In 1992, I met Francis Fukuyama when he was touring his book The End of History and the Last Man and explaining to anyone who would listen that the world had reached a point where there was no longer any meaningful dispute between Marxism and the market. More particularly, he said, it looked as though Western liberal democracy was becoming 'the final form of human government'.

It was such an alluring and hopeful phrase, as though a process of evolution was about to reach its happy conclusion. The rest would be simply a matter of management and education. I wonder how he accounts for the state of affairs at the end of the 2007 in which Russia and China appear to be doing rather well without following the example of Western liberal democracy and, indeed, challenge the model with disdain. The Russians, for instance, rather than becoming more democratically inclined have become less so. In a recent poll, just 20 per cent of Russians said they favoured democracy and a market economy.

For a vast number of the world's people, democracy is an aspiration that comes some way after security and prosperity. The two great powers of the communist era end this year more confident than at any moment since the fall of the Wall. And what is interesting is that their sense of purpose and defiance is accompanied by doubts in the West about the strength of our economies and uncertainty about the direction of our democracies. Forget Islam and Islamism: these are the important undercurrents of 2007.

Within less than a decade or so of the founding of the slightly risible organisation the Project for the New American Century, Time magazine has honoured - even though it says it is not an honour - Putin for making his country 'critical to the 21st century'. The dollar has collapsed to hover at 50p and America's war in Iraq, which now well exceeds its involvement in the Second World War, has cost $600bn, a sum which Nobel Prize-winning economist Joseph Stiglitz believes will reach $1 trillion.

This is a credit-card war. Americans will be paying Chinese banks for years after George W Bush has left office. Even though the current war costs about 1 per cent of America's annual $13,247bn GDP (Vietnam represented about 9 per cent), it is difficult not to see a perfectly plotted story line in this. America, the only superpower of the moment, is financed by its chief competitor in a prolonged exercise of distraction that absorbs a huge amount of money and much of its policy making and diplomatic energies. At the same time, the very nature of that distraction weakens US influence all over the world.

While the US frets about surges and troop withdrawal and bringing democracy to people who do not necessarily see its advantages, China extends its influence across the world, increases its defence budget by 17 per cent, fires something called a direct ascent anti-satellite missile to atomise one of its own weather satellites, the implications of which were certainly not missed by the Pentagon, and launches massive computer hacking operations against Western governments and businesses. There have been some 37,000 attempts to breach American security which emanated from China.

A few years ago, I visited Sudan with a friend. In our few days there, we encountered just two or three Americans. Other than the impotent rage about Darfur, there appeared to be no useful American engagement with Khartoum. The Chinese, on the other hand, were flying planeloads of oil and construction workers into the country, building Chinese hotels that would be exclusively serviced by Chinese staff. Nothing seemed to represent the rise of one influence and the decline of another. If you want a further example, it is the acquiescence of the fifth most valuable company in America, Google, to Chinese censorship.

The project for the new Chinese century has been well underway for some time and it is striking how intelligent the Chinese have been, extending their influence while rarely indulging in the big swinging dick diplomacy which can so easily sidetrack a government. That is not true of Russia, which over the last year has opted to challenge the West at practically every turn, whether by planting a flag on the seabed beneath the Arctic icecap, testing the massive ordnance air blast bomb with all the joy of kids letting off fireworks in the park or disputing the siting of US early-warning defence systems in eastern Europe. All this goes down very well at home, where people are beginning to feel the benefits of a GDP which is three times what it was in the 2002. Oil prices account for most of the rise, but there is a growing middle class with more money to spend and a sense of renewed national pride.

Putin has done little to update the infrastructure of his country, but Russians see that the modest improvements in the standard of living have been achieved at the same time as their President was moving against a free press and political opposition. The phrase used by the Kremlin is 'sovereign democracy', which makes a nationalist virtue of the decline of civil society and the rule of law, presenting both as an unwholesome foreign influence.

So much for Fukuyama's 'final form of human government'. Putin openly denies America's right to claim moral superiority or to know the secret of how governments should act in the 21st century. People who lecture Russians about democracy and the rule of law are told by Putin that 'they do not want to learn the lessons themselves'. It is a bully's argument, but he can at least demonstrate that the West's record is not perfect in this regard. Guantanamo, the Patriot Act and the general attack on constitutional rights in America and Britain do not help our case.

A recent poll published in the International Herald Tribune showed that a majority of Americans believed that their country is a threat to world peace and a similar proportion say that America is weaker today than at the start of the Bush administration. These are the great challenges that face the individual who will succeed Bush this time next year. America is still vastly more powerful and wealthy than any other nation on earth. With just one-fifth of China's workforce, America's GDP is nearly five times that of China's. Whatever the economic crisis of the year ahead, that relationship is not going to change overnight.

The new President will need to go on a charm offensive that must begin before he or she is even elected. America has to find a way of speaking more quietly while still carrying that big stick and if it is going to persuade the new middle classes of China and Russia that it has a moral leadership to offer the 21st century, it must adhere to the democratic values that it wishes to seed elsewhere and lead rather than follow on climate change.

To sound a note of optimism at the end of this rather scratchy, chaotic year, there are definite signs that opinion in both these areas is on the move among Americans.

henry.porter@observer.co.uk