Globalisation and War
"…the new security paradigm that shapes this age [is that] disconnectedness defines danger. Saddam Hussein's outlaw regime is dangerously disconnected from the globalizing world, from its rule sets, its norms…
"…show me where globalization is thinning or just plain absent, and I will show you regions plagued by politically repressive regimes, widespread poverty and disease, routine mass murder, and - most important - the chronic conflicts that incubate the next generation of global terrorists. These parts of the world I call the Non-Integrating Gap, or Gap.
…So where do we schedule the U.S. military's next round of away games ?…in the Gap.
"The reason I support going to war in Iraq is not simply that Saddam is a cutthroat Stalinist willing to kill anyone to stay in power, nor because that regime has clearly supported terrorist networks over the years. The real reason I support a war like this is that the resulting long-term military commitment will finally force America to deal with the entire Gap as a strategic threat environment."
This is how Thomas PM Barnett, strategist at the US Naval War College in Newport, Rhode Island and advisor to the Office of the Secretary of Defence, described Pentagon's role in the furtherance of globalisation. The speech, reproduced in Esquire, March 2003, was delivered in November 2002. In his view, the Pentagon's task is to (1) protect the "core" (the entire developed world "where globalization is thick"), (2) help the "seam states that lie along the Gap's bloody boundaries" (such as Pakistan, Mexico etc.) so as to "firewall the Core from the Gap's worst exports, such as terror, drugs, and pandemics; and, most important, (3) Shrink the Gap."
Since he does not hold any major public office, Barnett can afford to call a spade a spade. Now compare this army insider's pre-(Iraq) war version of the links between globalisation and war with the post-war mood of America Incorporated.
Barely a quarter after the invasion started, big business went gaga over the big news: in the second quarter of 2003 the US economy grew by 2.4%, much higher than expected. This is attributed to the hefty 44% (annualised) rise in defence spending, resulting in a 22% (annualised) growth in overall government spending. According to the Financial Times this was the largest run-up in government spending since the Vietnam War. The third quarter is expected to record an impressive 7% growth rate, the highest among G-7 countries, although experts doubt whether the upturn can be sustained in the face of the weak fundamentals (Paul Krugman in New York Times, 31 October, 2003).
To top it all, more than 70 American companies and individuals have won up to $8 billion in contracts for work in postwar Iraq and Afghanistan over the last two years, according to a new study by the Center for Public Integrity. Those companies donated more money to the presidential campaigns of George W. Bush - a little over $500,000 - than to any other politician over the last dozen years, the Center found. Moreover, dozens of lower-profile, but well-connected, companies also shared in the reconstruction bounty. Their tasks ranged from rebuilding Iraq's government, police, military and media to providing translators for use in interrogations and psychological operations. (For details, see "US contractors Reap the Windfalls…" in Corpwatch.org).
The increased spending coupled with reckless tax cuts have thrown the federal budget out of gear, inviting adverse comments from the IMF. But who cares when profits are up? Employment and people's living standards are down, so is the popularity curve of George W. Bush. The death toll and recolonisation costs in Iraq are rising, there is growing Congressional opposition at home and American policy is being condemned at every international forum. But the corporate mughals and the ruling clique are adamant. War economy, the time-tested lever which helped many imperialist regimes (such as the Nazis and Fascists followed by other European states in the 1930s) in the past to come out of recession, is here to stay. War is a continuation, by other means, of politics which is but the concentrated expression of economics. Is it not natural, then, that the economics of imperialist globalisation led by Washington will continually reproduce the sanguinary politics of war and empire-building?
However, even the most stubborn optimists in the ruling circles concede that all is not well with the economy.
Economic Woes of America
Starting with the dotcom bubble-bust and mega scandals and mega bankruptcies a la Enron, the US economy is passing through one of its worst phases in recent history. Some of the deeper maladies are:
- Unmanageable budget deficit: expected to reach 455 billion this year, up from 153 billion last year and higher than the previous record of 290 million in 1992;
- Abnormally low savings rate. At the end of 2002 it (domestic, business and state savings combined ) came down to 1.6% of GDP. This is less than a third of the average savings rate of the 1990s. On the other hand, outstanding debt of the American people, business concerns and governments taken together approached the astronomical figure of 30 thousand billion dollars - three times the annual GDP. And this "debt mountain", as Frederic Claimont called it (EPW, 1 February, 2003), is growing taller by 10 percent per year;
- Jobless growth. Joblessness during a recessionary phase is nothing new. From the early 1990s,however, even periods of recovery fail to generate jobs. Profits grow, but not jobs. The going gets tough for the ruling party, particularly when elections draw near (as at present, when in the third quarter of 2003, the actual number of jobs fell despite exceptional growth);
- Potentially most threatening perhaps, is a tricky combination of mounting current account deficit (henceforth CAD), falling dollar and the advent of the euro as a real alternative to the dollar.
