A Wake-Up Call for the United States? - April 11, 2015

A Wake-Up Call for the United States?

Larry Summers’, former Secretary of the Treasury, critic on the United States behaviour is harsh but sounds about right: the US ignored and failed to respond to China’s growing role. As a result, this new Chinese initiative can now break the United States’ dominance.

March 2015 may be remembered as the moment when the US has lost its role as world’s economic leader. As for now, 47 countries has signed up for Chinese established and spearheaded Asian Infrastructure Investment Bank (AIIB) among which Germany, Great-Britain, Switzerland, Australia.

What is the purpose of the AIIB?

The official answer is that there is $8trillion infrastructure funding gap between 2010 and 2020 for sustaining economic growth in Asia and the money to fill it in.

The implicit aim is obvious. China wants to take a leading role and reform economic and geopolitical leading roles in Asia. China got fed up with not being recognised for its growing influence and economic power in the global economic system. For example, in the International Monetary Fund, China has no more than 4 per cent of voting share (6th rank) against the US 17 per cent so obviously, the US gets more saying at important decisions.

In the case of the Asian Development Bank dominated by Japan and the US the same problem occurs. It is decided by them which countries and domains get development loans.

Therefore, Chinese established AIIB seems a logical move and nothing proves more China’s growing role in the world than the fact the United States’ allies have been signing up for the organisation. Of course, it is all about business and gaining more influence which is obvious in the era of global markets.

What will the new system bring?

Summers, Secretary of the Treasury between 1999 and 2001, says that AIIB might be the most important economic initiative of long decades as the US was unable to convince their allies (even the UK) not to join.

This can represent a serious blow to American interests and implies that the US needs to reconsider its best practices, as for certain examinations, China has already overtaken the US in the world economic ranking. In addition, developing countries have now a bigger role in global production. The US refusing to reform the share of IMF votes reflecting China’s and India’s increased global economic heft will backfire, claims Obama’s former advisor.

Here are three precepts U.S. leaders should keep in mind.

First, U.S. leadership must have a bipartisan foundation, be free from gross hypocrisy and be restrained in the pursuit of our self-interest. As long as one of our major parties is opposed to essentially all trade agreements and the other is resistant to funding international organizations, the United States will not be in a position to shape the global economic system. Other countries are legitimately frustrated when U.S. officials ask them to adjust their policies — only to then insist that state-level regulators, independent agencies and far-reaching judicial actions are beyond their control. We cannot expect to maintain the dollar's primary role in the international system if we are too aggressive about limiting its use in pursuit of particular security objectives.

Second, in global as well as domestic politics, the middle class counts the most. It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonization with moral concerns about global poverty and posterity while offering little that speaks to those in the middle. Approaches that do not serve the working class in industrial countries (and the rising urban populations in developing ones) are unlikely to work out well in the long run.

Third, we may be headed into a world where capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time. In no big industrialized country do markets expect real interest rates to be much above zero in 2020 or for inflation targets to be achieved. In the future, the priority must be promoting investment, not imposing austerity. The present system places the onus of adjustment on borrowing countries. The world we are now in requires a symmetric system in which pressure is placed on surplus countries as well,

says Larry Summer in The Washington Post’s article.

At the end of the article, he hopes that the event of the past month will be seen by future historians not as the end of an era, but as a salutary wake up-call.

By Innovative Securities