over the last four year. US rhetoric hasn’t matched financial reality.

Though I guess it is equally ironic that Russian purchases of Treasuries over the past few months have helped to finance the current US aid mission to Georgia.

One thing is clear: the world’s biggest financial powers are no longer the world’s large democracies. A gathering of the countries that matter for global economic coordination will no longer be a gathering of the leaders of the world’s big democracies. Coordination among the large democracies was never easy — and likely will only get harder as additional countries have to be brought in.

And that I suspect this is among the least significant — though among the most visible — ways the world will change as financial power moves away from the world’s big democracies.

Update: Both Paul Krugman and Steve Waldman touched on similar themes today. Both are worth reading.



  • Posted by FPR


    Comparative politics? You write for a website dedicated to US hegemony. There was always an unstated assumption behind your China monomania and that was the Chinese economic threat to US political power. It’s good you finally got it out in the open because capitalism has no country.

  • Posted by bsetser

    FFR — I am rather surprised that you consider China capitalist …

    state ownership. check
    state control over key prices. check
    state subsidies for key industrial inputs (like energy). check.
    state rationing of credit. check
    state intervention in the fx market. check.

    i fully realize that China’s success has been linked to some forms of liberalization — and the notion that China’s economy is planned form beijing is off. but describing China as capitalist is also — in my view — an oversimplication. China’s government is the one investing abroad, not China’s citizens.

  • Posted by don

    I hope this is not too far off topic, but there may be another balance changing – the balance between U.S. borrowing needs and the supply of excess saving from Asia and oil exporters. U.S. consumers are starting to spend less and, while part of the shortfall in borrowing demand is being made up with U.S. government borrowing, the U.S. current account (which is the net of public and private borrowing) is improving slightly. My question is, does this imply greater pressure needed to match the global supply and demand for credit and, perhaps, greater dollar appreciation?

  • Posted by Stormy

    Despite the flaws mentioned (how we classify countries), this post is a rough start on something very important.

    Question: Where is India?

    Suggestion: Include in your second graph the average price of oil for each year. What you will see that the shift you indicate occurred well before the rise in oil. While oil certainly has dramatically accelerating the wealth of the petro-states, it does not account for China.

    Following are just additional suggestions:

    1. Use slightly different categories: Democracies = Europe, Japan, North America.
    2. You might want to start with graphing each of the major countries…and tuck the rest under “Other.” Categories might suggest themselves then….those with important resources, for example.

    Again, you are on to an important shift–

  • Posted by Glen

    Brad says: i fully realize that China’s success has been linked to some forms of liberalization — and the notion that China’s economy is planned form beijing is off. but describing China as capitalist is also — in my view — an oversimplication.

    You are obviously right in terms of what criteria we would use to define textbook capitalist systems. Question is if those criteria are actually met, and whether ‘our’ systems are actually working like that today. I’m not so sure. Living in China, being Danish and having been everywhere in the Western world, I am convinced that I’ve never met a more naturally capitalist people than the Chinese though.

    Btw. when you look at China, the current is always interesting, but as Franz correctly said, China is about long term planning – and things are looking up, however gradual and often problematic.
    Napoleon adviced to let China sleep. In many ways China is only just about to wake up still, and the state investments are simply a preample to what will come when the Chinese people and companies have less constraints on them. I know its ‘off’ in terms of what you wanted to say, but I really think it is a necessary abstraction.

    Rien: Very interesting comments as per usual.

    Judy Yeo wrote: Not too sure if Russians or other countries, particularly in the EU see a non-authoritarian side to Putin or Chavez for that matter.


    The vast majority? Surely not. We have MSM too, you know… Most put the Ossetia debacle squarely on Russia and the obvious story is dismissed as the stuff of conspiracy freaks.
    Again – there’s very little enviable about the Kremlin rule if you believe that Western IDEALS are basically mostly good (and I profess to do so), but that doesn’t mean that the prism most Europeans use to understand for instance Russia isn’t ideologically and historically skewed to the n’th degree.
    That Russia is only – at best – quasi-democratic should be a trivial conclusion though. Politkovskaya cannot have died in vain that much.

  • Posted by gina

    I find it almost amusing that people call GW a democratically “elected” presided . He was appointed by the supreme court (a rather unconstitutional move on their part) the first round and blatantly stole the second term. Face facts we have lost the right to call America a democracy it is a fascist state rapidly devolving into a police state

  • Posted by Joe Hoofnagle

    This change in global financial power is a direct result of the insane US policy fir the last 30-40 years of not exploiting our natural resources (OIL) and instead, obtaining it from foreign sources by transfering OUR wealth to THEM. The environmental lobby has successded in weakening us to the point where we are now unable to defend ourselves against foreign aggression (such as 9-11). Ref the comments here about spreading democracy at the point of a byonet for example. HORSE SPIT!! Geo W was attempting to defend us against further aggresion by radical Islam by spreading democracy to them, and if we fail we die.

  • Posted by Joe H

    gina, I have news for you, the FIX was algore trying to steal fla by only recounting those precencts favorable to him rather than recounting the whole state of fla. It has since been proven that a recount of the WHOLE state proved GW won fla. Since the fla supremes agreed with algore’s attempt to steal fla in this manner, the US supremes was the only avenue left to save our dempcracy from the algore thievery. GW won; algore lost. GET OVER IT!!

  • Posted by Charley2u

    “Though I guess it is equally ironic that Russian purchases of Treasuries over the past few months have helped to finance the current US aid mission to Georgia.”

    I think this is on target, but misses the real insight: all US military spending since 1970 have been funded by the US trade deficit.

    The fact that the source has changed is of less consequence than this fact.

    The true consequence, for us, is that in the absence of such funding the vastly larger expenditures of the US versus the rest of the world on its military will have to come at the expense of domestic consumption.