Achilles' Heel
"…the U.S. current account has typically been in deficit for the past two decades. As a result, the net international investment position in the United States (the value of U.S. investment holdings abroad less that of foreign holdings in the United States) has moved from an accumulated surplus of slightly less than 10 percent of GDP in the late 1970s to a deficit of almost 20 percent of GDP in 2001… Recent increases in the current account deficit have led to some concerns that continued current account deficits (and the increase in the United States' international debt that would result) might not be sustainable."
This is how the (US) President's Report on the Economy, 2003, portrays the gravest problem facing the country. As expected, the Council of Economic Advisors which prepared this report took pains to play down the threat. But as the Guardian reported on 19 September2003,
"The International Monetary Fund yesterday warned that the colossal United States trade deficit was a noose around the neck of the economy, emphasising that the once mighty dollar could collapse at any moment… The IMF's chief economist Kenneth Rogoff said that it was just a matter of time before the gap closed, tipping the dollar into a potentially steep fall. 'If we were looking at a poor developing country, the world gives them just enough rope to hang themselves. A country like the United States, they give them enough rope to tie the noose around their neck several times. But it does happen in the end,' he said."
Now, what exactly does CAD mean? Why is it a noose around the neck of the Eagle?
When in a particular year the sum total of a country's export earnings and other earnings from abroad (such as dividends) falls below the total expenditures on account of imports and other costs incurred abroad (e.g., for wars and for maintaining military bases), that entails a CAD. When the opposite happens in a particular year, i.e., when total incomes from abroad exceeds total expenditure abroad, that country is said to have a current account surplus. In the year 2000, Japan, France and Germany enjoyed surpluses to the tune of 117 billion, 20 billion and 11 billion dollars respectively. In the same year, USA reported a deficit of 445 billion dollars ( up from 79 billion in 1990) compared to around 25 billion dollars each for England and Brazil and 18 billion dollars each for Germany and Mexico. At present the American CAD amounts to more than 4 per cent of its GDP, much higher than the 3% obtaining in the critical years of mid-'80s.
Here it may be noted that during its heyday the British empire enjoyed a consistent and comfortable surplus (e.g., 4% of GDP on the eve of World War I). By contrast, imperial America has been running a CAD almost for every year over the past half century.
How does the USA cope with this highly abnormal situation? It manages the CAD with the huge inflow of funds from abroad on capital account: FDI, investments in treasury bills and non-government bonds and securities, petrodollars earned by OPEC countries and deposited in American banks, and so on. The extent of dependence on investment from abroad will be evident from the fact that 42% of US treasury bills are now owned by foreigners.
The huge inflow takes place because of a dollar-fetishism caused by (a) the belief, supported by decades of real experience, that investment in dollar is as good as investment in gold, since its value never falls; (b) the position of the US as the safest investment heaven with very high, if not the highest, rate of return in the world. And to bolster these economic factors, there are the ultimate imperial weapons of political pressure in various forms (aid-diplomacy, veiled military threat or simply a threat of downgrading economic relations) and even armed intervention (as in the case of Iraq which dared to switch over to the euro as petrocurrency, followed by a decision to convert the country's $ 10 billion reserve fund at the UN to euro).
What if the economic factors behind the huge inflow of finance on capital account cease to operate ? There will be a decline in the inflow, for the politico-military pressures do not work equally effectively against all states and they cannot be applied against private (including institutional) investors. The decline will be small if there is no other feasible international currency, and big or perhaps even devastating if such an alternative emerges. In the latter case, the US will lose the unique advantage of carrying on with a persistent and growing CAD. The world's most-indebted country will face a situation comparable to that experienced not long ago by Mexico, Argentina, South Korea. There will be a run on US banks, as holders of dollar reserves convert these into other currencies. A stock market crash of unprecedented proportions will be unavoidable.
A strained flight of imagination? Not really. The deadly symbiosis of skyrocketing CAD, falling dollar and rising euro - where each reinforces the other - do constitute the proverbial Achilles' heel of the demonic dollar empire.
