Brussels: As capitalism staggers through its first globalized economic crisis, the costs won’t be measured only in dollars and cents.
From newly rich Russia to eternally impoverished sub-Saharan Africa, social strains are threatening the established political order, putting some countries’ very survival at risk.
In the past month, Nigerian rebels threatened renewed warfare against foreign oil producers, Russia sent riot police from Moscow to quell an anti-tax protest in Siberia and China’s communist leadership warned of social agitation as the 20th anniversary of the Tiananmen Square massacre looms.
Spillover effect: Liberia’s Ellen Johnson Sirleaf says the crisis could undermine the development momentum and the stability of nations. Antoine Antoniol / Bloomberg
The disillusionment and spillover effects of the global recession are not only likely to spark existing conflicts in the world and fuel terrorism, but also jeopardize global security in general, says Louis Michel, 61, the European Union’s development aid commissioner in Brussels.
Among the likely outcomes: instability in Pakistan, a more aggressive if economically stricken Iran, a collapsing Somalia, civil disorder in copper-dependent Zambia and a more warlike North Korea.
Cascading into a crisis
The US housing slump that began in 2007 has cascaded into a worldwide crisis that forced central bankers to cut interest rates to unlock credit markets, pushed governments to bail out their biggest banks amid $1 trillion (Rs48.6 trillion now) of write-downs, and sent titans including General Motors Corp. and American International Group Inc. begging for bailouts.
The World Bank reckons trade will shrink for the first time in at least 25 years, deepening the economic hole for governments in developing nations, where higher food and fuel prices cost consumers there an extra $680 billion last year and pushed 155 million people into poverty.
Nuclear-armed Pakistan, once touted by Bush as the key US ally in the war on terror, sits at the nexus between economic insecurity and extremism.
On 25 November, Pakistan clinched a $7.6 billion International Monetary Fund (IMF) bailout to avert a debt default amid ebbing growth and an inflation rate of 25% in November that is ruining the livelihoods of its poor.
A day later, an Islamic terrorist group went on a rampage in Mumbai, killing 183 people and adding a bloody new chapter to six decades of animosity on the subcontinent. India accused Pakistan of harbouring the militants.
Neighbouring Iran is among the energy-exporting states afflicted by the 73% drop in oil prices from last July’s peak of $147.27. The government, reliant on oil income for at least half the budget, may pare subsidies for utility bills, adding to the pain of October’s 30% inflation rate.
Elections in June may determine whether Iran, part of Bush’s axis of evil, presses ahead with its nuclear programme—or may change little regardless of outcome, says Yousef al-Otaiba, the United Arab Emirates’ ambassador to the US.
Whether or not President Mahmoud Ahmadinejad is re-elected, power will remain with Ayatollah Ali Khamenei and religious leaders. “Whoever comes to office in June is going to be a different face of what I think is the same policy,” al-Otaiba said.
On a global scale, the spiral of economic distress and political radicalism has been at work throughout history, from the bread riots that stoked the French Revolution to the mass unemployment that brought the Nazis to power in Germany. Some dictators, such as Adolf Hitler and Joseph Stalin, turned on their neighbours after disposing of internal enemies. Others, including Mao Zedong, walled off their societies, condemning millions to misery.
The increasingly lopsided world economy provides fertile ground for extremism and violence, French President Nicolas Sarkozy said at a conference last week in Paris. “With globalization,” he said, “we expected competition and abundance, and in the end, we got scarcity, debt, speculation and dumping.”
Historians say it is too early to declare the end of the intertwining of the global economy, under way at least since the collapse of the Soviet bloc in 1989. For one thing, developed nations still have a huge stake in the system: Even with $29 trillion wiped off the value of global equity markets last year, the Dow Jones Industrial Average is back where it was in 2003, hardly a time of privation.
As a result, disturbances in the West—from Greece’s worst riots since the 1970s, to a 31% increase in New Year’s Eve car torchings in France and a pickup in shoplifting at 84% of major US retailers— won’t shake the foundations of those societies.
