The leader that failed

Even this imperialist war may not be sufficient to ensure the United States' hegemony in the world economy in the medium term, as its need to be sustained by the rest of the world's savings grows.

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. While the world has indeed had one clearly dominant superpower, the U.S., the world economy has not had the benefit of similar stability or growth.

Indeed, even though that superpower possesses not only much greater direct power as well as more indirect power through the international institutions that it effectively controls, it has thus far been unable to ensure a much more rapid or stable growth of capitalism. Rather, this 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 U.S. 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 U.S.' effective leadership of it seem more problematic.

Well before this appalling war in Iraq, the U.S. economy was not in good shape. Some analysts have attributed the slowdown in investment, the depression in consumer confidence, and the continued growth of joblessness in the U.S., to uncertainty about the war itself. But most observers agree that the problems of the U.S. economy were evident even before the infamous September 11, 2001 terrorist attacks in New York, which have become the excuse for so much warfare thereafter.

By March 2003, it was clear that even the massive fiscal boost offered by the George 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 the gross domestic product (GDP) - was not sufficient to lift the economy out of its relatively depressed state. U.S. 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. This was its lowest level since November 2001. A reading below 50 points indicates an industry contraction.

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

The U.S.' GDP rose at an annual rate of 1.4 per cent in the final three months of last year. For the year as a whole the economy grew a modest 2.4 per cent. 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.

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. The weakness in the major economies - the European Union, Japan, and most of the developing countries excepting China and India - 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 U.S. The world economy is now so structured that it relies on large external deficits of the U.S. 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 U.S. economy, which must be sustained by confidence in it and its currency.

At the moment, the U.S. 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 fact, investors across the world, including in developing countries, contribute directly and indirectly to this huge inflow of resources into the U.S. economy. Indeed, the U.S. economy now absorbs 70 per cent of the world's savings, amounting to more than $400 billion annually in the past two years.

Meanwhile, the net foreign liability position of the U.S. will also worsen steadily, from about 25 per cent of GDP today to something like 60 per cent of GDP in 2008. If U.S. 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 U.S. economy grow at a faster rate than the rest of the world economy, to be its engine. Professor Godley himself seems to believe that this outcome is unlikely, if only because the increasing current account deficit will make the U.S. domestic economy much weaker than is currently anticipated. He suggests that there are other possibilities: a revival of private deficits, which seems unlikely at present; and concerted reflation and growth in the other major parts of the world economy such as Europe and Japan.

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 U.S. 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 U.S. imperialism and the possibility of growing inter-imperialist rivalry. This is why the war in Iraq is likely to have economic consequences for the U.S. and the world, which go well beyond the more obvious ones of providing contracts to U.S. companies in the short term, or allowing the U.S. control over major West Asian oilfields in the medium term.

In the short term, of course, there are the contracts. Already The Wall Street Journal has claimed that more than $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 - which can be conveniently paid out from the oil money of Iraq which is being held in reserve, 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) U.S. 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 U.S. 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 U.S. 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 utilise the rest of the world's savings) unhindered in the foreseeable future. In other words, this war is intended to put in place a hyper-imperialist system that has become indispensable for the U.S. economy to survive in its present form.

Such hyper-imperialism will require more than control over crucial natural resources such as oil. It will also require a moulding of the international financial and trade framework more completely in the image required by the U.S. Thus, the International Monetary Fund (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 World Trade Organisation (WTO) would have to be a multilateral framework without even minimal give-and-take across the major powers, a body completely subservient to U.S. interests. And so on.

Can the U.S. government pull it off? The hawks in the Bush administration, and their supporters in the rest of the world (including some of our own upwardly mobile sycophantic "analysts") 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 and so on.) also takes a more pessimistic view of the U.S. plans. This report argues that the U.S. shows many symptoms of an empire that is cresting. First, it sees deepening mistrust of the U.S. across the world and predicts, like many others, a rise in terrorism in reaction to U.S. unilateralism.

It also notes that the U.S. government is heading for record deficits, along the lines discussed earlier. Third, it believes that the "Washington Consensus", through which the U.S. 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 U.S. 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 U.S. 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).

There are certainly very major questions about the ability of the U.S. to acquire and maintain the required overwhelming supremacy over the rest of the world. It is a moot point the extent to which the U.S. itself can survive without relying upon the various global multilateral institutions that have been set up over time, and by completely ignoring any possibility of inter-imperialist rivalry. Which means that the period of hyper-imperialism itself is likely to be relatively short, paving the way in the rest of the world, for more uncertainty but also for hopes of better times in the future.