Can the US continue to rule the World Economy? Jayati Ghosh

Historically, international capitalism has tended to thrive more when one clear power has established its hegemony over the world economy. There have been at least two major phases when this was indisputably true: the period of the Gold Standard in the late 19th and early 20th centuries, when Britain was the economic superpower; and the two decades after the Second World War in the mid-20th century of the Bretton Woods-dollar standard, when the United States ruled the roost.

In both of these periods, the ability of the major power to control the broad pattern of international trade and capital flows was crucial to imparting some degree of stability to international balance of payments and to the progress of capitalism. In the more recent period, the past decade or more, the situation has been more ambiguous. Despite one clearly dominant superpower, the United States, the world economy has not had the benefit of similar stability or growth.

This is true even though the United States possesses not only much greater direct power as well as more indirect power through the international institutions that it effectively controls, than the earlier such periods. This period of unipolar domination has been a period of world economic slowdown, increased periodicity and intensity of financial and economic crises in different parts of the world, and generalised unemployment.

While unregulated financial capital mobility has certainly played a part in this, some blame must also lie at the door of the US economy, which has failed in its role as leader of the world capitalist system. It has failed to provide or to ensure adequate counter-cyclical or discounted lending to economies in distress. Even its role as engine of world growth, providing a market for exports of other countries, has been less evident in recent years, as its own economic slowdown had effects on the rest of the world economy, which was already mostly in recession.

Now, of course, the situation is both more complicated and more uncertain, to the extent that both the international economy and the United States’ effective leadership of it seem more problematic.

Well before the Iraq war, the United States economy was not in good shape. While some analysts have attributed the slowdown in investment, the depression in consumer confidence, and the continued growth of joblessness in the United States, to uncertainty about the war itself, but most observers agree that the problems of the US economy were evident from much earlier, even before September 11, 2001.

By March 2003, it was clear that even the massive fiscal boost offered by the Bush administration in the previous year – a combination of increased spending and very generous tax cuts to the rich amounting to a deficit as high as 7 per cent of GDP – was not sufficient to lift the economy out of its relatively depressed state. US manufacturing activity, measured by the Institute for Supply Management (ISM) purchasing managers’ index, slumped to 46.2 points in March from 50.5 in February, its lowest level since November 2001. A reading below 50 points indicates an industry contraction.

While this broke four previous months of growth in the index, even that growth had been halting, coming after more than a year of straight recession. Consumer spending – which has been the main engine behind US economic growth over the past decade, and which accounts for around two-thirds of US economic activity – slumped once again. Surveys on consumer confidence showed it to be at or close to 10-year lows.

U.S. gross domestic product rose at an annual rate of 1.4 percent in the final three months of last year. For the year as a whole the economy grew a modest 2.4 percent. While this was better than the near-stagnation (at 0.3 per cent) of the previous year, it was still not enough to generate new jobs. In fact, the U.S. economy shed 308,000 non-farm jobs in February, the biggest slide since the aftermath of the September 11 attacks, and coming after a continuous series of net job losses over the past one and half years.

This weakness in the world’s largest and strongest economy must be seen in the context of slow growth, stagnation or even recession in the other major parts of the world. This is now so apparent that even international financiers and large capitalists are calling for concerted intervention to reflate the world economy.

The Institute for International Economics, a Washington-based private-sector body representing banks, fund managers and finance houses, advised that the world’s top economic policymakers should promise now to take swift and concerted action – such as cutting interest rates. Unfortunately, it now seems that such merely monetary measures will not go far in lifting international economic activity in the present climate.

Meanwhile, there is a larger dilemma for both the world economy and for the United States. The world economy is now so structured that it relies on large external deficits of the US economy, to encourage growth elsewhere in the system. This, indeed, has been one of the historical roles of the “world leader” in capitalism. But the persistence of such deficits calls for continuous capital inflows into the US economy, which must be sustained by confidence in it and its currency.

