It is common to take a very pessimistic view of the U.S. economy both in an absolute sense and when comparing American economic performance relative to other countries, especially Japan. It is said that U.S. industry has been losing competitiveness in world markets, and that U.S. productivity growth-hampered by low investment, poor educational standards, and so on-has slackened severely, to the point where the United States may be entering an era of decline. In addition, growing foreign indebtedness threatens the future standard of living of the people of the United States, making the economy vulnerable to a withdrawal of foreign credits leading to a major recession (the "hard landing" scenario) and, perhaps most important of all, endangers the leadership or "hegemonic" position of the United States--an effect that threatens the openness and stability of the world economy.1
Finally, a weakening of the U.S. economic position would clearly have adverse
implications for its international political influence and for its ability to
exercise military power. Carried further, this view suggests that we are in
the midst of a historic transition from a world economy dominated by the United
States to one which might suffer through being "leaderless" or, alternatively,
one dominated by a group of countries including the United States, or even one
dominated by Japan.
In answer to these concerns, it has to be admitted that there are indeed problems,
especially those connected with the budget and current-account deficits which
are turning the United States into a net debtor in the world. Furthermore, the
relative position of the United States in the world economy has declined and
is likely to continue declining. These aspects will be discussed further below.
Yet one could also take a much more positive view, bearing in mind a few facts.
Neither extreme pessimism nor an attitude of neglect toward some of the problems
seems justified.
The Case for Optimism
The consistently high growth rates achieved by the industrial countries (the OECD countries) up to 1973 were quite remarkable, and the 1953-1973 era will go down in history, along with the era 1896-1913, as a period of outstanding economic success. Regrettably, the 1953-73 boom culminated in an inflationary explosion followed by a recession brought about by tight monetary policies and the first oil shock. All this created great uncertainty. In all countries productivity growth rates declined after 1973 and the question arose whether it was possible to maintain high levels of employment and capacity utilization while avoiding severe and possibly accelerating inflation. The 1970s thus proved to be a time when pessimism seemed justified. For a short period, 1976-79, during the Carter administration, the United States stood out by maintaining higher growth rates of employment and levels of capacity utilization than the other OECD countries, notably European countries. But this was at the cost of increasing inflation, which was higher than in other major countries. This episode seemed to confirm widespread doubts about the ability of governments to stimulate the economy to absorb a growing labor force while avoiding inflation. The recession of 1980-82-the biggest recession in the postwar period-was the direct result of tight monetary policies imposed to reduce inflation.
In 1983 the U.S. and other OECD economies started to recover and there has now been continuous, positive, and quite high growth for seven years. Growth rates are not back at the levels of the 1953-73 period, but the recent trend is surely something that can be viewed with approval. The U.S. unemployment rate is now at its lowest since 1973. At the same time the U.S. inflation rate has stayed quite low, though it rose a little in 1989. It seems that, for the time being at least, it is again possible to combine moderately high growth and high employment with low inflation.
It is also worth noting that world trade continues to grow, and that, in spite of a revival of protectionist sentiment in the United States and many examples of protectionist policies pursued by most of the OECD countries, the world trading system has not been broken up by a massive rise in protection.
One could also be optimistic in light of the non-consequences of the 1987 stock market crash. The important point is that it did not lead to a recession or even, as some feared, to a replay of the great depression. One can only conclude that there is much less reason now to expect such a replay. Central banks, notably the Federal Reserve Board, must receive credit for the way in which the effects of the crash were muted. They provided reassurance that they would, if necessary, stimulate the economy through monetary policy in order to avoid a major recession. To some extent, as a precautionary measure, they did actually engage in monetary expansion at that time, which helps to explain some rise in the inflation rate later. But they avoided a downward spiral of demand that might have resulted from expectations of a recession. This episode does not mean that recessions are not possible or likely. But it does suggest that major and prolonged recessions are only likely to result from deliberate policies that are designed to reduce the rate of inflation. Hence it is particularly important that accelerating inflation be avoided in the first place-and this has been achieved since 1983.
