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CPDS Home Contact | Competing Civilizations |
Summary + |
Summary As a result of failures to deal with risks to international stability the basis of global order has been at risk - and political and economic disorder like that that followed the collapse of 19th century globalization is not impossible. Democratic capitalism and communism were rival Western / European styles of political economy in the Cold War. This ended in 1989 when the communist Soviet Union collapsed in the face of the greater economic strength of the US and its allies. A new global order, based on democratic capitalism, seemed likely to emerge. However there are many competing understandings of the nature of such an order. At the same time the UN, the main institution that could have provided the political framework for a unified world, has been proving ineffectual, while the economic institutions established at the Breton Woods Conference primarily reflected US assumptions. Both have been subjected to criticism - though there appears to have been inadequate fundamental work on the causes of their problems to have allowed practical alternatives to be devised. Moreover there are uncorrected defects in dominant democratic capitalist practices, theories and institutions. In recent decades these defects and a universal failure to consider how they interact in practice with non-Western cultural assumptions have been contributing to economic and political distress in rapidly developing East Asia, and to even worst problems in states on the global margins (eg failed, repressive or rogue states, leading in some cases to terrorism as an extremist reaction to political exclusion). One symptom of this situation, was the launching of a terrorist attack apparently by Islamist extremists against core Western institutions in the US in September 2001. World leaders seemed unable to agree about how to manage the urgent security risk of 'terrorists with weapons of mass-destruction' and what model of political-economy could ease the political and economic malfunctions that give rise to such problems. The global response to this (which featured increasingly unilateral and militaristic action by the US) achieved very little (see Attachment on September 11: the First test). Another major challenge to the global order arose in October 2008 when a credit crisis, which had first been recognised in the US in mid 2007, threatened to turn into a total failure of the global financial system. Rescue operations were mounted by governments worldwide and calls emerged for the creation of a new world financial order. However success in creating this is anything but assured - for essentially the same reasons that the response to 911 attacks proved unsatisfactory. John Craig |
Fragmentation |
Fragmentation of the Global Order Rather than creating a fair and workable global political and economic order based on liberal democratic capitalism, political disorder and economic collapse are a feasible alternative if political leaders do not cope adequately with diverse and related security and economic challenges. Those most likely to suffer would (as always) be the world's poorest [1]. International trade and investment have become more significant to the world economy over the past 30 years [1]. It has been credibly suggested that economic globalization and accelerated rates of economic growth were partly attributable to unilateral US action in 1971 to end the Gold Standard (part of the 1944 Bretton Woods agreement which had required convertibility of currencies into gold). The subsequent emergence a (US) Dollar Standard overcame previous constraints on the creation of credit [1], and complemented the effect of improved transport and communication in 'globalizing' economic activity. Not only was the $US the world's reserve currency, but US monetary policy played an informal, unpublicised but significant role in counter-cyclical management of the global business cycle (eg the US Federal Reserve maintained extremely loose monetary policies at times citing the need to counter the risk of 'deflation' - though this was a problem in Japan not in the US. Thus it is reasonable to conclude that Japan (and perhaps other countries) had behind the scenes influence on US monetary policy). Moreover since communism was generally discredited as a system of political economy when the Cold War ended in 1989, large additional segments of humanity have been drawn into market economies and democratic capitalism in its various forms has been regarded as the global 'standard' - and likely to become the basis of a world order. However globalization has occurred before. At the close of the 19th century, in a global environment dominated by the British Empire international trade and investment were even more relatively significant in the world economy than they are now. Yet this collapsed in the frictions with Germany that led to World War I [1] - frictions that presumably arose from cultural differences in assumptions about the nature and role of power.
Furthermore it may have been the tensions in the 1920s and 1930s associated with attempting to modernize to adapt to the globalization of Western-style society which led Japan to try to achieve independence through aggression in Asia prior to World War II in the hope of creating an 'Asian Co-prosperity Sphere' [1]. Moreover, while democratic capitalist models are widespread, they come in quite distinctly different styles [1].
In the post Cold War environment differences due to such un-stated cultural parameters have become increasingly apparent - and contributed to a breakdown of multilateral institutions. Europe and the US have been seen to have radically different perspectives on the nature and reliability of global institutions [1]. Similarly differences are perceived in basic values and beliefs in terms of: the value of institutional or military solutions to conflicts; focus on past or future; and the role of religion [1]. The European Union has been developed as a model for building economic and political collaboration amongst various nations based on a preference for collaboration and consensus. While national membership is expanding [1, 2] and an effective economic union has been created, the EU is not untroubled. For example:
And East Asia, which now accounts for about half the world economy, incorporates elements of (neo-Confucian?) models that prefer government by elite bureaucracy (rather than by democracy and a rule of law) and which tend to favour mercantilist / communitarian economic goals, rather than being driven by the return on investors' capital available from meeting consumer demands.
Elsewhere the majority of the world's people live in states that have ineffective (or even despotic) regimes and tend to be economically disadvantaged to varying degrees. A substantial minority of this (still third) world involves states dominated by Islamic traditions - from whom also proposals have emerged for the creation of a new monetary system and economic union [1]. Furthermore there is no effective institutional basis for globalization. Current global institutions were created at the end of the second world war, and involve primarily the United Nations (UN) and economic organizations established as a result of the 1944 Breton Woods agreement (WTO, IMF and World Bank). However the core institution, the United Nations, is too often of little practical value being apparently:
Of particular significance is that the UN could suffer the League of Nations' fate due to its inability to enforce its resolutions related to security breaches (eg by despotic regimes). At the same time, global economic institutions have been heavily influenced by US interests to pursue its preferred liberal democratic capitalist model, and have attracted as much criticism as the UN system (eg see Bretton Woods project). Worldwide reactions against global economic institutions (on environmental and social grounds) have also arisen, and been conspicuous for the fact that those involved seem to be only interested in 'protest' and have no practical alternatives to suggest. In September 2003, the WTO's efforts to arrange a new round of multilateral trade liberalization was derailed by a dispute between developed and developing nations about whether improved access to the latter's markets is appropriate [1, 2, 3]. This breakdown in global multilateral trade arrangements may be as significant as the inability of the UN Security Council to resolve concerns about terrorists with WMD that led to unilateral US action in Iraq. It must impede trade, and thus reduce growth. Furthermore it seemed likely that global economic growth may prove unsustainable because of the financial imbalances created by dependence of recent growth on US demand, and the structural incompatibilities between various economic models which may make it impossible to overcome those imbalances. |
Failures |
Looking for Causes of Economic and Political Failures While many societies benefited from the global order that emerged after the Cold War, that era has been anything but problem free. For example:
In the context of the 911 attack in America Competing Civilizations suggested:
Economic and political failures have been associated with widespread misery, and have also contributed to the risk of terrorism. The latter seems to be an reaction to real or perceived social, economic or political concerns by extremists who feel otherwise powerless. It also has the potential to transmit failure to other states [1]. Those who had been economically and politically successful (especially the United States which was geared for Cold War conflicts) were for a long time not directly affected by the economic difficulties and political failures (and political extremism) - so they did not become serious about examining the political and economic development issues. The attack by Islamist extremists in America in 2001 provided the opportunity to address those broader questions, but in the absence of global agreement about how to address this the US pursued almost unilateral actions with a militarist emphasis that, though enormously costly, did not materially improve the global situation (see September 11: The First Test). However it is likely that the global financial crisis that emerged in 2008 will force a different approach. In the context of the 911 attack, Competing Civilizations had also suggested that defusing a potential 'clash of civilizations' required reviewing the role which money plays because, though though there are advantages in its use as a means of exchange, store of value and measure of economic success:
These issues have become critical since 2008 - though the latter continues to be put in the 'too hard' basket. |
GFC: A
Second Test? +
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Global Financial Crisis: The Second Test of Globalization? A global financial crisis (GFC) had become well recognised in late 2008 when:
