US Could no Longer Save World Economy

Mikhail Khazin (Russia)

The Marshall Plan era had already passed. The US is no longer able to save the world economy. It can be proved by the contemporary system of the division of labor. Meanwhile, it explains why China’s abilities are limited and it is not capable of boosting the world economy on its own.

In 1945 the world lay in ruins, and only the US, which territory had not been directly affected by military actions, saw its economy rising at a high pace and amounting to 50% of the world economy. At that moment the Marshall Plan designed for Europe was adopted. The real goal of the Plan, though widely-known, is not fully perceived. It is said that the financial aid was earmarked for the Western Europe, especially Germany, to revitalize production. This is partly true but the amount of these loans was limited against the general background. Nevertheless, the key point is different.

Let’s presume you are an owner of a European enterprise in late 40s. You have received a loan, have a factory built or restored. What’s then? Loans, not necessarily American, have to be paid back. To do it, the owner must sell his goods but who will buy them? People are short of money and the entire Europe has been ruined. What can be done to change the situation? Therefore, the genuine objective of the Marshall Plan was to make the US markets open to the European countries. First, the factories started to sell their goods to the US and, after having gained enough profit, the owners not only paid off the loans but also paid wages to boost the demand in the Western European countries.

The American demand was the key incentive for the German economic miracle to arise during the postwar recovery, and the US loans played there a minor role. The US was also affected by this recovery – the internal demand for the American goods was decreasing. It was partly compensated by the US equipment supplies to other countries but later this factor was to play a negative role.

As far as the American influence had expanded, the plan was projected for other countries. Following Mao Zedong’s Communist party victory in the Chinese Civil War in 1950s, Japan, Taiwan and Hong Kong became involved in the program. It was then in 1950s when the Japanese economic miracle emerged. The same scenario was projected for South Korea after the Korean War and for China in the early 70s. China had been pushing for it since the middle of the 1960s and achieved it by severing the relations with the Soviet Union and initiating a protracted “cultural revolution” which was aimed at breaking down the pro-Soviet lean of the “old” party elite.

Only after the 1971 default when the United States was in a grip of crisis, then State Secretary Henry Kissinger went to China to lay the groundwork for enhanced relationship. In 1973 US President Richard Nixon paid another visit to China, thus opening American markets for the Chinese goods.

As a result of this policy, large states and regions became interdependent with the US and cheaper goods than those produced in the US started satisfying the American internal demand, thus freeing up resources for high-tech products. Consequently, the US secured the role of a technological center and at the same time lost the market of cheap consumer goods.

Reaganomics gave a fresh impulse to this process: extensive loans pumped consumption and stimulated rapid growth in the US living standard, though by fast increase in import as well. External surplus in the 60s turned into adverse balance, which had been caused by an increasing gap between the flow of goods into the American markets (import) and the US export to external markets. At that time the gap was being compensated by two conditions: first, issue of dollars and, second, the influx of capital into the US financial markets.

As a consequence, the «20/40» situation has appeared: the US share in the world consumption as compared to 1945 has decreased, though not dramatically, up to some 35-40% but the national production has dropped sharply up to some 20% (statistics is based on the purchasing power parity rather than nominal exchange rates of various national currencies). It is clear that these figures cannot be absolutely precise, as both GDP and PPP are relative indicators. On the whole, the US today produces far less than consumes.

This difference is caused by the US support of the world production. Nobody wants their factories to stop working, people to lose their jobs. That is why all countries in the world, especially those directly affected by the US consumption, want the United States to continue playing its major role in the world economy. But the problem is that the US could no longer underpin the demand.

Mikhail Khazin – Russian economist, publicist, the head of the Expert Consulting Company «NEOCON».

Source: New Eastern Outlook

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