The global economy, the US' role and G-8 responsibilities

The US economy is so large that some of its metropolitan areas produce more than some countries. For example, last year, Chicago had about the same GDP as Australia; Boston had the same as Taiwan; Dallas, the same as Saudi Arabia; Milwaukee as much as Pakistan; New Ark in New Jersey as much as Iran and New York's GDP was more than India's.

Such statistics are both a blessing as well as a curse. It draws attention to the dominant position of the United States and thrusts upon it responsibilities. In a world tied together by its own trade equation, the US has now become the focal point, which actions enable other nations to thrive. In turn, if other nations win, then the US also prospers.

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We must not forget that international trade is a two-way street. Customers benefit from imports, which sometimes provides goods and services of higher quality or lower prices (or both) than those made at home. Producers on the other hand also tend to benefit from exports, which provide more customers for goods and services.

The role of the US economy for the rest of the world assumes special importance from the point of view of what and how much it imports from the rest of the world. It generates world-wide movement forward or recession through its own dynamics.

In 2002, imports to the United States from developing nations amounted to about $317 billion, it being the single largest market for developing nations' goods. Conversely, exports from the US to these nations totaled $130 billion, that is, the trade deficit was in the negative for the US by $187 billion. This was 44 per cent of the entire trade deficit run up last year by USA with all nations. In a manner of speaking, such US action continued to stimulate the developing world's economy including that of Bangladesh.

There is another important area where the USA casts a large shadow. The United States not only buys hundreds of billions of dollars worth of goods produced by developing nations, but it also invests heavily in some of these countries. It is this aspect which continues to be the desired equation for most developing nations in Asia, Latin America and Africa.

Because of several known reasons, the US today is the prime source of funds for the rest of the world. The US being relatively stable provides an enormous haven for capital investments (in stocks, bonds and real estate) from abroad. These capital inflows in turn provide the necessary support for imports into the United States so that it can, in turn, sustain its large trade deficits. Income generated through investments in the United States is also often used by foreign entrepreneurs and investors to start and expand businesses at home.

The integration and liberalisation of financial markets over the past 20 years has provided impetus in this regard. These factors have allowed capital to flow to its best uses, with broad benefits globally. Economists recognised this aspect and stress therefore on the theoretical principle of liberalisation for the developing world. This, they believe, will ensure foreign investors investing in the securities of other countries -- their stocks and bonds. Here however comes the catch. The US financial institutions play a very crucial role in determining and grading the investment climate in various countries. It is this reportage mechanism that encourages or retards possibilities for a developing nation to receive foreign funds. Unfortunately, the recent categorisation of various countries as being prone to terrorism has affected their chances and consequently reduced their potential for creating jobs and reducing poverty.

There appears to be a great deal of truth in this. In the five years after liberalisation, GDP growth in India has averaged 5.7 per cent annually, compared with 3.2 per cent in the five preceding years before liberalisation. Similarly, Thailand's average five-year growth has been 8.7 per cent after liberalisation of its securities markets and 3.5 per cent before. Bangladesh has also gained somewhat in this context but not really enough. That is probably because we have not been able to resolve some of our outstanding confusions and continue to have a poor image abroad.

It is important at this point to underline the significance of liberalised trade for the developing world. Whatever be the form -- multilateral, regional or bilateral -- it is the key ingredient in the recipe for prosperity. The coming months are vital for the developing world, also known as the South. New global trade negotiations, if they succeed, is expected to generate between $150 to $190 billion a year in higher incomes for the developing nations.

Trade liberalisation was introduced in the Uruguay Round and provided a good catalyst. In the six years after the Round, exports from developing nations grew by $1 trillion, to a total of $2.4 trillion in 2002. This leap forward has been possible because of duty free and sometimes quota free possibilities offered by the European Union and the United States. We have to build on that. In the case of Bangladesh, in particular, further easing of restrictions by the US will have a salutary effect.

US Trade Representative, ambassador RB Zoellick has recently indicated in an article in 'The Economist', published from London that America's trade policies are connected to its broader economic, political and security aims. He has also acknowledged that this intellectual integration may confound some trade scholars, but has argued that it follows in the footsteps of the architects of reconstruction after 1945. He believes that if US trade strategy is to be sustainable at home, it needs to be aligned with America's values and aspirations and its economic interests. That is something we cannot argue with. After all, each nation, big or small has its own vital interests. However, when one nation becomes an overwhelming factor in international economic relations, then its strategic interests cannot end up in assisting the path of protectionism espoused by projectionists, special interests, anti-globalisation nihilists and partisanship.

Ahead of the Cancun ministerial, the general feeling is that trade is rigged against the poor.

The developing countries to their sorrow are realising that their farmers' lack of good transportation and high technology is not being balanced out by their cheap labour. Instead their competitors in agricultural products in places like the United States or Europe have better seeds, fertilisers and equipment and their products are also often protected by high tariffs, or underwritten by massive farm subsidies that make them artificially cheap. The answer that is staring some countries in the face, specifically in Africa (dependent largely on export of agricultural products), is disaster. Struggling African and Asian cotton farmers are forced to compete with products from affluent US agribusinesses whose rock-bottom prices are made possible by as much as $3 billion in annual subsidies. Sugar products in Africa are similarly stymied by the European Union's insistence on subsidising beet sugar production as part of a wasteful farming -- welfare programme that gobbles up half its budget.

It is interesting to note here that the United States, Europe and Japan funnel nearly a billion dollars a day to their farmers in taxpayer subsidies. The argument given by the farming lobby is that the farmers cannot stay in business if they are left at the mercy of wildly fluctuating prices and are forced to compete against people who are happy to work in their fields for a dollar a day.

Sadly, the rigged game, as it is perceived, is sowing ever-greater resentment toward the United States, the principal architect of the global economic order. This is also affecting the world vision of that country and its stand for democracy and freedom.

An editorial which recently appeared in the 'International Herald Tribune' on 21 July is worth quoting -- "the United States and its wealthy allies (G-8) will not eradicate poverty -- or defeat terrorism -- by conspiring to deprive the world's poor farmers of even the most modest opportunities."

WTO negotiators within the scope of the 'development round' as initiated in Doha in late 2001, will be having a crucial meeting soon in Cancun, Mexico. Any success there will depend on the commitment by the G-8 countries and many others from the European Union to reduce barriers. Painful reforms will have to be made to make trade a meaningful two-way street.

At the same time the South must continue to dialogue with itself as well as with the North while it lends credibility to that process by concrete action. This is important because the South faces major economic problems of which, inter alia, the debt burden, protectionism by the North, exchange rates misalignment and commodity price collapse are but manifestations of a deeper international malaise. We must remember that the South as a group can acquire, through systematic cooperation, countervailing power or leverage in its relations and negotiations with the North.

It is true that results of cooperation among countries of the South at the regional level have mostly been less than encouraging. There have been conceptual failures in formulating programmes of regional cooperation and integration. There have also been failures at the level of policy formulation. More than anything else, the failure has been at the political level where leaders have not been able to evolve even broad areas of cooperation among themselves.

However, despite all these limitations and complexities, efforts have to be made at Cancun and immediately after by developing countries to break out of their present state of dependency on the North. The key to cooperation is for the stronger economies to offer protection to the weaker developing countries and for the latter to rely on medium-and long-term gains despite some hardship in the short term.

Muhammad Zamir is a former Secretary and Ambassador.