Tuesday, March 17, 2009

US is still a power to reckon with

As the world is currently debating what needs to happen to the economy in the G20 summit in Britain, lot of people have been questioning whether US is still a leader in the world economy. the distinction between emerging markets and developed markets have evaporated, in fact the risk premiums are coming closer, the questions people are asking is if a developed economy with so much transparency can have these problems, what can be said about economies like China,India etc which are still very opaque.

The five biggest investment banks in the world i.e Lehman, Bear Sterns have vanished, the 2 biggest mortgage companies namely Freddie Mac and Fannie Mae are under government support. The biggest bank Citibank, is depending on the government largess to survive. The biggest auto companies GM, Chrysler,Ford are at the mercy of the govt to survive.

How did these happen in a developed economy?

But before we pass any judgement, I feel that even though there are problems with US Capitalism, it still is the best we have.

The most vocal critics of US capitalism are sinking too and fast, For example look at Venezuela,Bolivia,Ecuador,Russia,Iran. For all their socialist rhetoric, they are all practically bankrupt states. One IMF estimates talks about Venezuela and Iran needing oil prices to be in the $90-95/barrel to balance the budgets.

The Russian economy soared along with oil prices, is also now in shatters. In the Russian model, the president and friends own all the natural resources and were printing money sometime back. The Russian stock market has fallen more than any other . Russia has spent one-third of it's for ex reserves to defend the ruble, which is down anyway.

It is no accident that so many critics of western capitalism are petro-states. A market economy succeeds by providing incentives for raising productivity and incomes. A state-controlled system is lousy at providing the right incentives, and so is bad for productivity. But a petro-state thrives simply on the geographical accident of mineral wealth, not great enterprise or efficiency.

Socialists bemoan the capitalist emphasis on profit and growth, and focus on distributing wealth instead. This would be fine if money dropped from up there , and the only task of governments was to distribute it. But if you have to produce the wealth in the first place, markets do it much better.

In this context the biggest critics of the US model are in fact pathetically dependent on it. When capitalist economies decline, so do the supposedly rival models. Clearly, they are not rival models at all but dependants of the capitalist model.

The true strength of a system is revealed in times of adversity. Today, despite US economic travails, the world views the dollar as a safe haven. The US system has a thousand flaws, but others are no better, and sometimes worse. Certainly the world economic system urgently needs major reform, and the G-20 meeting in Britain needs to kick-start the process. But the reforms must aim at a safer, gentler capitalism, not hardheaded socialism.

Your thoughts


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