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Capitals of Capital

NEW YORK – Recently, China’s government announced that it wants Shanghai to become a global financial capital equal to London and New York by 2020. An ambitious goal, which may or may not be achieved. But China’s aspirations also underscore a worrisome and increasingly pervasive new reality: political officials are making decisions normally left to markets on a scale not seen in decades.

Like the financial crisis itself, this trend is now global. Political leaders in dozens of countries are making decisions that will drive the performance of local (and global) markets for the foreseeable future.

In China, exports fell by more than 25% in February. Not to worry, said Premier Wen Jiabao: the Chinese government has “adequate ammunition” to add to its $586 billion stimulus package, a plan meant to create millions of jobs via enormous government investment in transportation, energy infrastructure, housing, and other large-scale projects.

In India, where government is more often considered a drag on commerce than a catalyst of growth, the decisions that move local markets are now more likely to come from bureaucrats in Delhi than from innovators in Mumbai. In fact, the Congress Party-led government, anxious to appear responsive to public demand for help during an election-year economic slowdown, has pushed forward three stimulus packages since December.

The bottom line: to find out how, when, and where assets will be allocated and wealth generated in dozens of countries across the developed and developing worlds these days, we must now look toward political, not financial, capitals.  

This trend will spell trouble for longer-term global economic growth. First, it’s tough enough for leaders within the Chinese Communist Party elite to agree on economic-policy priorities. The challenges facing US President Barack Obama as he tries to win support for risky and expensive policy options from quarrelsome Democrats and obstinate Republicans will create some tortured legislative compromises.

That pattern is being repeated elsewhere. In Russia, Ukraine, Hungary, Pakistan, Turkey, Malaysia, Mexico, Nigeria, and other states, battles among domestic political factions will yield often-incoherent responses to pressing economic problems.

Second, if it’s difficult to forge consensus within one country on how best to promote growth, imagine the same argument on a global scale. Most politicians craft policy to serve their local constituents and to protect their personal political capital. Reinvigorating global growth runs a distant second.

In Washington, many Democrats will use these policy debates to capitalize on popular fury at Wall Street, while many Republicans look for an opening to capitalize on hoped-for public anger at the Democrats. Some within the Chinese Communist Party leadership will support plans to engineer a shift from export-led growth to a model based on domestic consumption. Others will try to direct state funding toward their personal investment projects. Factions within the Russian, Indian, Mexican, and South African governments have their own competing political priorities.

With so many political officials crafting crisis responses to solve local problems or to create local opportunities, how likely are they to agree on a unified international approach?

Our first glimpse of the trouble in coordinating an international response to the financial crisis came last November, during the emergency G-20 summit in Washington. To get the G-8 to agree on priorities is a complicated enough; building consensus within the G-20 is exponentially more difficult, not simply because of the larger number of players involved, but because many of them don’t agree on the most basic rules of the global economic game.

While the April G-20 summit in London produced more economic-policy agreement than expected, this was largely because the most divisive issue – the US and British demand for more global stimulus spending – was removed from the table beforehand. As a result, the smiling presidents and prime ministers could afford to be more diplomatic than Czech Prime Minister Mirek Topolanek, who, in his role as acting president of the European Union, had warned that Obama’s economic plan would lead others down a “road to hell.”

Topolanek wasn’t at the G-20; his country is not a member. And, while British Prime Minister Gordon Brown agrees with Obama that the world’s leading industrialized countries must stimulate their domestic economies as much as they can, Bank of England Governor Mervyn King has warned that Britain may already have taken on too much debt for another round of stimulus.  

However frightening the global recession, a coordinated and coherent response to it by the world’s political leaders remains highly uncertain at best. And the increasingly heavy influence of political factors on market performance will likely weigh on global growth for years to come.