There is no guarantee that the good times will continue, but surely seven continuous years of moderate growth and low inflation deserve some celebration. This says nothing, of course, about the relative position of the United States, since-with some variations among countries-this kind of success can also be observed in the other major OECD countries. It can be regarded as a success of the capitalist system, whether in its U.S., European or Japanese version. 2
The Relative Decline of the United States
To return to the issues raised at the beginning of this paper, the statistics do not support the suggestion that there has been an absolute, as distinct from relative, economic decline in the United States. Per capita output has risen in every year since 1983 and is now significantly above that in 1973, the last year when productivity growth was high. The rate of growth of labor productivity-that is, output per manhour-has certainly fallen since 1973. But it has continued to be positive.3
While there has not been any absolute decline, other than in the rate of growth, there certainly has been a relentless relative decline of the United States. The U.S. share of world output has declined, and the United States is no longer so far ahead of many countries in the level of per capita gross national product. Here the focus will be on the relative position of the United States among the advanced industrial countries (the OECD countries). It should be observed that over a long period (1965-87) per capita growth rates of developing countries as a whole have also been greater than that of the United States.
The extent of the change in the position of the United States in the world economy is indicated by the following comparison. In 1965 the dollar value of U.S. gross domestic product was 51 percent of the total dollar value of the gross domestic products of all OECD countries. By 1987 the figure was down to 37 percent. In that same period, Japan's share rose from 6.6 percent to 19.6 percent. Behind this are differences in per capita growth rates which (broadly) are indications of relative productivity growth. For the OECD area as a whole the average annual per capita growth rate for the 1965-87 period was 2.3 percent. For the United States it was 1.5 percent and for Japan 4.2 percent. The British rate was about the same as the U.S. rate and the German rate was closer to the OECD average-2.5 percent.4
Another statistical comparison is also relevant here. Per capita GNP growth depends particularly on productivity growth which, in turn, depends on many things, the more important being investment in human and physical capital. With regard to investment in human capital, it is now broadly accepted that U.S. educational standards, at least below college level, leave much to be desired, especially when compared with Japan and some West European countries. But it is worth noting that the rate of investment in physical capital has also been much lower in the United States (as also in Britain) than in Japan and, to a lesser extent, in other OECD countries. In 1987, 16 percent of U.S. GNP went into gross investment. By contrast the gross investment ratio for the OECD area as a whole was 21 percent, for Germany was 20 percent and for Japan 30 percent.
Some decline in the relative position of the United States has surely been inevitable. Other countries have been catching up. The United States has been the most successful large world economy and it cannot expect to have a monopoly on economic success and especially not on the private enterprise-dominated market system which, with all its faults, is the major element in its success. When one compares per capita gross national products measured in dollars (using current exchange rates), one finds that by 1987 many countries, including Japan and Germany, had caught up with the United States and one, Switzerland, had clearly overtaken it. But much better comparisons are made when "purchasing power parities" (PPPs) are used to translate the per capita gross domestic products in various currencies into dollars. PPPs are the rates of currency conversion which eliminate the differences in price levels between countries and avoid the distortions which exchange rate fluctuations create. On this basis the United States is still well in the lead. By 1988 the Japanese and German per capita gross national products calculated in this way were both 73 percent of the U.S. level, and Switzerland's was 86 percent. 5
To gain perspective on the relative performance of the United States it is worth looking more closely at what happened during the 1983-88 growth recovery. It is notable that average annual growth in employment in the United States at 2.4 percent was far in excess of the OECD average, which was only 1.4 percent over this period. The superior American performance was due to rising labor force participation rates and immigration into the United States.
To consider this in more detail, the average annual growth of gross domestic product was 4.1 percent in the United States, a rate almost equal to that of Japan (4.3 percent). The relative aggregate sizes of these two economies thus did not change much over this period. But there was a much larger growth of employment in the United States-2.4 percent, compared with Japan's 1 percent, per annum. Hence productivity growth was much higher in Japan, which reflects poorly on the United States. On the other hand, comparing the U.S. growth rates with those of the European OECD countries as a whole, these countries combined had a much 1ower growth rate in employment--a 0.8 percent annual average--and also a lower total growth rate (2.7 percent per annum). Their productivity growth was only just a little higher than that of the United States. It was clearly an achievement of the United States relative to European countries to achieve similar productivity growth while increasing employment much more.
