It's not just the economy By Michael J Green and Steven P Schrage
Facing the worst economic crisis since the Great Depression, analysts at the
World Bank and the US Central Intelligence Agency are just beginning to
contemplate the ramifications for international stability if there is not a
recovery in the next year. For the most part, the focus has been on fragile
states such as some in Eastern Europe.
However, the Great Depression taught us that a downward global economic spiral
can even have jarring impacts on great powers. It is no mere coincidence that
the last great global economic downturn was followed by the most destructive
war in human history.
In the 1930s, economic desperation helped fuel autocratic
regimes and protectionism in a downward economic-security death spiral that
engulfed the world in conflict. This spiral was aided by the preoccupation of
the United States and other leading nations with economic troubles at home and
insufficient attention to working with other powers to maintain stability
abroad. Today's challenges are different, yet 1933's London Economic
Conference, which failed to stop the drift toward deeper depression and world
war, should be a cautionary tale for leaders heading to next month's London
Group of 20 (G-20) meeting.
There is no question the US must urgently act to address banking issues and to
restart its economy. But the lessons of the past suggest that we will also have
to keep an eye on those fragile threads in the international system that could
begin to unravel if the financial crisis is not reversed early in the Barack
Obama administration and realize that economics and security are intertwined in
most of the critical challenges we face.
A disillusioned rising power? Four areas in Asia merit particular
attention, although so far the current financial crisis has not changed Asia's
fundamental strategic picture. China is not replacing the US as regional
hegemon, since the leadership in Beijing is too nervous about the political
implications of the financial crisis at home to actually play a leading role in
solving it internationally.
Predictions that the US will be brought to its knees because China is the
leading holder of US debt often miss key points. China's currency controls and
full employment/export-oriented growth strategy give Beijing few choices other
than buying US Treasury bills or harming its own economy. Rather than creating
new rules or institutions in international finance, or reorienting the Chinese
economy to generate greater long-term consumer demand at home, Chinese leaders
are desperately clinging to the status quo (though Beijing deserves credit for
short-term efforts to stimulate economic growth).
The greater danger with China is not an eclipsing of US leadership, but instead
the kind of shift in strategic orientation that happened to Japan after the
Great Depression. Japan was arguably not a revisionist power before 1932 and
sought instead to converge with the global economy through open trade and
adoption of the gold standard.
The worldwide depression and protectionism of the 1930s devastated the newly
exposed Japanese economy and contributed directly to militaristic and autarkic
policies in Asia as the Japanese people reacted against what counted for
globalization at the time. China today is similarly converging with the global
economy, and many experts believe China needs at least 8% annual growth to
sustain social stability. Realistic growth predictions for 2009 are closer to
5%.
Veteran China hands were watching closely when millions of migrant workers
returned to work after the Lunar New Year holiday last month to find factories
closed and jobs gone. There were pockets of protests, but nationwide unrest
seems unlikely this year, and Chinese leaders are working around the clock to
ensure that it does not happen next year either. However, the economic slowdown
has only just begun and nobody is certain how it will impact the social
contract in China between the ruling communist party and the 1.3 billion
Chinese who have come to see President Hu Jintao's call for "harmonious
society" as inextricably linked to his promise of "peaceful development".
If the Japanese example is any precedent, a sustained economic slowdown has the
potential to open a dangerous path from economic nationalism to strategic
revisionism in China too.
Dangerous states
It is noteworthy that North Korea, Myanmar and Iran have all intensified their
defiance in the wake of the financial crisis, which has distracted the world's
leading nations, limited their moral authority and sown potential discord. With
Beijing worried about the potential impact of North Korean belligerence or
instability on Chinese internal stability, and leaders in Japan and South Korea
under siege in parliament because of the collapse of their stock markets,
leaders in the North Korean capital of Pyongyang have grown increasingly
boisterous about their country's claims to great power status as a nuclear
weapons state.
The junta in Myanmar has chosen this moment to arrest hundreds of political
dissidents and thumb its nose at fellow members of the 10-country Association
of Southeast Asian Nations. Iran continues its nuclear program while exploiting
differences between the US, UK and France (or the P-3 group) and China and
Russia - differences that could become more pronounced if economic friction
with Beijing or Russia crowds out cooperation or if Western European
governments grow nervous about sanctions as a tool of policy.
It is possible that the economic downturn will make these dangerous states more
pliable because of falling fuel prices (Iran) and greater need for foreign aid
(North Korea and Myanmar), but that may depend on the extent that authoritarian
leaders care about the well-being of their people or face internal political
pressures linked to the economy. So far, there is little evidence to suggest
either and much evidence to suggest these dangerous states see an opportunity
to advance their asymmetrical advantages against the international system.
