November 18, 2010

As the dust slowly settles after the stormy G20 summit in Seoul, the world begins to deal with a new crisis of leadership. The G20 meeting started amidst high hopes for reducing tension between the participants, particularly between the United States and China, and creating a roadmap for a stable world recovery. It failed. Its failure highlights the United States’ inability to perform its old leadership role in times of crisis. We have entered a new phase of globalization, a leaderless globalization.

Twice since WWII, the United States successfully led the economic reorganization of the world. It used its unchallenged economic and political power to design a new management of the world economy in Bretton Woods in 1944. Some three decades later, after the crisis of the late 1970s, the United States led a new remodeling of the world. This time, however, it weakened the possibility of its leadership in the future. We saw the consequences of that in Seoul.

The Bretton Woods Agreement allowed the United States to pursue a policy of national development under the protection of fixed exchange rates and capital control, and the guiding hand of the federal government. Helped by GATT’s promotion of free trade, the United States sold its increasing surplus output in the rest of the world. The trade surplus grew, and years of economic growth and enviable prosperity for many Americans followed. Meanwhile, Europe and Japan recovered from the devastating effects of the war. They too prospered. Their prosperity further expanded the market for the American industrial output. The Bretton Woods Agreement created a win-win environment for its leading participants. Then came the crisis of the 1970s.

By the late 1970s, the Post-War order and its largely nationalist framework had become an obstacle for corporations that were increasingly seeking diversification and flexibility in where they invested, how they produced, and how they managed their affairs. Creating a stable national economy was no longer a priority. The Bretton Woods Agreement had outlived its usefulness. The United States led the movement to undo its legacy.

From Jimmy Carter to George W. Bush, American presidents carried the torch of globalization and led the restructuring of the world through deregulation, privatization, and capital mobility. These policies were in America’s best national interest, they faithfully told the American people. Production and jobs in new technologies and high paying services would replace those leaving the country due to globalization. The United States was moving into a new area of comparative advantage. It would continue to lead the world, this time in high-end and high tech production, many believed.

The real narrative of the U.S. economy, however, ended differently. Except for a short period in the 1990s, the United States continued to lose its old manufacturing production and jobs without gaining leadership in new vital technologies. Ironically, it was China, the sweatshop of the world since the 1980s, which would surprisingly beat the United States in these new technologies.

The U.S. support for globalization radically changed the world. It helped the American-based corporations to successfully compete, invest, and produce globally. As their domestic output declined, they increased production, and prospered globally. Meanwhile, globalization facilitated the rise of new players in the world economy, those that would ultimately challenge the American leadership. With a farsighted policy of national development, China gained the most from globalization.

Unencumbered by the free market ideology, the Chinese designed a successful industrial policy. They selectively used elements of globalization, and became the factory of world. While the American law makers were scrapping the role of the government in the economy, the Chinese continued to regulate their evolving economy. They poured billions of dollars into new technologies, and charted the country’s future industrial development. They planned China’s evolution from the producer of low value added exports, to an emerging technological powerhouse. The United States abandoned Keynesianism and the use of industrial policy. The Chinese, however, retained both, even in the age of globalization.

The United States not only lost the production and export of old manufacturing goods, it failed to develop the technologies that would shape the future of the world. It became the victim of its own creation. Its zealous belief in free market globalization hastened its demise as the leader of the world. The G20 meeting was a loud manifestation of this decline.

The specific issues of tension between the United States, China, and others at the summit were reflections of deeper divides. They were the signs of a growing demand for autonomous and nationalist policy by countries that came to prominence through globalization. In some ways, the world is returning to what preceded the meeting in Bretton Woods. This time, however, without a United States to lead the way forward.

Economic crises are times of change, and the creation of new institutions and norms on the ashes of the old. In a world of interconnected economies, the journey from the old to the new requires the moral authority of a world leader. The United States has lost the ability to be that leader. China is far from assuming that role. Despite its remarkable achievements, China remains a largely underdeveloped country. Its authoritarian political regime is a formidable impediment to assuming this role. The world is entering uncharted terrains. Economic disorder is a possible outcome.