It is hard to argue that the United States is harmed when other countries become more productive and hence more prosperous. Other countries may be competitive suppliers in world markets, but they also provide world markets. The larger the world economy outside the United States the more opportunities there are for gains from trade for the United States. The United States derives more gains from trading with Japan than from trading with, say, India, essentially because there is much more trade with Japan, both importing and exporting. If the Indian economy grew to the size of the Japanese economy, the U.S. share of the total world economy would decline further, so that there would apparently be further relative U.S. decline, and yet the United States would be likely to derive more gains from trade. This is not to deny that particular U.S. industries may suffer from the extra competition they may encounter in foreign or domestic markets as a result of economic growth abroad, but other export industries, as well as consumers, would gain.
Nevertheless, the decline in the relative position of the United States over a long period raises important issues. Economic size has implications for the ability both to wield military power and to exercise economic bargaining strength. Here I am concerned with the implications for the management of the world economy.
The End of Hegemony and the Non-System
The view has been put forward that the satisfactory management of the world economy requires one country-the "hegemonic power"-to accept responsibility for the system, to stabilize the system as required, and to use its power to regulate the system in the world interest.6 It is said that this was a role played by Britain until 1913, and that has been played by the United States since 1945. The argument is that the interwar period was a period of transition from British to U.S. hegemony, and because of this, there was a failure of leadership during that period. A historical assessment cannot be made here, but the general idea is that one or a few countries must accept responsibility for "the system." The United States and Britain accepted responsibility at the end of World War II and constructed the Bretton Woods system.
One can be skeptical about this hegemony idea. 7 Before 1913 Britain did not try to impose free trade on other countries such as the United States, Russia and Germany, and London's pivotal financial role did not result from government design or sense of responsibility. Furthermore, has the United States really stabilized the system since 1945 or later? When one recalls the origin of the world inflation of 197 1-75, the recession of 1981-82 which precipitated the debt crisis, and the huge swings in the dollar since 1981 resulting from U.S. monetary and fiscal policies one can be skeptical, although it must be kept in mind that these adverse episodes merely punctuate a long period of mostly high world growth, notably in world trade.
It might appear that the Group of Seven "Summit" countries (the United States, Germany, Japan, France, Italy, Britain, and Canada) have played the leadership or "hegemonic" role since 1982, or even earlier. But in practice the United States has assumed the leadership and has played the dominant role. Japan and Germany have been hesitant to take initiatives for historical reasons, though this is now changing, and it cannot be said that either of these two countries has followed policies for any prolonged period that it considered contrary to its interests. In general the six non-U.S. partners have been content to concede leadership to the United States, essentially because in any case they have subscribed to the same general economic principles.
The system has worked, however, because on the monetary side it is more like a "non-system," every country doing what it chooses, though in some consultation with the other six (or sometimes a smaller group), with only intermittent acts of coordination, especially with regard to exchange rate intervention. The exchange of information and the coordination of monetary and related policies at times of potential crisis-like the debt crisis in 1982 and the stock market crash in 1987-are helpful for maintaining short-term stability. At the level of proclaimed intentions the seven governments have a common commitment to maintaining a reasonably open trading system, though all offend against this in response to pressures from domestic interest groups.
The question is whether this fairly satisfactory, if somewhat ad hoc, arrangement can survive a reduced sense of responsibility by the United States (because of its weaker position) and the growing relative economic power and probable assertiveness of the European Community and of Japan, especially as Japan is becoming less reluctant to take independent positions on international issues. In this respect Japan is responding to frequent criticisms about its failure to take the initiative. Suggestions have been made to formalize cooperation among the seven countries more, and possibly even to establish an area of fixed exchange rates--or, more modestly, "target exchange rate zones"--as a guide for agreed interventions by governments in the foreign exchange market. All this is possible, but does not, at the moment, seem likely. Monetary and exchange rate coordination of the kind that has taken place to date--namely, the minimum necessary to avoid crises and serious problems-is more readily achieved and produces fewer frictions than more ambitious arrangements would.
