Playing to the panda

The United States will reverse its economic decline only when it abandons the neo-liberal school of economics, reindustrializes and understands that the so-called Washington Consensus, once hailed as the only formula for the wealth of nations, has created false illusions of economic prosperity.

The U.S. financial meltdown of September 2008 was more than a routine economic hiccup. It marked the end of three decades of Reaganomics and replaced them with what many believe is the Chinese model of combining the market's "invisible hand," a longtime orthodoxy for Western countries, with the "visible hand" of the government, inherent from long-ago abandoned Marxist theories.

In a word, the new Beijing Formula seems to be replacing the Washington Consensus.

The ascendance of the West - the European powers and later the United States - as leading world economic, military and political powers, started some five centuries ago and accelerated with the onset of the Industrial Revolution.

The more the West manufactured, the more capital it accumulated, and the more markets it conquered. Wealth could afford standing mechanized armies that allowed the various European powers to subdue the world and use their might for their own mercantile interests - often leading to clashes over these interests.

While many historians argue that the raging intra-European conflicts ultimately led to the demise of their empires, a few other economic historians now attach the decline of the British Empire (for example) to the country's decision to slowly abandon its manufacturing sector in favor of service-oriented economies, in particular financial services. Britain was then replaced by other countries whose economies were perfecting manufacturing of all sorts: Enter the United States.

As an industrial powerhouse, the United States accumulated wealth that allowed it to fund a huge army and build an economic empire even greater in depth and breadth than Britain's.

By the 1960s, when the rebuilding of post-World War II Europe had concluded, the Cold War and the number of countries under Soviet control meant that the United States was left struggling to find markets for its robust production. To make up for this absence of international markets, the United States compensated by transforming itself into the world's leading consumer.

By the 1970s, the American market became saturated, and with the emergence of other industrial hubs in Germany and Japan, the United States' economy stalled. Inflation surged along with unemployment. The 1973 Arab oil boycott further complicated and exacerbated American economic troubles.

By the time the presidential elections of 1980 came around, President Jimmy Carter had failed to break this dead economy spell. Americans thus elected conservative Ronald Reagan, who brought with him neo-liberal economists like Milton Friedman and Arthur Laffer, among others.

The Reagan team argued that the market, if left on its own, was efficient enough to generate economic growth and that the solution to the United States' economic troubles rested in fixing its monetary policies. Lo and behold, the Friedman-Laffer trick worked - at least temporarily. 

Between 1980 and 2000, the United States saw unprecedented economic growth. And with the fall of the Soviet Union in 1990, the country stood as the world's lone military superpower.

The United States' economic prosperity combined with its military might - and the accompanying collapse of the command economies in the formerly communist states - made thinkers like Francis Fukuyama argue that history had reached its end with the West's combination of liberal political and economic systems proving to be the best model for society.

At the same time, John Williamson drafted the Washington Consensus in 10 points: Impose fiscal discipline, reform taxation, liberalize interest rates, raise spending on health and education, secure property rights, privatize state-run subsidies, deregulate markets, adopt a competitive exchange rate, remove barriers to trade and remove barriers to foreign direct investment.

The resulting availability of cheap credit not only pushed Americans, and their government, to live beyond their means through borrowing, it made Americans believe that the financial services sector was more important than all other sectors. Why use the capital to manufacture if this same money, when thrown into the financial market, can bring more money?

Eventually, the decline of the United States' industrial "rustbelt" in the Northeast and Midwest came to encompass much of the rest of the country. Through the World Bank and the International Monetary Fund, Washington managed to shove its Consensus pill down the throats of countries all around the world, most of which are under water today with colossal debts.

There was at least one major country that did not swallow the pill: China. Instead, benefiting at first from vast sources of cheap labor, it became the world's biggest factory.

Like a century earlier when an industrial United States displaced the financial services hub, Britain, as the world's economic power, China has come today to replace the United States in manufacturing, accumulation of wealth, and is en route to similarly displace the United States as the driver of the world economy.

At the same time, with the world increasingly interconnected and transforming into a "global village," China introduced some innovations into its own industrial model. Beijing realized that winning the biggest share in world trade required government intervention in favor of Chinese companies when competing with international companies.

China's model has so far been a success, and it does not look to be bending anytime soon. 

Meanwhile, the United States has to grapple with $13 trillion in government debt and 10 percent unemployment. More Friedman-Laffer will not cut it for American revival this time. Only reindustrialization will.

After all, a nation of real estate agents and stockbrokers cannot lead the world.

- The author is the Washington D.C. correspondent for the Kuwaiti daily Al-Rai.

Hussain Abdul-Hussain can be reached at
features@praguepost.com