– China, Growing Superpower

World financial system heading for collapse, author says
The World Today - Reporter: Eleanor Hall

ELEANOR HALL: A former United States trade negotiator and businessman is warning that the world financial system is headed for collapse before the end of this decade unless US policymakers make some radical changes.

Clyde Prestowitz is an international trade specialist who worked for the Reagan administration in the 1980s and now heads the Economic Strategy Institute in Washington.

He’s just written a compelling and at times alarming new book about the shift in power in the world economy from the United States to emerging economies like China and India.

His book, Three Billion New capitalists: the Great Shift of Wealth and Power to the East is intended to be a wake-up call to policy-makers in western countries, including Australia, to recognise and respond to the new challenges of international competition and to stop living beyond our means.

When he joined me in The World Today studio this morning, Mr Prestowitz described the savings problem in the United States in particular, as an urgent crisis that is set to topple the world economy.

CLYDE PRESTOWITZ: The US right now is absorbing 80 per cent of global savings. Well when you hit 100 per cent, the music stops and leading figures, people like Paul Volcker, the former Chairman of the US Federal Reserve, people like George Soros, the great speculator, have all made statements that they fear a major financial crisis within the next five years because the system is unsustainable.

ELEANOR HALL: Within five years?

CLYDE PRESTOWITZ: Yes.

Paul Volcker said publicly he thinks there's a 75 per cent chance of a major global financial crisis in the next five years.

ELEANOR HALL: Now what does that financial crisis look like?

CLYDE PRESTOWITZ: Well it… There are a lot of different scenarios, but the problem here is that everybody is holding too many dollars, so as soon as one player begins to sell, everybody starts rushing for the door. So you could get a cascade effect.

Actually for me, the real nightmare scenario is that nothing happens, because what that means is that US debt continues to mount.

We're now adding to our international debt at the rate of about $700-billion a year, so in a very short time at that rate, US international debt is equal to GDP or maybe even exceeds GDP.

So effectively this is a mortgage on the future of American kids and my kids and my grandchildren in particular, which suggests a dramatically reduced standard of living for Americans in the future and suggests a dramatically diminished position of power and influence in the global affairs in the future for what we think of as the world's only superpower.

It's fast becoming not a superpower.

ELEANOR HALL: But while you're talking about a decline in the dominance of the US, is that necessarily detrimental to the global economy?

CLYDE PRESTOWITZ: Depends on how it happens. I mean, I would say on the one hand it's desirable for the US share of the global economy to diminish. I mean after all the US has 5 per cent of the world's population and it accounts for 30 per cent of global production and 37 per cent of global consumption.

So this is a very distorted, bizarre, kind of unrealistic picture, and it needs to be rebalanced.

But how it happens is very important.

The most dangerous scenario I can imagine is a failing China and India. Imagine countries that are really falling apart with these huge populations. Millions of people fleeing, centres of development of new diseases that spread rapidly in the global system.

I don't what to think about that, so I want them to succeed. We should all want them to succeed.

But what we need to be considering is this. The rules of the international game have changed dramatically. The assumptions on which we've been playing this game of globalisation are no longer valid.

We've been assuming, as we've been playing this game for example, that developing countries don't do services, don't export services.

Well I'm sorry, they do now. The Internet has made it possible to put your call centres in India or Bangladesh or wherever. My taxes are calculated in Bangalore even though my tax accountant is in Washington DC.

So that's a huge assumption that has just changed.

We've been assuming for a long time that developing countries don't do high-tech. I just came from Shanghai where there's a new, I visited a new semi-conductor factory which is the highest of high-tech. They do do high-tech.

Talk to venture capital companies in Silicon Valley in California and they'll tell you, you know, if a start up comes to us and is not planning to do R and D in China, he won't get any money.

So this is a new world and all the assumptions we've been living with really are no longer valid.

So the issue for us is, we're rich, and I don't begrudge China getting rich. I hope they get rich and India, I hope they get richer.

But I'd like to stay rich. I want my kids to be rich too.

ELEANOR HALL: And are the world's economies, you know, the major economies policymakers aware of this problem?

CLYDE PRESTOWITZ: Largely not. I would say our policymakers are like generals fighting the last war, and I think that most of our political, most of our economists, most of the leading economists have really not in my view woken up to the fact that the fundamental assumptions on which much of their economic analysis has been done for the last 50 years are largely no longer valid.

ELEANOR HALL: So what should policymakers, for example in the US, be doing now?

CLYDE PRESTOWITZ: The most important single thing, if I had just one thing, if I had an hour or a half hour with President Bush and I could convince him of just one thing, it would be to balance the US Federal Budget deficit.

That single thing would change the saving and consumption picture in the US dramatically. It would send a huge signal to the rest of the world that the Americans are changing their tune and it would just be a very, very powerful thing.

ELEANOR HALL: Many economists would say that even despite costly things like the war in Iraq, the deficit is now heading down because the US growth just keeps powering along.

Isn't that at least putting the US in the right spot?

CLYDE PRESTOWITZ: Yes and no.

The yes Federal Budget deficit probably will decline this year because corporate profits have been very good.

The problem with it is that it's very likely a temporary phenomenon.

It's a lucky shot that we're getting this year. Fine, we'll take it, but we haven't addressed the structural problem.

ELEANOR HALL: One of the things that you suggest is essentially that governments should get more involved in planning, in putting together an economic strategy.

Isn't that something that your former boss, Ronald Reagan, might have turned in his grave at the thought of, the suggestion of bigger government?

CLYDE PRESTOWITZ: Well, yes. The fact of the matter is the US Government and all governments, the Aussie Government does the same thing, all of them make decisions about how to allocate resources. All of them have big budgets.

My point is that, in the US at least, these decisions are made without regard to any kind of overriding guidelines. It's going to spend the money.

So the question is, on what basis is it going to spend the money?

ELEANOR HALL: You're essentially saying the Government should be picking winners.

CLYDE PRESTOWITZ: Not even picking winners, because picking winners typically means that you give money to a particular company, like the EU gives money to the Airbus.

Now today, interestingly, the Americans invented the Internet. If you want to see the future, if you want to see how the Internet really works, go to Korea.

The Americans are way behind. The Americans are number 16 in deployment of high speed Internet capacity globally.

Go to Korea. Eighty per cent of the homes in Korea have 100 megabits per second of high-speed Internet broadband capacity coming in to their houses. It's fantastic.

And it is allowing the Koreans to begin to develop industries, technologies that cannot be developed in the United States or in Australia because we don't have that kind of underlying fundamental capacity.

This is a very important competitive statement, that Koreans are going to be more competitive in the future because they have that underlying high-tech infrastructure than Australia or the United States.

These are the kind of things we need to think about.

ELEANOR HALL: So countries like the United States and Australia are becoming complacent?

CLYDE PRESTOWITZ: Yes.

If you play bridge, or any kind of a card game, you know that it's nice to have high cards but if you play the cards badly, you can still lose.

And right now the United States is playing its cards – and I think Australia too – is playing its cards just about as badly as it's possible to play.

The issue here is much more than just the United States. It really is how does the advanced world respond to this enormous competitive challenge coming from Asia in a way that doesn't try to snuff Asia out. That's not what we want. In a way that tries to in fact foster and encourage Asian development but that maintains the kind of standard of living and opportunity that we have had for ourselves and that we hope to have for our kids.

ELEANOR HALL: The big challenge, set out there by Clyde Prestowitz who's the author of Three Billion New Capitalists: the Great Shift of Wealth and Power to the East, and who’s in Australia this week.

He was speaking to me in The World Today studio earlier today.