The underlying issue about the maintenance of the system is whether a shared sense of responsibility for the system's stability and openness can be maintained. With respect to the openness of the world trading system this requires, above all, a maintenance of goodwill among the principal governments supported by their legislatures and electorates. It is here that tendencies to xenophobia in various countries--whether "Japan-bashing" in the United States or its equivalents in Japan and Europe--present potential threats.
The achievements and potentialities of the mainly free enterprise, mixed-market economy, operating in the framework of an open world economy with free capital markets and reasonably free trade, have been immense. The maintenance of an open and cooperative international system is in the mutual interest of all countries and, at present, when the results have been so successful, there is no obvious reason to expect the system to be seriously damaged by unwise policies. The success of the current Uruguay Round trade negotiations and the strengthening of the GATT system are crucial to ensuring continued openness in trade, and the outcome of the negotiations will give an indication of where the trading system is going. The main danger is a progressive surrender to interest groups or, even worse, to xenophobia. While economic success provides a platform upon which political success, social welfare and social harmony can rest, it is also true that political failure-that is, surrender to interest groups or to xenophobia-can bring about economic failure.
At this point one might note a possible implication of dramatic recent events. The end of the Cold War could remove a glue that has held the major non-communist countries together. The East-West conflict has provided a kind of discipline for the system and has strengthened U.S. economic hegemony principally through the dependence of the allies on American military power. To that extent there could be a greater weakening of the system than would otherwise have taken place. But, as noted already, the international economic system or "non-system" has been so successful that it is clearly in the common interest to maintain its openness and stability, and the perception of this interest may indeed help to preserve it.
Competitiveness and the Deficits
It is not always understood that the supposed loss of competitiveness of the United States is directly related to the budget deficit. The impression that the United States has become less competitive results from the simple fact that for some years imports were growing faster than exports so that the United States has now a large and apparently continuing trade deficit. The rising share of imports in the total absorption of goods and services has been very visible in particular fields, such as automobiles. The depreciation of the dollar since 1985 has actually helped to make American industry more competitive in world markets, but the depreciation has so far not been enough actually to reverse the trade imbalance.
It is worth looking at some figures here to see just what has happened to real U.S. exports and imports of goods and services and to compare them with those of Japan.8 U.S. export growth declined sharply from 1981, so it is best to look at the whole period 1981-88. Over this period exports grew at an annual average rate of 4.3 percent. At the same time imports grew at 7.6 percent. This brings out the nature of the generally perceived problem. By contrast Japan's exports grew 6.7 percent and its imports 5.7 percent. The perceptions of loss of U.S. competitiveness are really based on the very poor U.S. export performance during the period of dollar appreciation 1981-85 when export growth was negative on average. In 1986 exports started growing again, and in 1987 they increased 13.5 percent and in 1988 17.6 percent--surely an indication of improved competitiveness, and a lot better than the figures for Japan for the same years (3.8 percent and 8.1 percent, respectively).
The supposed competitiveness decline is not itself the problem; rather it is
a symptom of a problem. It has nothing to do with trade restrictions in other
countries or even the United States. Rather it has everything to do with saving,
investment and the budget deficit. Since U.S. private savings are now not even
sufficient to finance U.S. private investment, it has been inevitable that,
through the mechanism of higher interest rates, foreign savings would be drawn
in to finance the budget deficit. This does
not, of course, mean that all Treasury bills are sold to foreigners-though some
are-but that the diversion of domestic savings to finance the deficit raises
interest rates, which then draws in capital from abroad to finance U.S. private
investment. Foreign funds fill the gap between total U.S. savings and investment.
This inevitably means that there has to be a current account deficit which is
brought about mainly through a trade deficit. There are other OECD countries
which also have quite high budget deficits, but they also have high private
savings ratios, so that a current account deficit does not result.