Financial Market Instability: A Many Sided Story (2003) presented an account of the emergence of this crisis as a result of financial arrangements that had become foundational to global economic growth and development. The crisis was revealed initially (in mid 2007) when, following falls in US housing prices in 2006, losses on US 'sub-prime' mortgages created large unexpected and non-transparent losses for banks. This then resulted in a 'credit crunch' (ie: it disrupted banks' ability to lend to one another; and made credit less available and more costly for their customers). The problem quickly spread globally and subsequently escalated, even though traditional remedies were vigorously applied (ie the US Federal Reserve responded with lower interest rates and made credit available to distressed institutions, while the US Government provided a fiscal stimulus to boost economic activity). GFC Causes There appear to be many factor whose interactions contributed to the GFC including: prior asset inflation; declining US housing prices; an oil price spike; loss of effective financial regulation due to globalization; inadequate aggregate global demand as a by-product of 2 decades of globalisation; failure of post-war international financial regime to recognise unsustainable macroeconomic consequences of demand-deficient Asian economic models, and the need which other emerging economies had to export-led development to guard against financial crises; emergence of an unregulated 'shadow' banking system in US; high levels of household debts which caused consumer spending to fall as financial losses emerged; innovations in financing and monetary policy; statisticians' adjustments to economic data which perhaps gave a misleading impression; decisions by regulators and businesses; government social policies; complex financing arrangements that rendered consequences incomprehensible (Flash Crashes); possible intrinsic disequilibrium in financial markets that was not perceived by deregulators; community irresponsibility; a lack of top-level US government economic expertise because of the 'war on terror' focus; a 'savings glut' in East Asia that was vital to economic models adopted in the region; Japan's ambitions and 'carry trades'; the way Lehman Brothers failed; very high levels of corporate debt in Europe; risky investments in emerging market economies; and policy actions by governments in reacting to the emerging crisis. More specifically:
While the GFC might seem like merely a matter of fixing the financial system (a massive challenge in itself), it is in fact far more difficult because:
Economic growth and globalization had been dependent on complex and dynamic arrangements within the global economy which effectively disintegrated. Efforts to stimulate economic activity through government spending and loose monetary policies could not be sufficient - because the problem is, in effect, to 'put Humpty Dumpty back together again' (see also reference to our inability to 'restart the music' [1]). |
Seeking a GFC Solution
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Seeking a GFC Solution Established machinery for international collaboration (eg G7, EU) made various attempts to promote a coordinated response to the GFC which would not only deal with the crisis but address its systemic causes. A forum of European and Asian leaders agreed in October 2008 on the need for such action, and arrangements were made for an international meeting in the US in November following the 2008 presidential election to find a way forward. US Leadership? [<] Much was apparently expected of the renewal of US leadership within global institutions under a new president in developing solutions to the financial and rapidly-escalating economic crises. However given the complexities of the issues (which currently render them virtually incomprehensible) and dysfunctions in global institutions it is hard to see how 'hope' (for apparently-long-overdue reform of US government programs; 'liberal' values that some cultures believe to be socially damaging; and a vacillating approach to international relations) might translate into world leadership in practical reform of global financial / economic systems.
G20: Avoiding Key Issues [<] A meeting of G20 nations (representing about 80% of the global economy) was arranged for mid-November 2008 to consider a coordinated response to the GFC. Resolutions were passed about (a) developing proposals for a coordinated response for consideration in 2009 and (b) restarting talks about liberalization of international trade under the WTO framework (which had previously failed because of disagreements about agricultural protection in developing countries).
There was however concern that: (a) the summit had not actually decided to take coordinated action; (b) the causes of the GFC were not raised in debating solutions; and the incoming US administration was not involved in the summit. There was also fairly clear differences of opinion between 'Europe' (which appeared to favour some sort of EU-style international regulatory regime) and the outgoing US administration's aversion to such arrangements. An APEC meeting in late November again highlighted fundamental differences in approach - when China also strongly endorsed a 'new international financial order' as an alternative to the 'free markets' approach favoured by the US [1]. While the US administration of Barack Obama was more likely than its predecessor to favour an 'international' solution, this seemed unlikely to be enough. For example, as noted above the Obama administration's approach to international affairs has been internally inconsistent. Moreover the new president gained electoral support by promising to protect jobs in failing industries, though trade protectionism could seriously worsen the economic downturn associated with GFC - and the G20 resolved to pursue the further removal of trade barriers by revitalizing stalled WTO negotiations [1] In the lead-up to the proposed G20 conference in April 2009 to discuss resolution of the crisis diverse and incompatible approaches to solutions were again very much in evidence.
Moreover unilateral action by various nations / regions acting independently seemed unlikely to lead to success.
In March 2009 a preliminary meeting of G20 finance ministers papered over pre-meeting differences between EU and US on fiscal stimulus and agreed on (a) a common framework for assessing impaired assets and bank recapitalization (b) boosting resources of the IMF and regional development banks to provide capital for emerging and developing economies (c) avoiding protectionism and (d) increase oversight of Credit Rating Agencies, transparency of exposures to off balance sheet vehicles; improvements in accounting standards, including provisioning and valuation uncertainty; greater standardization and resilience of credit derivatives markets [1] . Despite hopes expressed by some, the prospects of reaching agreement that would be effective appeared dim.
Moreover it was what was not being discussed at all that seemed most likely to inhibit effective agreement.
In the absence of commitment to addressing underlying problems, the predictable outcome of international negations related to the GFC could only be:
Such 'solutions' would imply that another crisis would emerge in a few years. G20: Announcing 'Peace for our Time'? [<]
Though Western leaders proclaimed the G20 meeting of April 2009 a success and there were some signs of progress, there is a real possibility that they were merely having a Neville Chamberlain moment because serious underlying problems were not being addressed.
It seemed that the economic dislocation triggered by the GFC could run much longer because: there was obvious confusion about the nature of the problem; nothing was done about the structural causes of the financial imbalances that make global growth unsustainable; correcting those imbalances is both essential and likely to make East Asian economic models unworkable; establishing global institutions to address the problem of economic management and financial regulation merely 'passed the buck'; and there are numerous market-level indicators of ongoing problems
The G20 summit was arguably a 'success' mainly in the sense that differences were papered over, no one walked out and a foundation was laid for ongoing negotiation. Many issues that needed attention were hinted at, which is at least a form of progress even though they were not addressed. In September 2009 a meeting of the G20 decided that fiscal and monetary stimulus measures had been successful but needed to be continued (and great care taken in phasing them out) and the global financial system needed reform in terms of (a) better coordination of monetary and fiscal policies (b) higher capital requirements [1] Some See Why Imbalances Matter Though G20 Officially Can't However the issues that the the G20 avoided did not go away. Various observers noted the relationship between global financial imbalances and the GFC that was mentioned above. For example, Professor Martin Wolf (amongst others) produced useful accounts of the relationship between financial imbalances and the GFC (eg Challenges for the World's Divided Economy, 8/1/08 and How imbalances led to credit crunch and inflation, 17/6/08). Moreover:
This issue was also reflected by G20 meeting in Pittsburgh which decided that (a) G20 would be forum for global economic management; (b) tougher bank rules would be in place by 2012. It was argued that responses by governments had stopped decline in global activity and stabilized financial markets - though (a) much more needed to be done to reform financial regulation and reshape global growth; and (b) stimulus measures will still be needed for some time. Other issues addressed included: IMF reform and world trade talks. In return for getting more say emerging economies would be expected to help rebalancing the world economy (by increased savings in deficit countries and more consumption in surplus countries). Some rebalancing was already occurring as US household consumption has shrunk. [1]. However while the G20 was able to get agreement on financial regulation (an issue on which there is wide agreement), it was seen to be likely to have difficulty getting agreement on trade, financial imbalances and reform of Bretton Woods institutions where there are significantly different views [1]. These difficulties had become increasingly apparent by the time of the G20s meeting in June 2010. In July 2010 it was being argued that global economy, artificially boosted since 2008, was headed for sharp slowdown as stimulus wanes while excesses (ie too much debt in many advanced economies and excess savings in China, emerging Asia, Germany and Japan) have not been addressed. Global aggregate demand must therefore be weak because spending was not being increased in countries that saved too much as spending fell in countries that now needed to de-leverage. At best the world would experience a long U-shaped recovery, but there were many potential sources of a shock that could make the situation much worse [1] In June 2012 a former head of the US Federal reserve expressed the view that financial imbalances had played significant role in the financial crisis, and argued for a more effective effective international financial system (see below). In August 2012 the president of the European Commission argued that the primary goal of the quantitative easing in Europe was to create a framework in which financial imbalances could be corrected (see below) Speculations about Moving Forward [<] Various observers have speculated about ways of moving forward, which do not yet appear to have resolved underlying difficulties.
