Obama’s Global Tryst

President-elect Barack Obama enters office as the globe confronts grave economic crisis. He must continue supporting free trade, but at the same time assist hundreds of thousands of Americans who struggle with job loss, falling home prices and foreclosures, and immense economic uncertainty about health care, energy and other resources. At the same time, Obama must manage two wars, one he promised to end. But troops in Iraq may have to be diverted to Afghanistan, the scene of increasing violence. Obama must balance promises made during the campaign to the challenges of many hard realities, in order to live up to the hopes of both Americans and foreigners. – YaleGlobal

Obama’s Global Tryst

Obama’s ability to live up to foreigners’ hopes will be critical to delivering on his promises to Americans
Nayan Chanda
Monday, November 24, 2008

Barack Obama’s victory is historic, but not simply because of the colour of his skin but the worldwide enthusiasm it has generated magnifying the challenge he faces at home and abroad. On 20 January 2009, Obama will walk into the Oval office as the head of a government straining under a mountain of debt, leading a country staring fearfully at the gathering clouds of a great depression, while well-wishers abroad implore him to retake the leadership of the world. Obama has the unenviable task of persuading his increasingly isolationist compatriots that the country needs to remain open and offer leadership, not so much because that is America’s manifest destiny, but because its exceptional dependence on a globalised economy requires it to do so.

Obama must remain true to his commitment to free trade, while tinkering with policies that give respite to American workers reeling from job losses brought about by competition. Protectionism that hurts world trade would have the effect of killing the goose that lays golden eggs — the very eggs that end up financing America’s debt. Obama will have to remind Americans that the prosperity that they have enjoyed, grew out of their engagement with the world.

While American consumers enjoyed the cornucopia delivered by increasingly open trade, raking up a huge trade deficit in the process, massive foreign savings flowed into the country to pay for those imports and sustain the home-buying binge with low mortgages. Thanks to some $5 trillion lent by foreigners in the past eight years, the Pentagon has outspent the rest of the world’s armed forces combined. The savings of the developing world and oil producers invested in the US treasury bills and market, have enabled the US economy to grow and project power abroad. Now stunned by the collapse of some American giants, foreign lenders have gone into a defensive position in dealing with the private sector. Obama’s plan to stanch recession through financial stimulus and ‘New Deal’ type job-creation in a ‘green’ economy will thus depend heavily on continuing lending by foreigners — to meet the budget shortfall of over $1 trillion in 2009.

The falling prices of oil may have been a welcome news for American consumers at another time but not now as it is a harbinger of worldwide recession. With sharply rising unemployment — 760,000 laid off this year alone — and people staying away from shopping malls, the US trade deficit may finally come down. That being the result of falling consumption rather than rising export would not bode well for foreign exporters, including the very countries who are looking forward to Obama’s stewardship to avoid being pulled into the vortex of a worldwide recession.

Those hoping to see American troops return home from Iraq may also be disappointed by the harsh realities confronting the new president. While Obama will focus on tending to the ailing domestic economy, the redeployment of American forces abroad could actually see troops moving to combat a growing Taliban insurgency in Afghanistan. This could paradoxically increase rather than decrease the $100 billion annual deployment costs in these two countries. Operations in rugged Afghanistan is more expensive than in Iraq. While an influential Democratic leader has talked about cutting a quarter of the defence budget, delivering such reductions will not be easy. For one, it is politically suicidal to moot reducing expenditures for servicemen and women deployed in war zones. Second, efforts to eliminate new weapons programmes will encounter stiff resistance from politicians fighting to save the jobs of their working-class constituents in the midst of an economic crisis.

Obama undoubtedly faces an array of challenges, but he can take comfort in the fact that when Franklin D. Roosevelt took over the presidency of a post-crash America in March 1933, around a quarter of the workers were unemployed and three-quarters of the country’s banks had shuttered their doors. In contrast, despite a recent cascade of layoffs, unemployment in the US is just edging over 6 per cent and, thanks to government interventions, a majority of banks remain solvent. Then there were no giant sovereign wealth funds, or successful trading nations sitting on piles of cash who could be persuaded to stimulate the US economy. America’s private sector may have lost the confidence of the world, but the US economy still commands respect, especially one underwritten by a government led by a transformational new president. Obama’s ability to live up to the hopes of foreigners will be critical to his success in delivering on his promises to Americans.

Nayan Chanda is director of publications at the Yale Center for the Study of Globalization and editor of YaleGlobal Online.

An ABP Pvt Ltd Publication Copyright © All rights reserved.