By Sukumar Muralidharan
At his first official briefing after the collapse of the Cancun conference, United States Trade Representative Robert Zoellick indicated that the U.S. had little time or inclination to continue with the complexities of negotiations within a 148-member body. It would, in its future trade diplomacy, tilt towards smaller and more manageable forums or plain old-fashioned bilateralism.
Zoellick had kicked off the Cancun discussions with the confident prognosis that the U.S. economy is well on the way to recovery. This was a matter, he said, that should be of interest to all countries. But the recovery was beginning with a current account deficit of $500 billion, eloquent testimony to the openness of the U.S. economy and the failure of its trading partners to ensure a measure of reciprocity. There was an unspoken threat in Zoellick's remarks, which his two deputies, Peter Allgeier and Josette Shiner, did not make too fine a point of spelling out. If the U.S. was not able to cure itself of its chronic deficit on current account, the world should not expect continuing access to its market. The warning was explicit in the case of China. As Zoellick put it at Cancun: "We have about a hundred billion dollar deficit with China (and) we want to keep our markets open to China. That's good for our consumers, it is good for competition and it is good for China. But we can only do so if China is also opening up its markets and playing a positive role."
The contribution of exports to U.S. economic growth has been increasing in recent times because the dollar has been depreciating. This has been a necessary correction to years of reckless and unsustainable current account deficits in the U.S. and the emergence of the euro as an alternative reserve currency. And with all the statistics that have been advanced to show that the U.S. recovery is indeed under way, the rate of unemployment has been soaring. Recent figures released by the Census Bureau also bear testimony to a substantial increase in the number of U.S. citizens living in poverty.
The falling dollar and the soft interest rates prevailing in the U.S. give the world less incentive to finance its current account deficit. This is now emerging as a major potential crisis for the U.S. economy. Just ahead of the Cancun conference, U.S. Treasury Secretary John Snow had completed a tour of East Asia, focussing specially on Japan and China. His purpose was bluntly stated. Japan and China both needed to revalue their currencies and sustain their purchases of U.S. treasury bonds.
According to the most recent Global Economic Prospects, an annual study by the World Bank, the country-wise pattern of ownership of U.S. equity and debt has shifted in recent years. The U.K. continues to be a major financial hub for the European region, dominating financial inflows into the U.S. market. Despite this, a significant change in the source of the financial flows is evident. The euro area and Japan, which were the main centres of demand for U.S. securities, have now yielded place to East Asia and Latin America. The 25 per cent share of the euro area in net foreign purchases of dollar-denominated assets in 2000, fell to 5 per cent in 2002. This was in the World Bank's estimation, a "large decline in relative demand for dollar-based assets", which tended to boost the value of the euro. Japan's share, in contrast, "increased from 9 to 17 per cent, while East Asia and Latin America almost doubled their shares in purchases from 19 to 35 per cent by 2002". This rather distinctive "shift in the origin of funds" may, in the World Bank's estimation, "set the stage for future currency movements".
Quite clearly, the pattern of inflows into U.S. debt and equity instruments will also have a bearing on future trade patterns. Countries that have been running large trade surpluses with the U.S. are being asked to increase their holdings of dollar-denominated assets in the short and medium-term and adjust their currencies upwards against the dollar as a long-term solution to trade imbalances. The medium-term adjustment though is an enemy of the long-term process, since a decline in the value of the dollar relative to counterpart currencies in the countries that hold large volumes of dollar-based assets, would reduce their incentive to buy U.S. securities.
More centrally, the U.S. fiscal strategy today, which is likely to result in a record budget deficit, can only be sustained in a high-interest rate regime. This would counteract any effort at adjusting East Asian currencies upward. It would also increase the interest burden borne by long-term housing mortgages, depressing consumer demand. The conjuncture makes for a fiscal and monetary policy conundrum in the U.S. that is likely to unravel only at the cost of engineering a crunching recession at home.
The world economic and trade situation today represents a full turn of the wheel since another Cancun summit a generation back. In October 1981, a group of 22 world leaders - from 14 developing and eight developed countries - gathered at the newly refurbished seaside resort for two days of deliberations on the world economy. The event perhaps marked the point of inflection when the vigorous debates of the 1970s over a "New International Economic Order" gave way to unquestioning acquiescence in the globalisation project. Ronald Reagan had been in the U.S. presidency for close to nine months and his first budget was just beginning to take effect, with its wishful prognosis that high tax cuts and massive increases in defence spending would spur economic growth.
Reagan's budgetary legerdemain had profound implications for the world economy. The U.S. Federal Reserve, with Paul Volcker at the helm, chose that moment of budgetary stringency to impose a policy of tight-money, which sent interest rates up to historic highs. Developing countries that had borrowed heavily in the heady boom of petrodollar recycling all through the 1970s, found themselves squeezed between a global economic recession that played havoc with their export earnings, and a massive increase in debt-servicing obligations. The Latin American debt crisis of the 1980s was the trigger for the widespread adoption of trade liberalisation and fiscal austerity measures in the developing world in succeeding years.
Concurrently, the U.S. budget moved strongly into the red, which worked itself through the external account into a massive current account deficit. From being the world's largest creditor, the U.S. was soon its largest debtor. The rapid buildup of debt seemed infinitely sustainable while the U.S. rode the illusory wave of the 1990s information technology boom. But several harsh trials have come with the bursting of that bubble. And the collapse of the 2003 Cancun conference may well be a key moment in the resurrection of the issue of equity between the global North and South.
The decade of the 1970s saw a challenge to the economic hegemony of the West at both the practical and ideological planes. In terms of actual practice, major commodity producing economies were able to bid up export prices and improve the terms of trade they received from developed market economies. The oil producing economies of West Asia provided the best and most dramatic illustration of this process. But other developing economies too were significant gainers through the decade, though on a relatively more modest scale. Following the explosion of the debt bomb in 1981 and the wave of currency devaluations and forced opening of markets, global commodity prices suffered a precipitous decline.
The waning fortunes of the developing world were reflected at the ideological plane in the diminishing vigour of the debate on the "New International Economic Order". Various ideas had been tossed about through the 1970s and the developing country governments that were most ardent in their advocacy of equity and justice on the global platform, had proved rather less attentive to these values in their domestic policies. With Reagan coming to Washington and the triumph of his "devil take the hindmost" fiscal strategy, the debate was effectively extinguished.
In pronouncing his final verdict on the recent Cancun conference, Zoellick explicitly warned developing countries against a return to the rhetoric of the 1970s. But he most certainly erred when he held that the "lost decade of the 1980s" was an outcome of the rhetoric of the 1970s. The boot indeed may be on the other foot. Zoellick's overblown claims are best construed as a rather feeble effort to evade the substantive elements of U.S. policy that contributed to two decades of misery for the developing world.
The U.S. Trade Representative's warnings are unlikely to be heeded for several reasons. First, the U.S. economy is increasingly unable to sustain the illusion of growth. It today sucks up an estimated 20 per cent of the world's savings to finance domestic consumption and government expenditure. But the world is waking up to the fact that the dollar-denominated assets that have been issued in exchange are not worth quite as much as initially promised. Economic growth in the U.S. in turn was fundamental to the sustenance of another, still greater illusion, that the globalisation process worked for the benefit of all.
The unity of developing countries at the Cancun conference and their refusal to accept the empty nostrums of the U.S. and the European Union, strongly suggest that the conceits of globalisation have been decisively exploded.
Ronald Reagan's ideological heirs in Washington may well be mute witness to the liquidation of the project he inaugurated. And Cancun has quite fortuitously witnessed two of the most important milestones in the rise and fall of globalisation.
