US Is The No 1 Risk To World Economy: US Prof

Source : The Business Times, September 18, 2007

Other sources of political threats are China, Iraq and oil prices: US economist

(SINGAPORE) By far the greatest risk to the global economy is the United States - not least because some of its foreign policy decisions could well drive oil prices past US$125 a barrel, says an American political economist.

Marvin Zonis, a professor at the University of Chicago's Graduate School of Business, places the US at the top of his list of threats to the global economic boom, ahead of China, Iraq and oil prices, in that order.

Speaking to BT during a visit here last week, he cited the US invasion of Iraq, 'failure in Iraq and massive failures in dealing with its own economy' as evidence of US policy disasters.

'The reality is that the US government has been managing its affairs in the worst possible manner for many years,' he said.

Prof Zonis heads a political risk consultancy, Marvin Zonis & Associates, in Chicago, and is a member of the board of advisers to the US Government Accountability Office (GAO), the investigative arm of Congress that scrutinises government spending.

Citing figures gleaned from his GAO role, in 2001, the present value of the US government's unfunded liabilities amounted to US$20 trillion, he said.

In other words, the US government owed Americans US$20 trillion in terms of future pensions, social security and medical benefit payouts as at 2001.

By 2007, the present value of the sum has ballooned to US$50 trillion.

'And that's because the President, and the Republican-controlled Congress, increased all the benefits without any commensurate increase in taxation,' Prof Zonis said.

'And so the US, which has a GDP of US$14 trillion, has unfunded liabilities worth US$50 trillion in the same dollars. 'This is a country that is going bankrupt. That is reality. And people in America don't want to hear this.' - Professor Marvin Zonis

And more than half of the US government's outstanding obligations are owned by non-Americans. That, plus the ballooning US current account deficit, which is running at around US$900 billion a year, can only spell a weakening greenback.

China - with its myriad short-term and long-term 'very serious' problems - poses the second most important source of political risk in the world, Prof Zonis said.

While the US 'and every rich economy in the world' are driven by personal consumption, China, the world's biggest factory, spends 45 per cent of its GDP on capital investment - the highest proportion anywhere in the world, ever. Consumer spending accounts for only about 40 per cent of the Chinese economy.

In Prof Zonis's view, China has built its economy on capital investments, but at some point it will have to 'stop building more new factories, and start closing down the factories'. That will pose major socio-political problems in employment and urbanisation - and ultimately, possibly derail economic growth.

In any case, China faces the huge challenge of managing inflation in the face of growing food prices, 'without powerfully slowing down the economy'.

Prof Zonis, who has been studying Middle Eastern affairs since the 1960s and who used to go to Iraq every two years for years, describes the third big risk - Iraq 'and everything that comes from Iraq' - as another US-inspired problem.

'The invasion of Iraq is already the greatest disaster in the history of US foreign policy,' he said, maintaining that it is a non-partisan remark.

And if the US does go on to attack Iran, there is the chance that oil prices - which hit a high past US$80 per barrel last week - could spiral into the US$125-US$150pb range, which would be 'really devastating for the global economy', he said.