Crisis Convergence

Why the global economic crash, the rise of the Tea Party, the Arab Spring, and China’s coming fall are all connected.

The clamor of economic and political events this year -- including the Arab Spring, the intensification of the Western economic crisis, the rise of the Tea Party, and the growing ascendancy of China -- has been deafening. But though most reporting has described these events as disconnected, they are far from coincidental.

The crisis of capitalism that erupted with the 2008 financial bust has very much to do with all of these seemingly disparate events. During the long boom period from 1980 to 2008, mainstream thinking ignored the principles of political economy laid out by Adam Smith, Karl Marx, and John Maynard Keynes. Instead, we got monetarism, free market ideology, Alan Greenspan's facile notions of a "new economy," and even the often self-serving hype about China's ability to rule the world and sustain global prosperity. Today, we can see better how the crisis of 2008 and 2009 marked the end of one era and the start of a new and still very uncertain one.

Smith, widely seen as the father of modern capitalism, had been convinced that public institutions were essential to a well-functioning market economy. But Marx in particular resonates today -- not for his predictions of capitalism's collapse, but for his analysis that "contradictions" between capital and labor would lead to recurrent economic and political crises, and social conflict. And Keynes continues to loom larger than life as a reminder that crises in capitalism need not be terminal.

The 2008 eruption demonstrated the hollowness of claims made by economists and politicians in the 1980s and thereafter that lasting stability and prosperity would be assured by low inflation, free markets, and unfettered globalization. The last quarter-century of faulty economic thinking has left us with a sour and acrimonious legacy, including the need to reduce the dead weight of 25 years of accumulated debt; the loss of credit creation, housing, and financial services as leading drivers of growth; rising income inequality; and a populist backlash against political and financial elites. The crisis shocked the pre-existing economic and political order on a scale unseen since the 1930s. The fabric of globalization, which had been stitched together around the so-called Washington Consensus, began to fray.

Seen in this light, many of 2011's international developments don't look so random at all. It was perhaps inevitable that the weakest links in the global system suddenly became much more vulnerable. And the Middle East certainly qualifies as a weak link, not least because the countries from the Sahara to Saudi Arabia were not strongly anchored into the globalization of manufacturing and finance, save through oil-dominated autocratic regimes supported by Western powers.

There is little question that the crisis has drained U.S. economic power and legitimacy, a dynamic that has been aided and abetted by a rising China. As the United States confronts economic, demographic, budgetary, and populist constraints over its global role and power, "American decline" has gone from fringe theory to conventional wisdom in a few short years.

This view may also be myopic, but for now the United States is on its back foot and under increasing pressure to readjust its global position. This fact was highlighted by its decision, after initial hesitancy, to lend its support to the removal of President Hosni Mubarak from power in Egypt, along with its threat to block financial aid if he did not step down. The decline in American influence doubtlessly also emboldened opponents of regimes elsewhere -- for example, in Bahrain, Tunisia, and Yemen -- to call for their rulers' overthrow.

But the conditions for the Arab Spring already existed before American decline took hold. For more than two decades, per capita incomes in the Middle East -- with the exception of those in the low-population oil states -- have been low and stagnant. Unemployment rates have averaged 25 percent in parts of the region, a statistic that masks much higher rates among those under 30. The spark for these conditions to explode into a revolution came with soaring food and energy prices. Here, too, the fingerprints of the beleaguered and debt-ridden Western economies can be found.

The U.S. Federal Reserve and other central banks responded to the aftermath of the financial crisis by adopting emergency stimulus measures known as "quantitative easing," in which the Fed bought large quantities of mortgage-backed and other financial assets to help relieve the arterial blockages in the banking system. In November 2010, the Fed implemented a second round of quantitative easing, deciding to buy $600 billion of U.S. Treasury bonds by June 2011 to help spur lending and spending by households and companies. Although it is hard to quantify this program's impact on world commodity prices, it unquestionably contributed to the rising food prices that proved decisive for the revolutionary movements. Printing money undermines confidence in paper currencies, including the U.S. dollar, and prompts investors and companies to buy real or physical assets, including metals, energy, and agricultural commodities, as a hedge against currency losses and fears of rising inflation.

The consequences of the crisis in Western capitalism are also having repercussions in China, which was the biggest beneficiary of the pre-crisis political and economic order. Political unrest in China has so far remained manageable: The country's "jasmine" human rights protests earlier this year proved ineffectual, and food price-related disturbances have also fizzled out. Much bigger matters of economic stability and political legitimacy are stalking China, however.

China's capitalist model has delivered unprecedented economic success over the last quarter-century. But it is a model that is now flawed. The slump in Western demand caused China's export industries to shudder in 2008 and 2009, with exports declining by over a third in the year to the first quarter of 2009. Thousands of factories in the Pearl River Delta shut down, and 20 million migrant workers were reportedly forced to return to rural areas for lack of work.

