What now?

Alex Nabaum

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China road
Jeffrey E. Garten

The crisis we face is not focused only on America but is global in scope. Other nations are looking to America, which accounts for 25 percent of global GDP, not just to get its own house in order but also to lead an internationally coordinated effort towards recovery. President Obama must therefore perform a complex act of focusing at home and abroad at the same time.

The most important ingredient in meeting this challenge is the U.S.-Chinese relationship. China holds almost $2 trillion in monetary reserves -- by far the largest hoard of foreign exchange in the world -- and its continued strong growth is critical to the health of all Asia and beyond. China is now America's key creditor: its continued investment in U.S. securities and U.S. companies directly, not to mention its support of the dollar, are preconditions for America's recovery. America's ability to keep consuming Chinese products and its ability to maintain an open regime for foreign investment are also vital to the Middle Kingdom's economic growth. Beyond all that, the United States and China together hold the keys to essential reforms of global financial institutions that must also do their part to hold up the world economy.

The two most important structural adjustments in the global economy also involve the United States and China. America must transform itself from a nation ofoverconsumption to one where people produce more and save more. China's savings rate is 60 percent of GDP, absurdly high for a nation that is still very poor on a percapita basis, and its trade surplus is much too high as well. It needs to spend and consume. Without these kinds of fundamental changes, the world economy will remain dangerously out of whack.

President-elect Obama should focus on a new partnership with Beijing, born of mutual need, not just to save the world economy but to point it once again to a prosperous path. This is much easier said than done and will require sustained effort, the marshaling of America's top diplomatic talent, and some very difficult compromises. Hopefully, the right preparations are under way.

Jeffrey E. Garten is the Juan Trippe Professor of International Trade, Finance, and Business at SOM, where he was dean from 1995 to 2005. He was undersecretary of commerce in the first Clinton administration and, before that, a managing director of the Blackstone Group on Wall Street.