Financial Crisis And the End of American Hegemony (II)

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Financial Crisis And the End of American Hegemony (II)

Daily Trust
(Abuja)
OPINION
22 September 2008
Posted to the web 23 September 2008

By Obadiah Mailafia

For America, it may not be the end of the world, but it certainly signals the end of en era. Strategic thinkers from Michael Howard to Paul Kennedy have warned that empires often self-destruct through the folly of imperial overstretch.

In over-extending herself beyond her means and her material capabilities, America has ended up alienating her allies, pursuing a unilateralist course that wise men from Franklin Roosevelt to Harry Truman and Ronald Reagan would never have dared to contemplate.

In so doing, George Bush and the neocons who govern America have exhausted the moral capital that the United States has accumulated since Woodrow Wilson's Atlantic Charter. In pursuing such misguided policies, they are threatening to also bring down the engine room of international capitalism by a combination of myopia, greed and folly. More than at any time in her illustrious history, America stands isolated and bereft of moral authority - and on the verge of bankruptcy.

In 1945, the U.S. economy accounted for 48% of world output. The Bretton Woods international financial architecture which was constructed through American leadership has ensured a worldwide expansion that has continued to our day. Through the Marshall Plan, America saved Europe from crumbling under the ashes left by the war against the Nazis.

Without American help, the development trajectories of Japan, South Korea, Taiwan and the Philippines would have been quite different from what they are today. For more than six decades, the U.S. has been the de facto global banker of last resort, with the dollar being the de facto world reserve currency. With her open economy and impregnable fortress of rules-based markets, the country has been the destination of choice for international investment capital.

It is an open secret that America is today the world's number one debtor-nation. One of the greatest achievements of the Clinton Presidency was to have eliminated the budget deficit. When the Republicans took over, the notion of balanced budgets was cast out through the window. It was further aggravated by military adventures in Afghanistan and Iraq that cost an astonishing US$1 billion daily in taxpayers' money. And we all know that those adventures have more to do with advancing the interests of oil sharks and the military-industrial complex than about fighting terrorism or spreading the ideals of democratic government.

The Bush administration has cornered itself into a classic quandary: if they remain in Iraq, they would continue to attract the hatred of the Arabs and the Islamic world while continuing to waste their national resources; if they leave, they would lose face and Iraq would most likely descend into chaos. In thus overstretching herself, the American Imperium has squandered its international goodwill whilst impoverishing its people at the same time.

To be sure, America still leads the world in high technology and innovation. But it is also a nation of spendthrifts, with a consumerist prodigality that inspires no one. Today, Asian countries hold U.S. treasury bills in excess of the magnitude of US$1 trillion. If those countries were suddenly to seek redemption of those assets, the United States economy would automatically be bankrupted. Indeed, super-investor Warren Buffett has predicted that the net ownership of American assets by foreigners would reach a staggering US$11 trillion in 2015, by which time, according to him, the country would become a nation of 'sharecroppers'.

One would have to agree with IMF Managing Director Dominique Strauss-Kahn's warning that the financial crisis is likely to portend a major slowdown in the world economy for much of the coming year. On his part, OECD secretary-general Angel Gurria believes there is a likelihood of a contagion effect, with the prospects of more banks collapsing and many more falling into 'intensive care'. The collapse of financial institutions will spread collateral damage to related industrial sectors, with the prospects of reduced output and the loss of millions of jobs.

For us in Nigeria, the current crisis could not have come at a worse time, especially when we have been facing a capital market meltdown of our own for some months now. It goes without saying that the current crisis calls for the highest qualities of prudence and economic statecraft. Whilst I welcome the effort by my former colleagues in the Central Bank in responding so robustly through the Monetary Policy Committee, it is important to point out that our own stock market crisis has more to do with internal institutional defects than from the turmoil that has erupted across the Atlantic.

Perhaps we also need to carefully consider the pros and cons of leaving our foreign reserves in dollar accounts. Part of the likely effects of the current crisis may be a massive shift of capital from North America into the Euroland area, a prospect that would further weaken the value of the dollar against other world currencies. The cognoscenti of high finance, including the great Warren Buffett, have long predicted that the almighty dollar will continue in its secular trend of decline over the coming decade.

Keeping all our reserves in dollars may be a great risk, as we may already have lost some 20% of our national wealth by sheer virtue of the dollar's decline over the last three years. For geopolitical reasons, countries such as Iran long ago took a decision to move their reserves into the Euro area. Any precipitate action in this regard would, of course, be untoward. But our monetary authorities must keep clear this possibility as an option in case the current turbulence transmutes into a cataclysm.

The months ahead will be difficult for the American people and indeed the world economy. Some have suggested that the current crisis will give Barack Obama the Presidency on a platter. Whilst this may be so, I believe that what America faces today transcends mere partisan politics. There is need for a new historic consensus to rebuild the country and to restore hope in a time of upheaval. We need no less than 'a world restored', as the young Kissinger once wrote as a doctoral student at Harvard.

But such restoration will not be possible without America retracing its moral bearings and forging a new coalition for the reconstruction of international economic order. Part of the greatness of American civilisation, if we could so call it, is its infinite capacity to reinvent itself and to adapt to new realities. In the new world that is upon us, America must eschew the arrogance of power and accept to share the responsibility for global leadership with the EU, China and India, and, shall we say, Nigeria, Brazil and other regional hegemons.

Francis Fukuyama's End of History thesis has turned out to be a rather premature verdict on the fate of the human condition in our time. The Promethean forces unleashed by technology and globalisation have created new dangers and tumults. In our age of complex interdependence, new fears and insecurities may resurrect the long-forgotten cloven hooves of history.

One of the paradoxes of our age is the emergence of an integrated world economy without the requisite multilateral governance institutions. A new Bretton Woods world is needed to address the challenges of global economic and political governance. More than ever before, we stand in need of vision and statesmanship; the kind of leadership that would effectively confront systemic challenges such as financial turbulence, global warming, the spread of infectious diseases and the nightmare of poverty which condemns half of the world's peoples to conditions akin to those of the dark Middle Ages.

It is in our collective self-interest to rally around America in her hour of crisis. Europe, Japan and China would have a major role to play in all this. When America does recover, as surely it would, her place and influence in the world would probably be a much reduced one. It is one of the iron laws of history that all empires sooner or later must come to an end. While some have crashed with a bang, others have come down with a whimper. To avoid inevitable chaos, statesmen must come together to hammer out a new framework for global economic and political governance.

The late Hedley Bull, Montague Burton Professor of International Relations at Oxford, once underlined the ethic of 'cosmopolitan enlightenment' as the moral foundation of a new international order. As an idealist without illusions, Bull was prescient enough to know that in an age of post-ideological politics, civilisation itself may be imperiled unless the nations come together to forge a new compact based on solidarity and hope.

Dr Mailafia is Chairman of the Centre for Policy and Economic Research, Abuja.
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