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.
From Stephens:
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.
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Henry Kissinger has some suggestions:
http://www.iht.com/articles/2008/05/29/opinion/edkissinger.php
Yeah…OK. 3rd world.
Gee Wiz, this is provocative stuff. It’s not just going to be a bad Recession. Not even a Depression. Nope. Now the US and its parenthetical (U.K.) shall be 3rd world castoffs.
Stephens, of course manages to use the key buzzwords of the Left. “Imperialism”. “Empire”. “Hegemon”.
Couldn’t he at least use a shred of creativity before employing a term (“3rd world”) meant to be applied to “underdeveloped” countries? Hell, even something as weak as “5th world” would at least demonstrate he has a minimal grasp of what it means to be a 3rd world country.
But I’m not trying to be contentious. And to prove this, I’m offereing a new buzz-phrase that’s bound to tickle the Left in all the right places:
Seriously, next time you’re at a cocktail party, courtesy of me, go ahead throw this one out into the conversation:
“Indubitably, the US and it’s intrepid little parenthetical–[at this point, do that litte thing with your “fingers” to the side of your head, usually done to emphasize it’s a quote…don’t worry, it’ll suffice for parenthetical as well, and you’re listener will really get a kick out of it]…the (“”U.K””) are Imperio-hegemonic-5th world-neocon-post-colonic-empires”.
Then, for dramatic effect, take a long draw of a sip from your drink, and say…
“And they’re fascists too.”
Beautiful.
The USA has had serious deterioration in leadership since Nixon (‘Nixonland’ is a good source here). The rise of the Republican party was accompanied by catering and inflaming resentment: against ‘welfare queens’, gays, blacks, immigrants, city dwellers, “liberal elites”, “liberal media”, etc. There has been so much resentment based political discourse that the ability to solve real problems with serious policy has been badly compromised. This has been made worse by the Republican philosophy that ‘government is the problem’ (not pollution, poverty, education, health care, etc etc).
We are not even bound together by an agreement to take science seriously anymore: only 18% of House Republicans there is any validity to the science of global warming.
American insularity has come to mean a focus on Americans hating Americans. The rest of the world, and the challenges of solving difficult problems, get short shrift.
No wonder we’re in decline. We can’t meet real challenges or solve real problems in this political state.
dan, re “post-colonic”; i like it!!
well said…
anon I would argue the contrary. The erosion of values coming out of the free love (myself) generation has resulted in a general lowering of the bar across virtually every segment of society, whether it is parental controls, education standards, personal standards, professional ethics etc. Call it a race to the bottom or whatever you want. Imperialism turned globalization merley embodies the process. The political defense of the incumbant structures should be expected, whcih is to say not belived.
I will put in my 2 cents about the concept “Third World”. You may think, no plumbing and unsanitary. Well, that’s one aspect. More generically, imagine your nice house and plumbing, but a busted public works system, bankrupted or hyperinflated out of existence. You can have all the pipe in the world, but if it doesn’t go anywhere…you get the idea. Same for the garbage man never showing up. Other characteristics of Third World are: a small elite, controlling most of the prime resources and wealth of the country; a non-democratic gov’t or sham-vote democracy, perpetuating a familial or tight group rotation as leader/generalissimo; poor civil rights; bribery/payoffs to get work done, contracts approved, political favors, etc; no public schools, or ones of such poor quality or limited scope that private schooling is vital to true education; a proportionally large amount of GDP invested in military activities; suppression/scapegoating of minority ethnic or religious groups;
When you look at it that way, you may find a lot more places aren’t as fabulous as billed.
Mara said:
“When you look at it that way, you may find a lot more places aren’t as fabulous as billed.”
When you look at it that way, you may find yourself saying “I resemble that.”
Dan-
While I agree that the U.S. is unlikely to join the “third world” anytime soon, its place of unrivalled dominance is at an end. Moreover, most of the “third world” has caught up to the first world (with the exception of Africa). Much of the world’s investment in infrastructure, education, industrialization, etc. is now taking place in Asia. Just compare the gleaming new airports of Asia with most “first world” airports, or the extensive broadband infrastructure of Japan and Korea with most U.S. cities, or the education provided to kids in India vs. the best private schools in the U.S. I suspect that you’ll be surprised by how much the difference has been narrowed (or even reversed) in the past few decades.