At the moment, the US runs a current account deficit of around 5 per cent of GDP, financed by capital inflows from the rest of the world. Two important contributors are Japan (with a current account surplus of more than 3 per cent of GDP) and the Eurozone countries (with a combined current account surplus of around 0.5 per cent of GDP). But in addition investors across the world, including in developing countries, contribute directly and indirectly to this huge inflow of resources into the US economy. The United States economy now absorbs 70 per cent of the world’s savings, amounting to more than $400 billion annually in the past two years.

The British economist Wynne Godley has estimated that over the medium term, if the United States economy is to achieve “normal” growth rates, it must depend upon huge fiscal and external deficits, reaching levels as high as 9 per cent of GDP. (Wynne Godley, “The US Economy: A Changing Strategic Predicament”, Levy Economics Institute, March 2003, available at or Professor Godley’s reasoning is as follows. If the US grows at its trend rate of 3-4 per cent a year, in the current pattern, the US trade deficit will worsen further, reaching between 6 per cent and 7 per cent of GDP by 2008.

Meanwhile, the net foreign liability position of the US will also worsen steadily, from about 25 per cent of GDP today to something like 60 per cent of GDP in 2008. If US interest rates were to go back to normal, from their current very low levels, the overall current account deficit could then be of the order of 8 to 9 per cent of GDP. Since the private sector has now moved back into balance after its historically high deficits during the phase of stock-market-led consumption boom, this means that the fiscal deficit must bear the burden of this imbalance.

This follows almost naturally from the requirement that the US economy has to be the engine of growth for the rest of the world, and therefore must generate large deficits to shore up world demand, and the deficits themselves then have to be financed by the rest of the world. Professor Godley himself seems to believe that this outcome is unlikely, if only because the increasing current account deficit will make the US domestic economy much weaker than is currently anticipated.

The point is that the current system of economic interaction across major national economies suggests that the continued inflow of most of the world’s savings into the US will remain a requirement for the stability and even growth of the capitalist system as a whole in the near future. How likely is this?

The answer could depend upon not just the outcome of the war in Iraq, but also upon how it affects both the world’s perception of the viability of US imperialism and the possibility of growing inter-imperialist rivalry. This is why the war in Iraq is likely to have economic consequences for the US and the world, which go well beyond the more obvious ones of providing contracts to US companies in the short term, or allowing the US control over major Middle Eastern oilfields in the medium term.

In the short term, of course, there are the contracts. Already the Wall Street Journal has claimed that more then $1.5 billion in contracts has been promised to favoured crony companies of the Bush administration. The need to rebuild all the infrastructure that the Anglo-American military is currently bombing, will lead to additional spending of at least $40-50 billion – much of which can be conveniently be paid out from the oil money of Iraq which is being held in reserve at the UN, as well as future oil revenues.

The oil system of Iraq can itself be privatised – the plans are apparently first to privatise domestic distribution, then production, and finally exploration and discovery in a series of moves to benefit (mainly) US oil companies. But all this will still amount to not more than $60 billion or so in the first couple of years, much less even than the $75 billion that President Bush has requested immediately for increased military expenditure. Even the more than $110 billion spent last year, not to mention the huge planned tax cuts of more than $670 billion proposed over a decade, have failed to provide the required stimulus to the US economy, so these are not likely to be enough either.

No, the intended impact of this war has to be greater – it has to be on the perceptions and expectations of the rest of the world. This aggressive and devastating show of military strength may be more than hubris – it may reflect the need of US imperialism to impress upon the rest of the world such a complete stamp of its own dominance that it can continue to rule the world economy (and access the rest of the world’s savings) unhindered in the foreseeable future. In other words, this war is intended to put into place a hyper-imperialist system that has become indispensable for the US economy to survive in its present form.

Such hyper-imperialism would require more than control over crucial natural resources such as oil. It would also require a moulding of the international financial and trade framework more completely in the image required by the US. Thus, the IMF would no longer be permitted even temporary deviations such as accepting that it was wrong in pushing for complete financial liberalisation in developing countries. The WTO would have to be a multilateral framework without even minimal give-and-take across the major powers, a body completely subservient to US interests. And so on.

