Thursday, May 22, 2008

The World has changed: When will American realize it?

Two recent articles by well-known authors are particularly insightful, yet particularly troubling. These articles are the work of Fred Bergsten, director of the Peterson Institute for International Economics, and Thomas Friedman, on the editorial staff of the New York Times. Bergsten’s article in the May 20 Wall Street Journal: Friedman’s article in the May 21 New York Times: The nature of these articles is troubling because they both deal with what is happening in the world these days and how the United States government, all parts of the government, seems to be missing the boat.

Whereas these articles are not directed toward areas that I generally deal with, they are very important because they paint a picture of how the world has changed and is continuing to change and the failure of those in leadership positions in the United States to recognize the changes and productively deal with them. Both of these articles relate to the rising power of other nations in the world order.

Bergson is interested in world trade and the role that the United States is to play in this world trade. He is particularly concerned with the move in Congress to change the rules relating to congressional action on trade legislation. His concern is specifically in reference to the free trade agreements with Columbia, South Korea and Panama. The move of the Democratic leadership in Congress, Bergson argues, is leading to a collapse in the credibility of the United States and a decline in international trust. It relates to the willingness of the United States to negotiate faithfully with other sovereign nations. The United States has seemingly developed a bi-partisan approach to international relations, from both the Bush administration and Congress, that others in the world community can only label as unilateral.

Bergson contends that this will “remove the U. S. from any significant international trade negotiations for the foreseeable future.” Given the “large and dynamic economies of Asia”, the strength of the European Union, and the wealth amassed in the Middle East, there is a good possibility that trade pacts will be negotiated within and between these trading centers, pacts that will discriminate against rather than include the United States. The world has changed and the United States is going to have to adapt to it.

Friedman approaches the situation from another direction, but he starts off his essay by stating that a new President may not have to worry about who the United States should talk with because, “The real story is how few countries are waiting around for us to call.” Again, the picture is one of an America that has gone off on its own, believing that it can act as the sole super-power in a world in which it can always get its way. The world has changed and we, the Americans, have not been paying attention.

“It is hard to remember a time,” Friedman goes on, “when more shifts in the global balance of power are happening at once—with so few in America’s favor.” He focuses on three of these shifts that he considers to be the major changes that have taken place. First, due to the failure to develop an energy policy large, transfers of wealth have been channeled toward “petro-authoritarians” and from this wealth, power will follow; second, the “rise of the rest”—BRIC and other rapidly growing nations—is resulting in growing “clout and self-assertion” that is being felt throughout the world; and third, the changing nature and location of leadership which is resulting in changing networks of communication and action.

I don’t want to get bogged-down in the negative aspects of this and I believe that there is enough blame to go around so that finger-pointing will not get us anywhere. The crucial issue, to me, is that the world is different from the one most of us believed existed and something needs to be done about it.

The United States is still a superpower, the only superpower. Yet within the globalized world that it desired and fostered, this power has become diffused. A lesson that has been learned in other areas is that a true monopoly is only local. Businesses have seen that they can dominate a geographic region because of the barriers to enter a market and the economies of scale that they can achieve within this area. However, when the local monopoly places an emphasis on growth and expansion into larger and larger areas it often finds that the expansion does not always produce the results it had anticipated. The larger market area contains more competitors that are not prevented from fiercely competing with the former monopoly and, due to the larger size of the market, the economies of scale that the firm relied on in the past are now not sufficient to differentiate the former monopoly from these other organizations.

The United States, rightly, I believe, pursued a policy of globalization. The success of this globalization can be observed throughout much of the world with many rapidly growing dynamic economies providing evidence that open trade can benefit many, many people and reduce poverty in major ways. But, as the rising level of economic performance has spread throughout the world, this globalization has rebounded back on the United States. As the rising levels of wealth and power among these nations has resulted in increasing self-confidence and authority, these nations have begun to talk with one another and have become more self-assertive. And their success has fostered a rising self-respect and willingness to stand up for themselves. Most believe that this trend will not end any time soon.

The economic policies of the United States in the last seven years have also contributed to the growing independence connected with the “rise of the rest.” Because of the monetary, fiscal, and regulatory policies followed by the United States during this time, the trends that were already in place, but that were unrecognized by the leadership, were stimulated and even encouraged. Whereas other nations around the world had come to the conclusion that they could not run their economic policies independent of the rest of the world, the United States acted as if this knowledge did not apply to them. The result was that the United States, economically and financially, got further and further into a hole. The leadership did not seem to realize that more of the same was not the answer. As Friedman concludes his essay, “The first rule of holes is when you’re in one, stop digging.” But, it still remains to be seen when we in the United States will understand this.

Others are moving, even if the United States is not. For example, Friedman reports on the testimony of Gal Luft, an energy expert, before Congress where Luft says that with oil at $200 a barrel, “OPEC could ‘potentially buy Bank of America in one month worth of production, Apple computers in a week and General Motors in just 3 days.” As many know, the purchase of United States assets has already started. With a continuing rise in the price of oil…it will just accelerate if nothing else is done.

Another example pertains to the decline in the value of the dollar. In the Financial Times on Monday, May 19, Harold James writes about the possibility that the Eurodollar will become “the world’s hegemonic currency.” This may result from the weakness in the value of the US dollar and the fact that the eurozone is overtaking the United States as the world’s largest economic area. Unless things change, James surmises, this could result in a passing of the baton. You can read his article at

One final example is the suggestion of France’s finance minister who recently urged action by central bankers to reduce the “misalignment” in the world’s major currencies…especially “the low American dollar":

The world that the new President is going to inherit is not the world that the candidates are now talking about in the campaign for the presidency. In one sense we can be thankful that the political discourse seems to have moved from that dominated by the attitudes of the 1960s. Hopefully, we can move the discussion about economic possibilities, policies, and programs into the 21st century.

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