Implications of US move for the world

  • Many commentators have written that the US withdrawal from Afghanistan is primarily driven by domestic political-economic concerns, even if they undermine its self-proclaimed role as the vanguard of liberalism and democracy.
A US army soldier stands guard as Afghans wait to leave from the airport in Kabul(AFP) PREMIUM
A US army soldier stands guard as Afghans wait to leave from the airport in Kabul(AFP)
Published on Aug 17, 2021 04:52 AM IST
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By Roshan Kishore, Hindustan Times, New Delhi

The Taliban’s takeover of Afghanistan, including the capital city of Kabul, has triggered concern across the world, and rightly so. Afghanistan would not have fallen to the Taliban had the United States not withdrawn its troops from the country. While the US had announced its troop withdrawal much earlier, the fact that it did not reconsider its decision even in the face of a near meltdown of the Afghan government’s resistance has drawn widespread criticism. The move has left a large section of the anti-Taliban Afghan population at the mercy of the group. As the world, especially India, will have to come to terms with the fallout of the Taliban establishing an Islamic Emirate in Afghanistan, the US’s indifference to the development has raised questions about its role as a global superpower.

Many commentators have written that the US withdrawal from Afghanistan is primarily driven by domestic political-economic concerns, even if they undermine its self-proclaimed role as the vanguard of liberalism and democracy.

An HT analysis shows that this is a reality which actually goes beyond the US’s willingness (or lack of it) to undertake military commitments outside its borders. The US has been displaying a similar tendency in fulfilling its role as the global capitalist leader, a term which was first popularised by Charles P Kindleberger, an economic historian who gave among the best accounts of the Great Depression of the 1930s. While the humanitarian and strategic implications of the US’s withdrawal from Afghanistan are likely to be catastrophic, the fallout of its economic actions (detailed below) is likely to be equally, if not more, profound for the world as we know it today. Here are three charts which explain this argument in detail.

US military spending has gone down with the end of the Cold War

Share of military spending in US GDP
Share of military spending in US GDP

Among the many things that forced the US to withdraw from Afghanistan was the cost of fighting a war which it could not decisively win even after two decades. According to an estimate by the Cost of War project by Watson Institute at Brown University, the Afghan war cost $2.26 trillion to the US between 2001 and 2021. This is almost 10% of the current annual GDP of the US. While saving dollars might have been a pressing concern in the US withdrawal from Afghanistan, the so called “War on Terror” itself was an aberration in the US’s declining military spending from the peak of the Cold War era. World Bank statistics on the share of military spending in US GDP – it came down from just under 10% in the 1960s to just above 3% by the end of 1990s – proves this point. With the US out of both Iraq and Afghanistan now, its military spending is bound to come down further.

US trade policy has taken a mercantilist turn

US trade deficit as a percentage of GDP
US trade deficit as a percentage of GDP

Kindleberger, among the most influential economic historians of the world, whose work on the Great Depression of the 1930s is considered to be a masterpiece, spoke about the need for a global capitalist leader for the stability of the international economic order. The Great Depression, according to Kindleberger, happened because Britain was not in a position to fulfil this role and the US, the emerging superpower, was not willing to take on the mantle. The US assumed this role in the period after the Second World War, triggering what is described as the Golden Age of capitalism. The US began its hegemonic phase with the Marshall Plan, where it funded reconstruction of war-ravaged Europe and also ran large trade deficits with many countries with anti-communist regimes. Being a “lender of last resort” and providing home market access were important requirements of what Kindleberger described as the role of a global capitalist leader. What began as a “stop the spread of communism” project, eventually culminated in the US aiding the rise of communist China as an economic superpower, emerging the biggest market for Chinese exports.

A rise in outsourcing, destruction of domestic blue-collar jobs and the associated economic pain triggered a massive backlash in US’s domestic politics against globalisation, the biggest manifestation of which was Donald Trump’s victory in 2016. While the trend of a falling US trade deficit has stagnated in the past few years, and the post-pandemic recovery has seen a spike in imports, it is unlikely that the US will ever revert to the policy of throwing open its markets to strategic allies as it did during the Cold War. This will matter to countries such as India, whose strategic alliance with the US is stronger than ever today.

Wall Street’s dominance, low interest rates and a looming financial sector crisis

Policy rate in the US
Policy rate in the US

The US government has remained unmoved to widespread appeals for reconsidering or even recalibrating the withdrawal from Afghanistan. This is in sharp contrast to the sensitivity the Federal Reserve, the US central bank, displays to criticism from financial markets whenever there is talk of raising interest rates, which are at near zero levels. A low interest rate regime in the US encourages investment in speculative assets such as shares both within and outside the country. Even a little talk of raising interest rates in the US, which will lead to money flowing back from riskier assets to the low-risk ones, can create a huge upset in financial markets, as happened during the “taper tantrum” of 2013.

What is also true, however, is the fact that a prolonged cheap money-driven stock market book can sow the seeds of financial sector instability and an economic shock, when a correction finally comes. While it is always difficult to predict when this moment will come, it will not be an exaggeration to say that by encouraging a low interest-driven financial sector boom, the US has become, either by omission or commission, a source of systemic instability rather than being a hegemon which brought stability to the global capitalist system. The chaos in Afghanistan is definitely heart-wrenching but it is not the last such episode we will emerge out of the US’s actions.

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Saturday, October 23, 2021