Thread: Only makes you stronger

http://www.tnr.com/politics/story.ht...e83915f5f8&p=1

Only Makes You Stronger
by Walter Russell Mead
Why the recession revived America.
Post Date Wednesday, February 04, 2009


Even before the Panic of 2008 sent financial markets into turmoil and launched what looks like the worst global recession in decades, talk of American decline was omnipresent. In the long term, the United States faces the rise of Asia and the looming fiscal problems posed by Medicare and other entitlement programs. In the short term, there is a sense that, after eight years of George W. Bush, the world, full of disdain for our way of life, seems to be spinning out of our--and perhaps anybody's--control. The financial panic simply brought all that simmering anxiety to a boil, and the consensus now seems to be that the United States isn't just in danger of decline, but in the full throes of it--the beginning of a "post-American" world.

Perhaps--but the long history of capitalism suggests another possibility. After all, capitalism has seen a steady procession of economic crises and panics, from the seventeenth-century Tulip Bubble in the Netherlands and the Stop of the Exchequer under Charles II in England through the Mississippi and South Sea bubbles of the early eighteenth century, on through the crises associated with the Napoleonic wars and the spectacular economic crashes that repeatedly wrought havoc and devastation to millions throughout the nineteenth century. The panics of 1837, 1857, 1873, 1893, and 1907 were especially severe, culminating in the Great Crash of 1929, which set off a depression that would not end until World War II. The series of crises continued after the war, and the last generation has seen the Penn Central bankruptcy in 1970, the first Arab oil crisis of 1973, the Third World debt crisis of 1982, the S&L crisis, the Asian crisis of 1997, the bursting of the dot-com bubble in 2001, and today's global financial meltdown.

And yet, this relentless series of crises has not disrupted the rise of a global capitalist system, centered first on the power of the United Kingdom and then, since World War II, on the power of the United States. After more than 300 years, it seems reasonable to conclude that financial and economic crises do not, by themselves, threaten either the international capitalist system or the special role within it of leading capitalist powers like the United Kingdom and the United States. If anything, the opposite seems true--that financial crises in some way sustain Anglophone power and capitalist development.

Indeed, many critics of both capitalism and the "Anglo-Saxons" who practice it so aggressively have pointed to what seems to be a perverse relationship between such crises and the consolidation of the "core" capitalist economies against the impoverished periphery. Marx noted that financial crises remorselessly crushed weaker companies, allowing the most successful and ruthless capitalists to cement their domination of the system. For dependency theorists like Raul Prebisch, crises served a similar function in the international system, helping stronger countries marginalize and impoverish developing ones.

Setting aside the flaws in both these overarching theories of capitalism, this analysis of economic crises is fundamentally sound--and especially relevant to the current meltdown. Cataloguing the early losses from the financial crisis, it's hard not to conclude that the central capitalist nations will weather the storm far better than those not so central. Emerging markets have been hit harder by the financial crisis than developed ones as investors around the world seek the safe haven provided by U.S. Treasury bills, and commodity-producing economies have suffered extraordinary shocks as commodity prices crashed from their record, boom-time highs. Countries like Russia, Venezuela, and Iran, which hoped to use oil revenue to mount a serious political challenge to American power and the existing world order, face serious new constraints. Vladimir Putin, Hugo Chavez, and Mahmoud Ahmadinejad must now spend less time planning big international moves and think a little bit harder about domestic stability. Far from being the last nail in America's coffin, the financial crisis may actually resuscitate U.S. power relative to its rivals.



The biggest loser of the financial crisis thus far seems to have been Russia, a country that stormed into 2008 breathing fire and boasting of its renewed great-power status. After years of military decline, it put its strategic bombers back in the air; sent its fleet to the Caribbean; and reintroduced displays of martial power to Kremlin parades. Petrodollars filled government coffers, and political dissent at home had largely disappeared. Russia's troubles had been eased by the effective suppression of the Chechen insurgency, while America's troubles remained severe, with the U.S. military mired in two wars. When its troops invaded Georgia, Russia seemed once again to be acting like a great power--and not a very nice one.

