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A new world economic order?

By Michael Cox

Professor Michael Cox

Memory can often play tricks on even the most intelligent of human beings, especially in an age of rapid unexpected change when all the normal signposts have been removed or simply washed away by the tides of history. Certainly, for those who have grown up over the last ten, turbulent years, the world today is a very different looking place to what it was back at the turn of the century. Indeed, inconceivable though it may seem now, most of us in the developed West were then in the best of moods – riding high on the back of three great revolutions in international affairs.

The first and most important of these revolutions was of course the final triumph of the market in the wake of the global collapse of the centrally planned alternative at the end of the 1980s and the beginning of the nineties. Initially Poland and Central Europe, then Russia, and finally even ‘communist’ China, discovered that they had no alternative but to join the only economic club in town – the one run by the West, organized on western principles, and according to critics, largely designed to further the interests of the West. Nobody liked to say it too loudly at the time for fear of sounding “triumphalist”. But for many during the heady days of the 1990s it really did seem as if the West was “best” and would, for this very obvious reason, remain the axis around which the world would rotate for the foreseeable future.

The second great core assumption – born of a much longer revolution in world affairs – related to the United States, that most ‘indispensable’ of nations which instead of doing what all other great powers had done in the past (that is decline) did quite the opposite. In fact, the core belief after the end of the USSR was that we were now living in what Charles Krauthammer called a “unipolar moment”, one which he felt would endure for a great deal of time: in part because the US could lay claim to the most efficient economy in the world; in part because it had constructed the greatest military ever known to man; and in part because none of the other powers in the world – China included – had any chance of ever catching up with the United States. A new Rome was sitting on the Potomac and hardly anybody, save the oddball and the eccentric, doubted its capacity to remain the shining city on the hill for many decades to come.

The third important revolution was the one that had changed the face of Europe in 1989 when communism ignominiously collapsed leaving hardly anything behind it except a lot of pollution, many unwanted tanks, and plenty of useless factories producing things that nobody wanted to buy. The end of the Cold War was undoubtedly Europe’s great chance, and its leaders back then – Jacques Delors in particular - enthusiastically grabbed at the historic opportunity. What they created was impressive to say the least. Indeed, by the beginning of the new century, Europe was becoming a serious point of global reference equipped with its own currency, the largest market in the world, a lot of new members (not all of them perfect to be sure), and the outlines of a ‘Common Foreign and Security Policy’ that would soon make it a major player on the international stage. Even some Americans bought into this new vision, including, significantly, Charles Kupchan former Director for European Affairs in the Clinton administration. America would not be the dominant actor in the 21st century he opined. Nor China or the Islamic world. Rather the future belonged to an integrating, dynamic and increasingly prosperous Europe. The next century was its for the taking.

How and why this optimism verging on the hubristic turned into its opposite in the years between 2000 and 2010 has already been the subject of much feverish analysis and speculation. But at least three broad explanations have been advanced to help us think seriously about what Time magazine not long ago characterized as the ‘decade from hell’.

One explanation, favoured by most by historians and social theorists, relates the fall from grace to the much earlier triumph of the West and the extraordinary lack of caution this then seemed to induce amongst most western policy-makers. Indeed, having won so much over such a long period of time stretching right back to the deregulating 1970s through to the hyper-globalizing 1990s, nothing now looked to be impossible. And even the impossible now seemed achievable. The liberation of Iraq? No problem said the all-powerful Americans with their invincible military machine. Constant economic growth? Easily achieved on the back of cheap money and ever more complex financial instruments. Everybody a home owner? Why not, even if it meant a pile up of unsustainable debt? Economic crises? A thing of the past. And the future? Not perfect of course. But at least as perfect as it was ever going to be in an imperfect world. Happy days were here again and nobody was prepared to listen to naysayers like Dr Doom (aka Nouriel Roubini) or his foreign policy counterparts who warned that America’s unnecessary “war of choice” in Iraq would end up costing the US its international standing, a lot of blood, and a vast amount of treasure ($3 trillion so far).

A second large explanation connects more directly to changes in the shape of the world economy. Here, Goldman Sachs does appear to have got it right back in 2001 when it predicted (against the then prevailing orthodoxy) that the future belonged to the emerging BRIC economies – Brazil, Russia, India, and of course, China. But what Goldman did not predict however was the sheer speed with which this shift was to take place and the main reasons why it did so. Goldman recall worked on a twenty five, even a fifty year time line: it also assumed steady growth for all countries in the international economy. What it did not anticipate was firstly the pace of China’s rise and the impact this then had on the rest of the world economy; and secondly what happened to the international financial system in 2008 when the established western economies suffered a series of smashing body blows. It was this ‘Black Swan’ event more than anything else that was to be the real turning-point. Before then the EU and the US could legitimately claim that they continued to represent the future. After 2008, such a claim sounded frankly spurious.

