The Shadow Market: How a Group of Wealthy Nations and Powerful Investors Se cretly Dominate the World
by Eric J. Weiner
New York: Scriber, 2010
Since the mid-1990s, the global system has been characterized by rising interdependence and a reconfiguration of power among a wide range of state and nonstate actors. Many analysts have commented on these developments. In this highly-readable but somewhat foreboding account, financial journalist Eric J. Weiner contributes to that general line of discussion. He defines the shadow market as "a collection of unaffiliated, extremely wealthy nations and investors that effectively run the international economy through their prodigious holdings ... of financial instruments, which they keep in unregulated investment vehicles such as hedge funds, private equity funds, and government-run sovereign wealth funds, as well as in vast government-owned companies." His label suggests that shadow market transactions have been conducted absent the bright light of public scrutiny.
Mr. Weiner's central argument is that over the past 15 years, China and the oil exporting countries have amassed stockpiles of highly-liquid financial capital, which in the current era are an increasingly important element of geopolitical power. Furthermore, those countries are learning how to transform that element of power into an effective instrument of power as they pursue their foreign policy objectives. That development does not bode well for the United States, which has structural weaknesses in its financial and external balances and is to an ever-greater degree reliant on inflows of foreign capital. Nor does it bode well for Europe, which was confronted with economic challenges even before the onset of the still ongoing Greece-centered financial crisis.
Mr. Weiner begins his discussion in startling fashion. He describes a crisis-simulation exercise conducted in Washington DC in March 2009. Players representing the United States pursued a broad range of global security objectives. Meanwhile, players representing China remained conservative and focused in their play. They inflicted damage on a vulnerable United States by releasing a relatively small portion of their holdings into the financial markets, thereby sending asset prices into a tailspin and undermining the US economy. Did such actions reduce the value of the assets still in the hands of the Chinese? Yes, but that cost was much less than the benefits associated with successfully achieving the country's geopolitical objectives.
The middle chapters of Mr. Weiner's book are well-done. He relates in masterful fashion numerous detailed accounts of episodes that illustrate how economic power now permeates foreign relations. One anecdote among many suggests the tenor of things. On 20 August 2009, the Scottish government returned Mr. Abdel Basset Ali al-Megrahi to Libya. He had been serving a life sentence for masterminding the December 1988 bombing of Pan Am flight 103 over Lockerbie, Scotland. …