Can the US government pull it off? The hawks in the Bush administration, and their (admittedly few) supporters in the rest of the world seem to think so. But such an outcome is not so obvious, or even likely.

Interestingly, a recent report by a financial research company for private institutional investors (“Independent Strategy”, which delivers its analyses to financiers such as Goldman Sachs etc.) also takes a more pessimistic view of the US plans. This report argues that the US shows many symptoms of an empire that is cresting. First, it sees deepening mistrust of the US across the world and predicts, like many others, a rise in terrorism in reaction to US unilateralism.

It also notes that the US government is heading for record deficits, along the lines discussed earlier. Third, it believes that the “Washington Consensus”, through which the US was able to push through neo-liberal marketist reforms across the world, is breaking down, as more and more governments reject strategies that are known to deliver economic instability and crises.

Finally, the weakening dollar is seen as a sign that the US can no longer depend upon the rest of the world to finance its deficits. This analysis intended for international financiers actually argues as follows: “The dollar will go on down because the good empire has the same faultlines as many other empires: unsustainable living standards at the core depend on flows of wealth from the periphery. .. The US no longer earns the return needed to sustain these flows. The costs of war and unilateralism will increase the thirst for capital, but reduce the return earned by it.” (Independent Strategy, quoted by Mark Tran, in the Guardian Unlimited, March 26,2003)

This brings up all sorts of possibilities for the global economy. There are serious doubts about the ability of the US to acquire and maintain this degree of required overwhelming supremacy over the rest of the world, which it seems to require to ensure economic hegemony. Nor can unilateralism be a feasible option for the US in supervising this hegemony, simply because international economic interdependence is now too far advanced. It is a moot point the extent to which the US afford to ignore or bypass the various global multilateral institutions that have been set up over time, and which have served its own economic interests reasonably well. Unilateralism also ignites the possibility of growing inter-imperialist rivalry. All of this suggests that even the period of hyper-imperialism is likely to be relatively short.

April 7, 2003.

Comments by Arturo O’Connell

I agree with your overall conclusion, i.e., that a militarised domination of the world will unleash an opposition that maybe a more discreet economic domination would not. And therefore I think that the neo-conservative project – there are a lot of differences among the protagonists with a few being slightly more realistic – the one you label as “hyper-imperialism” (Kautsky would have called it “ultraimperialism” with only one power dominating the scene) will have a short life.

But I would like to make a few observations about details in your paper.

First; a point of detail. You mention that the U.S. is absorbing 70 per cent of the world’s savings amounting to more than US$400 billion annually in the past two years. Now world savings in years 2001-2002 have been close to US$7 trillion while net lending to the U.S. has been – depending on the source of information if, for instance, IMF’s current account statistics or the world flow of funds statistics – something like from 260 to 350 billion in the flow of funds data to 390 to 500 in the current account data. Therefore you cannot possibly say that the U.S. economy absorbs 70 per cent of world savings; in fact at worst it absorbs 7 per cent of world savings and 9 per cent of the rest of the world savings. What is true to the facts is that the U.S. is absorbing around 70 per cent of gross global capital imports.

Second. I don’t see the reason why the “centre” economy – to use Prebisch’s expression – should run a deficit in current account as part of its role in the world economy. Great Britain did not at the time of their predominance. What Great Britain did was to run a balance of trade deficit more than compensated by a surplus in “invisibles” which allowed them to run a capital account surplus providing both a market for the rest of the world produce and capital for investment. Anyway the fact that the rest of the world had to provide a net trade balance meant that the resource balance was negative for them, most specifically for us the “periphery” – to borrow again from Prebisch’s terminology – as in the case of Argentina in the pre-1930 “golden age” when the country was experiencing a negative net transfer of resources (on average) of 5 per cent of GDP. The British could simultaneously acquire a positive net transfer of resources from the rest of the world plus increase their foreign assets, which is not so bad at all.

