Paul Krugman, discussing commodity prices, posts a nice chart of recent trends in the world economy. Developing countries are recovering much better than rich ones.
Krugman modestly forgets to point out that he had something to do with this. He and Joseph Stiglitz may be treated as weird bearded hippies in Washington; but beards, Nobel Prizes, and sound analysis seem to go down better in Asia. They are listened to with respect, ever since Krugman defended Malaysia’s capital controls during the Asian financial crisis of 1997. Stiglitz subsequently blamed the whole thing on the misguided sectarian pressure on developing countries from the IMF and the World Bank to open up their financial markets and allow the miracles of Wall Street financial innovation to work their magic. Somehow this always happened to work out better for the bankers than Third Worlders in the street.
The trenchant criticisms of Krugman, Stiglitz and Sachs have provided vital intellectual cover to burnt-fingered Third World finance ministers in pushing back successfully against this pillar of the Washington consensus. So successfully that the policy plank has been quietly dropped by the World Bank and IMF – which has even been pushing the Russian government to reintroduce capital controls.
Capital controls may well have prevented the banking crisis in the very financially interdependent rich countries from propagating to the rest of the world. Typical developing countries only faced a trade slump: nasty while it lasted, but no permanent damage, unlike a banking crisis, which leaves the victims enfeebled by debt overhangs and broken credit channels for years.
Krugman’s chart also bears thinking about in geopolitical terms.
If your concern is human welfare – and this must be the main paradigm – faster growth by poorer countries is good news. Prosperity is not zero-sum, though the carrying capacity of the environment is. Power has a different calculus. Hard power, the ability to coerce other countries into doing what you want, or (more often) to prevent them from doing what you don’t want, is roughtly zero-sum in the world as a whole (footnote). Soft power allows some positive-sum games through trade in the broad sense, and collaboration to solve problems, such as putting down pirates, preventing wars, or saving the climate, but much of it follows the same logic.
Palmerston’s heirs in the
chanceries foreign-policy shops of rich countries, unlike JS Mill’s in their central banks and finance ministries, are therefore congenitally worried by the trends illustrated by this graph.
Source : IMF. Spreadsheet with downloaded data and link here. I picked 1995 as a reasonable start date for the GDP series for Russia and the Eastern European new members of the EU, though enlargement didn’t reach all the 27 countries of the data series till 2007. Brazil, India and Russia are lumped together purely for legibility; actual cooperation between the BRICs is token.
The secular trend is a declining share of rich countries in world output. In numbers, respectively a 0.37% annual loss of GDP share for the EU-27, 0.11% for Japan, and 0.15% for the US. The EU figure is distorted by the transition in Eastern Europe, and the Japanese decline only started around 1990. Recently both their rates have been converging around the US one. World GDP is $74 trn, so 0.1% represents $74bn a year today.
The EU and Japan have more or less opted out of the hard power game, so facing up to relative decline is a much bigger issue in Washington. Fair enough, as neither China, India nor reviving Russia have opted out either, not to mention lesser troublemakers like Iran and North Korea – and, in a unique position, Israel. But there’s very little policymakers can do to halt long-term relative decline. The poor are catching up, period, and there are more of them.
I’ll be agnostic here on whether the decline of American power is a good thing, and anyway it’s inevitable. However, it is important to everybody that the decline be gracefully managed and institutions for global governance adapted or built. Many of my readers, as American patriots, will think the decline is bad in tself and should be as slow as possible. So they should be alarmed by what’s been happening recently.
Policymakers in Washington may not be able to halt or even slow the decline in American power, but what they can surely do is speed it up. And this they did. Look what happened to relative shares during the last four years.
The recession roughly doubled the decline. The USA lost an additional 0.6% of share between 2007 and 2010; so it cashed eight years’ decline in four. And it won’t come back. As Krugman’s graph illustrates, the legacy of a banking crisis is prolonged slow growth.
The financial crisis had many fathers, all trying to walk away from the ugly baby, starting with the reckless bankers. But under George W. Bush, regulatory capture wasn’t a temptation but a principle. Even a major-league disaster has not shaken the devotion of Republicans in Congress to the interests of speculators. The disconnect from the reality everybody else inhabits – including the financial policymakers of the ever larger rest of the world – is striking. David Cameron’s Tory-Lib government in Britain, slashing the welfare state to an extent the Tea Party can only dream of, is imposing a banking tax.
The Bush Administration was a coalition between two groups. First, the neocon foreign-policy hawks, proclaiming an “American century” of swaggering hegemony, and the free use of US military supremacy. They re-discovered in the sands of lraq that unvarnished imperialism is impracticable today, and a failed attempt merely alienates allies, makes whole populations sympathetic to the imperialised, raises fresh groups of diehard enemeies, and emboldens adversaries. The undoubted ability of the Pentagon to destroy Burma’s armed forces in 48 hours in practice gives the US no usable leverage whatever over the regime’s day-to-day misbehaviour. In six years the hawks threw away a priceless capital of goodwill and influence accumulated by the USA since the Marshall Plan. Compare the spontaneous worldwide outpouring of sympathy immediately following 9/11 with the current sullen acquiescence of a small band of NATO allies in the quagmire war in Afghanistan.
The second component was the Republicanism of money. (I read it that the social conservatives were just played for suckers.) Was this less traditional than it seemed? Just as the neocons took over from the realists in foreign policy, so the financiers sidelined the captains of industry in economic policy. (Look at the current Republican indifference to the G-20 summit and the failed trade deal with South Korea.) The hubris here was under-reach not over-reach; simply making quite sure that no steps were taken, or even seriously considered, to head off the disaster the unsupervised financial market was hatching.
The damage done by the second group to America’s place in the world was slower to reveal itself. But now you can see the double whammy.
Footnote on power
Strictly speaking the proposition holds if we define positive coercive power – the ability to force others to do what you want and they don’t – as the converse of the ability not to be be coerced into doing what you don’t want and others do. This sums to zero among any closed group of states. Similarly for the power to prevent others from doing what they want and you don’t. Call these two together hard power, and it sums to zero as well. QED.
Soft power is partly non-coercive ways of achieving the same ends, so it can reasonably be seen as zero-sum too. But it also covers negotiation, trade, and collaboration, which can easily be positive-sum. It also includes the ability to do things by yourself, which is closely linked to wealth. In 2510, either Switzerland won’t exist as an independent actor, or it will be able to send a spaceship to the moon if it chooses. These sorts of soft power are in principle positive-sum in a closed group of states.
If we add hard and soft power together in some unspecified and possibly illegitimate way, we have a hybrid concept of power that is a little positive-sum, but less than just looking at wealth would indicate.