But the Georgian invasion may have been the high point of Putin's "New Russia" rather than a portent of things to come. Historically, Russian power has rested on four legs. Its immense agricultural territory made it a granary of Europe. Timber, fur, and other products gave Russia a profitable niche in world trade. Its enormous territory, stretching from the remote steppes of Asia well into Europe, brought it into the heart of continental politics. Its enormous population--as recently as 1989, greater than that of the United States--gave it awesome military potential.

Today, a much-diminished Russia cannot realistically aspire to fill the shoes of czarist Russia, much less those of the Soviet Union. In Europe, the post-cold war loss of the Baltic republics, most of Georgia, Armenia, Azerbaijan, and above all Ukraine has pushed Russia back to its boundaries at the time of Ivan the Terrible, leaving Russia shorn of half its population and most of its agricultural potential. Now Russia is struggling, with only partial success, simply to maintain its Soviet-era infrastructure and educational system, unable to build the base for a modern economy. Pushed from the center to the far fringes of European geography, lagging well behind Western norms in economic and social productivity, and challenged by the rising powers to its east, Russia retains only shards of the power potential that once made it a credible rival of the United States.

It was in this context that the financial crisis hit last fall. The Georgia invasion itself had already spooked foreign and domestic investors into pulling their money out of Russia. That capital flight only accelerated as the price of oil and gas fell by more than two-thirds. Soon it became apparent that Russia's vaunted economic recovery rested on little more than the high price of petrochemicals. In 2007, oil, fuel, and gas exports accounted for 65 percent of Russia's export revenues. With its currency falling, its export earnings crashing, and its foreign exchange reserves melting away, an increasingly cash-strapped Russian state now faces enormous difficulties in maintaining its military spending.

The assertive foreign policy propounded by Putin and Dmitry Medvedev was presented as the consequence of a rising Russia; in actuality, it was a high-stakes bluff by a ruling elite which knows that its power base continues to erode. During Bush's second term, Russia had a rare opportunity: The prices of oil and gas were rising; the United States was, apparently, bogged down in a losing war in Iraq and needed Russian help at the Security Council to deal with Iran; and the gap between Europe and the United States was wider than at any time since World War II. With the future looking bleak, Russia chose to assert itself at this moment of maximum strength.

But now the Russian economy looks shakier than ever; foreign investors have lost faith in the country's legal and financial systems; Washington has drawn closer to European capitals; the United States appears headed for an honorable and timely exit from the war in Iraq; and rising European concern over Iran may enable the United States to address its nuclear program without Russian support at the United Nations. The fall in oil prices, Chavez's own political troubles at home, and the economic troubles in Cuba make the Russian fleet's presence in the Caribbean a curiosity rather than a threat of any kind. Russia has or can develop additional opportunities, perhaps in Ukraine, but its weak economic base and dismal future prospects suggest that the natural limits of its power are easily reached. The much touted "Russian renaissance" is likely to be counted a casualty of the Panic of 2008.



The damage to China's position is more subtle. The crisis has not--yet--led to the nightmare scenario that China-watchers fear: a recession or slowdown producing the kind of social unrest that could challenge the government. That may still come to pass--the recent economic news from China has been consistently worse than most experts predicted--but, even if the worst case is avoided, the financial crisis has nevertheless had significant effects. For one thing, it has reminded China that its growth remains dependent on the health of the U.S. economy. For another, it has shown that China's modernization is likely to be long, dangerous, and complex rather than fast and sweet, as some assumed.

In the lead-up to last summer's Beijing Olympics, talk of a Chinese bid to challenge America's global position reached fever pitch, and the inexorable rise of China is one reason why so many commentators are fretting about the "post-American era." But suggestions that China could grow at, say, 10 percent annually for the next 30 years were already looking premature before the economic downturn. (In late 2007, the World Bank slashed its estimate of China's GDP by 40 percent, citing inaccuracies in the methods used to calculate purchasing power parity.) And the financial crisis makes it certain that China's growth is likely to be much slower during some of those years. Already exports are falling, unemployment is rising, and the Shanghai stock market is down about 60 percent.