A New World Order: Leadership by Emerging Economies? [<] In June 2009 various observers noted that growth in emerging economies had remained relatively strong and that this was likely to: (a) drive future global growth; and (b) indicate the emergence of a 'new world order' [1]. For example:
In January 2010, it was noted that though emerging economies had been initially badly affected by GFC (because of dependence on trade and capital flows) they had subsequently achieved better growth and become attractive destinations for investment - though this could prove a bubble [1, 2]. And by September 2010, consumers in emerging economies (especially the BRICs) were being viewed as the saviours of the global economy in an environment in which weaknesses in developed economies (due to high debt levels) inhibited the growth of economic demand. However the ability of such economies to continue growth may have been little more than a temporary consequence of the shift towards export-oriented growth and the accumulation of foreign exchange reserves as protection against possible financial crises which had been favoured as a reaction to the Asian crisis of 1997. The ability of major emerging economies (with the probable exception of India) to do this in the past depended on the willingness / ability of the US (mainly) to compensate for the resulting demand deficits.
Though most emerging economies had been protected by strong current account and fiscal balances, the IMF pointed out that many had been severely affected by the GFC because of their dependence on foreign capital inflows (mainly from Europe). [1]. While economic activity could be maintained for a time on the basis of accumulated reserves, long term growth in an environment in which such economies were expected to drive global growth (ie support export-led strategies by others and run current account deficits) would require the development of effective local financial systems. Creating financial systems that could operate without current account surpluses (which requires strong demand elsewhere) may be structurally impractical in emerging East Asian economies (eg China) that have adopted variations on the economic model that was the basis of Japan's pre-1990 economic miracles (see Are East Asian Economic Models Sustainable?). China position, for example, seems to be vulnerable, as it seems to involve a 'Ponzi-like' financial system, which would be in crisis if global growth has to depend on demand from emerging economies (see Heading for a Crash?). Expectations that 'Asian capital' could provide the basis for 'financing the world' in future are fanciful, because financial institutions whose capacity to provide finance depends on cash flows (rather than sound balance sheets) clearly could not do so if those cash flows dry up (see Future of the World: Again?). China may in fact be making determined efforts to create a new international economic and (perhaps) political order because of concern about this constraint (see Creating a New 'Confucian' Economic World?) - though such an initiative may not be durable. A fundamental critique of the prevailing global economic and financial system was put forward in June 2009 by André Lara Resende (a Brazilian economist) leading him to conclude that establishing a new world reserve currency might allow emerging economies to increase demand and thus speed the resumption of global growth [1]. This proposal raised complex issues including: (a) the fear of currency crises that led to export-oriented growth in emerging economies; (b) the intractable stagnation probably facing the US economy; (c) the crisis this potentially creates for emerging economies; and (d) the possibility of enabling emerging economies to boost global growth..
A BRIC forum in Russia in June 2009 sought means to ease the GFC while boosting the role of emerging economies. It called for a stronger voice in global forums; a diversified, stable and predictable currency system; and comprehensive reform of UN in dealing with global challenges [1].
An exchange of views with an advocate of the superior prospects of emerging economies in May-June 2010 is recorded in Emerging Markets: What about the Longer term?. It presents both that observer's reasons for believing that such economies have prospects that are stronger than those of developed economies, and the present writer's reservations. In early 2012 concerns about currency appreciation were leading emerging economies in Latin America (notably Brazil) to express concerns about 'currency war'. At the same time it was noted that state-owned companies in other BRICs were sacrificing profits to maintain economic activity - just as China seemed to be doing [1] A US Response to the GFC : Backing Away from Bretton Woods? [<] In March 2010, it appeared possible that the US might respond to the economic pressures that it was facing by backing away from the post-WWII Bretton Woods international order under which the US provided allies with access to its markets on condition that the US could exert a high level of control over security and foreign policy issues. Efforts seem to be focused on now boosting US exports.
US efforts to reduce / reverse its current account deficits seems likely to (a) be unavoidable due to constraints on other sources of demand to sustain US growth; and (b) likely to adversely affect countries (especially those in East Asia) that are highly dependent on current account surpluses (see China's Economic Performance) . This effect will be amplified by the apparent need to reduce the rapidly expanding role which financial services have played in the growth of developed economies particularly since the 1990s. Initiatives that are likely to contribute towards reducing / reversing US current account deficits include: (a) QE2 increase in liquidity that seems likely to trigger 'carry trades' to emerging economies (and thus asset inflation and increased spending) - see Currency War?; and (b) exploration of options for significant reduction in US budget deficits [1] Restricting the Economic Role of Financial Services? [<] In April 2010 proposals emerged that could have the effect of significantly changing the role that financial services play in developed economies - because of concern about the instabilities that can result.
There is an inherent boom-bust risk associated with the activities of
financial institutions due to the feedback relationship between increases /
decreases in the availability of credit, and increases / decreases in the
level of 'real' economic activity and the perceived value of assets - a
phenomenon which George Soros described in The Alchemy of Finance.
What seem like virtuous feedbacks during a boom, can become vicious when a
boom is perceived as a bubble and bursts. Authorities may be able, at
considerable cost, to rescue too-big-to-fail financial institutions after a
crisis emerges, but still apparently have no real way to judge when a
burst-able economic bubble is emerging (see
Booms and Busts: Unsatisfactory
Tools for Macroeconomic Management). Even more fundamentally, it can be noted that Western societies arguably gained strength by creating social environments in which individual rationality could be an effective means for problem solving - and thereby dramatically increased the effectiveness of individuals in all walks of life. The use of money as a means of exchange and as a store of value facilitated rational decision making by individuals. However the development of complex financial systems resulted in the creation of feedback relationships that individuals have no means for recognising or taking into account - and this reduces scope for the effective use of individual rationality. These and other reasons for concern about reliance on financial criteria as the basis for thinking about economies are suggested in Fixing Australia: Do the Econocrats have the right answer? Concerns have been expressed that regulation of financial institutions in the US will have the effect of damaging financial services industries (an outcome which is arguably necessary).
Clearly reforms that restricted the role that financial services play in developed economies would have consequences - because knowledge-intensive industries (especially financial services) have played a significant role in the diversification of developed economies since the 1990s as many traditional industries were increasingly challenged by emerging economies. Expected consequences would include:
The G20 Summit in June 2010 sought to find a path to sustainable global growth, at a time when the side effects of 'emergency room' treatments (ie the unprecedented fiscal and monetary stimulus measures) used to prevent the GFC turning into a depression were coming to be recognised (eg because, in the BIS's view [1, 2], they distorted economies and inhibited post-crisis adjustments).