The final reason for the great shift had less to do with economic shifts and more with politics and a marked change in the capacity of governments to manage the world around them. Whether this happened because of a decline in quality of the political class, or because the world was becoming almost impossible to manage anyway, remains a moot question. The fact remains that as the new century wore on it was becoming increasingly clear that the West in particular was facing a set of challenges to which it simply did not have any easy answers. And nowhere was this becoming more apparent than in that once “steady as she goes”, rather unexciting place, known as the European Union. The crisis began slowly but then accelerated most rapidly after 2008 leaving a trail of failed governments in its wake (at least eight fell between 2008 and 2010). Nor was this all. As governments fell and the crisis deepened, not only did belief in the European project begin to ebb, but many began to wonder about normal politics itself. The situation was not much better in the United States either. Indeed, having elected a rather impressive man to the White House in 2008, three years on ordinary Americans were beginning to lose faith in the political process and a belief in that very American idea that the future would always be better than the past.

We live in other words not just in ‘interesting times‘, but in quite extraordinary times where few in the West now appear to have much confidence any longer in the notion of the West; where policy leaders on both sides of the Atlantic realize how limited their options are; where a once imperial America now talks in humbling terms of ‘leading from behind’ and adjusting to a new multi-polar world order; and where few have any idea at all about what the seismic economic changes now taking place in the world economy will mean for either global prosperity or international stability.

Time therefore to take time out to reflect on how these multiple and most unexpected changes will impact on the global political economy and the business world. At least five questions need to be answered – and will be, we hope, in three innovative courses to be delivered at the world famous LSE Executive Summer School in June 2012:

  • Professor Saul Estrin and Professor Danny Quah, A Shifting World Economy: Business Strategies to Thrive

  • Dr Andrew Walter and Dr Jeff Chwieroth, Global Finance in Crisis: Causes, Consequences, Futures

  • Dr. Gianluca Benigno and Dr. Keyu Jin (and guest lecturer Nobel Laureate 2010, Prof. Chris Pissarides), Macroeconomic Challenges of Global Imbalances

The first question – very much in the LSE tradition of drilling down into core issues – has to do with the basic cause or causes of our current crisis. Here one can pick from a variety of explanations - some broader ones as suggested above; other of a more specific economic character rooted in an out-of-control system of deregulated financial markets, global imbalances, cheap money, extensive home ownership, and growing income inequalities; a world moreover where governments before the crisis either did not seem to understood what was happening, or even if they did, did not have the power or the instruments at their disposal to do much to change the course of history.

The second question relates to the past, present and the future of the world economy. Here the biggest question of all is to what degree is this particular crisis different to those that have happened at regular intervals since World War II? And if it is different, then why should this be so? Furthermore, why has it since proven so difficult to reform a system that has caused so much economic dislocation? Why moreover has it has proven so difficult for the West to get out of the crisis? Certainly, there seem to be very few optimists around in the West just now. Indeed, one of the most striking things about the present crisis is that whereas people can’t stop talking about it in the West, in countries like China and India they wonder what all the fuss is about – at least for the time being.

The third question concerns governance at both national and international levels. There are, as all three courses reveal, many fascinating issues raised by the present economic conjuncture. But one of the most critical has to do with the way in which world manages – or tries to manage – an increasingly integrated globalized economy where states still matter a lot, but where decisions taken by ‘markets’ seem to matter a whole lot more. This in turn raises many more questions, not the least important of which is whether or not governments have very much power at all; and in turn whether they are willing to give up what power they have to construct some new financial architecture which is far more in tune with the modern age?

The fourth question relates to that very simple but all-important issue: who wins and who loses in the new world economic order? The “rest” we are told look set to be winners; and amongst the “rest”, Asia and China in particular seem to be especially well placed to take advantage of the new world in the making. Yet there is still a very long way to go before we can talk of a permanent power shift. Even rising China it is suggested in these courses has to take care. After all, its prosperity upon which many countries in the international economy now depend, also depends on the international economy remaining buoyant and economically dynamic too.

Finally, all three courses question the idea that there are simple explanations of ‘why we are where we are’ today. They are also united in insisting that there is no easy way forward. Nor to continue are they at all certain that the world will become either a more stable or a more equal place in the future. All they can promise is to get those who are trying to make sense of a rapidly shifting global economy to at least base their thinking and their decisions – and those of their companies – on rigorous analysis; one which takes as its point of departure the inescapable fact that while businesses today are confronted with very real opportunities, these are presenting themselves in a world where the economic challenges are as real and as serious as anything we have seen since the 1930s.

Professor Michael Cox teaches in the Department of International Relations at the LSE. He is also Co-Director of LSE IDEAS and Academic Director of Executive Summer School. His main work more recently has focused on the changes in US foreign policy in an age of globalization and the impact of the financial and economic crisis on the balance of power. His most recent books include Soft Power and US Foreign Policy and The Global 1989: Continuity and Change in World Politics, both published in 2010. His next book will be a second edition of his co-edited and highly successful Oxford University Press textbook, US Foreign Policy. This will appear in 2012.

This article first appeared on Danny Quah's blog.|

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