Euro-challenge
After World War II, US dollar replaced British pound as the international currency of choice in respect to all three functions of money: unit of account, store of value, medium of exchange. By the 1990s, with the Deutsche mark and the yen taking rapid strides, dollar domination declined from absolute to overwhelming. In the 1990s, the domination remained, but declined in degree. On January 1, 1999, the euro was created, linking an economic area nearly the size of the U.S. economy. The euro's impact began to be felt in markets throughout the world economy. The following facts and figures give us some idea of the growing euro-challenge to the predominance of dollar:
- In the international bond markets the percentage share of new issues denominated in dollar declined from 54 in 1998 to 45 in 1999 to 44 in 2000 while the corresponding share of euro rose from 25 (euro-area currencies in 1998) to 37 and then slid somewhat to 34 thanks to a good rise in the share of yen. In the international currency markets too, the percentage share of dollar in terms of amount outstanding came down from 79.4 in 1993 to 59.4 in 1998 to 49.1 in 2000, whereas the share of euro rose from a mere 8.5 to 19.2 to 32.4 respectively;
- In international banking there is also evidence of currency diversification over the last two decades. During the 1980s, 60% of the cross-border assets of banks were in dollars and 19% in the euro legacy currencies. In the 1990s, the dollar's share fell to 47% and the euro legacy currencies' share rose to 27%. In 1999, the respective shares were: 45% for dollar and 32% for euro;
- Up to the year 2000 dollar was stronger than euro. Since then, and particularly since 2002, the latter caught up with and often surpassed the former. Over the last couple of years, the euro has risen by around 35 per cent against the dollar. In the second week of October this year, the dollar reached a new three month low against the yen. The euro also rose against the British pound.
In this backdrop, the EU is trying to attract more countries' trade and currency reserves into euro, in a bid to chip away at U.S. hegemony over the global economy and money supply. A shot in the arm came their way when President Vladimir Putin said on 9 October, 2003 that Russia could switch its trade in oil from dollars to euro. Interestingly, Putin said this at a joint news conference with German Chancellor Gerhard Schroeder in the Urals town of Yekaterinburg, where the two leaders conducted two-day talks. A move by Russia, as the world's second largest oil exporter, to trade oil in euro, could provoke a chain reaction among other oil producers (such as Iran and Saudi Arabia) currently mulling a switch and would further boost the euro's gradually growing share of global currency reserves. As Youssef Ibrahim - managing director of the Strategic Energy Investment Group in Dubai and a member of the U.S. Council on Foreign Relations, an influential body of leading world thinkers which help set the United States' foreign policy agenda - said , "Slowly more power and muscle is moving from the United States to the EU, and that's mainly because of what happened in Iraq." (Moscow Times, 10 October, 2003).
Putin's declaration, of course, may well be a mere bargaining tactic, for he is unlikely to mar his good relations with the US at this stage. However, Washington is worried over the fact that the unity and understanding of the Plaza Accord period (when in 1985 the dollar soared too high hurting American exports, G7 finance ministers met at UN Plaza,New York, and agreed to intervene to push it down) is no longer there. Moreover, currently the euro-area is attracting more foreign capital than the US. In the years 2000 and 2002, for instance ,just three countries - France, Germany and the Netherlands - together attracted more investment from abroad than the US. This is only normal, for as the (US) President's Report on the Economy, 2003, admits, on the whole investment returns are higher in other countries than in the US.
Fault Lines in Eurozone
To take note of the advances made by the euro is not to forget that in terms of certain indices (such as TNC domination: 48% of the top 500 MNCs in the world are US-based while only 28% are Europe-based). Europe lags far behind the USA. No less important are the inherent weaknesses of this currency:
- The euro represents on attempt to combine political segregation based on the nation state with pan-European convergence of macroeconomic policies. This often proves difficult. To take one recent example, the European Commission warned France for breaching the European pact (budget deficit not to cross a ceiling of 3% of GDP) last year and this year and for talking no serious steps to avert that in the 2004 budget. Germany also has breached the rule for two years running, but EU ministers feel Berlin is trying harder. France may even be fined for the breach. As Graham Weston, Liberal Democratic leader in the European Parliament, said, Britain could not be expected to consider joining the euro if others simply ignored the rules. He also referred to Sweden's negative vote last month as a indication of lack of public confidence. To be sure, the disgruntlement against the big ones, against the Franco-German leading core of the EU, does not augur well for the union;
- There is no standard maturity structure for government bonds in the eurozone and yields tend to diverge. In this respect the US market is better placed, having a single user in the US treasury. Moreover, the US treasury plays a vital role in the liquidity of the government bond market;
- The strong euro is not an unmixed blessing. It makes European exports dearer for foreign customers and thereby reduces the competitiveness of European industries. The same thing holds good, the opposite way, for the weak dollar. It is indeed very difficult to predict the net outcome that is likely to emerge, in the medium or longer run, from the multiple crosscurrents in recent economic trends.
On balance, it seems proper to suggest that the euro is not going to dislodge the dollar from the No 1 position in near future. There is much inertia in the choice of an international currency: the British pound, for example, continued to play a prominent role well after its predominance in the world economy waned. But one thing is definite. Gone are the days of unipolarity in international financial markets, and therefore the vulnerable heel of the mighty Achilles stands more exposed than ever before.
Bottomline
Every era has its seemingly undefeatable Achilles and every Achilles has his heel: it's only a matter of time before conditions emerge when he is hit on the heel and destroyed.