However the risk of serious economic instability in the medium term remained severe due to the G20's failure to address most of the complex changes needed for sustainable economic growth that the GFC had exposed (eg the need to: (a) do more than recapitalise banks to overcome constraints on the availability of credit; and (b) invent new techniques for macro-economic management - given that the use of both fiscal and monetary policies seemed to have been compromised). In particular it failed to gain agreement on ways to reduce the financial imbalances that must make sustained growth impossible for reasons that the present writer first suggested in Structural Incompatibility Puts Global Growth at Risk (2003). In fact the G20 seemed to turn a blind eye to the limits imposed by those imbalances - just as it had done in April 2009 (see Announcing 'Peace in our Time'), despite analysts' increasing recognition of the problem. The G20 seemed oblivious to (perhaps because of Western leaders' ignorance of) the role that neo-Confucian models of socio-political-economy in Asia played in those financial imbalances, and that the latter also had a non-trivial role in generating the GFC (because the demand deficits required by the neo-Confucian economic models had to be balanced by excess demand elsewhere if global growth was not to stall, and this was achieved by easy monetary policy mainly in the US which led to the accumulation of large debts). Rather than dealing with such complexities the G20 appeared to focus on reaching a compromise between the incompatible opinions of US and German leaders (each of which had some validity) about the role of fiscal policy in macroeconomic management - even though the limits to which fiscal policy could be the basis of macroeconomic management had been widely recognised in the 1970s.
The G20 seemed to agree that everyone would 'do their own thing' with some sort of general trend towards reducing fiscal deficits and government debts in a few years time. This left unanswered the question of where the demand would come from to sustain global growth in a situation in which private demand seemed weak world-wide. The US was not in any position to (and said it wouldn't) remain as the 'consumer of last resort', while others made it clear that they wouldn't pick up the burden (and the associated increasing debts). This situation had clear parallels with conditions in the 1930s that led to 'beggar my neighbour' competitive devaluations, the US's Smoot-Hawley tariff and the collapse of international trade. Though in 2010 it seemed more likely that there would be a drift towards 'competitive austerity' (which the US ultimately would have no alternative to joining), the outcome would be similar. The US President said that he expected China to significantly increase the value of its currency [1] apparently in the hope that this would alter international financial imbalances and in ignorance of the fact that: (a) changes in exchange rates have historically had little impact on trade imbalances (because of the importance of established production capabilities / distribution networks etc); and (b) if trade imbalances were altered to the extent necessary to make any material difference to the financial imbalances, China's economy would be wracked by severe financial crises - an outcome that China's authorities would not willingly allow. Professor Nouriel Roubini (one of the small number of observers who anticipated the GFC on the basis of risky financial practices in the US) subsequently expanded his analysis to take account of the need for coordinated responses which would not only promote growth but also correct the financial imbalances that otherwise make growth unsustainable. And it is possible to see the influence of these ideas in the G20's deliberations.
However even such proposals contained limitations. For example:
Even if the G20's failure to deal with international financial imbalances did not result in another victory for protectionism in the US, global growth could not be sustainable. The expectation that surfaced in (about) August 2010 that emerging economies could provide the demand to drive global growth reflected a failure to consider that such economies had been able to prosper on the basis of export-led growth because current account surpluses were needed (and adopted because they had proven successful in East Asia and been advocated by the IMF) to protect poorly developed financial systems from financial crises (see above). Economies, whose financial stability depends on current account surpluses, can't provide the demand that now-heavily-indebted developed economies can no longer provide without simply setting themselves up for financial crises. Moreover, in the absence of Asia-literate Western leaders, managing the resulting economic breakdown and international stresses would be beyond the G20 (just as a lack of real Asia-literacy had been leading to ill-informed domestic decisions by political leaders in Australia). The global economic breakdown through 'competitive austerity' that the G20's failure implied would seriously damage (East) 'Asia', but there was little that that region's leaders (eg in Japan and China) could do to prevent this under the prevailing international order based on Western democratic traditions (ie those that incorporate features that are unnatural in (East) 'Asia' such as individual initiative, a rule of law and economic coordination through profit-seeking by independent enterprises) - see China may not have the solution, but it does have a problem. In the face of 'competitive austerity', China's proposal for a new reserve currency system to replace the $US (through IMF-managed Special Drawing Rights) might be seen as a way to overcome the global demand deficit by providing credit to enable emerging economies (with notionally sound balance sheets because foreign exchange reserves had had to be accumulated because of their underdeveloped financial systems) to increase demand. However the latter proposal unfortunately contained severe defects (see above). Alternatively, initiatives by Western societies (eg those the present writer suggested in China may not have the solution, but it does have a problem) seemed more likely to provide a constructive path to sustainable growth though they needed to be extended to helping 'Asia' to cope with the consequences. In September 2010, it was argued that the G20 would be incapable of generating solutions to any global challenges - because it incorporates the range of countries who have significant influence but these have many different attitudes towards democracy, the economic role of government and the importance of transparency in investment - and that as a result the world was entering into an age of instability [1] In October 2010 IMF and World Bank meetings were no longer seen to reflect the peacefulness of G20 meetings. Countries are retreating from cooperation. Major developed economies are limping alone, and major emerging economies such as China are unwilling to do more [1] In the face of a possible 'currency war' the US sought to focus more directly on trade imbalances that were the source of these problems (eg by setting limits to trade imbalances) but this was opposed by major exporters - Germany and Japan [1] In late 2010, after considerable discussion, the US Federal Reserve launched a major new round of quantitative easing (QE2). This involved, in essence, printing money ($US600bn) to buy long dated US Treasury securities. This was nominally intended to stimulate a stagnant US economy, but for reasons outlined below the move seemed to the present writer to have broader goals, ie to create financial difficulties for countries reliant on the international financial imbalances that contributed to pre-GFC asset bubbles in the US, and thus to the GFC (see Impacting the Global Economy) and which now prevent US economic recovery. This 'pedal to the metal' tactic can perhaps be likened to the methods used by the US to break the USSR in the Cold War (ie run an arms race flat out to see whose economy fails first). Putting pressure on financial systems by boosting liquidity is one way to find out whose financial system is most at risk - and the answer to this is by no means certain.
Many of those countries (eg China, Brazil and Germany) expressed serious concern about the Fed's action - because of the likely adverse effects on their economies of large capital inflows (ie stimulating the same sort of asset inflation that the US had experienced in the past as a result of unwanted capital inflows) - and proposed measures to control capital flows. Brazil's finance minister (the first to warn of pending 'currency war') suggested that it was necessary for the US economy to recover, but that this had to be achieved by stimulating consumption in the US - eg with fiscal policy [1]. However, given that the US seemed no longer willing, nor able, to be the world's 'consumer of last resort' (see above) this clearly was not the Fed's goal.
China in particular is likely to be significantly affected because its currency is linked to the $US - while being undervalued just as $US is overvalued. QE2 liquidity will flow into undervalued segment of dollar economy - and this will cause further overheating of China's economy [1]. China rejected US calls for measures to rebalance global trade (eg by limiting current account surpluses or deficits to 4% of GDP), and instead suggested that QE2 was the biggest threat to the global economy [1].