The special feature of the United States currently is the combination of a
substantial budget deficit with a low private savings ratio, hence requiring
the use of foreign funds. The mirror image of the capital account surplus is
the current account deficit, hence the trade deficit, and thus the perceived
loss of competitiveness. In the U.S. case the two deficits go together, the
budget deficit being the primary cause of the current account deficit. This
has been described as the "twin deficit" problem.
The sustained growth rate of the economy and the high level of employment have
been the bases for favorable views of the economy, helping to elect Republican
presidents. On the other hand, the adverse effects on export- and import-competing
industries of the forces that have caused the trade deficit have been the basis
for pessimism about the U.S. ability to compete and its overall role in the
world. Hence, contradictory attitudes have emerged, reflecting, on the one hand,
the recovery of the U.S. economy as a whole and, on the other hand, the decline
of a part of it, namely the part that is less competitive internationally.
Eventually the trade balance will have to change, turning even into a surplus. As the interest bill mounts, exports relative to gross domestic product will have to increase, and the import ratio will have to decline to pay for the growing interest and dividend remittances abroad. This process should eventually be associated with more depreciation of the dollar to induce the necessary shift of resources towards exports and towards industries that replace imports. Once the trade balance improves (a process that has actually already begun) the United States will become more competitive, and then complaints may eventually be heard out of Germany and Japan about their loss of competitiveness.
How Serious is the Deficit Problem?
The question really is whether the twin deficit is a serious problem, and whether it has broader implications for the issues discussed at the beginning of this paper, notably the U.S. role in the world. With regard to economic implications, there are considerable differences of opinion as to how serious or desperate the twin deficit problem is, even when it is agreed that some remedial action is required. Many kinds of figures could be given here. But one set of calculations, recently published by two members of the staff of the Bank for International Settlements (BIS), is of particular interest. 9 These calculations are concerned not with the public debt but with the U.S. external debt-that is, with the consequences of allowing the current account deficit steadily to increase U.S. foreign indebtedness.
The first point to note is that until about 1984, the United States was a large international creditor, the result of earlier current account surpluses. Its foreign assets exceeded its liabilities. As a result of the subsequent current account deficits, the U.S. international investment position was transformed, so that in 1985 it became a net debtor, its foreign liabilities exceeding its assets. By 1988, U.S. private assets abroad were worth $1.12 trillion, and liabilities were equal to $1.46 trillion. Comparing with 1981, the figures were $621 billion for the assets and $398 billion for the liabilities. These are Department of Commerce figures, where assets and liabilities are measured in terms of book values.10
The calculations by the two BIS authors show how the share of U.S. financial obligations (including direct investment in the United States) in the total financial private asset portfolios held outside the United States has changed and may change further. The point is that if foreigners are only holding a small part of their total portfolios in the form of U.S. assets, they may be willing to take up more if the U.S. current account deficit continues. Continued financing of the deficit for some time (but not forever!) would then present no problem. But if the U.S. share were to became very large, one would expect investors to be increasingly reluctant to take up more of these assets. And if the U.S. deficits continued, one might then expect some kind of financial crisis: the long predicted "hard landing" scenario would come true. The BIS researchers calculate that U.S. assets as a proportion of private foreign assets held in industrial countries outside the United States rose from 16.5 percent in 1981 to 29 percent in 1988. If the deficit were to continue at 1988 levels, and if certain other assumptions hold, the U.S. share would rise to 34 percent by 1993. This suggests that it could conceivably continue, and might help to explain why funds continue to flow into the United States, and indeed why the dollar actually appreciated in 1989. Another calculation lends support to this conclusion. The BIS report calculates U.S. assets as a percentage of the total financial asset portfolio, including both foreign and domestic assets, held by companies and financial institutions of all kinds (the enterprise sector). The proportion was 1.8 percent in 1981 and had only risen to 2.8 percent by 1988. By 1993 it would be 3.2 percent if the U.S. deficit continued at its 1988 level (and given other specific reasonable assumptions).
