A good comment by Philip Stephens in the Financial Times, “Uncomfortable truths for a new world of them and us,” is a polite and understated wake-up call to the fading former imperialist of the West. He notes that the countries currently dominant in major international organizations assume that life will continue more or less as now, except the rising powers will have a few more votes. Stephens argues that the advanced economies are psychologically ill prepared for the shift in power and economic might that is in motion and are too often assigning responsibility to third world countries for phenomena where the West is far from blameless.
As uncomfortable as this message is, there is an even grimmer way to cast Stephens’ data. For the first time since the Great Depression, a major financial crisis is centered in first world countries. And the irony, mentioned here before, is that the US’s status is very much like that of Indonesia or Thailand circa 1997, except we have the reserve currency and nukes.
But the ugly fact is that the US (and the UK) has the potential to go from first world to third world on a relative basis. We’ve already have one developing economy trait: the emergence of a super-rich cohort that lives in splendid isolation, often with considerable security.
If you think that’s impossible, remember that Argentina had a spectacularly rapid fall. Bad leadership can destroy an economy in a surprisingly short period of time. Again, the US will hopefully escape that fate, but no matter what happens, our economic strength is ebbing as others are moving forward. A severe crisis in the advanced economies could lead to a bad outcomes even in emerging economies, but that scenario has perils of its own.
Globalisation belonged to us; financial crises happened to them.
The world has been turned on its head. Consumers in the wealthiest nations are struggling with the consequences of the credit crunch and with the soaring cost of energy and food. In China, retail sales have been rising at an annual 15 per cent. I cannot think of a better description of the emerging global order.
The trouble is that the politics of globalisation lags ever further behind the economics… the west still wants to imagine things as they used to be. In this world of them and us, “they” are accused by Democratic contenders in the US presidential contest of stealing “our” jobs. Now, you hear Europeans say, “they” are driving up international commodity prices by burning “our” fuel and eating “our” food.
The other day I listened to an eminent central banker offer a lucid explanation of the collapse of confidence that last summer paralysed international credit markets…
The crisis, this banker told a conference hosted by the Weidenfeld Institute for Strategic Dialogue, flowed from the coincidence of a global savings glut with the explosion in financial innovation made possible by ever more sophisticated information technology. This had engendered among all those highly paid investment bankers and traders an insouciant indifference to risk. It was always going to end in tears.
The savings had come largely from the fast-growing Asian economies and from the burgeoning incomes of oil and gas producers, though some could be traced to a disinclination to investment in developed nations after the bursting of the dotcom bubble. As risk premiums had fallen and spreads narrowed, central bankers and regulators had warned of the dangers. What they had not foreseen was that the explosion in subprime mortgage lending in the US would be the catalyst for such a sudden bust.
None of the above, I suppose, is any great revelation to those in the banking business now counting the bonuses lost to irrational exuberance. What struck me, though, was how this crisis (no one is sure it is over) provides a perfect metaphor for the new geopolitical landscape.
Think back to the financial shocks of the 1980s and 1990s. For those of us in the west, these were unfortunate events in faraway places: Latin America, Russia, Asia, Latin America again. There was a risk of contagion, but in so far as rich nations paid a price, it lay largely in the cost of bailing out their own feckless banks. The really unpleasant medicine, prescribed by the International Monetary Fund, had to be taken by the far less fortunate borrowers.
The parameters of globalisation were set by the west. Liberalisation of trade and capital flows was a project owned largely by the US. It was not quite an imperialist enterprise, but, while everyone was supposed to gain from economic integration, the unspoken assumption was that the biggest benefits would flow to the richest. The rules were set out in something called, unsurprisingly, the Washington Consensus.
Against that background, the west’s present discomfort is replete with irony. A sizeable chunk of the excess savings that inflated the credit bubble were a product of the Washington Consensus. Never again, the victims of the 1997 east Asian crisis said to themselves after being forced to take the IMF’s medicine in 1997. This would be the last time they were held hostage to western bailouts. Instead they amassed their own huge foreign currency reserves.
So the boot is now on the other foot. The IMF is forecasting that the advanced economies will just about keep their heads above water. With luck, growth this year and next will come in at a touch above 1 per cent. If they do avoid recession – and most of my American friends think it unlikely as far as the US is concerned – they will have to thank robust growth rates in Asia and Latin America. The forecast for China is growth of about 9 per cent in both years, for India 8 per cent and for emerging and developing economies as a whole something more than 6 per cent.
The old powers have not grasped this new reality….. More seats, maybe, at the World Bank, the United Nations and, yes, on the board of the IMF. But the assumption is that the rising powers will simply be accommodated within the existing system….Missing is a willingness to see that this is a transformational moment that demands we look at the world entirely afresh.
One of the reasons for such reticence has been the emergence of another “them and us” – this time within western societies. The “us” in this case are the well educated and well positioned who have been able to extract sizeable rents from the process of global economic integration. The “them” are the under-educated and less fortunate who have seen their jobs lost or their incomes depressed by big shifts in comparative advantage flowing from technological innovation and open economies.
The response of governments thus far has lain somewhere between despair and denial: there is nothing to be done in the face of global market forces; or the benefits of globalisation will eventually trickle down. The active education and welfare policies necessary to ease the adjustment have been conspicuous by their absence. How do you tell your electorates that all the old assumptions about welfare capitalism must be rethought?
Difficult. But these two sets of pressures – between nations and within them – cannot indefinitely be ignored. That way lies an inexorable slide into the beggar-thy-neighbour protectionism that would make the recent financial storm seem like a summer squall. However it is handled, the adjustment process to the new world order will be wrenching. The US and Europe, after all, have between them have enjoyed the best part of two centuries of effortless political and economic hegemony.
There is no reason they should not continue to prosper in a world where power is more evenly spread. Globalisation need not be a zero-sum game. But if the west is going to adapt, it must recognise that it can no longer expect to write the rules.