China, it may be noted, would be extremely vulnerable in the event that global economic growth were disrupted because its ability to avoid a medium term financial crisis associated with the poor balance sheets of its institutions seems to be critically dependent on strong ongoing cash flows (see Heading for a Crash?). However the fact that countries concerned about the flood of new liquidity can't protect themselves by raising interest rates (as this would merely increase the 'carry trade' effect) means that capital controls are likely - and this could disrupt global financial system [1]. Such a disruption (which now seems difficult to avoid) will be bad news for both emerging economies and for the US (because the lead role in making risky investments with the proceeds of the Fed's monetary easing is likely to be taken by US financial institutions). In March 2011, another proposal emerged (from the G20 with conditional support from the US Federal Reserve) that could help to reduce international financial imbalances. This involved the G20 lending 'hard' currencies to emerging economies who are experiencing short term financial crises (in the expectation that this would reduce their need to hold large foreign reserves). It was apparently envisaged that the hard currencies that the IMF might provide would have to be drawn from the foreign reserves of countries such as Japan and China [1]. This is a variation on proposals for the IMF to issue SDRs under those circumstances (because SDRs would have had to be backed by hard currencies anyway). It is an interesting concept. The goal is presumably to reduce both the risk of financial crises in emerging economies, and the financial imbalances that arise when such economies seek to hold large foreign reserves. It would place responsibility for financing measures to counter international financial risk on countries such as Japan and China whose distorted domestic financial systems are primary causes of the financial imbalances (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy). In early 2012, widespread concern was being expressed in Latin America about the effect that rapidly appreciating currencies were having on industrial competitiveness [1]. And Brazil again suggested that monetary policy expansion in US and EU constituted a form of 'currency war' [1] In August 2012, much stronger proposals for quantitative easing emerged in Europe in response to market aversion to sovereign debts in countries such as Spain [1] In October 2012 concerns were being expressed about the effect in Asia of the US Federal Reserve's 'pedal to the metal' loose monetary policies. Stocks, currencies and real estate markets are sharply higher, and governments are struggling to contain the inflationary pressures. Indonesia, the Philippines, Thailand and Malaysia are likely to be more affected than China which restricts capital inflows (Law F., 'Investment flood hits Asia, The Australian, 24/10/12) In December 2012 the adverse effects of 'pedal to the metal' monetary policies were being noted, though apparently without adequate understanding of the issues involved.
G20 in Korea: Unreal Optimism? [<] In November 2010, another G20 summit (in Korea) failed to find a solution to the problems posed by international financial imbalances. The best that could be said was that everyone now recognised the problem, and that discussions about solutions (mainly between the US and China) were expected to continue.
The G20's official optimism seemed unfounded given the intractable nature of the problem (see Too hard for the G20). More realistically, one observer noted that the international monetary system was now being run in two incompatible ways, and another argued that the issue now was who will have the ability to determine how the world works in future. Another observer argued that both the US and China were engaged in an 'economic war' (which paralleled the Cold War and pitted the US's reserve currency status and animal spirits against China's economic discipline, pegged currency and vast workforce). Both were suggested to be seeking to increase their GDPs through stimulus measures, though these must lead to long term problems (eg unsustainable government debts or inflation) [1] A contest for control of the international financial system had apparently been developing for decades, though it had been invisible-in-plain-sight to Asia-illiterate Western observers (see An Unrecognised Clash if Financial Systems and Babes in the Asian Woods). It still apparently remained invisible to the Treasuries of the US, Singapore and Australia - noting their idealised but impractical proposals to the G20 summit. They suggested that growth in future would need to be driven by domestic demand in emerging economies - and that achieving this primarily required revaluing currencies. However the real constraint for many such economies (just as for Japan) was that that financial systems were often insufficiently developed to tolerate current account deficits (eg see Who's got Superman?). For many emerging economies this problem could be overcome. But in the case of major East Asian economies (eg Japan and China), current account surpluses (and thus a mercantilist economic strategy) seemed to be vital to the systems of socio-political economy that had allowed them to enjoy economic 'miracles' (see Understanding East Asia's Economic Models) - even though those systems put global economic growth at risk.
Scenarios that were more realistic, though less comfortable than the Treasuries' proposals, included:
Scenarios about how presenting problems might be resolved (eg by international collaboration) have also been suggested, though these have not inspired confidence.
An official US investigation into the GFC that reported in January 2011 simply dealt with domestic issues, and did not even mention the role that international financial imbalances had played in giving rise to the crisis (see FCIC: Eroding Confidence in the US?). And as illustrated by an interchange that arose following circulation of the latter comments, one informed US observer argued that domestic distortions in the US's political / public administration process are the main reason that such imbalances are not being officially addressed (ie the multinationals who, together with 'Wall Street', profit from the commercial dealings that result in imbalances have a dominant insider influence). The present writer's perception is that this is probably correct, but is only part of the problem. Variations of earlier proposals for resolving the problem of international financial imbalances through issuances of Special Drawing Rights (SDR) by the IMF have been advanced. A US observer suggested that those SDRs should be backed by the hard currency reserves of countries with large reserves (such as Japan, Germany and China), while a 'Beijing Group' suggested that $US300bn in SDRs should be issued annually by the IMF on behalf of the G20 without specifying who might back this in the event that losses were incurred.
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G20 in Washington: Waiting for 'Hell to Freeze Over' won't Solve the Problem [<] In April 2011, a G20 meeting in Washington again demonstrated that, despite hopes to the contrary, progress was not being made in resolving difficulties associated with international financial imbalances. This implied that it was likely to be futile to further pursue solutions solely through G20 negotiations in the face of apparent obstructionism, noting that some major economies (eg those of Japan and China) appear to depend on those imbalances and thus can't easily adjust to allow them to be reduced. Rather those who are economically constrained by imbalances (especially, but not only, the US) need to take even stronger action than that associated with the Federal Reserve's quantitative easing to put pressure for substantive reform on countries whose financial systems are structured to depend on the imbalances that put global growth at risk - even though those economies might then be disrupted. Options to increase such pressure are outlined in China may not have the solution, but it seems to have a problem.
Sovereign Defaults: Stage 2 of the GFC? [<] Increased concern was also expressed from 2010 about the unsustainable debt levels facing peripheral governments within the Eurozone, especially the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain). This was seen as potentially leading to sovereign defaults that could trigger further international financial and economic instabilities. However other governments faced (especially Japan) faced very high debt / GDP ratios, while the US's ability to maintain very high government deficits and high debt levels (see below) appeared to depend on the $US's status as the world's reserve currency. It was the the present writer's expectation in mid-late 2009 that further stages of financial and economic crisis were likely which had been overlooked in coordinated efforts by governments through the G20 to deal with the GFC (see Unresolved Problems and Coming Crises) Factors in generating the problem in Europe apparently included:
In August 2012 the president of the European Commission suggested that Europe would seek to overcome problems associated with financial imbalances within a 'firewall' created by expansion of the European Stability mechanism
Further observations about political aspects of the situation are in Saving Democracy. Limiting the 'Consumer of Last Resort' [<] In early August 2011, the US government finally accepted the need to constrain the growth of US government debt. Soon thereafter the US government lost its AAA credit rating because the adjustments to its budgetary position were seen to be inadequate and the US political process was not handling the challenge well. This seemed likely to result in serious consequences for the global economy because poorly developed financial systems in major East Asian economies, and in emerging economies elsewhere, had been protected from financial crises by limiting domestic demand and reliance on current account surpluses largely at the expense of the US, the world's 'consumer of last resort'.
US Focus on the Asia Pacific [<] In November 2011, the US President announced an intention to shift the US's national security focus to the Pacific, involving in particular:
The incompatibility between such US expectations and East Asian practices clearly lays the foundation for ongoing international tensions. From 2011 disputes grew between US and China about the apparently poor accounting practices of Chinese companies with US operations (and the suspect auditing of the Chinese operations of US companies) - and this (like the US Federal Reserve's so-called 'Currency War') seems likely to start getting at the root causes of those international financial imbalances that have their origin in East Asia. Creating an Effective International Financial System? [<] In June 2012, a former chairman of the US Federal Reserve, Paul Volcker, suggested that the global economy would be unable to rely indefinitely on high levels of consumption in the US, and on associated financial imbalances. He put forward some suggestions about how a more effective international financial / monetary system might be created in order to reduce the risk of financial crises.
