Listener: 19 April, 2003.
Keywords: Globalisation & Trade; Macroeconomics & Money;
We see only vaguely the world order which will follow the flames of Iraq. The whole episode has confirmed the American (Hard) Right’s suspicions of the old order, based on alliances and multilateral institutions, which Franklin Delano Roosevelt and Harry Truman (and, indeed Peter Fraser) contributed to creating after the Second World War. They argue the case for, what amounts to, an American imperium – a world empire over which it wields unqualified power. With President Bush they have an administration which could pursue such a unilateralist goal, with profound international political and military implications. But as this is only a short economics column, the focus is on the economic and financial ones.
The United States is not as economically powerful as it is militarily powerful. Indeed, there are many who interpret the war on Iraq as the US using its military might to strengthen its economic power, most notably via commanding Iraqi oil, and its financial power, to reinforce the US dollar as the world currency. (There is a parallel argument that it has been using its military to compensate for its relative international political weakness in a heterogenous UN-led world.) Even so, the military and imperial requirements may be a drag on the economy.
The relative economic power of the US may be diminishing anyway. There are grave structural imbalances in the American corporate sector, indicated by falling share prices over the last three years, plus continuing gloomy news on employment, investment profits and bankruptcies. The war expenditures – thought to amount to a not inconsiderable 1 percent of US GDP – will stimulate some sectors. Additionally, in order to strengthening the weakening US economy, the Bush administration is proposing further tax breaks involving almost inconceivable sums. (Whether they will work is another column.) One projection – probably an underestimate – suggests a budget deficit of $US2 trillion over ten years. That is equivalent to around 40 years of New Zealand’s current production.
The deficit means that the US government has to issue US dollar denominated bonds to a value of (roughly) two trillion, which have to go into the world’s balance sheets. In the past, the US dollar has been the currency of international choice, so investors were very willing to hold them. But twenty years ago, when the Reagan administration was similarly increasing the US budget deficit, there was no Euro, which has the potential to be the preferred international currency. Because the European Union is a major part of the world economy, we must expect some reduction in the dominance of the US dollar and rise in the significance of the Euro. However, the US budget deficit may accelerate the shift, as international investors become reluctant to hold so many dollars. (That would drive up US interest rates – ouch!)
It is even possible that the world will return to trading blocks, although an economically powerful East Asia probably wont have its own currency, but straddle the dollar and the euro. The fragmentation of world trading arrangements is a worrisome prospect to New Zealand. The US-Iraq war has put back any conclusion to the Doha round (the latest multilateral trading negotiations), although whether by six months or six years is unclear. In the interim the US ‘Imperium’ is likely to pursue preferential bilateral free-trading deals, especially with those who supported it during the Iraq war. Australia will rank early in the line-up, but New Zealand not, although the Australians have said they will support us in our US trade negotiations. (The cynic would say ‘as much as they can, without undermining their own prospects’.)
That raises very real problems for us, not only because any preference Australia has over New Zealand is likely to affect choices by international investors. More fundamentally, where would New Zealand fit into a fragmenting world economy? The European Union is focussed on incorporating a raft of new members – in any case we have not been paying a lot of attention to that market in recent years. The East Asian economy (centred probably on China rather than Japan) is unlikely to take international initiatives, being too politically heterogeneous and far too busy producing things.
This is why in the sixty years since Peter Fraser, New Zealand has increasingly pursued a multilateralist strategy – politically, militarily and economically. That is where Helen Clark’s instincts lie. But if the new world order has a vigorous American Imperium, as is likely to be pursued by Bush and may continue under a Democrat president, New Zealand may have to alter its strategy. But it is not obvious to what.
Readers will be deluged with prognoses about the post-Iraq-war future, many of which reflect the political preferences of the writer. The ponderings here reflect neither the columnist’s best hopes, nor his worse fears.
Some readers’ queries arising out of the column are covered in A Note on Iraq, Oil and the US Dollar