US still retains its hold : Business Line 20th November 2007

While the US has seen the emergence of several countervailing forces in the economic field, though not so much by design, it is still dominant in the political arena.

Is the US stronger or weaker today than it was, say, a decade and a half ago, when the Cold War had ended and the communist bloc was disbanded? This is interesting because when the Soviet Union broke up, it was felt that there would be no political countervailing power in the world and the US would tend to have its way.
It was also the largest economy in the world which symbolised economic progress and remained the anchor for the world at large. As a corollary, it was felt that their economic hegemony would also widen. But things have started changing in this century.
The US economy, while still being the largest one with considerable influence, is no longer the driving force in the world economy. The growth of the European Union, which works more like a single nation, competes favourably with the US economy and has the potential to be a growth driver.
The East Asian nations created another such informal group which drove the world economy and even though they did stutter in 1997-98, have recovered to hold their positions. China has emerged as another leader today and provides vital growth stimuli to the rest of the world; while India, Brazil and Russia are, along with China, some of the fastest growing nations. A large part of this growth foundation is coming domestically from these economies, thus insulating them partly from the US growth process. Strong influence over other nations
The US economy, though the forerunner still, is not known for prudent management. The fiscal deficit has been reined in, but the high current account deficit of nearly 7 per cent is almost double the prudential limit of 4 per cent set informally by economists.
The reason is that the country is spending beyond its means and manages to do so as the dollar is the anchor currency today and other surplus nations are willing to invest their surpluses in Fed bonds, thus supporting the deficit.
This brings to the fore the point that the dollar could be losing its glitter and the creation of the euro, which was expected to be a viable substitute for other nations, may just about be emerging as a more-sought-after currency.
Today, some feel that export indenting should be in euros. The fall of the dollar is another reason why the OPEC has been raising the price of crude oil.
Another area where the US exerted considerable influence over other nations was the indirect manner in which it extended its own policies. This was through the twin multilateral lending agencies — the International Monetary Fund (IMF) and the World Bank.
These agencies tended to enforce free-market economics on the assisted nations which was more in line with what the US wanted, though it could be expanded to encompass the western developed nations.
Now both the World Bank and the IMF have become relatively less important and potent with growth in the developing nations, in general, and proliferation of capital flows. Fewer countries have run into balance of payments problems and astute regulators are able to pre-empt such crises or take prompt corrective action.
The global capital flows have made countries less reliant on World Bank assistance, which could be directed more to the poorest of nations. The WTO impasse too has most fingers pointing at the US which has been named as being instrumental in trying to push forth unequal treaties. Maybe a decade ago, the US could have gotten the developing nations to agree to its terms, but the latter have now formed an informal alliance to resist such endeavours.
Also, it has been observed that the virtual monopoly power which was held by American companies, which had shifted partly to Japan and Germany in the 1970s and 1980s, has actually migrated to East Asia and China, which dominate the markets right from electronics and automobiles to minor consumer goods and toys. Clearly, the production centres are getting more diversified than they were earlier which has also contributed significantly to the rising import bill of the US.
The Federal Reserve, which is considered to be the most important monetary authority in the world, plays a dominant role, though individual central banks have ceased to pursue the path laid down by the Fed. Countries have tended to look more at their domestic conditions for formulating their policies and the Fed rate acts as best as a benchmark.
The Fed’s action to lower rates, despite the sub-prime crisis, has not made the Bank of England or the ECB follow suit.The political arena
While the US has seen the emergence of several countervailing forces in the economic field, though not so much by design, it is still dominant in the political arena. All the developed countries such as the UK, Germany and Japan either overtly or covertly have supported the US war on terror.
The developing nations are coming closer to the US in the latter’s crusade in this direction though, more often than not, the US has been placating them with economic incentives.
Russia and China are significant military powers, though they have discretely let the US take the lead in any such intervention. Therefore, invariably the US has taken the stick for its policies with Mr George Bush becoming probably the most disliked President both internally and externally.
The decline of the power of the US in the economic sphere has definitely been very gradual and the investment banks expect Brazil, Russia, India and China to be the future leaders. But the US has still retained its charm for being a true democracy which offers a plethora of opportunities and both Indian students and professionals would still cast their votes for a better life in this country. Therein lies the irony.