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Monday, May 5, 2003

Rudderless world economy

From 1993 to 2001, the administration of U.S. President Bill Clinton based its policies on the Democratic Party's platform of compassion toward the underprivileged and tolerance toward dissent. In the past, this ideology had prompted Democratic administrations to try to legislate an end to racial discrimination. It drove Clinton to mediate in Israeli-Palestinian peace negotiations. In the same spirit, Clinton gave policy priority to reforming a health care system in which more than 15 percent of Americans were without insurance.

In the 1990s, the United States transformed itself into a postindustrial economy. High-tech manufacturing industries, armed with information technology, and nonmanufacturing industries, such as banking and telecommunications, formed the two economic pillars. Income gaps between individuals widened to an alarming extent, as did the income gaps between nations affected by globalization.

There was no way the Democratic administration could have slowed either the acceleration toward a postindustrial economy or the pace of globalization. Meanwhile, U.S. companies, especially financial institutions, took advantage of globalization and prospered.

Under the Clinton administration, though, the U.S. -- with unrivaled military and economic power -- was able to govern the global market economy. The East Asian currency crises of 1997 and 1998 did not develop into a full-blown international financial crisis because the U.S. Treasury Department, in coordination with the International Monetary Fund, offered emergency assistance to troubled countries in exchange for "conditionality," or commitments on economic and financial policies.

Like globalization, U.S. unilateralism owes its advancement to the collapse of the Soviet Union in December 1991. The Clinton administration's unilateralism was based on strong U.S. economic power. East Asian countries would not have achieved such amazing economic growth if they had not been able to export industrial products to the U.S. The IMF and the World Trade Organization, the foundation of the international economic order, were under effective U.S. control.

World history changed dramatically with the U.S. presidential election in November 2000. Under President George W. Bush, U.S. unilateralism has come to be based on military power.

During the Cold War, the Soviet Union provided various forms of support to underground activities in capitalist countries to "liberate workers from capitalist exploitation and suppression." Although Soviet forces under the Warsaw Pact suppressed liberalization and democratization movements in Czechoslovakia, they never made incursions into foreign territory on the pretext of "liberating workers." Soviet military aggression was averted, thanks to a powerful U.S. deterrent.

Some political scientists once insisted that democratic nations would never start a war. The preemptive strike against Iraq has debunked that theory. The U.S. and Britain justified their invasion by claiming they were trying to "liberate" Iraqis from Saddam Hussein's dictatorship and to democratize Iraq. Moreover, these self-styled models of democracy challenged our preconceived notions by opening the war without a United Nations resolution.

The question is, how will U.S. unilateralism change in the coming years?

Moving toward the 2004 presidential election, the Bush administration is likely to strengthen military unilateralism. After all, polls show the majority of U.S. voters approved of the U.S. military action in Iraq. However, the U.S. business community is likely to be divided over unilateralism. Defense, oil and pharmaceutical industries are among the sectors that have either benefited from the war or will benefit from reconstruction efforts in Iraq. Some media reports indicate that reconstruction contracts will be granted only to U.S. companies. The hackneyed phrase "military-industrial complex" sounds fresh today.

The U.S. financial industry, which reaped handsome profits through economic unilateralism in the 1990s, is likely to suffer under Bush's military unilateralism. If the world is destabilized and thrown into confusion, the industry will have trouble managing their portfolios; they won't find low-risk investments with yields exceeding 30 percent, as they did in the 1990s.

While the Clinton administration was supported by the Treasury Department and the financial industry, the Bush administration will likely derive support from the Defense Department and defense industry.

Military unilateralism, backed by U.S. neoconservatives, will no doubt cast a shadow over the U.S. economy. With the Tokyo stock market affected by the New York stock market to an almost abnormal extent and East Asian economies highly dependent on exports to the U.S. for economic growth, this shadow could trigger a global recession.

The U.S., which governed the global economy through the 1990s, is apt to abandon that role due to the strong influence of the "neocons." If currency crises recur in East Asia, Eastern Europe or South America through frequent hedge-fund transfers of capital, a serious financial crisis could hit the global economy because of the lack of governance.

The U.N. is capable of governing the world economy, but U.S. neocons have caused the U.N. to lose prestige. Although Japan did not take part in the military strike on Iraq, it supported Washington's actions, which included ignoring the U.N. Thus Japan, too, is accountable for the consequences of the lack of governance in the world economy.

Takamitsu Sawa, professor of economics at Kyoto University, is also director of the university's Institute of Economic Research.

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