Advisory Panel member
Bill Emmott is the former editor of The Economist and a member of the Advisors to Swiss Re.
Economic crises have a tendency to cause political disruption. It has not yet happened with this crisis.
Economic crises have a tendency to cause political disruption. It has not yet happened with this crisis. The global economic crisis that began to be felt in August 2007, but really only began to feel painful and shocking in September 2008, has brought many surprises. The collapse of Lehman Brothers and of Bear Stearns, along with the takeover by Bank of America of Merrill Lynch suddenly transformed Wall Street. Who would have predicted, before 2008, that an insurance giant like AIG would soon be owned by the American government, nor that the American and British governments would soon own major shareholdings in their biggest banks?
Following on from those events, the speed with which global demand and global trade started to drop in the months after the Lehman shock was truly alarming. Comparisons with the slump of the 1930s inevitably began to be made. The fact that, following the 1929 crash on Wall Street American GDP dropped by 25% made such comparisons both tempting, for the gloomy-minded, and un-nerving, for the rest of us. A particularly chilling chart began to be used, copying one made famous by the American economist and financial historian, Charles Kindleberger, in which he depicted the decline of the 1930s by mapping the fall in world trade as a spiral inside a spider’s web. During the eight months from October 2008 until May 2009, the fall in world trade volumes followed the Kindleberger chart with terrifying accuracy.
So, there have been many surprises. But here is another surprise. It is that the political consequences of the economic crisis have so far been quite mild. In the 1930s, of course, the political consequences included the spread of fascism in Europe, military coups in Asia, seizures of territory and ultimately the Second World War. Today, the political climate is a great deal friendlier and more stable than it was in the 1930s, a period in which the scars of the Treaty of Versailles of 1919 and of colonialism in Asia and Africa were still livid. Nevertheless, the political calm is surprising, if you consider that the 1989 Tiananmen Square massacre in Beijing followed a slump in the Chinese economy, that the collapse of the Soviet Union had economic failure as its origin, or that many changes of regime in Latin America during the 1980s had the region’s debt crisis as their trigger.
Indeed, your present author should confess that back in October 2008, in an article for the Washington Post, he wrote:
"(Here is) another recurrent truth about economic crises: It is political instability that turns a crisis into a disaster, bringing about real change. During the 1997–98 financial crisis in East Asia, the most dramatic and painful effects were felt in Indonesia, not because of its economic weaknesses but because the crisis led to the overthrow of its longtime dictator, Suharto, and then to several years of chaos.
If we look for the Suharto of this crisis, for a place where economic stress could produce a political explosion, we are unlikely to find it in the United States or Western Europe. It is more likely to be found in poorer countries such as Pakistan or, likelier still, in countries whose economies and regimes have become dependent on high commodity prices: Russia, Venezuela, some African nations, perhaps even Iran. In those places, if prices collapse, all political bets are off."
So far, there have been no political explosions. Iran has come closest to a drama, but it is a bit of a stretch to attribute the protests following its rigged presidential election as having been driven by the global economic crisis. Russia certainly began to feel like a country under economic stress, as oil prices tumbled from their July 2008 peak of USD 150 a barrel back down to USD 35, as unemployment rose, banks failed and the rouble was hit by selling pressure. But no political crisis occurred. In China, the violent unrest in Tibet in March 2008 and in the far-western mainly Muslim province of Xinjiang in June 2009 may well have had some economic roots, in the first case because of rapid inflation and in the second because of China’s overall economic slowdown. Yet the connections were indirect, and the unrest has been contained, albeit amid a sullen atmosphere in both provinces that bodes ill for the future.
The political changes that have occurred There may, it is true, be new surprises just around the corner. Japan offers a helpful reminder: two or even three years after Japan’s financial bubble burst in 1990, few people would have forecast that a full “lost decade” would follow, nor that even today the country would be suffering from falling wages and household incomes, quite high unemployment rates, and public debts that are equivalent to more than 180% of GDP.
More could change in the rich West too; the long-term damage done by the economic shocks of 2007-09 could prove to be more profound than it now appears. Unemployment is still rising in all the rich countries and in many poor ones, even if at a slower rate than in the first few months of this year. The higher that joblessness goes, and the longer it lasts, the more pressure there will be on politicians to find new solutions.
Nevertheless, thus far globalisation is intact. There have been protectionist threats, but none yet that is strong enough to reverse the process. The World Bank and the World Trade Organisation (WTO) have both compiled lists of protectionist measures implemented in both developed and developing countries, and although their lists are dispiriting they do not represent a sharp break from liberalisation. WTO agreements permit some trade-restricting measures as long as they are temporary, and countries have the scope to raise their actual border-tariffs up to a maximum level laid down in their treaties: so far, countries have not gone beyond that point. Moreover, the much-delayed Doha Development Round of WTO trade negotiations, which began in 2001 and reached a point of apparent collapse in 2008, is showing signs of new life, helped by changes of government and personnel in both America and India, the two countries that blocked a deal in 2008.