China recovered quickly due to a stimulus program worth about 14 percent of its GDP and the global economic bounce last year, but exporters now face a very different world dictated by anemic Western consumption and growth prospects. Moreover, the explosion of credit creation since 2008 and the unsustainable rise in investment and residential real estate spending are sowing the seeds of rising inflation. The instability that will likely follow may remain in abeyance until after the Chinese Communist Party's leadership change in 2012, but China's economy is already slowing to a growth rate of around 8 percent.

In some ways, this July's high-speed rail tragedy on the newly opened Beijing-Shanghai line serves as a metaphor for China: It's a high-speed economy with (capitalist) design faults that, sooner or later, will result in an accident. There are already strong signs that the quality of investment, and of investment financing, is deteriorating. Left unaddressed, these trends might well validate Marx's prediction that investment booms, endemic in capitalism, end up in overproduction and underconsumption, and then social conflict.

China has limited time to effect a radical political and economic shift. It has to take power and privilege away from state-owned companies, coastal regions, and regional party elites. It must also de-emphasize capital investment, which currently accounts for an unprecedented 50 percent of GDP. And it has to prioritize a bigger economic weight for household consumption, which accounts for a mere 35 percent of GDP, a fairer income distribution, better employment for China's annual flow of 6 million graduates, the rights of rural migrants, and the neglected countryside.

If this shift doesn't start in earnest soon, the Chinese economy will succumb to a credit and investment bust from which significantly slower growth would follow. This will be especially sensitive in a China where incidents of social unrest are increasing significantly in number, intensity, and breadth. In the absence of the rule of law and other critical social institutions, the state's assurance of steady and persistent annual growth of 8 to 10 percent represents a social contract. If it is broken, China could suffer significant political repercussions.

Rebalancing in China promises to be an intensely political, as well as economic, process. There is great uncertainty as to whether the Communist Party's reputation for pragmatism will stand up to this challenge, especially if China's "princelings," the children of the revolutionary leaders, increase their influence in the new leadership. Should China fail, its economy is at risk of stalling out in a few short years -- a development that would make this tumultuous year appear to be the calm before another storm.



Is There a Map to the Future?

The former head of the U.S. National Intelligence Council explains why governments try -- and fail -- to see over the horizon.

The world is in the midst of the most profound shift of global power and influence in more than a century. The collapse of the Cold War order, the rise of China and India as new global powers, and the advent of new transnational challenges have all combined to overturn old verities and points of reference.

This period of flux has spawned a cottage industry of futuristic debate and analysis, much of it good and interesting. Yet governments, including the U.S. government, remain very poor at long-range strategic planning -- that is, at making policy choices on the basis of well-considered strategic objectives and methods for achieving them, with a view to the long term. Why? Is it that government officials are less clever than outside analysts, scholars, and pundits? Or is it that forecasting the future -- and making decisions that have real consequences on the basis of these forecasts -- is vastly harder than armchair analysts imagine?

As chairman of the U.S. National Intelligence Council (NIC), which provides strategic analysis to the president and his National Security Council, I oversaw production of one of the pioneering pieces of long-range analysis: Mapping the Global Future: Report of the NIC's 2020 Project. This report generated great interest around the world, for both its methodology and its provocative conclusions about the dramatic shift of global power and influence, roughly from west to east. It was translated into Chinese, Russian, Spanish, and French, and served as a model for dozens of long-range analyses in other countries. Yet the most striking thing about Mapping the Global Future is how little impact it had on actual policy. Our judgment that international institutions were in crisis and needed to be radically reshaped to accommodate the rise of other powers was largely ignored. Another key finding -- that whereas the language of terrorism may be couched in ideological and religious terms, its underlying goals are essentially political -- likewise made hardly a dent in the overmilitarized and self-defeating counterterrorism policies adopted after the 9/11 terrorist attacks.

The same dynamic is evident in other countries. I learned this firsthand in leading a nonofficial U.S. delegation around the world, under the auspices of the Atlantic Council, for strategic dialogues with counterparts in Brazil, China, Egypt, Germany, Russia, South Africa, and a dozen other key countries. Our dialogues revealed a surprising level of agreement on the broad trends affecting the global future, but generated few ideas for going beyond immediate challenges to prepare for those just over the horizon.

Why is this? And how can governments better prepare for the future?

The "why" is the easier question to answer. For one thing, senior political leaders are keenly aware of the contingent nature of history. Most are like Woodrow Call, the veteran Texas Ranger in Larry McMurtry's Lonesome Dove: "Though he had always been a careful planner, life ... had long ago convinced him of the fragility of plans. The truth was, most plans did fail, to one degree or another, for one reason or another. He had survived ... because he was quick to respond to what he had actually found, not because his planning was infallible." Policymakers might add that the crucial test is how they react to unexpected events -- whether the responses are haphazard and episodic, or take place within a larger strategic framework -- not whether they saw them coming.