But whether you believe the U.S. will descend to the third world, or the third world will ascend to the first, the difference is not merely a difference in degree (i.e. a few more seats at the IMF and the UN). It will be a difference in kind (i.e. fundamental shifts in power and geopolitical balance, necessitating new diplomatic and foreign policy directions). And that is what the Western powers fail to recognize.
“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.”
I think the problem is that the elite currently enjoying the ill-gotten gains from the yoked billions of earth are probably not going to be too keen on changing anything.
The key is getting them to walk away from this current operating basis without blasting large numbers of people or countries to oblivion, financially or physically. I don’t doubt the ability of the avg person to do fine in an equitable sharing of power. In fact, I think it would be better than today.
I think we can safely say, with rancor, “they” are spending our “money”.
Free trade, yea right.
whoops … without rancor
Whether the US stay in the 1st world, or slide into the 2nd or 3rd remain to be seen. That said, several signs point to a deterioration of the preeminence of America.
1) Neglect of its physical infrastructure, be it transportation, water systems (the Philadelphia one hasn’t had a major overhaul in 120 years!) bridges etc. If there is no will to invest in ourselves, what does that tell us about our priorities?
2) The overreaching influence of money in politics is reaching worrisome levels. As an example, when a publication like the WSJ write an article like “Is Justice For Sale?”, it should be time for a serious debate, no?
As for the extreme partisanship that is poisoning any attempt to solve problems, we have yet to see the end of it.
3) As Anon @ 1:31 noted: “We are not even bound together by an agreement to take science seriously anymore” For a country that pride itself on creativity and technological innovation…such an attitude cannot bode well for the future. You just CAN’T have technology development without a robust sector in fundamental scientific research. Not going to happen.
4) The financial sector has captured an ever-rising share of the market profits. It is far from clear (at least to me) that it have been used to promote re-investment in the country at large.
A financial sector that has also benefited from extraordinary regulatory leniency and favorable treatment from the politicians. Judging by where we stand now with the so-called sub-prime and credit crisis, one has the right to wonder if such treatment was not ill-advised.
5) The parabolic rise in income inequality has yet to demonstrate any tangible benefits for the population at large. There seems to be a huge dam of isolation, self-serving justification and class isolation (“we deserve everything we got, and then some”) preventing the long-awaited trickle down.
6) The decline of the middle class is not what anyone would expect from a country that pretend to have a policy of economic sustainability and growth. When more and more people feel they do not have a stake in the distribution of wealth , why should they fully participate and contribute?
7) Finally, the CDC publish a very disturbing report showing for the first time in six decades, an increase in mortality AND a decrease in life expectancy, in women from low socioeconomic status across a sample of 1,000 counties. This is very important because such indicators are prime markers of the overall health of the population. Note that this observation is unique to the US among developed countries. Hardly encouraging stuff.
We’re actually shrinking relative to the rest of the world!
Hat tip, Economist’s View:
Economist traces height trends, by Tom Hundley, Chicago Tribune: When John Komlos wants to take the measure of a nation’s economic well-being, he doesn’t check its gross domestic product or consumer price index. He ignores … unemployment figures. Instead, Komlos takes a look at how tall its people have grown.
“Height is a very good overall indicator of how well the human organism thrives in its socioeconomic environment,” he explained.
Komlos, a professor in the economics department at the University of Munich, Germany, has dedicated his professional life to the study of anthropometric history—his own coinage for the academic field that studies the links between a population’s height and general well-being.
What Komlos has learned is that Americans, despite their nation’s prosperity, abundance of food and cutting-edge medical technology, stopped getting taller in the 1950s and have now been passed by their European cousins.
“Americans were head and shoulders above Europeans in the 18th Century, and it stayed that way for two centuries,” he said. “Now it’s the other way around.”
This, according to Komlos, suggests that Europeans eat better, have better access to health care and enjoy a more equitable distribution of national wealth. They will almost certainly live longer than their American counterparts. …
Re: global warming, anthropogenic
Many of us do take science seriously. What we categorically refuse to take seriously is watermelon politics (green on the outside, red on the inside) masquerading as science.