In the emerging or developing countries, including China and India, the belief that economic development requires liberalisation of markets and of the private sector has not changed. The role of the state in those countries, especially in Asia, is a larger and more profound one than in America, but that has been the case for half a century, throughout the “Asian miracle” that was led by Japan.
In America and Europe, belief in liberalisation has become shakier. Some banks and even (in America’s case) car manufacturers have been taken into state ownership. Yet no one expects this to be permanent. Prime ministers and presidents do not want to be bankers or auto executives. Public finances are deep in debt, and governments will need to sell assets in order to help repay that debt, and to cut spending wherever they can, in order to reduce their annual budget deficits. The only sector where change really does look likely to be profound is in financial services itself, especially in investment banking. Shareholders will be more averse to taking risks, regulators will require banks to hold more capital, derivatives markets will have to become more transparent and closely regulated, and governments may, for purposes of political populism, impose controls on the pay of bank executives.
In geopolitics, the strongest feature of this crisis, as opposed to that of the 1930s, has been unity rather than disunity. The global nature of the crisis has made the bigger powers, at least, feel the need to seek common solutions and to avoid worsening the crisis by arguing amongst themselves. So most obvious consequence of the crisis has been the creation – or, strictly since it existed before, the upgrading – of the broad, G20 (“Group of 20”) summit including poor and emerging countries as well as the rich ones. But that would soon have happened anyway, given the rise in importance of China, India and Brazil during the past decade or two.
Some commentators believe that the global crisis of 2007-09 may have accelerated that shift of power to Asia and the other emerging giants, but it is surely too soon to draw that conclusion. Economic recovery has come more quickly to China and India than to the United States or Western Europe, but the difference is a matter merely of months rather than years, and any shift of power will depend on whether rapid Asian growth proves sustainable and whether America or Western Europe prove to suffer a Japanese-style stagnation or whether they succeed in shaking off the burden of debt and financial adjustment more quickly.
In domestic politics, the effects of the crisis thus far are more subtle and gentle. Many, though not everyone, will have been pleasantly surprised by the fact that on November 7th 2008 American voters elected their first African-American president, Barack Obama. Arguably, that choice would have been less likely had the economic climate not changed so markedly from 2007 onwards. Nonetheless, a switch from a Republican to a Democrat would have been likely, thanks to the wars in Iraq and Afghanistan, so even without an economic crisis America might well have had a President Hillary Clinton – and she is now Secretary of State in any case.
Similarly, the election in Japan on August 30th 2009 of the centre-left Democratic Party of Japan (DPJ) in the first full rejection of the conservative Liberal Democratic Party for more than half a century, might not have happened in such a clear and comprensive way had Japan’s economy not been hit hard by the drop in global trade this year. But the DPJ would most likely still have emerged as the largest party and would have led a new coalition government.
Subtle though those political effects are, these elections will, however, have policy consequences. They mean that in the world’s two biggest economies, America and Japan, administrations have been elected that say they want to reshape or extend those countries’ welfare states. Add in the increasing efforts during the past five years by the Chinese government to expand public spending on health, education and social welfare, and the result is that the welfare state is likely to be expanded in all the world’s top three economies. The burden of public debts in America and Japan, and political resistance to higher taxes, will make the task difficult, to say the least, but still policy will move in that welfarist direction. In China too the task will be difficult, because public spending there is equivalent to only 20% of GDP (compared with 35% in America and Japan, 40–55% in Western Europe) and any substantial, sustained rise in that spending will require the tax base to be widened in order to finance it. A wider tax base threatens to have political ramifications: no taxation without representation, as the slogan of the Boston Tea Party put it more than two centuries ago.
Shocks still to come?
The political impact of the global economic crisis has, therefore, been quite limited – surprisingly limited, in fact. Could there be more shocks ahead? Certainly, though the current co-operation between the big powers makes those shocks likelier to be domestic ones than international. Looking back again to the East Asian financial crisis of 1997–98, it was only in the second year, in 1998, that President Suharto was overthrown. The overthrow of the Shah of Iran in 1979, which some historians ascribe in part to the weakening of American influence in the Middle East during the 1970s, took place many years after that influence had begun to weaken: six years since the Arab oil embargo of 1973, five years since the resignation of President Richard Nixon, four years since the final American withdrawal from Vietnam.
Historical parallels should be used only as guides to possibilities and to plausible patterns, not as sources of inevitable sequences or indicators of simple links between cause and effect. Circumstances differ, especially as the patterns of social, political and economic behaviour are themselves so complex and varied. Two final points can nevertheless be made.
One is that the emergence of civil resistance, of popular protest of the sort that produces sudden political instability and change, is generally a slow process that has often been fuelled at least in part by a sense of disappointed aspirations. A regime that was tolerated because it delivered rising living standards may be rebelled against if that ability becomes called into question, over a period of several years. This might now be called the China Danger.The second is that when political change happens, it typically looks like a complete shock, one that few were able to predict in advance. The fall of the Shah was one such example; another was the fall of the Soviet Union. Historians, however, later refute the shock theory, by finding underlying forces that had built up over time. The lesson is simple to state, but hard to implement: that just because the politics of a country, especially an authoritarian one, looks calm on the surface, it does not mean that there is no political risk.