However, while this recognised that not all countries could afford to have a market-based floating exchange rate (by implication countries such as Japan and China), there was no obvious reference to, or necessary recognition of:
In early 2013 a German member of the European Federal Parliament sought suggestions about what are the most dangerous financial products - without apparent recognition of the risks that large / persistent international financial imbalances generate [1] Debt Denial: Stage 3 of the GFC... or Worse? [<] In early 2013, there was growing optimism about global economic recovery. However this is likely to be misplaced because nothing had been done to resolve fundamental problems in the global financial system (eg those that give rise to large financial imbalances) and 'recovery' was being expected in an environment characterised by 'Ponzi-like' financial systems.
In 2009 the present writer had speculated that the GFC was likely to be a three stage process. The first seemed to be the global financial system shocks that was triggered by US sub-prime crisis - though it reflected far more profound structural weaknesses in the international financial and economic order (eg see GFC Causes). The second involved the potential for sovereign defaults that was increasingly obvious in 2010. The third could involve either the breakdown of the global financial system altogether or the failure of East Asian economic models - related: (a) their internal weaknesses; and (b) the stresses that they impose on the global financial system creating an environment in which their internal weaknesses can no longer be papered over. To create an environment in which economic growth can be sustainable there is arguably a need to:
In the unstable environment that will exist in the meantime countries would arguably reduce their risks by seeking: political stability; a future oriented economy; and sound balance sheets for households, businesses and governments. Financial system reforms to be achieved in an environment in which there are numerous other challenges facing the global community such as:
A process to build agreement and facilitate complementary domestic initiatives that the present writer suggested in the context of the need for effective global responses to the underlying problems related to the 'war against terror' might (with modifications) be relevant if there were to be a serious international commitment to addressing the true complexity of the GFC (see Proposal for A New 'Manhattan' Project for Global Peace, Prosperity and Security, 2001). Moreover in parallel with the narrow financial-system reforms initially arranged through, and the macroeconomic policies subsequently discussed by, the G20, it might be desirable to assemble some sort of 'coalition of the willing' to address the more fundamental problems. However, as experience suggests that such initiatives are unlikely, the GFC probably marks the end of an era in many respects. For example:
The future may be one in which political and economic power will be available for the taking, and there will be many contenders perhaps using methods of which Western societies have little experience or understanding (eg see China as the Future of the World?, Creating a New 'Confucian' Economic World? and Don't Forget Japan). One observer appears to see such a world as like a return to the Middle Ages.
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ATTACHMENT: September 11: The First Test
Outline
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September 11: The First Test Outline The 911 attack in America in 2001 initially created the global unity needed to lead overdue reforms to the global order that would eliminate the breeding grounds of terrorism. However no common basis for this could be arranged by top-level UK diplomacy. Also, because of the growing availability of weapons of mass destruction, the September 11 attack ensured that malfunctioning states on the global margins (who breed or support terrorism, and have often been acquiring WMD) could no longer simply be ignored or 'contained'. Thus, instead of leading multi-lateral efforts to treat the cultural, economic and political causes of terrorism, the US administration chose to advocate general democratic political reform in the Middle East (perhaps to reverse the adverse perceptions of itself based on its past support of autocratic regimes), and also to pursue (almost unilateral) military action for regime change in the most morally and legally exposed 'rogue' state (Iraq), apparently in the expectation that 'liberation' could create a model showing how the economic and political failures that have bred terrorism might be overcome. A fair case could be made for such an attempt to 'nip a new Cold War style contest between different systems of political economy in the bud', eg democratic reform to current autocratic regimes in the Middle East, might (a) be very popular (b) pre-empt revolutions by Islamist extremists and (c) result in at most a temporary shift in democratically-gained power to Islamists, as the latter's policies would not be the basis for practical governance. There were also many reasons to doubt that it would be an adequate or optimal response to current problems. For example, the 'freedom' that the US leadership rightly sees as the basis of its economic and political strength (and hopes to 'export' to allow others to improve their circumstances) depends on many complementary cultural features - a constraint that has universally been put in the 'too hard' basket. And democratic government requires supporting civil institutions and community attitudes that would take many years to develop. In the longer term, unilateral US action to impose conditions that, contrary to its expectations, would not actually allow all to achieve prosperity risks increasing the political exclusion that leads extremists to resort to terrorism. In practice the attempt to leverage transformation of the Middle East by changing Iraq regime seemed by late 2003 likely to have only limited impact, and to be being downgraded. And by early 2004 it appeared that the outcome could be a significant deterioration of the situation in the region. Changes in tactics (mainly involving use of military forces to protect communities rather than to attack militants) stabilized the situation but did not make it possible to claim that the initiative had been a success. Moreover there are real prospects that US influence might be overwhelmed by the attempt to find a unilateral solution, as: the US could never have enough resources; unexpected military, financial or trade retaliations might emerge; or a global economic crisis (that would escalate political extremism) might eventuate from the combined effect of: financial imbalances that may reflect structural incompatibilities between major economic models; or loss of consumer confidence if the 'war against terrorists with WMD' is not resolved; etc. The possibility that the attack in America could have been manufactured in order to justify US involvement in efforts to stabilize the Middle East (though implausible) was widely canvassed. The power vacuum that could emerge would not be filled quickly or democratically. The modern world was presented with a perilous and most-urgent three-way choice between (a) following the US administration and trying to make its 'solution' work or (b) creating a successful global multilateral order or perhaps (c) decades of political chaos and economic reversals. It may be that precipitating a crisis was expected to change global institutions on the basis of a MADness (mutually assured destruction) similar to that which prevented serious conflicts during the Cold War. It may also be that China has been attempting to capture the high ground in global institutions on the assumption that its neo-Confucian traditions provide a better (and profoundly different) way to manage a multi-cultural global order than Western-style democratic capitalism does. |
Creating Unity |
The Attack in America created Unity In this environment, the September 11 2001 attack in America created a massive strategic opportunity for leading nations to achieve constructive change by:
The need for response to terrorism that eliminated the factors that caused it (rather than a primarily military response) was obviously well recognized [1, 2, 3, 4], as was the critical role that nation building played - especially in Asia - in ultimate success in the Cold War [1].
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Diplomacy failed |
Diplomacy did not Produce Agreement Britain's Prime Minister publicly advocated broadly-based global reform as the solution to international terrorism on behalf of the US-led coalition against terror [1]. However, despite travelling for months seeking international agreement, success apparently proved elusive. While the nature of those discussions are not publicly known (a fact that makes meaningful public discussion of the world's response to terrorism now virtually impossible), it is likely that agreement was elusive because of a combination of:
In this environment, the US administration's ideas about responding to terrorism were outlined in its National Security Strategy: 2002.
This represented a more assertive policy, because rather than participating in multilateral discussions and complaining that they are going nowhere, the US stated that it had a solution and was going to implement it (and in doing so wanted to encourage multilateral institutions to become more effective).
