9
Jul

Why is the U.S. afraid to lead the global economic recovery?

By Kati Suominen 

The release of another weak U.S. jobs report this Friday, July 6 — which showed the economy adding only 80,000 jobs in June and the unemployment rate holding steady at 8.2 percent — raises some serious red flags. It’s just one of many signs these days that the world economy is once again on the brink of an abyss. Nearly four years after the collapse of Lehman Brothers, U.S. growth is flailing, central banks are racing to cut interest rates, and several European nations have plunged back into recession. Instead of powering the 21st-century world economy, export-dependent emerging markets remain hostage to the transatlantic economic morass. We should be out of this by now. The missing ingredient? U.S. leadership.

In the 20th century, beginning with the creation of the Bretton Woods system in 1944, America’s great contribution was to champion an economic paradigm and set of institutions that promoted open markets and economic stability around the world. The successive Groups of Five, Seven, and Eight, first formed in the early 1970s, helped coordinate macroeconomic policies among the world’s leading economies and combat global financial imbalances that burdened U.S. trade politics. The International Monetary Fund (IMF) spread the Washington Consensus across Asia and Latin America, and shepherded economies in transition toward capitalism. Eight multilateral trade rounds brought down barriers to global commerce, culminating in the establishment of the World Trade Organization (WTO) in 1995.

Meanwhile, a wave of bank deregulation and financial liberalization began in the United States and proliferated around the world, making credit more available and affordable while propelling consumption and entrepreneurship the world over. The U.S. dollar, the world’s venerable reserve currency, economized global transactions and fueled international trade. Central bank independence spread from Washington to the world and helped usher in the Great Moderation, which has produced a quarter-century of low and steady inflation around the world. Read more…

Kati Suominen is resident fellow at the German Marshall Fund of the United States in Washington. Her latest book is “Peerless and Periled: The Paradox of American Leadership in the World Economic Order”.

As published in www.foreignpolicy.com on July 6, 2012.

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