Opinion
The geopolitical risks we face today stem from solutions to earlier excesses
Summary
- Addressing the ‘polycrisis’ faced by today’s world demands acknowledgement that our problems have deep historical roots and have been in the making for over seven decades.
The International Monetary Fund recently raised a note of caution about India’s rising public debt-to-gross domestic product (GDP) ratio as part of a standard process of assessing country risks. Today, there is a burgeoning cottage industry of storied institutions that are compiling lists of risks arising not for specific countries, but at a global level across the domains of economics, politics, geopolitics and society. The World Economic Forum has referred to the current concatenation of hazards as a ‘polycrisis,’ a situation “where disparate crises interact such that the overall impact far exceeds the sum of each part." However, the literature, rich as it is, fails to recognize that current risks have deep historical roots and that they have been in the making for well over 70 years. This cognitive gap acts as a barrier, preventing us from seeing the present juncture in the correct perspective and formulating an appropriate response.
The geopolitical risks that have arisen in the face of an aggressive China flexing its muscle and the Ukraine war are well appreciated. However, the fact that these risks are directly a result of the self-serving policies of the US is not acknowledged.
In 1972, in the midst of the Cold War, US president Richard Nixon fashioned a détente with China to exploit the wedge in Sino-Soviet relations arising from their differing ideological perspectives on Communism. The US’s economic engagement with China was also an attempt to mitigate its dependence on Japan and the East Asian economies that had shot into prominence in the 50s and 60s. Further, the ties were lucrative for American multinational corporations, and founded on the assumption that an affluent China would automatically gravitate toward a democratic polity. The economic success of China despite persistent authoritarianism represents a gamble gone wrong, not a hand of compassion spurned by an ungrateful beneficiary.
Nixon also played an important role in the geopolitical over-reach that resulted in the North Atlantic Treaty Organization (Nato) attempting to encircle Russia by inducting members on its western borders. In 1970, he floated the dollar, which until then had been pegged at $35 to an ounce of gold under the Bretton Woods agreement of 1944. This made the dollar the de facto ‘gold standard’ of the world, unconstrained by even a notional obligation to be anchored by any commodity price. The decision by OPEC in the 1970s to invest dollars earned from oil exports in US government bonds, and a similar decision by China in the mid-90s with regard to its export surpluses, further cemented the dollar’s position as the world’s chief medium of exchange. These developments gave the US government a free hand to run up sizeable budget deficits to finance its geopolitical ambitions in countries as diverse as Afghanistan and Ukraine.
As of September 2023, the US government’s public debt was 122% of GDP and total debt including government, household and corporate was 372% of GDP. In addition to the supremacy of the dollar, the commercial demands of the US war engine and the government’s obligations to an ageing population, steep indebtedness is a result of US deregulation of its financial services industry and unfettered growth in the securitization of housing, education and credit card loans. This deregulation started in 1980, when the Keynesian world-view that highlighted the limits of markets gave way to the ‘Washington Consensus’ that emphasized self-corrections inherent in the market mechanism. Deregulation also meant that financial investors in advanced economies started lending to governments in developing countries at market rates of interest with limited debt restructuring options due to the large number of creditors involved in any loan. As a result, in the past three years alone, there have been 18 sovereign defaults by 10 developing countries—greater than the number in the previous two decades. About 60% of low-income countries are currently at high risk of debt distress or already in it, a big risk for global macroeconomic and social stability.
In sum, the present impasse represents a realization of the risks of market-led growth and geopolitical over-reach in a unipolar world. The risks of unfettered markets and unipolarity have been replaced by risks of protectionism and great-power conflict. The new risks simultaneously represent matters of concern and solutions to the risks of the previous world order. For instance, a weakening of the dollar as a result of China, Russia and others reducing their holdings of US Treasury securities could prevent geopolitical overreach of the kind that led to wars in Iraq, Syria and Ukraine. Similarly, a slowdown of global growth may not be entirely unwelcome in a world locked in a carbon-intensive growth trajectory.
Those who argue that a breakdown of the US-led world order makes it harder to solve problems like climate change need to recognize that it was this very order that created the problem in the first place over a long arc of history extending over decades. The resulting humility would help us appreciate and adopt new ways of looking at the world that are necessary to move past our present challenges.
India needs to be vigilant about avoiding the mistakes of the previous world order even as it takes advantage of the new world coming into being.
