Whether it is the ASEM summit in Beijing or the G-20 meeting convened by President George W. Bush in his last weeks in office, it is obvious that the present global financial turmoil is recognized as being an international problem that needs to be handled globally in a cooperative manner. It is difficult to find a precedent for such a cooperative approach towards finding a global solution.
That should demonstrate beyond all doubt the globalised character of the international economy and the degree of economic interdependency that has developed among nations of the world. The last comparable crisis of similar global magnitude was the Great Depression of early thirties of the last century, though it was not tackled globally in a cooperative way. That too called for a massive intervention by the state in the US. On that account, there was a significant amount of opposition to the New Deal policies of President Franklin D. Roosevelt from the devotees of free market. But the opposition did not prevail then, just as it has not in the case of the present crisis.
What we are missing today is leadership of Roosevelt caliber. In his inaugural speech, Roosevelt proclaimed that what people had to fear was fear itself. That sentiment will apply to the situation today also.
The Roosevelt era was the beginning of the rise of the US as the hegemonic power in the world. The Second World War and the Cold War which lined up Western Europe, Japan and, after 1971, China too, behind the US made the second half of 20th century an American century. The Soviet Union collapsed in 1991 and communism as an ideology was abandoned in most of the world, including China and Russia.
Economically, the international system got globalised. The European Union evolved with a GDP close to that of the US. Russia, China, Brazil and India emerged as trillion-dollar economies. Increasingly, the centre of gravity of international economy was shifting to Asia. A significant proportion of American GDP was generated from financial services. Going in for several layers of mortgages and derivatives was considered innovative and a smart trade practice and crony capitalism ensured that regulation though prescribed by law was not enforced with necessary vigor. At one point of time the irrational exuberance of the market was commented upon in the US but was not followed up with greater vigilance by the regulating agency. In the last few years, the possibility of likely retrenchment in the US economy had been forecast in international intelligence assessment documents, though not the magnitude and rapidity of decline. The net result of all these developments is, to quote Manmohan Singh, "when the capital
development of a country becomes the by-product of the activities of a casino, the job is likely to be ill-done."
Therefore, there are proposals for radical overhaul of the Bretton Woods institutions and to develop a global polity to provide effective governance and supervision of globalization of economy. In 1945 the victorious US had its way in fashioning the global economic order and shaping the World Bank and the International Monetary Fund.
Today, the US is not a victorious power but in need of global assistance for its economic recovery. There is clear realization within the US that days in which the Americans could sustain an extravagant consumerist lifestyle based on the savings of the rest of the world and financed by massive trade deficits and foreign investments are over.
After this crisis, foreign investors will be very careful in accepting the ratings offered by US credit rating firms and exposing their investments to US financial institutions without extraordinary checks. The US will be the world's largest debtor country and will have deficit budgets for many years to come. Against this background, the US will face major problems in financing its expanding social security and medicare. It is therefore natural to expect the impact of these factors on the US foreign policy and exertion of sobering influence on the possibilities of adventurism resorted to by American power.
The US is no doubt the pre-eminent military power of the world. But in today's balance of power system the military power of the US is not likely to play the role it did during the Cold War period. After this debilitating financial crisis the US will no longer be looked upon as a pre-eminent economic power as it has been in the last six decades. If there is to be a new international economic supervisory and regulatory regime for the globalised economy it is bound to make the US less untethered than it has been so far. While the US has been the engine of global economic growth till now, the International Monetary Fund predicts that this time economic recovery of the industrial world will depend on the fast growing emergent economies of China, India, Brazil and Russia, which will act as engines of growth.
In these circumstances the international order in the post- financial crisis era is bound to undergo radical changes, though it is difficult to predict the scope and nature of the changes. In all likelihood the US may lose part of its economic pre-eminence. The emerging economies will play a more significant role in international economy with necessary political impact on international politics. Yet one cannot rule out the possibility of the US remaining the number one economic power in the world. When there is a major economic recovery after a major recession, the scope and nature of recovery will be influenced to a large extent by technological progress that takes place during that period.
New non-polluting automobiles, nanotechnology, biotechnology, energy conservation, technology and further advances in information and communication technology are all expected to develop in the near future. The pecking order in the new economic hierarchy will to a considerable extent be determined by the success of the various major powers in tapping these emerging technologies and harnessing them for their recovery and advancement. There is vast scope for both cooperation and competition among the major industrial powers and emerging powers in this respect for mutual benefit.
The European countries appear to favor a more rigorous supervisory and regulatory mechanism as a solution to the present crisis. India and other developing countries, including China, may press for more expenditure in infrastructure projects, financed partly by international financial institutions and partly by developed countries. This will be a classical Keynesian approach of spending large sums as a "counter-cyclical device". They are likely to go along with Europe on the creation of an effective supervisory and regulatory mechanism.
Will the US go along with these approaches in the G-20 summit to be held in Washington Nov 15? Unlike in the days of the Great Depression when the focus was on the recreation of jobs through massive investments in infrastructural projects, this time the US focus will also be on safeguarding the economic and technological pre-eminence of itself in the international system. The US is also less likely to be amenable to an international supervisory and regulatory regime.
One should expect a major confrontation between the US and the rest of the major powers of the world on how far the US is prepared to come into a rule-bound international financial system.
(K. Subrahmanyam is India's pre-eminent analyst on strategic and international affairs. He can be contacted at email@example.com)