These global dialogues also revealed that middle powers, even important ones like Brazil and France, often feel themselves the objects rather than the subjects of history. They are disinclined to broad strategic planning because they lack confidence in their capacity to implement ambitious plans. France has tried, with mixed results, to compensate by acting via the European Union; it is an open question whether Brazil can eventually act like the global power it aspires to be.

For the United States, the problem is different. During the Cold War, there was little debate on strategic priorities -- containing the Soviet Union was the sine qua non of U.S. foreign policy. After the Cold War, America not only lost its strategic lodestar, but also fell victim to the illusions of a "unipolar moment," which encouraged many to believe the United States was so powerful that it could simply dictate the global future by virtue of its unrivaled power. And just as many were beginning to question that dangerous illusion, the 9/11 terrorist attacks seemed to provide a new strategic rationale. George W. Bush's administration, partly out of conviction and partly from opportunism, launched a badly misguided "global war on terror" -- wildly exaggerating the threat posed by international terrorism and diverting the United States from more profound challenges of the early 21st century. (It is instructive to note that in the Mapping the Global Future report, produced during Bush's presidency, international terrorism did not make the shortlist of major global challenges.)

Another factor militating against strategic planning is that decisions flowing out of such a process have huge consequences for policies and budgets. For example, the U.S. Defense Department's Quadrennial Defense Review -- much praised except by those who actually know anything about it -- has become more a competition for resources than a serious exercise in strategic planning. The State Department's similarly inspired Quadrennial Diplomacy and Development Review seems destined to meet the same predictable fate.

Policymakers are right to be skeptical of bold forecasts. They should be skeptical when those doing the forecasting do not have to place bets on their judgments. They should be even more skeptical when the forecasters have a direct stake in the outcome. A policymaker who does his own strategic forecasting is like a lawyer who represents himself in court: He has a fool for a client.

So what does good strategic forecasting look like? The starting point is a careful and reasonably dispassionate analysis of broad global trends and the interaction among them. Mapping the Global Future looked at the interaction of several factors -- the youth bulge in many Arab states, poor economic prospects, sclerotic political systems incapable of reform, and the rapid spread of information technologies -- and concluded that many countries in the Middle East and North Africa were ripe for social upheaval. It did not, however, "predict" the Arab Spring. There are too many contingent factors to be able to predict precisely when or how such upheavals might occur or what the triggering event might be.

Sometimes change is not arithmetic but logarithmic, with nothing much seeming to happen until an accumulation of factors produces sudden, dramatic change. The Soviet Union's collapse is one example of this phenomenon; future transformations in China could be another. Huge upheavals are clearly coming in Japan and much of Europe, owing to the rapid aging of these societies and the dramatic shrinkage of their working-age populations. We cannot predict exactly how they will play out, but we can say with confidence that the coming impact will be transformative.

Scenario analysis can help overcome some of the limitations of trend analysis. As I like to tell my students, linear thinking will get you a much-changed caterpillar, but it won't get you a butterfly. For that you need a leap of imagination. Scenarios can help us imagine some of those leaps to the future, from which we then reason backward to see how, say, a peaceful, non-nuclear, unified Korea might emerge -- or, more worrying, how its more antagonistic, nuclear-armed counterpart might come about instead.

Then there are "wild card" events, some of which fall in the category of "predictable surprises." The nuclear disaster at Fukushima may not have been predictable, but it was certainly possible to imagine a major disaster at a Japanese nuclear power plant, with predictable consequences. Whether the 9/11 terrorist attacks could have been prevented is debatable, but it had long been understood in the counterterrorism and national security communities around the world that a terrorist attack involving hijacked airplanes was among the most likely scenarios, if only because "skyjacking" had been an all-too-familiar terrorist tactic for many years. And the defense against such an attack would have involved precisely the steps taken after 9/11 -- steps that might have been taken beforehand had strategic analysis driven policy decisions.

The United States now finds itself at a point where it possesses neither the power to impose its will nor the clarity of purpose the Cold War seemed to provide. It needs to develop the habit of strategic thinking -- or, to put it more precisely, to embed strategic analysis more integrally into policy decisions and discriminate more rigorously among ambitious foreign undertakings.

A good place to start would be to institute a process of interagency strategic planning. This would mean wresting strategic planning from individual departments, which of course jealously guard their prerogatives and resist any attempt to bring them under a central coordinating body. There was a brief effort to create such a planning group a few years ago -- I was a member of it -- but the effort died after a single meeting, owing to strong bureaucratic resistance. Yet the need is compelling: The United States would never have gotten itself into a disastrous occupation of Iraq had these policies been subjected to serious critical scrutiny.

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