As the economic crunch continues to unfold, commentators, politicians and thoughtful citizens alike are trying to get a grip on its multiple dimensions. Pity the policy-makers and political leaders who are trying to find the way to solve a six-sided boxful of dilemmas because this is a real Rubik’s Cube of a crisis.
To solve Rubik’s Cube, you have to cope with multiple possibilities and the interdependence of all the different parts (see below for more on the Cube). Get one wrong and it’s all wrong. That’s today’s crisis. That’s the challenge.
Sides 1 & 2: Credit crunch and recession
The first two sides of the crisis cube are the credit crunch and the economic recession. These are closely related (as are all six sides) but nonetheless different. Remember back in September/October of 2008 how the discussion was about the difference between a crisis in the finance sector and the ‘real economy’? Perhaps the recession could have been stopped if the full ramifications of the credit crunch had been spotted earlier. But they weren’t.
So now we have on the one hand the unwillingness of banks to lend to cover the debts generated through madcap borrowing and lending, with values that are based on debt and financial assets falling through the floor, the writing down of huge amounts of paper wealth, and an international banking system that would have jammed completely were it not for government interventions to underwrite debt and cover past, present and future losses. This means that investment capital is in danger of becoming chronically unavailable. For businesses that roll over their debts – i.e., pay them off on time by taking out new loans to replace old ones – this effect is potentially catastrophic.
But it is not only because companies have been running on debt that there is a recession. The lack of investment capital means projects that are underway are being cut back and new ones are being shelved. That is affecting consumption, which is reducing trade, which is bringing output down. Exports and manufacturing have slumped dramatically since late last year. The IMF now expects the world economy to shrink during 2009. Even if it does grow, it will be marginal, it will not be in the wealthier countries, and for almost all countries where there is growth it will be at a rate that is below population growth, which amounts to what most people understand by economic shrinkage.
3rd side: Social impact
Governments are desperate to get a handle on the first two sides of the cube because the third is a potential explosion. In 2008 many countries saw riots over the price of food. As the economic crunch has bitten in Europe, it has produced violent protest in Greece, Latvia, Lithuania, Bulgaria and France. The government has been toppled in Iceland and in Ireland there has been mass protest. Small protests in the UK have been treated by some as harbingers of worse to come, with garish headlines about a ‘summer of rage’ popping up a couple of weeks back. Little noticed by international news media, Copenhagen has been suffering all kinds of social violence; this appears to be non-organised in the sense of having no political agenda, and some of it is straightforward drug gang warfare, but in the country that in 2008 came out of an international survey as the happiest country in the world, it’s a sign of the times.
Policies that are designed to get the two economic sides of the cube sorted must also grapple with the social dimension. There is increasing pressure to provide more secure social safety nets – if senior bankers can have them, why not the rest of us? – but the trouble is that, politically and historically, if not in logic, a strong social safety net is associated among other things with job security, which means making harder to fire people, which restricts the flexibility of the labour market which is essential if new entrepreneurial endeavour is to be unleashed to get us out of the grip of recession. Reacting to economic crisis by reducing labour market flexibility is hardly the way to go; a labour market free-for-all, on the other hand, risks an awful lot of sacrifice of hope and prosperity for far too many people. Balancing a strategy for economic recovery with a strategy for social stability may be one of the hardest challenges in this crisis.
4th side: International conflict
While doing everything that they can for their own economies and social stability, governments must also pay attention to the international dimension and especially the implications for conflict. This can itself be understood as having at least three components.
- First, will one government’s measure to ease the crisis be the last straw for another country? Beggar-my-neighbour policies are the spectre that haunts the world economy and explain why there is so much riding on the outcome whenever there are international meetings and summits with the crisis on the agenda.
- Second, is somebody going to be tempted to make a move for short-term advantage in a long-term rivalry? The opportunist might calculate (or simply hope) that the rival is distracted or weakened by the crisis, or just not care about the medium-term consequences if there is some immediate political gain to be won for domestic credibility or international leverage. China and the US are playing footsie in the China Sea. Russia is seeking an airbase in Venezuela.
- Third, there are the implications for violent conflicts in developing countries, already struggling to get by, hit by the food price crisis of 2008, and now taking a threefold hit from the economic crunch – loss of investment capital, loss of export opportunities, and loss of income sent home by migrant workers because the international labour market is collapsing. These effects of the current crisis will increase conflict risk because they put more pressure on economic and political systems that are barely stable to begin with.