It is thus conceivable that the rest of the industrial world (principally Japan and Germany) will be content to continue lending to the United States. Of course this does not alter the fact that the federal government is incurring an increasing debt service burden, and eventually taxes will have to rise to pay for this, at least if inflation is to be avoided. It is vital to bear in mind that because lenders are ready to lend it does not follow that more borrowing is in the interest of the borrower.
The budget deficit is not something inevitable, the result of some external shock, some structural weakness or some fundamental popular force which governments cannot resist. It was created by policy changes, specifically, tax cuts, at the beginning of the Reagan administration. The public was never asked whether it wanted tax cuts that would bring about sustained budget deficits. To the public the Panglossian argument was advanced that the tax cuts would increase saving, investment and work effort so much that a rise in the tax base would compensate for the reduction in the average tax rate. Hence it was claimed that there would not actually be any decline in revenue from taxation, so that no budget deficit would emerge. This was the "Laffer curve" theory, dismissed by most economists at the time.
Some important supporters of tax cuts were apparently believers in a more Machiavellian theory. Their aim was to reduce the size of government in the economy. The theory was that tax cuts would force the administration and Congress to agree to reductions in government expenditure so as to avoid a deficit. We know that this, also, did not happen. It was easier to run a deficit than to cut government spending, and the reason it was easier was that the world capital market was available to finance the deficit. If foreign funds had not been so readily available interest rates would have risen more, domestic borrowers, both households and corporations, would have been crowded out and political pressure to reduce the deficit would no doubt have become very powerful. Essentially the high savers of Japan and Germany came to the rescue and prevented the Machiavellian theory from coming true.
There is now almost universal agreement that the deficit, at its present level, is undesirable. Its adverse effects in imposing a burden on the future are widely appreciated, even if its interaction with the trade deficit and the supposed loss of competitiveness are not, and even if foreigners continue to be willing to finance it. Partly owing to the buoyancy of the economy there has been some reduction of the deficit, and on present trends it may indeed decline as a proportion of the national product. Yet as long as there is any deficit the public debt builds up, and this is likely to be reflected also in increased foreign debt, at least for given private savings and investment. Perhaps the "peace dividend" that is widely expected will come in as a deus ex machina to solve the problem. Conceivably, it could fully solve the problem. At the time of writing the U.S. policy response to the radical changes in Europe seems cautious or unclear, and it has to be an open question whether one could envisage a drastic reduction of defense expenditures within a short period. There are also other candidates for the use of this dividend, so for the moment one must assume that the deficit problem will remain.
The striking feature of the current situation is that, while lip service is paid to the need to reduce the deficit, the political system has been incapable of bringing about simple measures--namely, increases in some taxes--designed to raise revenue equal to 2-3 percent of the gross national product. This failure of the system does throw doubt on the ability of the United States to achieve economic objectives and to exercise the kind of international economic leadership that is sometimes required.
It has been said that the Roman Empire collapsed because of excessively high taxation. It is more certainly true that tax rates in many Northwest European countries became excessive during the postwar boom and had significant disincentive effects. Thus, tax rates can be too high. But it is also true that societies whose governments are not capable or willing to raise adequate taxes to finance their necessary activities and avoid deficits suffer economically as well as politically--the outstanding current examples current being Argentina and Brazil.
It is hard to believe that a debtor nation--and one going increasingly into debt--can carry the same authority or influence as a creditor nation internationally. This is a large subject that cannot be pursued in detail here. 11 There are many parallels with the transformation of Britain's role.
During the postwar period American influence in the broad sense was undoubtedly strengthened through the ownership and control of many companies all over the world, the result of private direct investment outflows in the sixties and seventies. The inflow of U.S. capital to Europe and elsewhere was welcomed in the recipient countries for the benefits that it generated--technology transfer, tax revenue, employment generation--so that countries and regions competed for it. At the same time it was resented for all the familiar reasons. Now the flow is in the reverse direction. Given the low level of U.S. private savings and given the budget deficit there are clearly benefits to the United States from this inflow, but it is also likely to create resentment and, among some, perceptions of domestic failure.
