There is a qualitative change in the international milieu in which the Obama administration will function.
Dogmatists of the right and the left concede that Barack Obama’s victory in the United States presidential election is momentous but insist it is ethereal. They concede that Mr. Obama is a breath of fresh air but insist he will be hard pressed to keep his equilibrium amid the Washington consensual pressures.
However, there is a qualitative change in the international milieu in which the Obama administration will function. While chasing Somali pirates, we shouldn’t overlook the three new determinants appearing in the international system which suggest that the U.S. policies cannot remain immutable. These are: the U.S. economic crisis, China’s growing role, and power shifts in Europe. First, it needs to be understood that the crisis in the U.S. economy is fundamentally different from the cyclical “recessions” of the past. Consumer debt expansion, a traditional tool to fuel the economy, is no longer available. Monetary policy will not suffice. Nor can a fiscal policy built on tax rebates help to create aggregate demand sufficient to maintain full employment.
The government can spend a lot more on infrastructure projects to boost employment, wages, and aggregate demand. But, then, where will the money come from with a baseline of a trillion-dollar budget deficit? The budget has been financed by Japan, China and the OPEC suppliers of oil. Will they finance new huge outpourings of dollar debts? At the same time, the bailout needs are increasing. General Motors and Ford have joined the queue, which is incessantly lengthening.
Indeed, the recession paradigm itself gets transformed as the problem is not of liquidity but that the U.S. production has been moved offshore. The bailout funds so far have been wasted in addressing falling unemployment or mortgage defaults. In sum, the U.S., by abusing its reserve currency role, has hurt its creditworthiness and imperilled the exchange value of the dollar; budget deficit is out of control and galloping; jobs have moved offshore; the government can pay bills only by printing money. Any loss of the reserve currency role of the dollar will have a catastrophic effect. It needs to be protected by curbing foreign borrowing through reducing budget deficit.
We are, therefore, at a threshold where the U.S. has no alternative but to halt gratuitous wars and slash military spending. Can the U.S. sustain its 700 military bases in foreign countries? The world community is demanding that the reins of the international financial and economic system be taken away from American hands as a condition for continued lending to the bankrupt superpower. Is China, Japan or Saudi Arabia in any mood to finance new American wars?
This reality alone — that the U.S. crisis is beyond the reach of traditional solutions — must be factored in world politics, and it has nothing to do with Mr. Obama’s political expediency in choosing his cabinet team.
Oasis of stability
The second major determinant in world politics is that China is not only an oasis of economic stability in the present international milieu but is also critical to the U.S. for overcoming its crisis. The fourth session of the U.S.-China strategic dialogue on economic issues due in December will be a landmark event. It is obvious that China’s massive international reserves, estimated to be in the region of $1.9 trillion, give it a unique standing. Its economy is not facing the danger of a recession and is more or less protected from external risks.
Bad loans, which made up 50 per cent of China’s bank assets 10 years ago, account for only 5 per cent today. The economy is not “export-driven” as it might seem. The share of exports in the GDP is just about 10 per cent. Domestic investments, which account for 40 per cent of China’s GDP, are the locomotive of growth for the economy. As the Economist magazine put it, “even if the contribution from net exports fell to zero, China’s GDP growth would still be close to 9% thanks to strong domestic demand … Employment figures also confirm that exports’ share of the economy is relatively small ... Surveys suggest that one-third of manufacturing workers are in export-oriented sectors, which is equivalent to only 6 per cent of the total workforce.”
Chinese companies are not heavily indebted to foreign funding; budget surplus at 1 per cent last year will remain the same in 2008. Clearly, there is no reason for Beijing to lose sleep over a “hard landing” for the economy. Actually, the drop in consumer activity in the U.S. and other industrial countries may even make the cheaper Chinese goods more attractive.
All this places China in a position to continue to buy U.S. Treasury bonds. In political terms, China is in a position to finance the Obama administration’s reconstruction plan for the U.S. financial sector. This has immense strategic significance for world politics. As things stand, each American citizen is in “debt” to China by $4000. China, in other words, becomes a true “stakeholder” in the revival of the U.S. economy.
China has so far been extremely cautious in making investments abroad, buying relatively small stakes below 3 per cent shareholding. But the 21st Century Business Herald, China’s leading business newspaper, quoted a senior official of the Ministry of Industry and Information Technology as saying, “the auto manufacturing giants of China … have the capacity and intention to buy some assets of the two crisis-plagued American automakers [General Motors and Ford].” The report adds: “It would be much easier now for strong automakers to go global by acquiring some assets of their U.S. counterparts in times of crisis … In the coming two years China is likely to see a few of its large … manufacturing enterprises set a precedent for achieving globalization by acquiring global companies.”
China can do this with petty cash. Bloomberg reported last week that the U.S. Treasury yields on two, five and 10-year notes and 30-year bonds had dropped to the least since the Treasury began regular issuance of securities. The 30-year yield tumbled 46 basis points to 3.46 per cent, the biggest drop on record. The yield has been the lowest since the regular sales started in 1977. The yields on 5-year notes declined to 1.8 per cent, not seen since 1954.
The full magnitude of the U.S.-China tango — and its profound implications for world politics — can be grasped only if we allow the words of the well-known American commentator Mike Whitney to sink in: “This is not a normal recession, which is a downturn in the business cycle and ‘a period of reduced economic activity’ usually brought on by a mismatch between supply and demand. This is not a cyclical downturn; the structured finance system has collapsed leaving behind a multi-trillion dollar capital hole that is bringing the broader economy to its knees.”
The third determinant in world politics is the transformation of Europe’s geopolitical landscape. First, Europe recognises that the U.S.-dominated international financial and economic architecture has become archaic. At the G-20 summit in Washington, Germany, France, Italy and the U.K. spoke of the need to overhaul the present monetary-financial system.
Secondly, European powers are dissociating from the attempts of the U.S. to oust Russia from its sphere of influence. Everyone is crossing his fingers and waiting to see how the Obama administration will handle the contentious issue of deployment of U.S. missile defence systems in Europe. Russian President Dmitry Medvedev recently told Figaro newspaper: “The first reaction we have seen from the new U.S. administration gives us grounds for hope. In any event, our future partners are reflecting on how useful and effective this system could be, and so it seems that we do have something to discuss.”
France, which currently holds the EU presidency, has proposed a meeting on European security involving Russia and the U.S. Talks within the framework of the OSCE may take place in mid-2009. All indications are Europe refuses to be hustled into the U.S. designs for NATO expansion. It seems the NATO Foreign Ministers’ meet in Budapest in December is unlikely to decide on the accession of Ukraine and Georgia, which is Russia’s “red line.”
Clearly, Europe disfavours the U.S. strategy to isolate Russia. Integration is the buzzword. Even the U.K. tends to agree. The President of the European Commission, Jose Manuel Barroso, summed up: “The conflict in Georgia has emphasised the crucial need for permanent political dialogue between the EU and Russia, while the global economic crisis has underlined once more the interdependence between the EU and Russian economies.” The EU and Russia have agreed to resume talks on a new partnership agreement.
At the end of the day, the financial crisis is transforming the U.S. trans-Atlantic leadership role phenomenally. Europe seeks a pooling of international efforts into anti-crisis measures. No one wants a new “Berlin Wall.” This may provide an impetus to build a Europe-Russia common cause. Unsurprisingly, Europe views Mr. Obama with enthusiasm, interest and hope. It prescribes for him modesty, patience and a dose of humility. Certainly, it wants him to emphasise diplomacy and multilateralism.
(The writer is a former ambassador and Indian Foreign Service officer.)