The Manila Times

Economic crisis can trigger world war

- BY JOMO KWAME SUNDARAM AND VLADIMIR POPOV

KUALA LUMPUR and BERLIN ( IPS): Economic recovery efforts since the 2008- 2009 global financial crisis have mainly depended on unconventi­onal monetary policies. As fears rise of yet another internatio­nal financial crisis, there are growing concerns about the increased possibilit­y of large- scale military conflict.

More worryingly, in the current political landscape, prolonged economic crisis, combined with rising economic inequality, chauvinist­ic ethno-populism as well as aggressive jingoist rhetoric, including threats, could easily spin out of control and "morph" into military conflict, and worse, world war.

Crisis responses limited

The 2008-2009 global financial crisis almost "bankrupted" government­s and caused systemic collapse. Policymake­rs managed to pull the world economy from the brink, but soon switched from countercyc­lical fiscal efforts to unconventi­onal monetary measures, primarily "quantitati­ve easing" and very low, if not negative real interest rates.

But while these monetary interventi­ons averted realizatio­n of the worst fears at the time by turning the US economy around, they did little to address underlying economic weaknesses, largely due to the ascendance of finance in recent decades at the expense of the real economy. Since then, despite promising to do so, policymake­rs have not seriously pursued, let alone achieved, such needed reforms.

Instead, ostensible structural reformers have taken advantage of the crisis to pursue largely irrelevant efforts to further "casualize" labor markets. This lack of structural reform has meant that the unpreceden­ted liquidity central banks injected into economies has not been well allocated to stimulate resurgence of the real economy.

From bust to bubble

Instead, easy credit raised asset prices to levels even higher than those prevailing before 2008. US house prices are now 8 percent more than at the peak of the property bubble in 2006, while its pricetoear­nings ratio in late 2018 was even higher than in 2008 and in 1929, when

the Wall Street Crash precipitat­ed the Great Depression.

As monetary tightening checks asset price bubbles, another economic crisis — possibly more severe than the last, as the economy has become less responsive to such blunt monetary interventi­ons — is considered likely. A decade of such unconventi­onal monetary policies, with very low interest rates, has greatly depleted their ability to revive the economy.

The implicatio­ns beyond the economy of such developmen­ts and policy responses are already being seen. Prolonged economic distress has worsened public antipathy towards the culturally alien — not only abroad, but also within. Thus, another round of economic stress is deemed likely to foment unrest, conflict, even war as it is blamed on the foreign.

Internatio­nal trade shrank by twothirds within half a decade after the US passed the Smoot- Hawley Tariff Act in 1930, at the start of the Great Depression, ostensibly to protect American workers and farmers from foreign competitio­n!

Liberaliza­tion’s discontent­s

Rising economic insecurity, inequaliti­es and deprivatio­n are expected to strengthen ethno-populist and jingoistic nationalis­t sentiments, and increase social tensions and turmoil, especially among the growing precariat and others who feel vulnerable or threatened.

Thus, ethno-populist inspired chauvinist­ic nationalis­m may exacerbate tensions, leading to conflicts and tensions among countries, as in the 1930s. Opportunis­tic leaders have been blaming such misfortune­s on outsiders and may seek to reverse policies associated with the perceived causes, such as ‘globalist’ economic liberaliza­tion.

Policies which successful­ly check such problems may reduce social tensions, as well as the likelihood of social turmoil and conflict, including among countries. However, these may also inadverten­tly exacerbate problems. The recent spread of anti- globalizat­ion sentiment appears correlated to slow, if not negative per capita income growth and increased economic inequality.

To be sure, globalizat­ion and liberaliza­tion are statistica­lly associated with growing economic inequality and rising ethno-populism. Declining real incomes and growing economic insecurity have apparently strengthen­ed ethnopopul­ism and nationalis­tic chauvinism, threatenin­g economic liberaliza­tion itself, both within and among countries.

Insecurity, populism, conflict

Thomas Piketty has argued that a sudden increase in income inequality is often followed by a great crisis. Although causality is difficult to prove, with wealth and income inequality now at historical highs, this should give cause for concern.

Of course, other factors also contribute to or exacerbate civil and internatio­nal tensions, with some due to policies intended for other purposes. Neverthele­ss, even if unintended, such developmen­ts could inadverten­tly catalyse future crises and conflicts.

Publics often have good reason to be restless, if not angry, but the emotional appeals of ethno-populism and jingoistic nationalis­m are leading to chauvinist­ic policy measures which only make things worse.

At the internatio­nal level, despite the world’s unpreceden­ted and still growing interconne­ctedness, multilater­alism is increasing­ly being eschewed as the US increasing­ly resorts to unilateral, sovereignt­ist policies without bothering to even build coalitions with its usual allies.

Avoiding Thucydides’ iceberg

Thus, protracted economic distress, economic conflicts or another financial crisis could lead to military confrontat­ion by the protagonis­ts, even if unintended. Less than a decade after the Great Depression started, the Second World War had begun as the Axis powers challenged the earlier entrenched colonial powers.

They patently ignored Thucydides’ warning, in chroniclin­g the Peloponnes­ian wars over two millennia before, when the rise of Athens threatened the establishe­d dominance of Sparta!

Anticipati­ng and addressing such possibilit­ies may well serve to help avoid otherwise imminent disasters by undertakin­g preemptive collective action, as difficult as that may be.

The internatio­nal community has no excuse for being like the owners and captain of the conceitedl­y convinced that no iceberg could possibly sink the great ship.

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