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So where's the discussion about deficits and debt relief?

Published by The Straits Times, Singapore on 2004-10-11

THE "town hall" encounter last week between President George W. Bush of the United States and his Democratic challenger, Senator John F. Kerry of Massachusetts, may have been more stylistically spirited and vigourous than their first debate the previous week. But both men continued to largely ignore substantive issues such as globalisation, the burgeoning budgetary and trade deficits of the US, and what to do about the Third World's record debt of US$3 trillion.

These issues are interlinked, particularly in a unipolar world dominated by the sole superpower, the US, whose domestic as well as international fiscal policies continue to influence a global economy that's yet to fully recover from a lingering recession. Viewers in Asia and other parts of the world may be forgiven if the two presidential contenders left the impression that their foreign-policy radar did not extend much beyond Iraq - where the US occupation has generated more chaos than stability - and North Korea, whose nuclear ambitions are certainly worrisome for the international community.

The presidential debate also came in a week that witnessed a failure on the part of the world's finance ministers and central bankers to agree on a plan for debt relief for developing countries. At the annual meetings of the World Bank and the International Monetary Fund, an unexpectedly bold proposal by US Treasury Secretary John Snow to cancel virtually all such debt to governments got nowhere. Neither did another proposal by his British counterpart, Chancellor of the Exchequer Gordon Brown, under which industrialised nations would help jumpstart economic development in the 135 countries of the Third World by forgiving substantial portions of these countries' external debts.

These developing countries argue that, in many cases, almost 90 percent of their export revenues from commodities and small-scale manufacturing goes into debt-service, leaving little for domestic development. But some of the rich-country representatives continue to insist that the principle of "pay as you go" that applies to individual consumers in most countries should apply to their governments as well.

The subtext of this rich-country contention: If only Third World countries managed their economies better, restrained their political kleptocrats, contained corruption, and freed the private sector from the suffocating extortion of greedy bureaucrats, then economic growth would be accelerated and wary international lenders would be more willing to consider fresh infusion of capital into their languishing economies. There's validity to these points, but they offer no immediate solace, nor solutions, to the Third World's pressing problem of how to meet the rising expectations of growing and more educated populations.

Whether President Bush is re-elected or Senator Kerry defeats him on November 2, neither man is going to be able to gloss over such vital issues involving the global economy and growth once he takes office in January 2005. Mr Bush believes in "trade, not aid," and his administration has steadily trimmed foreign assistance, other than to Israel and Egypt. Mr Kerry wants America to re-assume its leadership in the aid game - which it has ceded to Japan, now the world's biggest economic donor at US$12 billion annually - but where's he going to find the funds?

The next president will also have to figure how to find ways to deal with rising oil prices, which went beyond a record US$52 a barrel late last week. Higher energy costs can hurt company earnings; they could depress stock markets, and also curtail consumer spending. Taken together, these factors would eventually slow global economic growth. Analysts usually expect every $10-a-barrel increase in oil prices to shave growth in the gross domestic product by 0.3 to 0.5 percentage points.

The rise in the price of crude oil - up 60 percent so far this year - has cast everyone's calculus into confusion. The price rise, in fact, was the highest since future contracts in oil were created 21 years ago. And the rise in global oil consumption has gone beyond a record 80 million barrels a day, or more than a billion barrels annually than previously projected. What explains the increased consumption of oil? The relentless appetite of economies such as China, India and Japan. And, of course, the continued high consumer demands in the US.

Rising oil prices will most certainly increase the US trade deficit, already expected to exceed US$600 billion in 2004, or more than five percent of the US gross domestic product, a figure than many economists consider unsustainable. That trade deficit, plus the US national budgetary deficit - the difference between the US$2 trillion that the government spends annually and what it gets through taxes and investment income - means that the total US national debt will soar beyond US7.3 trillion this year, 40 percent of which is held by countries such as China, Japan, Taiwan, as well as by foreign individuals and institutions. That debt figure is more than twice the amount of debt of the rest of the UN's 191 member nations put together, and almost a fifth of the total annual global trade of US$31 trillion. The US spends US$320 billion of its revenues in servicing debt-interest payments each year.

And the new president is most certainly going to have to worry about the perceptions of foreign investors concerning the fundamentals of the US economy. Borrowing from foreigners typically finances trade deficits: Japan, for example, holds nearly 17 percent of US Treasury bonds, although it's buying less of late. But now these overseas investors are worried, and some of them have already begun selling stocks and putting their cash into the euro or in Asian currencies. This has lowered the value of the US dollar, which has lost 25 percent of its value against the euro over the last 18 months.

It behooves the US presidential candidates to discuss such issues candidly during their public appearances. This wouldn't be scare mongering but a much-needed reality check. After all, they are asking for votes from constituents whose children will also have to bear the long-term consequences of current politics and economics.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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