The crisis makes international cooperation more important than ever – there is no exit route from recession for any country alone – at the same time as it introduces new problems that make the international environment less conducive to cooperation on the scale required. Philosophically, we can remark that if it weren’t difficult it wouldn’t be necessary. But the practicalities are about trade-offs and compromises with reluctant partners and irritating adversaries, which muddies things up at a time when what everybody wants is to have a clear policy.
5th side: Climate change
Last week’s meeting of climate scientists in Copenhagen revealed that global warming and climate change are even more advanced than previously understood and that coordinated inter-governmental action is required with greater urgency, depth and breadth than ever. Sacrificing the international focus on climate change while dealing with the economic, social and political crisis of today will be self-defeating and self-destructive. Denial of the science of climate change and deferral of policies to address it are equally and profoundly irresponsible. So the economic recovery, the return to more stable social relations and the process of building peace all have to be green tinged. Last week at a conference convened by UK DFID, Prime Minister Gordon Brown declared that the recovery from recession would be transformative because it would be low carbon. Yes – except that it is so much harder to achieve the sort of large-scale bold innovation that implies when the lights are going out and jobless totals are soaring.
6th side: International institutions
And lastly, we can talk about international solutions to international problems as much as we like, but it will come to nought if we don’t recognise that another part of the problem in this crisis is the lack of international institutions with which to deal effectively with the other five sides.
The economic institutions could not provide enough regulation of global finance. They offer thousands of holes between national jurisdictions for clever lawyers to help banks and big corporation escape tax. They are not large enough to establish firm foundations for the safe operation of international finance. The World Bank and International Monetary Fund and their associated bodies were designed in a world that had yet to experience 1980s/90 style globalisation. The challenges of the last three decades are beyond them because they were not designed for this era. The result has been a series of financial crises over the last three decades that have rocked the global economic system but not kicked it in the teeth – not until late last year.
The institution of the G-7 was added in the 1970s as a result of the crisis of 1973-4 – the rise in oil prices and the end of the long boom that had characterised economic history since recovery from World War II. Though expanded to the G-8 to include Russia, the group is too narrow for today’s needs and is effectively a dead letter.
It is probably a bit overblown to say, as some commentators have said, that we need a new ‘Bretton Woods’ – the site of the conference that produced the World Bank and the IMF and ushered in the managed capitalism of the first three decades after 1945. But it is not enough simply to mimic the 1970s pattern and replace the G-8 by the G-20 while boosting the financial weight of the IMF two or three-fold. Something else is needed – decisive agreement on an international mode of financial regulation. The current attack on tax havens makes good copy but it only scratches the surface; the big boys like Barclays don’t only go to the Cayman Islands or the Isle of Man to escape tax in the UK, they go to Ireland or the Netherlands and benefit from the fact that these countries have perfectly good but different tax systems.
On the climate front, the current international institutional architecture is over-stretched. A superb climate deal at Copenhagen in December this year could be entirely undermined if there is no proper institution to interpret, focus, coordinate and enforce the agreed outcomes. Agreements without institutions are fine statements but not much more.
On peacebuilding, the UN architecture is now stronger than it has ever been, but it still has significant deficiencies. These are under discussion during these months. Some of the pieces are in place but not all and not only the UN system as a whole but also all the main actors in international politics still have a long way to go in understanding the challenge of building long term peace and in using the instruments that have already been created.
There is a whole lot of new design and construction of institutions to undertake.
The hands of politics
The hands that shift the sides of the cube around, whose owner is prematurely triumphant at getting one side sorted out, only to curse upon realising that this one-sided solution has done nothing but bring chaos to the other five – these hands are, of course, the political leaders and policy-makers.
Rubik’s Cube is only a metaphor of the crisis we now face. But when I think of it this way, I find myself thinking that our adversarial systems and cultures of politics, in which everything the other sides says must be wrong because it is the other side, a political relationship in which discussion is consistently driven down to the level of yah-boo – I just find myself thinking that this way of thinking is not good enough. Those hands on the Cube need help from other hands – from commentators and thoughtful citizens, and maybe from opposition politicans too.
RUBIK’S CUBE may be world’s best selling toy. It has six square sides, each consisting of 3×3 small squares (there are versions with 4×4 and even 5×5 small squares). A pivot mechanism allows each side to be rotated separately. Solving Rubik’s Cube means getting the six sides of the box organised so that each side is made up one single colour. Only when the last piece of the last side has clicked into place and no piece is out of place can we say the puzzle of the cube has been solved. According to Wikipedia a classic 3×3 Rubik’s Cube has about 43 quintillion possible combinations of the small squares. For those who prefer their incomprehensible numbers in figures and with precision, that’s 43,252,003,274,489,856,000. So that’s quite a lot.