Navigating the ‘mid-transition’ period of the low-carbon shift: The critical role of finance ministries


Navigating the ‘mid-transition’ period of the low-carbon shift: The critical role of finance ministries



U.S.: A Losing Superpower?

Leonardo Martinez-Diaz
Leonardo Martinez-Diaz Global Director - Sustainable Finance Center, World Resources Institute

April 28, 2007

The rise of India and China, we are told, is shaking the world economy and will change the economic opportunities of the next generation. The entry of these two giants into the world economy has nearly doubled the total amount of workers in the global system, creating new opportunities for investors, lowering labor costs and increasing competition for resources.

According to projections by Goldman Sachs, an investment bank, China will replace the United States as the world’s largest economy by 2050, with India following closely behind in third place.

What will these changes mean for American influence in the world? Whether the rise of these two countries strengthens or weakens U.S. influence will depend largely on how the United States adapts to the changing economic landscape.

If we are prepared to make the difficult choices needed to keep the United States engaged in the world and at the center of the world economy, then the rise of India and China should be welcomed as good news.

But if we fail at these challenges, the coming decades will be the story of how American influence was eclipsed and of how the United States lost its ability to manage the world economy.

To understand the choices we face, we must first think of the rise of India and China in two ways. On one hand, the rise of India and China could reinforce American economic and military influence. U.S. corporations and investors, by taking advantage of cheap Chinese and Indian labor, will continue to reap handsome profits. If invested wisely, these should fuel growth at home and help America keep its technological, scientific and military edge.

On the other hand, the rise of India and China could weaken America’s global influence. This would not happen overnight, and it would most likely not take the form of a direct military challenge to the United States. Rather, India and China may start disengaging from international institutions where the United States is most influential.

Gradually, the two countries may build their own networks of trade and investment agreements, set up regional institutions and build global webs that largely exclude the United States. There are already plenty of signs that this is exactly what India and China are doing. Over time, the United States would be pushed from the center of global economic management and become one of several competing power hubs.

In which of these two worlds we will live by mid-century depends on how the United States copes with two key challenges. The first is the need to restore confidence in the global multilateral institutions in which America has a large stake and influence. This means rescuing the Doha round of trade talks from paralysis and persuading the world that the World Trade Organization — not bilateral trade talks — is the best place to negotiate trade deals.

Also, Washington will have to rescue the International Monetary Fund from its crisis of legitimacy. This institution can play a crucial role in preserving global financial stability, but it will first have to persuade the rising powers and others that it can be responsive to the needs of all its members, not just to its European and U.S. shareholders.

The second challenge is keeping the United States engaged in the world, which means preserving domestic political support for an open economy. The solution here is forging a new consensus about how resources should be allocated within the U.S. economy.

American workers who lose their jobs or face stagnant or falling wages because of offshoring need to be protected with stronger social safety nets. Even if these workers are relatively few, the perception that they are abundant will continue to turn Americans against economic openness.

Those who benefit most from the rise of India and China — U.S. corporations and shareholders — must be ready to foot a large part of the bill through higher corporate and income taxes.

So far, the Bush administration has failed to meet either challenge. It has undermined global economic institutions through severe neglect. At home, it has done nothing to strengthen safety nets, made taxation more regressive and pursued a debilitating fiscal policy, making it harder for future generations to pay for safety nets.

If we continue in this direction, Americans will lose all faith in the idea that U.S. influence in the world has anything to do with the opportunities and quality of life they enjoy at home. And if this happens, domestic support for U.S. engagement in the world will crumble, and China and India will then truly become menacing competitors instead of valuable partners.