At the same time, Beijing will have to devote more resources and more attention to stabilizing Chinese society, building a national health care system, providing a social security net, and caring for an aging population, which, thanks to the one-child policy, will need massive help from the government to support itself in old age. Doing so will leave China fewer resources for military build-ups and foreign adventures. As the crisis has forcefully reminded Americans, creating and regulating a functional and flexible financial system is difficult. Every other country in the world has experienced significant financial crises while building such systems, and China is unlikely to be an exception.

All this means that China's rise looks increasingly like a gradual process. A deceleration in China's long-term growth rate would postpone indefinitely the date when China could emerge as a peer competitor to the United States. The present global distribution of power could be changing slowly, if at all.

The greatest danger both to U.S.-China relations and to American power itself is probably not that China will rise too far, too fast; it is that the current crisis might end China's growth miracle. In the worst-case scenario, the turmoil in the international economy will plunge China into a major economic downturn. The Chinese financial system will implode as loans to both state and private enterprises go bad. Millions or even tens of millions of Chinese will be unemployed in a country without an effective social safety net. The collapse of asset bubbles in the stock and property markets will wipe out the savings of a generation of the Chinese middle class. The political consequences could include dangerous unrest--and a bitter climate of anti-foreign feeling that blames others for China's woes. (Think of Weimar Germany, when both Nazi and communist politicians blamed the West for Germany's economic travails.) Worse, instability could lead to a vicious cycle, as nervous investors moved their money out of the country, further slowing growth and, in turn, fomenting ever-greater bitterness. Thanks to a generation of rapid economic growth, China has so far been able to manage the stresses and conflicts of modernization and change; nobody knows what will happen if the growth stops.

India's future is also a question. Support for global integration is a fairly recent development in India, and many serious Indians remain skeptical of it. While India's 60-year-old democratic system has resisted many shocks, a deep economic recession in a country where mass poverty and even hunger are still major concerns could undermine political order, long-term growth, and India's attitude toward the United States and global economic integration. The violent Naxalite insurrection plaguing a significant swath of the country could get worse; religious extremism among both Hindus and Muslims could further polarize Indian politics; and India's economic miracle could be nipped in the bud.

If current market turmoil seriously damaged the performance and prospects of India and China, the current crisis could join the Great Depression in the list of economic events that changed history, even if the recessions in the West are relatively short and mild. The United States should stand ready to assist Chinese and Indian financial authorities on an emergency basis--and work very hard to help both countries escape or at least weather any economic downturn. It may test the political will of the Obama administration, but the United States must avoid a protectionist response to the economic slowdown. U.S. moves to limit market access for Chinese and Indian producers could poison relations for years. For billions of people in nuclear-armed countries to emerge from this crisis believing either that the United States was indifferent to their well-being or that it had profited from their distress could damage U.S. foreign policy far more severely than any mistake made by George W. Bush.



It's not just the great powers whose trajectories have been affected by the crash. Lesser powers like Saudi Arabia and Iran also face new constraints. The crisis has strengthened the U.S. position in the Middle East as falling oil prices reduce Iranian influence and increase the dependence of the oil sheikdoms on U.S. protection. Success in Iraq--however late, however undeserved, however limited--had already improved the Obama administration's prospects for addressing regional crises. Now, the collapse in oil prices has put the Iranian regime on the defensive. The annual inflation rate rose above 29 percent last September, up from about 17 percent in 2007, according to Iran's Bank Markazi. Economists forecast that Iran's real GDP growth will drop markedly in the coming months as stagnating oil revenues and the continued global economic downturn force the government to rein in its expansionary fiscal policy.

All this has weakened Ahmadinejad at home and Iran abroad. Iranian officials must balance the relative merits of support for allies like Hamas, Hezbollah, and Syria against domestic needs, while international sanctions and other diplomatic sticks have been made more painful and Western carrots (like trade opportunities) have become more attractive. Meanwhile, Saudi Arabia and other oil states have become more dependent on the United States for protection against Iran, and they have fewer resources to fund religious extremism as they use diminished oil revenues to support basic domestic spending and development goals. None of this makes the Middle East an easy target for U.S. diplomacy, but thanks in part to the economic crisis, the incoming administration has the chance to try some new ideas and to enter negotiations with Iran (and Syria) from a position of enhanced strength.



