This month may be recognised as the turning point in the United States’ role as the global economic system’s underwriter. True, the United States had had its share of frustrations and moments when its behaviour was far from multilateral, such as the Nixon shock of 1971 when the dollar’s convertibility to gold was ended. But there has been no event since Bretton Woods that compares to China’s attempt to construct a major new organisation and the United States’ failure to persuade dozens of its traditional allies, beginning with Britain, to stay out of it.
This failure of strategy and tactics has been in the works for a long time, and it should prompt a thorough examination of the US approach to global economics. With China’s economy rivalling that of the United States and emerging nations accounting for at least half of global output, the global economic architecture requires significant changes. In the United States, political pressures from all sides have made it increasingly dysfunctional.
The United States is the only country that has failed to accept the International Monetary Fund governance reforms that Washington pushed for in 2009. This is mostly due to right-wing opposition. This measure would have boosted global economic confidence by supplementing IMF resources. More importantly, it would bring nations like China and India closer to receiving a share of IMF votes commensurate with their increased economic might.
Meanwhile, left-wing pressures have resulted in widespread restrictions on infrastructure projects funded by existing development banks, which have consequently shrunk as funders, even though many developing countries now see infrastructure finance as their primary source of external funding.
With US agreements not being kept and US-backed regulations preventing other countries from providing or receiving funding through existing institutions, China was free to establish the Asian Infrastructure Investment Bank. There is debate over the tactical strategy that should have been taken once the initiative was presented. However, the broader issue at hand is one of strategy. Here are three principles that American leaders should remember.
First, domestically, American leadership must be bipartisan, free of blatant hypocrisy, and self-restrained in pursuit of self-interest. The United States will be unable to shape the global economic system if one of our major parties opposes all trade deals virtually and the other refuses to finance foreign organisations.
Other countries are annoyed when US officials implore them to change their policies, only to be told that state regulators, independent agencies, and far-reaching judicial rulings are beyond their control. This is especially true when many international companies claim that US activities are causing the serious rule of law issues.
The legitimacy of US leadership depends on our ability to resist the temptation to use it for personal gain, even if that gain appears irresistible. We can’t expect to keep the dollar’s principal function in the international system if we’re too hard on it to limit its usage for specific security goals.
Second, the middle class is the most important group in global and domestic politics. The current international schedule appears to mix elite concerns about intellectual property, investor protection, and regulatory harmonisation with moral worries about global poverty and posterity while delivering little to the middle. Approaches that do not benefit the working class in developed countries (or the growing urban population in emerging countries) are unlikely to succeed in the long run.
Third, we could be going to a world where capital is plentiful and deflationary forces are severe. For a while, demand may be in short supply. In any major industrialised economy, markets do not expect real interest rates to be much above zero in 2020, nor do they wish inflation targets to be met. Promoting investment, rather than enforcing austerity, must be the goal in the future. The current approach places the burden of adjustment on the ” borrowing countries.” Today, the globe requires a symmetric framework in which “surplus” countries are also subjected to pressure.
These principles are only the beginning, and there are still many unanswered questions. There are concerns about global public goods, acting with the speed and clarity that the contemporary era necessitates, governmental and non-governmental cooperation, and much more. What matters is that the previous month’s events are remembered as a wake-up call by future historians rather than the end of an era.