Global Policy Forum

By David E. Sanger

Throughout much of the 1990's, Washington had a standard — and somewhat preachy — message to the rest of the world: In an era when markets rule and military might is of limited use, a nation's influence rises and fall largely on its financial credibility.

That was easy to say when the country's markets were rising, its biggest companies were trusted to report the facts each quarter and the rest of the world wanted to look like America. But now that a chunk of that 90's success has been exposed as mythical — and markets have staggered back to pre-boom levels — a sobering question is settling over Washington.

If America's corporate prowess and clean markets were as much a source of its superpower status as its military might, could corporate abuses erode a key element of national power? Is America going to pay a diplomatic price for crony capitalism, as so many other countries have?

"There's no question it undercuts us," said Joseph S. Nye Jr., the Harvard professor who coined the phrase "soft power" to describe the non-military sources of American global influence. "We had a model that looked like it worked better than the European model, certainly better than the Japanese model — and it stood for no-crony capitalism. Now, that model is damaged, and, with it, so is a bit of our credibility."

Just how much is open to debate. But history shows there is a strong connection between a nation's attractiveness as a place to invest and its ability to shape the world in its own image. Ask the Japanese. So more than the fate of the Dow may be riding on the quality of the reforms that Congress and Mr. Bush agree upon in coming weeks.

"If you step back and look at the 90's, American prestige was enhanced by our fiscal strengths — the dollar was strong, the markets were strong, no one doubted that we were the safest place to invest," said Robert D. Hormats, a former senior State Department official who is an investment banker at Goldman, Sachs. "Now there is good reason to wonder whether we will be as generous with foreign aid" — which President Bush announced just a few months ago he wants to increase by 50 percent in the next few years — "and whether we will try to stave off imports, always a temptation in downturns."

If so, the rest of the world would see more of the hard edge of America, the America of pre-emptive strikes against its potential enemies, and less of the open economy the country hailed as a model for the world.

What the effects of that might be are hard to predict. The United States has not been through a major downturn since it emerged as the great winner of the age of globalization. So it has never felt the sting of what happens when the global investing herd stampedes out of the country. After all, until now America has been the undisputed gold standard, the safe haven in world storms.

Many in Washington argue that it still is. American clout hinges on far more than just the reliability of profit-and-loss statements — the power of its ideas, its culture and the astounding reach of its military are all part of the mix. This was a point President Bush underscored Friday when he escaped questions about corporate America's troubles, and his own behavior as a private investor, to travel to Fort Drum, N.Y., to bask in the reflected glory of the 10th Mountain Division, whose troops chased Al Qaeda through the caves in Afghanistan. But just as traditional American power is resurgent, the quality of its soft power is subject to more doubt than any time in recent history. Short-term effects are obvious. Even as Alan Greenspan assured the world that America's long-term prospects are good, foreigners pulled money out of the American market, sending the dollar spinning down. A single Euro, the European currency, is now worth slightly more than a dollar for the first time in two and a half years — and that's not because Europe's economic prospects have improved.

IT'S a sign that we have lost the moral high ground," said Lael Brainard, a former international economic adviser to President Bill Clinton who drafted some of the speeches on good corporate governance. "We were in the awkward position of lecturing all the countries on regulation, bankruptcy procedures, international accounting standards. In an ideal world, we would now admit we had a lot of problems of our own and welcome some ideas from the rest of the world."

Mr. Bush's aides may not agree and, when asked about the diplomatic impact of recent woes, they insist it will be next to nil. "There may be some lectures to our trade negotiators," one senior official said. "Maybe some more resistance the next time the World Bank and the I.M.F. hand out prescriptions to the Argentinas of the world, or to Indonesia. But that's around the edges. It doesn't affect the central issues we're facing."

The official is probably right in the broadest sense: it's hard to imagine the French or the Saudis invoking Enron as they push back at Mr. Bush's insistence that it is time to depose Saddam Hussein. But that is about brute power, not subtle influence. And influence is harder to measure, partly because its accumulation and erosion are harder to detect.

The Chinese, once the greatest economic power, understand that, or seem to. That is why they overcame domestic opposition to join the World Trade Organization, in hopes that they would not only attract foreign capital, but extend their influence in Asia.

The Japanese learned the lesson the hard way: they have seen great influence wane as the world lost confidence first in their companies, then in their government. As investors decided the Japanese islands were sinking in a sea of debt and deception, Japan's diplomatic influence around Asia and the world diminished markedly. And when pressed to reform, they passed weak measures and called them a solution — a cautionary tale for the Congress.

NO one is predicting the same for America — the Japanese, for example, had no military to make up for their loss of economic influence. America's culture continues to have a uniquely potent export power. And the American model of capitalism, however flawed, still seems to beat the alternatives.

"It will be hard for the Europeans and the Japanese to argue that their systems are better at stopping these kinds of abuses," says Walter Russell Mead, author of a new book examining the spread of American ideas. "But all these events are bound to have some indirect influence on foreign policy. This is a serious crisis for the Republican Party, and the Bush administration, and that means it weakens the administration's authority a bit. And there are risks."

Perhaps none of that will happen; perhaps these past months will prove to be just another ugly blip in American capitalism. But this is the first major American downturn since the country emerged as the winner of the globalization sweepstakes. The fact remains that when global success and global influence are commodities, it hurts when the world yells "sell."

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