The present situation when the rest of the world is not only providing a positive resource balance but also a positive capital account balance to the “centre” has no historical parallel I might be aware of (in year 2001 the periphery’s aggregate net transfer of resources to the “centre” amounted to about 3.5% of their combined GDP).

They have been junctures at which that process was less than wholly voluntary with monetary authorities – mainly Japanese – having to provide official resources. But during the bubble years everybody around the world was made to convince themselves – through a massive propaganda drive by media and financial agents – that the U.S. economy – the “New Economy” – was so much more productive that it was the right destination for the rest of the world savings (already reduced in the case of the periphery by service on foreign investment and finance). The collapse of the stock markets plus the Enron-type affairs have put that to an end. And now the loss in the value of US$ relative to other currencies has made it even less attractive to place funds in the U.S.

Third. I think that you cannot blame the U.S. on its own for not providing a dynamic demand for the rest of the world. In fact the U.S. till recently had been providing such a demand – growing at 4% per year till quite recently while the rest of the world absorption was growing at only 2% per year – while the Europeans mired in their Stability Pact and the Japanese in their financial bottleneck have not been providing anything at all.

In fact what I think is required is for the rest of the world, most specifically for the other two major areas in the advanced economies, to provide such a force, or at least part of it.

Such an exercise is going to be a difficult challenge for societies like the European ones that are dominated by very conservative governments dominated by panic about running full employment policies and consequently – following Kalecki’s warnings – risking empowering their working classes, who would no longer in that case be blackmailed by the unemployment threat. As to Japan, while I do not fully understand the whole thing, my sense is that their submission to U.S. pressure – asking them to expand and issue liquidity – made them move into high gear in the late 1980’s and experience a bubble that they are trying to absorb only very gradually. This fits the circumstances of an advanced economy, and not economies such as Argentina’s, where costs of banking crises have reached almost 50% of GDP and were absorbed in a couple of years with the associated destruction of the standard of living of our people.

Anyway, following Keynes I think that the surplus economies are as much to be blamed – or even more – than the deficit economy if adjustment of external imbalances unleashes a worldwide recession and a competitive struggle for markets in the downward spiral.

Fourth. The way out for those unsustainable current account deficits (see IMF’s WEO September 2002 that acknowledges their unsustainability) could be a “concerted intervention” to reflate all the major economies as well as provide developing and transition countries abundant finance through IFIs. But more in accordance with Mr. Bush’s policies unilateral posture I guess that what we are going to see is a devaluation of the US dollar vis-a-vis the other major currencies and watch how the Europeans and the Japanese rush to ask: please stop it (Japan has frantically been buying dollars to keep the yen down). What would be asked from them? Possibly some commitments not to run down their US$ foreign exchange reserves, further liberalise their imports – for instance of agricultural products – of U.S. products and services, etc. Otherwise the U.S. would need their military strength to extract tribute from some promising third country; as you mention in your piece, part of the Iraq move might provide a tiny contribution towards that purpose. But the sums involved are too massive for poor Iraq’s contribution to b enough.

We have a lonely superpower that is spreading their military wings but is in badly need of capital from the rest of the world. And not in the more subtle British way, i.e., via high volume of invisibles allowing them to simultaneously profit from a positive resource balance and an increasing their net ownership of assets in the rest of the world. How could the U.S. impose higher returns on their investments in the rest of the world and/or lower the returns of the rest of the world investments in the U.S. so as to be able to run a surplus in their invisibles that would compensate for their “real” balance deficit so as to stop being in need of capital from abroad? One extra way would be a la Gulf War when the rest of the advanced countries and oil exporting satrapies were made to foot the bill. It could be interesting to develop such an argument and imagine the ways in which such a thing might materialise.

If the U.S. is unable in the coming period to sort out this difficulty I guess that for all the pronouncements of the neocons we will witness a weakening rather than a strengthening of the “American hyper-imperialism (or ultraimperialism)”.