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Foreign Affairs
May/June 1998
Abstract
The crises of globalization will be solved by neither a super-IMF nor an unfettered market. Herewith, a third way.
The logic of free trade does not apply to currency convertibility, as the Asian currency crisis should have made clear.
America should not undermine global trade through a Free Trade Area of the Americas in the mistaken belief that it has natural markets in South America.
Essays
America's economy is in its eighth year of sustained growth, transcending the German and Japanese "miracles." This is no fluke. America's unique brand of entrepreneurial capitalism is based on a series of advantages that explain the stunning success of the 1990s and provide the basis for extending this winning streak. These strengths include deft managers, technological innovation, and a culture that values rugged individualism -- all fueled by finance capital that can nimbly meet the needs of a globalized, rapidly changing economy. Furthermore, the era of the deficit is over. Pessimists who warn of inflation should be ignored; American business leaders understand that today's low level of inflation is self-perpetuating. America's prosperity is structural, not transient, and its lead over Europe and Asia will only widen with time. America had the twentieth century. It will also have the twenty-first.
Only a few years ago pundits were sure that the United States was losing to Asia and Europe and had to emulate their more state- directed economies to remain competitive. Now the conventional wisdom is that America is number one and that the rest of the world should adopt its more laissez-faire approach. In fact, neither caricature is right. Asia was booming and now it is slumping, but it will be back. Europe's underlying ossification will persist. But most important, while the U.S. economy is in a period of robust growth, nothing fundamental has changed. Its long-run growth rate has not accelerated, productivity has not risen, and the structural unemployment rate has fallen by one percentage point at most. Come the next recession, all this triumphalism will seem silly.
Many observers of the Asian financial crisis have been tempted to declare the victory of American-style capitalism. Just as the fall of the Berlin Wall in 1989 vindicated America's political model -- liberal democracy -- so the collapse of Asia's markets in 1997 proved the wisdom of America's economic model -- free-market capitalism. But it is presumptuous to think that the crisis foretells Asian acceptance of American ways. The facts are far more complex. The Asian economies best able to withstand the present crisis may be those with more political freedom, but the real key may be competent government. East Asia is changing, but it is not Americanizing.
Tokyo's economic sluggishness is souring life at home and setting off alarms abroad. Scandal after scandal has revealed shocking malfeasance: unethical banking practices, illegal deals between financial institutions and politicians, and the strong-arm tactics of organized crime. Moreover, Japan's financial sector is swamped by a mind-boggling array of bad debts and underfunded pension liabilities, amounting to as much as $1.5 trillion. Tokyo promises economic stimulus and deregulation, but the results will disappoint. Worse yet, Japan will be reluctant to help bail out its Southeast Asian neighbors and will prove a weak international partner for America.
Will Russia be run by democrats or oligarchs? The signs are worrying. The West would rather not dwell on the extent to which Russia's market is dominated by robber barons and permeated by crime and corruption. Russia's democracy is weak, with unfair election campaigns, a compromised media, and few checks on the presidency. The West cannot afford to let Russia descend into chaos, which might mean losing control of Russia's arsenal of weapons of mass destruction, but its two-faced NATO expansion policy hurts the democrats' chances.
India's elections aroused fears about its political viability but elicited yawns about its economic health. The reality of India's prospects is just the opposite. Conventional wisdom aside, the main threat India faces is economic. Slower growth and a stalled program of economic reforms could endanger India's stability. Its politics, by contrast, exhibit an admirable ability to bring extremists, including the Hindu nationalists of the newly preeminent Bharatiya Janata Party, closer to the center. India's democracy is the glue that keeps the country together; its economy, if not reformed, could cause dangerous strains.
The French always seem to be opposing the United States on some issue or other. They coddle Saddam Hussein and denounce American "cultural imperialism." Why is France so difficult to deal with? It is, quite simply, in a bad mood, unsure of its place and status in a new world. The French are jealous of America, which seems to run the world; afraid of globalization, which threatens to erode their culture; and ambivalent about European unification, which might drown out their voice. France must meet these challenges while struggling with a cumbersome statist economy and a rising extreme right. To do it all, France must transcend itself.
Book Reviews
Richard Holbrooke's gripping memoir shows how he improvised a makeshift peace in what was left of Bosnia despite a timorous Pentagon, a reluctant president, waweirding allies, and brutal ethnic cleansers. But the Dayton Accord came too late.
William Bundy's indictment of Nixon and Kissinger's deceptions ignores the philosophical sophistication they brought to American foreign policy.
Richard Cooper would prefer to fight global warming with an international carbon tax, but the Kyoto protocol is shrewder policy and more realistic politics.
Charles Kupchan on putting democracy first, Juliana Geran Pilon on ethnic conflict and elections, Nigel Gould-Davies on undemocratic democracy, and Kenneth Cain on the alternatives.
Francis Fukuyama on Paths to Peace; Richard Cooper on corruption; Eliot Cohen on new materials; David Hendrickson on The Dark Side of Camelot; Stanley Hoffmann on Robert Paxton; Robert Legvold on Chechnya.