Challenges to the democratic model
The trend in East Asia has been for developing economies to steadily embrace
democracy and the rule of law in order to sustain their national success. But
to thrive, new democracies also have to deliver basic economic growth. The
economic crisis has hit democracies hard, with Japanese Prime Minister Aso
Taro's approval collapsing to single digits in the polls and South Korea's Lee
Myung-bak and Taiwan's Ma Ying Jeou doing only a little better (and the
collapse in Taiwan's exports - particularly to China - is sure to undermine
Ma's argument that a more accommodating stance toward Beijing will bring
economic benefits to Taiwan). Thailand's new coalition government has an
uncertain future after two years of post-coup drift and now economic crisis.
The string of old and new democracies in East Asia has helped to anchor US
relations with China and to maintain what former secretary of state Condoleezza
Rice once called a "balance of power that favors freedom". A reversal of the
democratic expansion of the past two decades would not only impact the global
balance of power but also increase the potential number of failed states, with
all the attendant risk they bring from harboring terrorists to incubating
pandemic diseases and trafficking in persons. It would also undermine the
demonstration effect of liberal norms we are urging China to embrace at home.
Protectionism
The collapse of financial markets in 1929 was compounded by protectionist
measures such as the Smoot-Hawley tariff act in 1932. Suddenly, the economic
collapse became a zero-sum race for autarkic trading blocs that became a key
cause of war. Today, the globalization of finance, services and manufacturing
networks and the World Trade Organization (WTO) make such a rapid move to
trading blocs unlikely. However, protectionism could still unravel the
international system through other guises.
Already, new spending packages around the world are providing support for
certain industries that might be perceived by foreign competitors as unfair
trade measures, potentially creating a "Smoot-Hawley 2.0" stimulus effect as
governments race to prop up industries. "Buy American" conditionality in the US
economic stimulus package earlier this year was watered down somewhat by the
Obama administration, but it set a tempting precedent for other countries to
put up barriers to close markets.
Nations pushing the bounds of their trade commitments could overload the
circuits of a system that can take two years to determine violations - more
than enough time for a global meltdown. Climate change legislation is also
likely to become a stalking horse for protectionism as legislatures
enthusiastically embrace punitive tariffs against Chinese or Indian goods that
are produced outside of the framework for reducing greenhouse gas emissions.
Finally, competitive devaluation - already being pursued by China in the view
of some economists - could intensify international protectionism and friction.
Global trade has already contracted for the first time in over two decades and
governments have only just begun exploring unilateral measures that could cause
further barriers. Meanwhile, trade liberalization has stalled in the Doha Round
of the WTO and the Obama administration has come into office expressing strong
reservations about major bilateral free trade agreements already negotiated
with allies like South Korea and Columbia.
Even if the clarion call of protectionism does not lead to the kind of autarkic
blocs that contributed to war in the 1930s, it could still distract governments
from collaboration on common threats and slow the prospects for more rapid
recovery.
Don't worry, but be smart
These danger signs do not mean that the worst case scenarios are likely to
happen even if the economic crisis extends beyond 2009, but history and
contemporary trends both suggest that they could happen if we are not careful.
Fortunately, we can learn from past failings.
We know that it is important to fight protectionism, and the US and its key
allies can lead in that effort at home and through the WTO, APEC [Asia-Pacific
Economic Cooperation grouping of nations], the Group of Seven [leading
industrialized nations] and [the broader] the G-20, or through other new or
strengthened alliances that might be built between committed partners.
We know that offensive trade liberalization through renewed efforts at the WTO
or with the South Korea-US Free Trade Agreement would be the best defense of
all against protectionism. We know that it is important to provide economic
assistance to fragile states like Pakistan and through the World Bank and
International Monetary Fund even amidst our own financial crises.
We know that it would be foolhardy to slash defense spending or to replace
deterrence and strong alliances with weak diplomatic arrangements as we did in
the 1920s and 1930s. And we know that we need a global strategy for
revitalizing economic growth and recognizing its interconnections to security
rather than seeking relative gains through unilateral approaches.
Michael J Green is Senior Advisor and Japan Chair at the Center for
Strategic and International Studies (CSIS) and Associate Professor at
Georgetown University. Steven P Schrage is the CSIS Scholl Chair in
International Business and a former senior official with the US Trade
Representative's Office, State Department and Ways & Means Committee.
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