Business Times
https://www.businesstimes.com.sg/opinion/geo-economic-hegemon-no-more
Geo-economic hegemon no more?
It boasted the ‘Committee to Save the World’ in the late-1990s. Today, however, amid mounting global crises, the US is more akin to an ineffective global bystander.
Wed, Oct
19, 2022
SOME readers may have been too young to recall the famous Time magazine cover of Feb 15, 1999, featuring the three leading economic policymakers in the administration of then US President Bill Clinton – Alan Greenspan, Larry Summers and Robert Rubin – and hailing them as “The Committee to Save the World” for their successful efforts to avert an Asian financial crisis.
Greenspan, then the chairman of the US Federal Reserve; Rubin, Secretary of the Treasury; and Summers, his deputy, were celebrated on the cover of Time as the “Three Marketeers (who) have prevented a global economic meltdown”.
Time’s cover story went on to note that the three economic stars of the Clinton administration had “outgrown ideology” and shared a faith “in the markets and in their ability to analyse them” and agreed “that trying to defy global market forces is in the end futile”.
“As volatility has upset foreign markets and economic models, the three men have forged a unique partnership to prevent the turmoil from engulfing the globe,” wrote the author, Joshua Cooper Ramos, who followed the three during their trips to those parts of the world where economies were unravelling and were then supposedly rescued by the masters of the universe from Washington.
As someone who covered Washington’s response to the Asian financial crisis in the late 1990s, I recall the way these economists were transformed then into global media icons. Hence, the then 44-year-old deputy treasury secretary Summers, a former Harvard economics professor who ended up orchestrating the international bailouts for the Asian economies, was greeted during a visit to Japan “as if he were General (Douglas) MacArthur”, reported The New Yorker, while the adjective “brilliant” would become forever associated with his name.
Rubin, a former investment banker with Goldman Sachs, would be referred to as a “financial wizard” and Greenspan, well, he would from now on be hailed as “legendary”, a real-life Oracle of Delphi with a formidable reputation whose economic prognostications could determine fortunes in the financial markets. When Greenspan spoke, everyone listened!
Many economists had agreed at the time that the three policymakers came, indeed, close to saving the global economy, and in the process solidified the position of the US as its main engine. A series of decisions advanced by Washington, including the floating of the Thai baht and the deal to bail out hedge fund Long-Term Capital Management while the Federal Reserve kept interest rates at 5.5 per cent, helped end the financial turmoil in Asia as well as in Russia and Latin America. It then led to the longest and uninterrupted expansion of the US economy fuelled by falling interest rates, a rising US dollar and growing American consumer demand.
It’s safe to say that today – against the backdrop of rising inflation, increasing economic instability and fears of a global recession – no one is expecting the convening of any new Committee to Save the World, as was made clear during last week’s meeting in Washington of the International Monetary Fund (IMF) and World Bank. The latter has lowered its annual global economic growth estimate for 2023 to 1.9 per cent, down from a previous 3 per cent forecast.
“The world is in a dangerous situation,” said Sri Mulyani Indrawati, Indonesia’s finance minister and chair of the Group of 20 leading economies, as she addressed the meeting on Oct 13. “Shock upon shock, upon shock,” said IMF managing director Kristalina Georgieva, warning of “much more uncertainty to come”.
If anything, US Treasury secretary Janet Yellen and Fed chairman Jerome Powell, and the expansionary fiscal and monetary policies that they have pursued, were seen by many of the participants in the meetings in Washington as being responsible in part for the current economic turmoil fuelled by inflation.
Moreover, the Fed’s response to the inflationary surge in the form of raising borrowing costs aimed at taming soaring domestic prices has been causing problems beyond US borders as they drive up inflation elsewhere. At the same time, the Biden administration remains committed to a strong US dollar policy and to what is in essence an economic nationalist agenda whose goal is to save the American economy, not unlike that of his predecessor.
Disregarding the cross-border spillover of its policies, the Fed intends to continue with its large interest rate increases that aren’t going to save the world, but will probably only make things worse. That is especially the case when it comes to the struggling emerging economies that have yet to recover from the devastating effects of the Covid-19 pandemic and now have to deal with rising energy and food prices.
But it would be a mistake to suggest that the main reason the United States is now not in a position to save the global economy is only because its current Treasury secretary and Fed chairman aren’t as brilliant as those who held those posts in the late 1990s.
To say that the geo-strategic and geo-economic environment of that period is very different from the present day would be an understatement.
To recall, it was just a few years after the end of the Cold War, that Unipolar Moment, when the US faced no major global military rivals or economic competitors. The combination of major defence cuts, rising trade flows and the birth of the Silicon Valley, allowed policymakers to turn the American economy – booming thanks to growing consumer demand – into both the buyer and the lender of last resort.
More specifically, the Asian economies could be bolstered through aid from the IMF and the World Bank financed mostly by the US, while the American markets welcomed their stream of cheap exports.
It was a moment in economic history that wouldn’t repeat itself, but which provided US policymakers with an opportunity to ensure that their free market agenda that they adopted at home through a loose monetary policy, tight fiscal policy and liberal trade policy, together with the removal of many of the regulations on Wall Street, including the Glass-Steagall Act, would then be embraced abroad in the form of the Washington Consensus and a so-called neo-liberal agenda.
But that Unipolar Moment lasted less than a decade. The growing US current account deficit with China reflected the imbalance between a part of the global economy that was producing and not saving, and the other that was consuming without saving, leading eventually to the 2008 global financial crisis triggered by the collapse of the US housing market.
Former Fed chairman Ben Bernanke and other US policymakers have been inflating their way toward a stable American economy by maintaining low interest rates, which worked as long as governments could prevent fiscal expansion by keeping in place painful austerity programmes without generating, at least for a while, a political backlash.
But these policies would become unsustainable politically and economically, first by the need to cover the costs of America’s global wars and then the response to the global pandemic, and now to the consequences of the war in Ukraine. The free market policy that worked in the 1990s wouldn’t resolve the current problems.
One member of the Committee to Save the World, former Treasury secretary Summers, has criticised the IMF and the World Bank for failing to take action in response to the current economic crisis. “The fire department is still in the station,” said Summers last week. “I’m very disappointed in the response,” he stressed.
But based on his experience in the late 1990s, Summers knows that such collective action to sustain the global economy is only possible when a leading geo-economic hegemon brings everyone together and has the political will and the financial resources to pay the costs of such an expansive endeavour.
Hence, Summers’ suggestion that the US provides additional US$5 billion funding for the World Bank doesn’t sound politically feasible. Pursuing what is considered to be its core national security interest, the US with the support of its allies will continue to spend billions of dollars on financing the military and economic response to Russia’s aggression in Ukraine, which is bound to raise energy prices and overall inflation.
In that context, the economic problems facing the emerging economies won’t be placed on the top of the US policy agenda in the way the Asian financial crisis did in the late 1990s.
And not least, the US Fed chair Powell will continue to raise interest rates until he beats inflation, in his role as a member of the Committee to Save the American Economy.