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Unilateral Action |
Unilateral Action In the 1990s as the effectiveness of the UN declined and the effect of disorder and economic failures in marginal states started to spread, some in the US defence establishment became increasingly attracted by the 'neo-con' idea of using its power to create unilateral security solutions. As a diplomatic search for consensus was not seen to have produced a satisfactory solution in the post 911 era, such influences dominated and the US apparently pursued a multi-dimensional strategy involving:
The negative popular perceptions of the US in the Middle East (and the desire of Islamist terrorists to attack it) have been based on perceived US support for autocratic regimes with whom there has been widespread disaffection. Applying pressure for a shift to more inclusive governance [1, 2] (which would create a legitimate outlet for frustrations) could perhaps lead to:
Despite concern about the difficulty of creating democratic institutions a case can be made for attempting this [1] on the basis that:
In practice it can be noted that:
It can be speculated that US analysts were likely to have seen military action in Iraq to be a useful step in this process [1] because:
Speculations by an mid-rank officer inside the Office of Secretary of Defense who opposed US strategy was that it was based on securing bases for action against Syria and Iran, positioning for the fall of regional sheikdoms, keeping OPEC on a dollar track, and fulfilling a half-baked imperial vision - and that public was being deceived [1]. However, military action in Iraq generated opposition from many sources on the basis of: the perceived humanitarian cost; a lack of coherent rationalization of the plan; concern that it could not be effective; suspected linkages with the Israel / Palestine conflict; the presumed self-interested motives of those developing such plans; and extremists' alternative visions for 'revolution' in the Middle East. In particular objections came from:
The difficulty of evaluating very complex issues (because of the way human brains are wired) can be noted in considering this debate [1] |
Flaws |
Fatal Flaws? However there seemed to be a critical problem in any unilateral option which focused on replacing Iraq's rogue regime. The NSS presented 'freedom' as the key ingredient needed to create prosperity and thus inhibit a collapse into political authoritarianism. Other analysts suggested more details of possible institutional requirements that would allow 'freedom' to be effective.
The expectation that 'freedom' can lead to prosperity may have been be based on some recent developments in economic growth theory.
Furthermore there seems little doubt that individual freedom has been a major factor in the economic gains made by Western (especially Anglo-American) societies (see Cultural Foundations of Western Dominance). None-the-less the short term economic benefits of 'freedom' to others are uncertain: For example:
It has been argued that on several occasions over the last two centuries earlier US administrations have sought to ensure progress in backward states through enforcement of Western standards with little success [1]. Moreover the types of profound problems that Iraq presented were replicated in various ways (though seldom as severely) in dozens of modern states. Thus, while changing Iraq's murderous regime was desirable, a review of prevailing commercial / economic 'wisdom', the organization of global institutions and the impact of cultural constraints on political and economic systems are even more necessary. Visiting Baghdad in force was not a pre-requisite to achieving this. The US and its allies can not achieve what is needed to suppress terrorism by making a scapegoat of Iraq's regime, any more than conspiracy theorists achieve when they make scapegoats of the US administration for its allegedly selfish motives in dealing with what are, after all, only symptoms of much more profound problems.
In practice 'visiting Baghdad in force' seems to have created the opportunity for extremists (who have no ability to advance their community's welfare, or interest in doing so) to present themselves as relevant by developing a 'resistance' to outside forces [1]. This plays into the hands of those who (like those involved in the Palestinian Intifada [1]) resort to violence to avoid having to face up to the practical difficulties of developing a modern society and thereby ensure ongoing chaos and that nobody wins. And in the medium term, a unilateral US attempt to impose 'freedom' everywhere (which even without 'resistance' can not actually lead everyone to prosperity) must increase the numbers of people who find themselves both economically and socially disadvantaged and politically excluded.
In less favoured environments, economic and social disadvantage and political exclusion will allow extremists to see terrorism as a way to force others to care. While it seems that extremists usually have 'rat-bag' ideas, they don't know this. Moreover they will not tend to learn much (except perhaps a self-induced sense of moral virtue and hatred of their 'oppressors') when they are shot at after they have resorted to terrorism. |
Problems in Iraq |
Practical Problems in Iraq [Added from November 2003] By late 2003, a successful military campaign had been followed by:
However serious difficulties were encountered in ensuring security and establishing a viable regime in Iraq [1, 2, 3]. The US sought multilateral support because of the difficulty of the challenge [1, 2] - which the UN apparently wished to provide [1] or encourage [1] though some key states were opposed. In practice the security situation was not stabilized, and attacks on Coalition forces, perceived collaborators, the UN and humanitarian agencies continued. Rather than establishing a (democratic) constitution for Iraq before elections and a formal transfer of power, it seemed likely that power will be transferred hurriedly to a populist administration [1, 2, 3] - presumably operating under Iraq's partly-satisfactory 1925 constitution [1]. Alternately it might take the form of an Islamic state conforming to the wishes of the Shi-ite majority [1, 2]. The latter's long term prospects would presumably be poor. The overall outcome seems likely to be:
However there is also real concern that attempts to transfer power to an Iraqi administration could result in complete failure [1] and a situation in the region far worse than had previously existed [1]. A major source of the problem seems to be that, in the absence of other arrangements, US military forces were left with most responsibility for interim administration. Their focus was on security issues which were real but only a small part of the task that had to be addressed - and they clearly lacked the knowledge and skills to establish constructive rapport with the Iraqi community. By late 2004, various observers speculated about a complete breakdown in authority [1, 2]. And US president Bush suggested that it seemed that the war against terror could never be won [1]. The loss of security in Iraq through a democratic experiment might actually discourage the region from exploring this option rather than providing a positive example [1]. By early 2005 it was suggested that escalating insurgency could destabilize the attempt to establish democratic government in Iraq, and create a pool of fighters who would extend in the Middle East generally and against the US [1] It seems likely that the precedence given to implementing a 'free market' Economic Plan for Iraq was a factor in difficulties in establishing a viable new truly-Iraqi administration [1]. It was argued above, that such theories could not generate a viable economic solution because much more is required for a successful market economy than economic 'liberty'. An even more profound problem was that sophisticated political and economic institutions (which are not present in Iraq) are required to even understand the issues involved. It seems it was only belatedly recognized that there must thus be a divergence between the Economic Plan and any democratic consensus of Iraqis, and that this led to dangerous delays in establishing a new truly Iraqi administration. By late 2006 the outcome was described in terms of: future control of the Middle East by radicals who will cause great harm in region and to the rest of the world; escalation of Sunni-Shia tensions; a new base for terrorists in Iraq; perceptions of democracy as leading to a loss of public order and Sunni control; reinforcement of anti-American sentiment; reduction in US influence worldwide; failure of Middle East peace process; Iran and Israel as the major powers in the region; Islam filling the political and intellectual vacuum and underpinning the politics of the region; and authoritarian and religiously intolerant Arab regimes .[1] |
Global Chaos? |
The Risk of Systemic Failure and the Growth of Global Chaos The current global order is being strained by world leaders' failure to date to agree on how to deal with the immediate threat of terrorists with WMD, and the role which the economic and political failure of weak states plays in breeding terrorism or direct threats. As noted above, the US administration has seemed to have a plan. Other nations have been publicly divided between: those who saw the US's strategy as better than nothing; those who distrust the US leadership or the democratic capitalist model that they hope to globalize; and those who recognize a need for broadly-based global reform but do not know what model would actually work and lack the economic and military strength to achieve this without US backing. The problem has been that:
Moreover those who could see flaws in what was proposed were not themselves actually doing anything else to solve the problem. It was futile to just oppose others' solutions [1]. And, because it was not hard to envisage the situation deteriorating [1], perhaps catastrophically, it was equally futile to formulate plans for what might be done at some future date after current administrations had failed and been democratically replaced - as there might be too little left for future administrations to work with. Action seems to be needed urgently because:
If the strains in the current global order are not mended, it could fail leaving a huge vacuum of power that would not be filled by liberal democratic states. In particular:
As a result genuine global debate in the public arena is emerging for the first time about what should be done - and this will:
In particular China, which has achieved accelerated economic growth (see China's Development), has started operating within the international system [1], and done so with considerable sophistication. It seems likely that China's leadership has made a strategic judgment that modernized Confucian traditions (derived from those which have supported a Chinese empire for 4000 years) are likely to prove better able to dominate in a multi-cultural global order than those of Western democratic capitalism. Needless-to-say this would involve a global order build principles that were vastly different to those Western societies have sought in efforts to develop a global order in recent centuries (eg individualism; individual rights; universal ethics; coordination of economic transactions through financial outcomes; democracy) [eg see China as the Future of the World, The Abduction of Modernity]. This challenge seems likely to ensure that the US also attempts to rejuvenate the multilateral system. |
Governing by Crisis |
Global Governance by Crisis? In evaluating what is being achieved by the more-or-less unilateral US action against terrorism, it is relevant to speculate about the possibility of either a simplistic, or a very sophisticated, strategic intent and method. At the simplest level, the 'war against terror' has led to the emergence of a military-focused US presence in many of the world's trouble spots [1] . And this, which can be viewed as a form of 'imperium', may be all that has been intended and achieved. However it may be that a 'hidden agenda' behind unilateral US action has been to create a situation which would force the world to take multilateral mechanisms such as the UN more seriously [1].
