Thu, June 16, 2011
Book Review: The Last Economic Superpower
Joseph Quinlan, chief market strategist for US Trust, has written an insightful book on the shifts taking place in the world economy. The book's subtitle captures its scope: The retreat of globalization, the end of American dominance, and what we can do about it.
Although the world economy is still highly interconnected, Quinlan argues that a major change has taken place in the global economic scene. In the final two decades of the 20th century, capital moved freely around the globe, fueling trade, cross-border lending, and foreign investment. The United States, the remaining superpower after the unraveling of the Soviet Union, stood at the center of the world economy and provided leadership for the rest of the world.
Initially, there was little concern when, in 1988, the US became a net debtor nation for the first time since World War I. But the nation’s indebtedness has continued to grow unchecked, and with the financial crises of September 2008 global confidence in American economic leadership began to wane. In the ensuing global recession, the world started becoming financially cautious, distrustful of US leadership, and fearful of the risks associated with free-flowing global capital markets.
Quinlan’s account of the rise and fall of globalization is well-written and detailed as he describes the waxing and waning of America’s influence on the world economy. He argues persuasively that the present trajectory of the world is in the direction of a future in which Europe, Japan, and the US are greatly marginalized as influencers of the global economy. Global capital flows, he writes, are “increasingly dictated by actions taken by central bankers and investment managers in Kuwait, Beijing, and São Paulo. The global money centers of New York and London, of course, still matter, but the shift in investment capital – from the West to the Rest – reflects the fact that the world excess reserves… are in the vaults of China, Brazil, Russia, and the Middle East.”
Troublingly, Quinlan also observes that protectionism is on the rise across the globe. Growing nationalism and discontentment among the poor in developing countries is likely to increase pressure for more barriers to cross-border trade. These pressures, coupled with the unsustainable debt levels of most of the Western nations and Japan, may lead to economic stagnation and rising prices for staples and consumer goods worldwide.
Quinlan closes with his own proposals for avoiding a global economic “Cold War.” He focuses on the need for Western nations to engage the developing nations more effectively on economic issues and on the need for debt level reduction in the large debtor countries of the West. For example, he suggests that the US and Europe, which have dominated the leadership of the International Monetary Fund and the World Bank since their inceptions, should, as a gesture of respect, allow the developing nations to have a greater role in these organizations.
Although Quinlan tries to end his book on a hopeful note, one cannot help wondering whether the leaders of the United States, Europe, and Japan are up to the challenge of carrying out his prescription for the revitalization of economic globalization. The European Union has been struggling for a year to craft an acceptable solution to the creeping sovereign debt crisis, American politicians continue to squabble over tax reform, spending, and the national debt limit, and Japan is on its fifth prime ministers in as many years. If successful solutions for such internal challenges do not begin to emerge, Quinlan’s worst-case scenario could become a reality: the world could head toward a period of increasing economic balkanization and conflict, much like that experienced in the years between the first and second World Wars.
Disclosure: I was given a free review copy of this book.