From the middle of Queen Victoria`s reign in the 19th Century until the first Nixon administration in the early 1970s, the world economy had been dominated by two English-speaking nations: the United Kingdom and the United States. Their dominance can be illustrated by comparing their combined gross national products with the GNP of the industrial world as a whole. Their combined share of GNP rose from just over 25 percent of the world total in 1820 to a peak of just over 60 percent in the early 1950s. But since the early postwar years, it has dropped back to 45 percent and is likely to shrink further during the decade ahead.
The decline in the Anglo-American share of world GNP does not reflect an absolute deterioration in the two nations` wealth and economic performance. Instead, it reflects a change in their relative status resulting from the rise of new economic powers. Since 1945, world trade has expanded dramatically and new industrial centers have emerged–centers that employ technology hitherto available only to a few countries in Europe and North America.
It was inevitable that the Anglo-American share of the global economy would shrink. The problem confronting Western nations today is that these changes are creating a mismatch between political responsibilities and economic performance which increasingly threatens to undermine the system of international relations that made possible the economic progress of the last 100 years.
The tenfold increase in world GNP during the 19th Century and fourfold rise since 1950 did not occur in a political vacuum. Except for a lapse between world wars (1919-39), it occurred because Britain and America provided a framework for international economic relations that was highly conducive to economic expansion, including a liberal trading system, capital mobility and a stable, freely convertible currency serving as a price anchor for both trade and finance.
Such a framework made it possible for world trade to grow rapidly, for countries to achieve large gains in productivity by specializing in certain types of output and for both capital and technology to be diffused to developing nations. The dominance of British and American military power in many regions of the world also has permitted other countries to hold down their own defense expenditures and, hence, to have more resources available for economic development.
The support of Britain and America for a liberal international economic system during their period of ascendancy was not a historical accident but a natural outgrowth of their economic self-interest. At the height of empire in 1913, Britain had external assets equal to almost 200 percent of its GNP. This wealth made the British balance of payments the major source of equilibrium in the world`s balance of payments. Britain`s external wealth generated a large flow of investment income that it used to run a trade deficit which permitted developing countries, such as Argentina and Australia, to run trade surpluses for debt servicing. If Britain had not pursued free-trade policies, its foreign investments would have lost much of their value.
Although never as large an external investor as Britain, America`s overwhelming technological superiority after World War II also made the U.S. a natural supporter of free trade as well as creating the political self-confidence necessary for a constructive international leadership role. The U.S. helped its former enemies to rebuild their countries after World War II, whereas European victors of World War I had imposed a reparations burden on Germany that increased the risk of future strife.
The challenge facing the West during the next decade will be to maintain an open trading system and political stability in the face of economic power shifts comparable to those that occurred during the decline of British hegemony in the 1920s. For just as Britain became increasingly over-extended after World War I, so the U.S. is now confronted with a growing mismatch between its international political obligations and economic resources.
Since 1982, the Reagan administration`s large budget deficits have turned the U.S. into the world economy`s borrower and spender of last resort. Although these policies helped to rescue the international system from recession in the early `80s, the U.S. now has a current account deficit exceeding 3 percent of GNP compared to a previous high of only 1.5 percent in the late 19th Century. More important, this large external borrowing has been used to finance a boom in public and private consumption, not to create an expanded capital stock to generate new exports for debt servicing. The failure of the U.S. to increase its rate of investment during the `80s suggests that it will be difficult for the American people to correct their trade deficit without reducing living standards. Once the full consequences of this adjustment becomes apparent to the public, there is a danger that the resurgent American confidence of the Reagan era could degenerate into a frustrated nationalism, spawning a new political mood conducive to
isolationism, protectionism and withdrawal of American military forces from Europe and Asia.
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In contrast to the shift from British to American economic supremacy during the first half of the 20th Century, there is also no new country on the horizon capable of fully assuming America`s traditional roles. (While Germany and Japan are emerging as major financial powers, both are reluctant to assume important responsibilities outside of their immediate regions.)
The Western alliance therefore must develop a multilateral framework for sharing burdens and responsibilities previously assumed by one dominant nation. Europe and Japan will have to increase their defense budgets as America winds down its external military commitments. New institutional mechanisms will have to be created for recycling Japan`s surplus savings to the developing countries. Japan, Germany and other export-oriented nations will have to spearhead the international effort to limit protectionism because America itself will increasingly be in the vanguard of trade restraint.
Unfortunately, there are few good historical precedents for the kind of international burden-sharing and policy coordination which the Western nations must now achieve. As the meager results of last week`s summit conference in Venice will testify, most Western leaders have yet to grasp the full magnitude of the challenge that lies ahead. America is now a debtor nation with the habits of a creditor nation; Germany and Japan have become creditor nations but retain the habits of debtor nations. Few political leaders outside the U.S. seem to realize that the Reagan period will go down in history as an Indian-summer reprieve from America`s imperial retreat, not a rejuvenation of the economic engine necessary to sustain a large international role. Indeed, it is now fashionable for many Republican intellectuals to advocate withdrawal of American military forces from Europe, whereas 10 years ago such positions were associated only with left-wing isolationists.
As British history has often demonstrated, it takes great nations many years to bring political expectations into line with change in their economic resources. The problem for the Western alliance is that it cannot permit a global power vacuum to develop as post-Reagan America adjusts to its new economic status. If the alliance does not develop a new framework for burden- sharing and policy coordination to help the American people recover from the excesses of the 1980s, the risk will increase of a future U.S. government abandoning many of its traditional international responsibilities before other nations are ready to assume them.