However if this hidden agenda was real, then the possibility of an even more deeply hidden source of influence on US policy might need to be considered - because the methods being used would correspond to the role of leaders in Japanese society who traditionally stimulate change by precipitating a crisis (see A New Shogun Scenario). |
Addendum: Security Strategy |
ADDENDUM: Précis of US National Security Strategy: 2002 Introduction: The struggles between liberty and totalitarianism ended with victory for freedom—and a single sustainable model for national success: freedom, democracy, and free enterprise. Now only nations committed basic human rights and political and economic freedom will be able to assure future prosperity. The US has unparalleled military strength and great economic and political influence. It does not use its strength for unilateral advantage - but seeks a balance of power that favors freedom. In a safe world people can make their own lives better. The US will defend peace by fighting terrorists and tyrants, building good relations among great powers, and encouraging free and open societies on every continent. Defence requirements have changed. Enemies in the past needed armies and great industrial capabilities. Now, shadowy networks can bring great chaos cheaply - by using the power of modern technologies. Defence requires military power, homeland defenses, law enforcement, intelligence, and cutting terrorist financing - and is a global enterprise of uncertain duration. America will help nations in combating terror, and hold to account nations that support terror. The gravest danger comes from combining radicalism and technology. Enemies are seeking weapons of mass destruction. This will not succeed. Defenses will be built against missiles, and access to dangerous technology denied. The US will act against such emerging threats before they are fully formed - using the best intelligence and careful planning. In future, the only path to peace and security is the path of action. In defending peace, the US will take advantage of an historic opportunity to preserve the peace. The international community has the best chance since the rise of the nation-state in the seventeenth century to build a world where great powers compete in peace rather than preparing for war. The great powers are united by common dangers of terrorist violence and chaos. The US will build on these common interests to promote global security. Nations are also increasingly united by common values. The US will encourage the advancement of democracy and economic openness in Russia and China, as these are the best foundations for domestic stability and international order. Aggression from other great powers will be resisted, as the peaceful pursuit of prosperity, trade, and cultural advancement is welcomed. The US will extend the benefits of freedom across the globe - by working to bring the hope of democracy, development, free markets, and free trade to every corner of the world. 911 showed weak states, like Afghanistan, can pose as great a danger to our national interests as strong states. Poverty does not make poor people into terrorists. Yet poverty, weak institutions, and corruption can make weak states vulnerable to terrorist networks and drug cartels. The US will stand beside any nation determined to build a better future by seeking the rewards of liberty for its people. Free trade and free markets have proven their ability to lift whole societies out of poverty. The US will deliver greater development assistance through the New Millennium Challenge Account to nations that govern justly, and also reduce the toll of infectious diseases. In build a balance of power that favors freedom, the US believes that nations have responsibilities - to enjoy freedom they must fight terror; to have international stability they must prevent the spread of WMD; to have aid they must govern themselves wisely. No nation can build a safer, better world alone. Alliances and multilateral institutions are vital. But international obligations must be taken seriously - and not only symbolically. Freedom is the non-negotiable demand of human dignity. In history, freedom has often been threatened. Now, humanity has the opportunity to further freedom’s triumph. The US is happy to lead in this mission. Overview of America's International Strategy : The United States possesses unprecedented— and unequaled—strength and influence in the world. Sustained by faith in the principles of liberty, and the value of a free society, this position comes with unparalleled responsibilities, obligations, and opportunity. The great strength of this nation must be used to promote a balance of power that favors freedom. For most of the twentieth century, the world was divided by a great struggle over ideas: destructive totalitarian visions versus freedom and equality. That great struggle is over. The militant visions of class, nation, and race which promised utopia and delivered misery have been defeated and discredited. America is now threatened less by conquering states than we are by failing ones. We are menaced less by fleets and armies than by catastrophic technologies in the hands of the embittered few. We must defeat these threats to our Nation, allies, and friends. This is also a time of opportunity for America. We will work to translate this moment of influence into decades of peace, prosperity, and liberty. The U.S. national security strategy will be based on a distinctly American internationalism that reflects the union of our values and our national interests. The aim of this strategy is to help make the world not just safer but better. Our goals on the path to progress are clear: political and economic freedom, peaceful relations with other states, and respect for human dignity. And this path is not America’s alone. It is open to all. To achieve these goals, the United States will:
A supportive view It is only recently in history that nations have commented on their national strategies - as compared with expecting historians to deduce them. Kissinger's State of the World reports had been candid. But it was the DoD Reorganization Act of 1986 that obliged presidents to report regularly on National Security Strategy. Most such reports have restated past practices. However the National Security Strategy: 2002 has stirred controversy. The terrorist attacks have prepared the war for a new strategic approach. The differences from statements under Clinton are interesting - it refers to defending peace (rather than assuming it); it calls for cooperating amongst great powers. It seeks free and open societies world-wide, where Clinton advocated democracy and human rights. It is more forceful and multilateral than its predecessor. A significant innovation is equating terrorists with tyrants as sources of danger. This is because such persons now have access to WMD. The strategy stresses the legality of nations taking action (before being attacked against forces that threaten attack. This strategy relies on hegemony - which in turn relies upon cooperation amongst the great powers (where Clinton's concern had only been with the weak). It also assumes that others prefer the stability that a hegemon brings, and that the US's universalist values are a better basis for this than many others. Finally the strategy reflects the view that it was not poverty that motivated terrorism, but rather the absence of representative institutions in their own countries that turned political dissidence into religious fanaticism. Thus the goal of US strategy must be to spread democracy everywhere - the job that Woodrow Wilson started. The strategy differs from Clintons in that it is proactive; it is coherent (which Clinton's simultaneous cultivation and humiliation of Russia never achieved); reflects an advanced view of hegemony; and combines power and principles. However it doesn't rationalize Bush's 'axis of evil' comments- which may have been ill-advised. Why go after Hussein? The probably reason is the power of victory. In Afghanistan the US got a taste of being welcomed as liberators, and it is assumed that this would happen again in Iraq (which is the most feasible place to now achieve this). The intent could be to undermine and remove reactionary regimes in the Middle East - thus eliminating the breeding grounds of terrorism. In the process this can save the UN from the irrelevant into which it would descend if its resolutions continue to be neglected. If this is so, then it is a truly grand strategy whose goal is to modernize the entire Middle East. There is no way to tell if this would work. Success requires being able to do many things simultaneously. It is not that authoritarian regimes support terrorism, but that they produce generations of disaffected people from whom terrorists draw recruits. Authoritarians have been relied upon in the past - but this may not continue in future. The strategy also relies on (a) being welcomed as liberators in Iraq (b) maintaining the high moral ground. The relationship between terrorism and WMD means that authoritarian regimes anywhere can no longer be tolerated. (Gaddis J., A Grand Strategy of Transformation, Foreign Policy, March April 2003) Opposing views Typical opposing views can be identified as links from the above document. |
WORKING NOTES |
Undigested notes These issues form the backdrop to efforts that were emerging in late 2008 to devise a new world (financial) order in the face of the manifest breakdown of the established (and highly fragmented) system. What is much less likely is that one will be found that is acceptable and workable. because
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