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Mainstream, VOL XLIX, No 34, August 13, 2011 - INDEPENDENCE DAY SPECIAL

Is the US Now a Third World Country?

Saturday 20 August 2011, by Ash Narain Roy


All these years, the US sat in judgment over the economic crisis faced by the Third World countries and cited credit ratings agencies’ adverse reports to damn them. Latin America in particular, suffering from hyperinflation and astronomical debt, had grown used to receiving bitter medicine and sermons from the US. Ironically, Latin American economies are today flourishing and the US seems to be running out of money to service its mounting debt. Experts believe that the credit contraction will sweep into the established democracies of Europe and the US. What a paradigm shift that today the doctors have got the disease and the priests have become sinners! The flawed mantra of the market being chanted ad nauseum at the Third World governments has begun to haunt the US and the West.

The Obama Administration may have succeeded in averting the technical credit default, but such is the investors’ fears that nothing seems to be working. On August 4, stock markets tumbled across the world including in India. Almost every market index slid. So did the prices of oil. It was the worst fall since December 2008. Investors were rattled by an intensifying global economic slowdown and the fear of the American economy slipping back into recession. Memories of the market turmoil that followed the collapse of the Lehman Brothers came back to haunt the Americans. Wall Street saw the worst day in more than two years. People will have every reason to question the state of health of the US and European banking system.

It would, of course, be premature to call it Latin Americanisation of the US. It would equally be wrong to presume that had the US defaulted, it would have been in the same dire financial straits as Greece and Portugal or that America’s economic future would have unfolded in the same manner. But there are analysts like former US Comptroller General and head of the Comeback America Institute David Walker who maintain that the US is less than three years away from becoming Greece in terms of the ratio of national debt to the GNP. In Greece’s case, it reached nearly 150 per cent which led to the country nearly defaulting on its debt. The US is nearing the 100 per cent threshold.

Well, the US may not default by printing more money and raising the debt limit. But risks are there for all to see in terms of interest rates, currency volatility and inflation. The ripple effect could be dramatic nonetheless in terms of lower corporate profits, weak consumer spending and costlier bank and housing loans. But what is worrisome is America’s constant decline and the fading away of the American dream.

With Europe wrestling with what Amartya Sen calls the “blood, sweat and tears” strategy of deficit reduction and the international community losing its confidence in the US, the world’s sole superpower, China and Russia have started heckling the US on the credit crisis. Russian Prime Minister Vladimir Putin said that the US was living “like a parasite” on the global economy and accused the Americans of “living beyond their means and shifting a part of the weight of their problems to the world economy”.

Beijing’s reaction is even more acerbic. The official Chinese media has come down heavily on the US for its credit crisis. The Xinhua assailed the US for playing a “dangerously irresponsible” game of chicken and accused the nation of “debt addiction which it cannot seem to kick”.

Since the time of the Founding Fathers, US leaders have believed in the concept of American exceptionalism, that the US is a special country with a special mission. It is a notion that continues to this day in many quarters. However, the continuing crisis has prompted some analysts to say that the US is sliding into the same trap in which poor Third World often find themselves in.

According to Spiegel Online, the United States is lately faced with a new phenomenon called “the new poor”. In many parts of the US, about 20 per cent of the residents are at risk of homelessness. The once-rich, who have lost their homes, are now forced to sleep in their expensive cars parked in the city’s corners. Not only this, during the past months, the number of people taking advantage of the free meals programme has doubled.

Another signal that marks the demise of American exceptionalism is the disappearance of the middle class. The middle class in the US was all along the engine of political stability and economic growth. In recent years, the gap between the rich and poor has increased at a staggering pace, systematically wiping the existence of the middle class from America. Today one per cent of Americans own as much as 37 per cent of national wealth. Recently the US Department of Agriculture came out with a damning report that said that some 50 million Americans now survive on government food stamps.

Yet another sign of the US sliding into the category of the Third World is the frequent outage in many cities. Many Americans have lost half of their savings and value. They therefore no longer qualify for low-interest loans. Some are making less money than the unemployed. This in turn reduces or eliminates their ability to pay taxes.

As a result, many state and local governments are faced with enormous budget deficits. In Hawaii, schools are closed on some Fridays to save the state money. A county in Georgia has eliminated all public bus services and in Colorado Springs, a city of 380,000 people, a third of street-lights have been shut off to save electricity. Arianna Huffington therefore warns that “America is in danger of becoming a Third World country”. The American dream is fast turning into an American nightmare.

PERHAPS the most worrisome is the employment outlook. In June 2011, only 58.2 per cent Americans were employed which was down from 63 per cent in June 2007. As Paul Krugman says, “For the first time since the Great Depression, many American workers are facing the prospect of very long-term—maybe permanent—unemployment.” It is clear that Obama’s policy is not working.

It was Latin America that suffered the most during the lost decades.

Ironically, the US economy is suffering from a similar fate. It lost the first decade of the twentyfirst century to an ill-conceived boom and subsequent bust. It is now in danger of losing another decade to the stagnation of an incomplete recovery. How did the US come to such a pass? To a large extent the Bush Administration’s policy of funding massive deficits with foreign borrowing was ill-conceived. What was much worse still was fighting wars in faraway places through plastic money.

Michael Schuman posted a more troubling question on Time Blog: “Can democracy solve the West’s economic problems?” Political paralysis in both the US and Europe, argues Schuman, “has become a primary hurdle to solving the West’s economic woes”. In the US, political leaders “are being too worried about personal gain and ideological talking points than actually strengthening the sagging US economy”. He further adds: “The core of the political problem on both sides of the Atlantic is the same —the demands of electoral politics in a modern democracy. In the US, both Republicans and Democrats took positions in the debt debate aimed at protecting their loyal voters. ... In Europe, political leaders like German Chancellor Angela Merkel make decisions on how to fight the euro crisis with one eye on voters back home. In other words, the politicians of the West are choosing the narrow interests of electoral victories over the greater, long-term good of their nations.”

Isn’t the same affliction plaguing current politics in India?

Another way of looking at the US is that it is still the largest economy in the world and it also dominates the global monetary system. In many respects, the entire architecture of global finance is built upon the US economy. Its capital markets are the most liquid. The dollar is the world’s No 1 reserve currency and the primary one used in foreign exchange transactions and trade. Countries like China and Japan have their national wealth stored to a great degree in US debt. When investors get nervous, they rush to US dollar–based assets, and especially US debt. The perception has always been that the US is the ultimate safe haven.

The US is the standard by which risk is assessed in financial markets. The world looks to America for a range of “global public goods” —including the reserve currency. With no other country able and willing to step into this role, the result of a US credit default would have been global efficiency losses and a higher risk of economic and financial fragmentation. The world shudders to think, if the US fails, will Communist China fill the vacuum?

On balance, the US is facing a new defining moment. It has the potential to reassert its global position. But that may not be so in the near future. Europe is crumbling. The euro zone is in crisis. What went wrong in Europe? A generation of fiscal mismanagement and clientelistic economic largesse, underpinned by cheap credits and EU funds, appear to have caused the financial crisis in Greece, Portugal and Spain. German worry is, if one country leaves euro zone, it may have a domino effect.

The yen too is heading for collapse. Japan’s accumulated debt is now at 924 trillion Yen ($ 11.3 trillion). Even if 10 trillion yen is repaid every year, it will take 92 years to pay off the debt.

That being the case, the outlook for the US is anything but rosy. The US and Europe are part of the crisis. Are ‘Chindia’ part of the solution? Many Western geo-political sages have started wondering, “do the rest need the West?”

The author is the Director, Institute of Social Sciences, New Delhi.

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