It is the failed or failing states that stand to lose the most. The punch line: Poverty does cause violence, says Raymond Fisman, a professor at the Columbia Business School in New York. Researchers led by Edward Miguel of the University of California have even quantified it: A 5% drop in national income in African countries increases the risk of civil conflict in the following year to 30%.
The most frail nations are those concentrated south of the Sahara desert, plagued by a legacy of despotism, corruption, disease and economic misfortune—often all at once. The region accounts for seven of the top 10 countries in a ranking of failed states compiled by the Fund for Peace, a Washington-based research group.
With commodity prices sinking, cutting the UBS Bloomberg Constant Maturity Commodity Index by almost half in the past six months, mining companies including Anglo-American Plc., De Beers, Lonmin Plc. and Xstrata Plc. are slashing jobs, adding to Africa’s economic woes.
Nigeria, holder of Africa’s biggest fossil fuel reserves, is staring into a $5 billion budget hole due to the oil price swoon. It also confronts an emboldened guerrilla movement in the southern Niger Delta, the oil producing region that has attracted the likes of Royal Dutch Shell Plc. and Chevron Corp.
The outlook is not optimistic, says Pauline Baker, president of the Fund for Peace, which ranks Nigeria 18th on the most-at-risk list. Unless Nigeria begins to pull itself together, I think with the lowering oil price in particular it is quite vulnerable.
As incomes shrivel in the poor world, the economically stricken rich world isn’t able to fill the gap. Even when the going was good, the group of eight industrial powers were struggling to meet a 2005 commitment to increase annual aid to poor countries by $50 billion by 2010. Now, official donations are set to fall by as much as 30%, the European Commission predicts.
Perched between advanced economies and the raw material exporters in the southern hemisphere is Russia, which used the eightfold oil price surge from 2002 to 2008 to reassert its claim to the great power status that evaporated along with the Soviet empire.
Under President-turned-Prime Minister Vladimir Putin, that newfound clout became manifest in last year’s invasion of neighbouring Georgia and this month’s shutdown of gas shipments to Europe. The tactics deflected domestic attention from the onset of the first recession since Russia’s debt default in 1998. The rouble dropped 19% against the dollar in 2008, the steepest slide in nine years.
“Belligerency fuelled by sudden wealth is likely to be inflamed by sudden scarcity,” says Harold James, a professor at Princeton University.
“Economic difficulties are always a spur to foreign political adventurism,” James says. “In Russia, there’s already a big devaluation, there’s unrest in Siberia and other provincial cities. This is really where the destabilization is going to come from.”
As Russia clashes with its neighbours, China may be headed towards domestic repression. While growth of 7.5% as predicted by the World Bank will outstrip the industrial economies, the pace will be the slowest since 1990, the year after the army put down the Tiananmen pro-democracy uprising.
China’s recipe for raising the standard of living has relied on creating jobs in coastal boomtowns such as Shanghai as a magnet for millions of poor from the vast, rural interior. Now that formula is breaking down. At least 10 million migrant workers lost their jobs in the first 11 months of 2008, an unidentified labour ministry official told Caijing magazine last month.
Using Communist Party code for riots and civil disorder, the state-controlled Outlook magazine last week warned that a spike in mass incidents will test the government’s ability to preserve the social peace.
At stake is the endurance of the Chinese hybrid of an open economy and closed political system. During its two-decade rise that has increased gross domestic product almost 10 times to make China the world’s fourth largest economy, a buoyant economy provided insurance against political dissent.
In a worst-case scenario, US intelligence agencies say, the communist leadership would roll back China’s integration into the world economy.
Although a protracted slump could pose a serious political threat, the regime would be tempted to deflect public criticism by blaming China’s woes on foreign interference, stoking the more virulent and xenophobic forms of Chinese nationalism, the US National Intelligence Council concluded in November.
China has known outbursts of chauvinism in the past and remained intact, thanks to a social hierarchy dating back to the age of Confucius. Poorer countries lacking that political anchor face a bleaker outlook.
The crisis could undermine the development momentum, Liberian President Ellen Johnson Sirleaf said in an interview. It would mean joblessness would increase, and that could undermine the stability of nations.