The writer is a professor at and past president of Harvard University. He was treasury secretary from 1999 to 2001 and economic adviser to President Obama from 2009 through 2010.
This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system. True, there have been any number of periods of frustration for the United States before and multiple times when U.S. behavior was hardly multilateralist, such as the 1971 Nixon shock ending the convertibility of the dollar into gold. But I can think of no event since Bretton Woods comparable to the combination of China’s effort to establish a major new institution and the failure of the United States to persuade dozens of its traditional allies, starting with Britain, to stay out.
This failure of strategy and tactics was a long time coming, and it should lead to a comprehensive review of the U.S. approach to global economics. With China’s economic size rivaling that of the United States and emerging markets accounting for at least half of world output, the global economic architecture needs substantial adjustment. Political pressures from all sides in the United States have rendered the architecture increasingly dysfunctional.
Largely because of resistance from the right, the United States stands alone in the world in failing to approve International Monetary Fund governance reforms that Washington itself pushed for in 2009. By supplementing IMF resources, this change would have bolstered confidence in the global economy. More important, it would come closer to giving countries such as China and India a share of IMF votes commensurate with their increased economic heft.
At the same time, pressures from the left have led to pervasive restrictions on the infrastructure projects financed through the existing development banks — which consequently have receded as infrastructure funders, even as many developing countries have come to see infrastructure finance as their principal external funding need.
With U.S. commitments unhonored and U.S.-backed policies blocking the kinds of finance other countries want to provide or receive through the existing institutions, the way was clear for China to establish the Asian Infrastructure Investment Bank. There is room for argument about the tactical approach that should have been taken once the initiative was put forward, but the larger question now is one of strategy. Here are three precepts U.S. leaders should keep in mind.
First, U.S. leadership must have a bipartisan foundation, be free from gross hypocrisy and be restrained in the pursuit of our self-interest. As long as one of our major parties is opposed to essentially all trade agreements and the other is resistant to funding international organizations, the United States will not be in a position to shape the global economic system.
Other countries are legitimately frustrated when U.S. officials ask them to adjust their policies — only to then insist that state-level regulators, independent agencies and far-reaching judicial actions are beyond their control. This is especially true when many foreign businesses assert that U.S. actions raise real rule-of-law problems.
The legitimacy of U.S. leadership depends on our resisting the temptation to abuse it in pursuit of parochial interest even when that interest appears compelling. We cannot expect to maintain the dollar’s primary role in the international system if we are too aggressive about limiting its use in pursuit of particular security objectives.
Second, in global as well as domestic politics, the middle class counts the most. It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonization with moral concerns about global poverty and posterity while offering little that speaks to those in the middle. Approaches that do not serve the working class in industrial countries (and the rising urban populations in developing ones) are unlikely to work out well in the long run.
Third, we may be headed into a world where capital is abundant, deflationary pressures are substantial and demand could be in short supply for quite some time. In no big industrialized country do markets expect real interest rates to be much above zero in 2020 or for inflation targets to be achieved. In the future, the priority must be promoting investment, not imposing austerity. The present system places the onus of adjustment on borrowing countries. The world we are now in requires a symmetric system in which pressure is placed on surplus countries as well.
These precepts are just a beginning. There are questions about global public goods, about acting with the speed and clarity that the current era requires, about cooperation between governmental and nongovernmental actors and much more. What is crucial is that the events of the past month will be seen by future historians not as the end of an era, but as a salutary wake-up call.