Every crisis is different, but there seem to be reasons why, over time, financial crises on balance reinforce rather than undermine the world position of the leading capitalist countries. Since capitalism first emerged in early modern Europe, the ability to exploit the advantages of rapid economic development has been a key factor in international competition. Countries that can encourage--or at least allow and sustain--the change, dislocation, upheaval, and pain that capitalism often involves, while providing their tumultuous market societies with appropriate regulatory and legal frameworks, grow swiftly. They produce cutting-edge technologies that translate into military and economic power. They are able to invest in education, making their workforces ever more productive. They typically develop liberal political institutions and cultural norms that value, or at least tolerate, dissent and that allow people of different political and religious viewpoints to collaborate on a vast social project of modernization--and to maintain political stability in the face of accelerating social and economic change. The vast productive capacity of leading capitalist powers gives them the ability to project influence around the world and, to some degree, to remake the world to suit their own interests and preferences. This is what the United Kingdom and the United States have done in past centuries, and what other capitalist powers like France, Germany, and Japan have done to a lesser extent. In these countries, the social forces that support the idea of a competitive market economy within an appropriately liberal legal and political framework are relatively strong.

But, in many other countries where capitalism rubs people the wrong way, this is not the case. On either side of the Atlantic, for example, the Latin world is often drawn to anti-capitalist movements and rulers on both the right and the left. Russia, too, has never really taken to capitalism and liberal society--whether during the time of the czars, the commissars, or the post-cold war leaders who so signally failed to build a stable, open system of liberal democratic capitalism even as many former Warsaw Pact nations were making rapid transitions. Partly as a result of these internal cultural pressures, and partly because, in much of the world, capitalism has appeared as an unwelcome interloper, imposed by foreign forces and shaped to fit foreign rather than domestic interests and preferences, many countries are only half-heartedly capitalist. When crisis strikes, they are quick to decide that capitalism is a failure and look for alternatives.

So far, such half-hearted experiments not only have failed to work; they have left the societies that have tried them in a progressively worse position, farther behind the front-runners as time goes by. Argentina has lost ground to Chile; Russian development has fallen farther behind that of the Baltic states and Central Europe. Frequently, the crisis has weakened the power of the merchants, industrialists, financiers, and professionals who want to develop a liberal capitalist society integrated into the world. Crisis can also strengthen the hand of religious extremists, populist radicals, or authoritarian traditionalists who are determined to resist liberal capitalist society for a variety of reasons. Meanwhile, the companies and banks based in these societies are often less established and more vulnerable to the consequences of a financial crisis than more established firms in wealthier societies.

As a result, developing countries and countries where capitalism has relatively recent and shallow roots tend to suffer greater economic and political damage when crisis strikes--as, inevitably, it does. And, consequently, financial crises often reinforce rather than challenge the global distribution of power and wealth. This may be happening yet again.

None of which means that we can just sit back and enjoy the recession. History may suggest that financial crises actually help capitalist great powers maintain their leads--but it has other, less reassuring messages as well. If financial crises have been a normal part of life during the 300-year rise of the liberal capitalist system under the Anglophone powers, so has war. The wars of the League of Augsburg and the Spanish Succession; the Seven Years War; the American Revolution; the Napoleonic Wars; the two World Wars; the cold war: The list of wars is almost as long as the list of financial crises.

Bad economic times can breed wars. Europe was a pretty peaceful place in 1928, but the Depression poisoned German public opinion and helped bring Adolf Hitler to power. If the current crisis turns into a depression, what rough beasts might start slouching toward Moscow, Karachi, Beijing, or New Delhi to be born?

The United States may not, yet, decline, but, if we can't get the world economy back on track, we may still have to fight.

Walter Russell Mead is the Henry A. Kissinger Senior Fellow in U.S. Foreign Policy at the Council on Foreign Relations and the author of God and Gold: Britain, America and the Making of the Modern World. Lauren Gottlieb provided research assistance for this article.