The world##s policymakers are finally waking up to how synchronized and how severe the global economic crisis is turning out to be. Just this week, newspapers reported that the British army is being put on standby to deal with possible civil disorder.
World leaders are beginning to grasp the all too likely political fallout from a sustained period of falling output, rapidly rising unemployment and declining equity and home prices. However, their uncoordinated global policy response to this crisis underscores the political failure to embrace policies most likely to restore growth and not simply bust national budgets.
Conversely, global policymakers do not seem to have grasped the downside risks to the global economy posed by a deteriorating domestic and international political environment. If the past is any guide, the souring of the political environment must be expected to fan the corrosive protectionist tendencies and nationalistic economic policy responses that are already all too much in evidence.
After spending much of 2008 cheerleading the global economy, the International Monetary Fund now concedes that output in the world##s advanced economies is expected to contract by as much as 2% in 2009. This would be the first time in the post-war period that output contracted in all of the world##s major economies. The IMF is also now expecting only a very gradual global economic recovery in 2010, which will keep global unemployment at a high level.
Sadly, the erstwhile rapidly growing emerging-market economies will not be spared by the ravages of the global recession. Output is already declining precipitously across Eastern and Central Europe as well as in a number of key Asian economies, like South Korea and Thailand. A number of important emerging-market countries like Ukraine seem to be headed for debt default, while a highly oil-dependent Russia seems to be on the cusp of a full-blown currency crisis.
Perhaps of even greater concern is the virtual grinding to a halt of economic growth in China. The IMF now expects that China##s growth rate will approximately halve to 6% in 2009. Such a growth rate would fall far short of what is needed to absorb the 20 million Chinese workers who migrate each year from the countryside to the towns in search of a better life.
As a barometer of the political and social tensions that this grim world economic outlook portends, one needs look no further than the recent employment forecast of the International Labor Organization. The ILO believes that the global financial crisis will wipe out 30 million jobs worldwide in 2009, while in a worst case scenario as many as 50 million jobs could be lost.
What do these trends mean in the short and medium term? The Great Depression showed how social and global chaos followed hard on economic collapse. The mere fact that parliaments across the globe, from America to Japan, are unable to make responsible, economically sound recovery plans suggests that they do not know what to do and are simply hoping for the least disruption. Equally worrisome is the adoption of more statist economic programs around the globe, and the concurrent decline of trust in free-market systems.
The threat of instability is a pressing concern. China, until last year the world##s fastest growing economy, just reported that 20 million migrant laborers lost their jobs. Even in the flush times of recent years, China faced upward of 70,000 labor uprisings a year. A sustained downturn poses grave and possibly immediate threats to Chinese internal stability. The regime in Beijing may be faced with a choice of repressing its own people or diverting their energies outward, leading to conflict with China##s neighbors.
Russia, an oil state completely dependent on energy sales, has had to put down riots in its Far East as well as in downtown Moscow. Vladimir Putin##s rule has been predicated on squeezing civil liberties while providing economic largesse. If that devil##s bargain falls apart, then wide-scale repression inside Russia, along with a continuing threatening posture toward Russia##s neighbors, is likely.
Even apparently stable societies face increasing risk and the threat of internal or possibly external conflict. As Japan##s exports have plummeted by nearly 50%, one-third of the country##s prefectures have passed emergency economic stabilization plans. Hundreds of thousands of temporary employees hired during the first part of this decade are being laid off.
Spain##s unemployment rate is expected to climb to nearly 20% by the end of 2010; Spanish unions are already protesting the lack of jobs, and the specter of violence, as occurred in the 1980s, is haunting the country. Meanwhile, in Greece, workers have already taken to the streets.
Europe as a whole will face dangerously increasing tensions between native citizens and immigrants, largely from poorer Muslim nations, who have increased the labor pool in the past several decades. Spain has absorbed five million immigrants since 1999, while nearly 9% of Germany##s residents have foreign citizenship, including almost 2 million Turks. The xenophobic labor strikes in the U.K. do not bode well for the rest of Europe.
A prolonged global downturn, let alone a collapse, would dramatically raise tensions inside these countries. Couple that with possible protectionist legislation in the United States, unresolved ethnic and territorial disputes in all regions of the globe and a loss of confidence that world leaders actually know what they are doing. The result may be a series of small explosions that coalesce into a big bang.
One has to hope that ahead of the next G-20 summit in London this April, global policymakers will get real about the gravity of the present global economic and political situation. For only with a coordinated and forceful economic policy response is there any hope of extricating ourselves from what is turning out to be the most serious global economic slump since the Great Depression.
Michael Auslin is a resident scholar and Desmond Lachman is a resident fellow at the American Enterprise Institute. Forbes Magazine