Theory of economic boom still disputable

By Gwynne Dyer

LONDON (JP): We are on the brink of a "financial precipice", said U.S. President Bill Clinton recently; it could be the worst financial crisis in fifty years. So what happens in the real world if we fall over the financial precipice?

The real world has seen great changes for the better in the past decade or so, with large numbers of countries from Mexico to Russia to Indonesia starting down the road to democracy. But this wave of democratization (which has already led to a sharp fall in global military spending) still has a fragile feel about it. Would it really survive a severe global recession?

It's not yet certain that the financial crisis will cause a killer recession. This doesn't always follow -- it didn't in 1987, when "Black Monday" saw the markets crash without any serious side-effects on things like employment and economic growth -- but this time the connection is very close.

In the quarter of the world where the financial markets have already collapsed (mainly Russia and Southeast and East Asia), jobs are vanishing and output is plunging. If the infection goes on spreading, then the three-quarters of the world that isn't already in a full-blown recession joins the quarter that is, and we all sit around in the gloom for a year or so until the recovery starts.

Even that may be an optimistic prediction. That's what happened in all the other recessions since 1945 -- but as Clinton (belatedly) recognized, this may not be like the other recessions.

Unfortunately, the rules may have changed, for this would be the first slump to happen in a truly globalized economy. So it may last longer and get much worse, like the Great Depression of the 1930s -- or it may even begin a long period of deflation like the previous "Great Depression" of the 1870s, which saw prices fall steadily for several decades until the gold rushes of the 1890s.

(That was at the time of an emerging world economy too).

Worst-case economic scenarios like this grow more plausible by the day, and inevitably lead to worries about political stability.

Will a "red-brown" coalition take power in Russia, and re- start the Cold War? Will Indonesia, South Korea, even Brazil slide back into military control? Will anti-reform Communists in China evict the present ruling group and secure their power by embarking on a policy of aggressive and militaristic nationalism?

Will we, in other words, see a reprise of the political trends of the last great depression, with the world stumbling into a political crisis even worse than the economic one? It's not a happy thought, but it's getting harder to avoid the question.

Let's begin by noting that the world is a good deal more stable politically than most people realize. Of the dozen most important countries (on a rough-and-ready definition of population and economic power), only two have experienced a change of regime in the past fifty years: Russia, which emerged from Communism in 1991, and Brazil, which dipped into military dictatorship in the 70s and re-democratized in the 1980s.

Democracy is a good deal more solid in Brazil than it is in Russia, but the fundamental point is that the change in both countries was towards democracy, was driven by popular demand -- and was accomplished with almost no violence. In the other big country which may now be undergoing a change of regime, Indonesia, the pattern is the same.

And with the single exception of China, all the other countries on the "most important" list are established democracies where there is virtually no risk of backsliding into dictatorship: the United States, India, Japan, Germany, France, Britain, Italy and Canada. (These dozen countries, by the way, also contain just over half of the world's people).

If the last bulwark of Brazil falls to the speculators in coming weeks, then most of Latin America will join the rest of the world's "emerging economies" in acute financial crisis. That would make thirty or more countries where 4, 6, or 8 percent annual growth rates abruptly turn into minus numbers, and there's bound to be some political backsliding as a result, especially in the smallest and poorest places. But probably not in any country, either in Latin America or elsewhere, with over 20 million people.

There was fairly solid evidence for that in last week's Brazilian election, when President Fernando Enrique Cardoso was re-elected by a healthy majority on a platform that frankly predicted budget cuts, higher taxes, and rising unemployment for the next few years. The voters understood that hard times were coming, but opted for rational ways of dealing with them rather than magical potions.

There is equally encouraging evidence from Asia, where the first response to real economic hardship has been pressure for greater democratization -- in Indonesia, where the deposed dictator Soeharto now sulks in his villa, in South Korea and Thailand, where fully civilian governments have replaced ones with military antecedents, and now in Malaysia, where Mahathir Mohamad faces the most serious challenge in his two decades of power.

In theory, of course, things could take a turn for the worse if the recession/depression (pick your term) lasts for a very long time. In theory, people's patience will eventually run out, and they will then back any plausible thug who promises instant relief.

But this is a theory based on the experience of the 1930s, when the dominant mass media lent themselves more easily to centralized control and manipulation.

Besides, globalization has dramatically shortened the average length of recessions. So what we really face, in all likelihood, is a short, deep global slump, followed by renewed growth at a less hectic pace than the mid-1990s -- and no major political disasters even in the worst-hit new democracies. The prophets of doom are no more to be trusted than the "Goldilocks" theorists of perpetual economic boom who got us into this mess.