The greater danger, actually, is to become dependent on foreign liquid funds which can flow out as readily as they flow in, in response to market sentiment. The dollar exchange rate and U.S. interest rates have become heavily dependent on perceptions internationally of U.S. economic policies, notably with regard to likely effects on inflation. This is the kind of problem the heavily indebted developing countries faced after 1981. For that reason it is preferable from a U.S. point of view that foreign funds enter in the form of direct investment, which implies a long-term commitment to the American economy and the returns on which are tied to, among other things, the prosperity of the U.S. economy.
In addition, the ability to influence international events depends to some
extent on the ability to write checks-to aid friends, support good causes and
build up goodwill, quite apart from engaging in military spending for which
finance has been more readily available. The world's largest economy and richest
nation has the resources to achieve this and other purposes-though not, of course,
to an unlimited extent-but there has to be a willingness to raise sufficient
taxes or reduce other expenditures to achieve these objectives. And as long
as there is a substantial deficit there will be great reluctance to use a peace
dividend, for example, for increased foreign aid rather than deficit reduction.
Footnotes
1. An interesting discussion of the "America in decline" issue in historical perspective (with many examples) is in Charles P. Kindleberger, "America in Decline? Possible Parallels and Consequences", Working Paper 89-7, Georgetown University Department of Economics, April 1989.
2. Since the 1980-82 recession growth rates in most developing countries in Latin America and Africa have been poor (in some cases negative in per capita terms) so that this growth recovery has not been worldwide.
3. The average annual increase in labor productivity 1948-73 was 2.8 percent, while from 1981 to 1986 it was 1.2 percent. [Source: Annual Report of the Council of Economic Advisers, Washington, D.C., 1987.]
4. These figures come from the World Development Report 1989 (Washington, D.C.: The World Bank, 1989).
5. The 1987 figures for per capita GNP in dollars at current exchange rates were: USA $18,338, Japan $19,437, Germany $18,280. The highest OECD figure was for Switzerland: $25,848. The source for these figures as well as for the purchasing power parity calculations is OECD In Figures, Supplement to the OECD Observer, no. 158, (June/July 1989).
6. The hegemony issue is discussed in various writings by Charles Kindleberger.
In addition to the essay cited earlier, see his The World in Depression 1929-39
(Berkeley: University of California Press, 1973); and Robert 0. Keohane, After
Hegemony: Cooperation and Discord in the World Political Economy (Princeton:
Princeton University Press, 1984).
7. I owe these thoughts to Richard Pomfret.
8. These figures come from OECD Economic Outlook, December 1989.
9. Michael Dealtry and Jozef Van't dack, The U.S. External Deficit and Associated Shifts in International Portfolios, BIS Economic Papers, no. 25 (Basle: Bank for International Settlements, September 1989)
10. A complication here is that the measurement of direct investment in terms of book values may give a misleading impression, since current values normally exceed book values, particularly when an investment was made many years ago. This suggests that book value measurements understate U.S.-owned assets abroad (resulting mostly from investments made many years ago) relative to foreign-owned assets in the United States (a higher proportion of which have been acquired more recently). As a way of determining in which year the United States changed from a net foreign creditor to a net debtor, it may be better to look at what happened to net investment income-that is, to the excess of U.S. receipts of dividends and interest from abroad over payments abroad. On this basis the United States only became a net debtor in 1989, payments abroad first exceeding receipts abroad in that year.
11. A strong argument stressing the adverse effects of foreign indebtedness on the position of the United States is put by Benjamin M. Friedman in Day of Reckoning (New York: Random House, 1988).
W. Max Corden is professor of international economics at SAIS. From 1986 to
1988, he was a senior advisor to the International Monetary Fund. He is the
author of Inflation, Exchange Rates, and the World Economy (Chicago: University
of Chicago Press, 1986). He wishes to thank Isaiah Frank and
Richard Pomfret for helpful comments on an earlier draft.