Whither peace - when global economy's crumbling?

straitstimes.asia1.com.sg By JEFFREY GARTEN

PARIS - The Bush administration is leaving no doubt that it intends to use the United States' enormous military power to make the world a safer place. But to succeed, Washington must develop a more robust global economic policy as well. Unless its military confrontations lead to something much better for the millions of people who will be hurt, Americans will have won the wars and lost the peace.

It is true that the administration is promoting trade liberalisation aggressively by pushing for new commercial deals with Latin America, as it has done with Chile recently and is now doing in Central America. It is also pressing for more tariff and quota reductions around the world in an omnibus negotiation that it hopes to conclude within two years under the auspices of the World Trade Organisation (WTO).

These efforts are an excellent start. But there are at least four broader challenges the US must confront now, and with an urgency that the Bush administration has yet to demonstrate.

The first is reinvigorating global economic growth. The world economy is in trouble: corporate investment and trade are slowing, factories are producing more than they can sell and deflation is threatening many regions. The two potential economic engines besides the US - Germany and Japan - are stagnating. Big emerging markets, from Indonesia to Brazil, are in deep trouble.

The US economy is the world's most powerful by far, accounting for almost a third of global demand these days, but even if it grows at a healthy rate this year, the US by itself cannot create a sustainable international economic recovery. Its own revival depends on the health of its companies and that, in turn, depends in part on expanding foreign markets.

Overseas sales of US goods and services made up at least 25 per cent of America's economic growth in the 1990s. Moreover, because many of America's top companies - Intel, Coca-Cola and Johnson & Johnson, for example - rely on Europe, Japan and developing countries for more than 30 per cent of their revenues, stronger foreign economies are important to the health of US stock markets.

Washington must bring together its economic partners - the Group of Seven nations made up of Canada and Japan and those in the European Union (EU) - to get the global economy moving again.

The US, which is already running huge budget deficits and has lowered interest rates to levels not seen in generations, has little room to manoeuvre. But it can encourage the European Central Bank, Europe's equivalent of the Federal Reserve, to lower its relatively high interest rates, since inflation on the continent is not nearly the threat that stagflation is.

The EU must also let up on its growth-constricting demands that Germany, Italy and France restrict spending and, in some instances, raise taxes. The US and Europe can push Japan to restructure its growth-strangling bank debts.

Second, there will soon be an acute need to rebuild countries that are either defeated or disintegrating. The estimates for reconstructing Iraq, for example, range from US$120 billion (S$209 billion) over 10 years, in the case of a very short war, to US$1.2 trillion after a prolonged conflict, according to extensive work by economist William Nordhaus.

The job of economic relief and reconstruction will most likely need to be handled by the United Nations, but substantial US financial support will be essential. Given budget deficits at home, this will be no easy task. Will this money come from domestic programmes or from foreign aid already promised to others?

One problem is that there is no single agency in Washington capable of overseeing the extensive UN efforts that must be mounted. One needs to be created, just as the Economic Cooperation Administration was established in 1948 to oversee the Marshall Plan.

Third, America needs to prepare for all-too-possible international economic crises. A major run-up in oil prices in reaction to turmoil in Venezuela and Iraq has already begun and could send the global economy into a deep recession. The US should be working with the EU and Japan to release emergency oil reserves if oil prices spiral out of control. It should be encouraging Russia to expand production, too, by promising that the US will buy Moscow's supplies well into the future.

Another crisis could involve the dollar, which was down 15 per cent against the euro last year. If the US trade deficit continues to soar and foreigners get nervous, they could dump their dollars.

It would help if Washington could persuade the European Central Bank to lower its interest rates and make the euro less attractive as an alternative to the dollar. Beyond that, Washington, Brussels and Tokyo will have to be prepared to coordinate purchases of the dollar if it goes into free fall.

Latin America could also provide the spark for a global financial debacle. After all, Argentina and Venezuela are in deep trouble, and Brazil's economy is fragile at best. In 1997, a currency collapse in Thailand set off a global financial meltdown. The lesson is that Washington and its economic partners had better focus more on what is happening south of the Rio Grande.

Finally, the US will have to give much more attention to helping developing countries, the very nations in which so much of today's turmoil exists, get a fairer deal from globalisation, which has so far disproportionally benefited rich countries.

This means not only negotiating trade agreements but also improving the WTO's ability to settle trade disputes and give technical assistance to struggling countries overwhelmed by the blizzard of new trade laws in the last decade. It also means helping the World Bank and its regional counterparts to deal with poverty more effectively, rather than just criticising their performance, which is what Washington so often does.

Admittedly, the Bush administration has never shown much interest in multilateral diplomacy except when other countries press it to the wall, as they have with Iraq. But in the economic realm, there is no choice but to seek partners.

In the immediate aftermath of World War II, the US pushed for the establishment of the International Monetary Fund and World Bank, and coordinated the Marshall Plan with European nations. Washington realised then that economic stability and prosperity were essential to a country's security.

It is true today, too.

• The writer is dean of the Yale School of Management and author of The Politics Of Fortune: A New Agenda For Business Leaders. He held economic and foreign policy positions in the Nixon, Ford, Carter and Clinton administrations. This comment appeared in the New York Times.