London - The crises at the heart of the international
financial and political system go beyond the debt woes currently gripping the
Western world and to the heart of the way the global economy has been run for
over two decades.
After relying on it to deliver years of growth, lift
millions from poverty, keep living standards rising and citizens happy, nation
states look to have lost control of globalisation.
In the short term, that leaves policymakers looking impotent
in the face of fast-moving markets and other uncontrolled and perhaps
uncontrollable systems - undermining their authority and potentially helping
fuel a wider backlash.
In the longer run, there are already signs the world could
repeat the mistakes of the 1930s and retreat into protectionism and political
polarisation. There are few obvious solutions, and some of the underlying
problems have been building for a long time.
"In times of economic recession, countries tend to
become isolationist and retrench from globalisation," says Celina Realuyo,
assistant professor of National Security affairs at the US National Defence
University in Washington DC.
"Given the increased number of stakeholders on any
issue - climate change, the global financial system, cyber security - it is
unclear how traditional nation states can lead on any issue, let alone build
consensus globally," she said.
The financial system, the internet and even the supply
chains for natural resources have quietly slipped beyond effective forms of
These instruments of globalisation have delivered huge
wealth and kept economies moving with arguably greater efficiency, but can also
swiftly turn on those in authority.
Just as Egyptian President Hosni Mubarak discovered that
shutting down the internet was not enough to prevent social media-fuelled
protest overthrowing him, the world's most powerful nation states are
confronting their helplessness in controlling markets and financial flows.
Technology and deregulation allow both information and
assets to be transferred around the world faster than ever before - perhaps
faster than states can possibly control, even with sophisticated laws,
censorship and other controls.
The broad consensus at the 2009 London G20 meeting has
already been replaced by a much uglier tone of polarisation and mutual
recrimination at both domestic and international levels.
Where once they would have lobbied quietly, Russia and China
now angrily criticise the United States, with Russian Prime Minister Vladimir
Putin describing it as an economic "parasite".
In the United States and Europe, far right groups including
the Tea Party, eurosceptics and nationalist forces look to be rising, sometimes
potentially blocking policymaking.
On the left, calls grow for greater controls on unfettered
markets and capital.
Over the past year, global currency valuations have become
the source of new international tensions as major states accuse each other of
"competitive devaluation" to boost exports.
In cyberspace, nations worry powerful computer attacks on
essential systems could one day spark war, with rows over cyber spying already
fuelling mutual distrust.
Are controls and censorship possible?
It's unlikely that nations can genuinely pull back from
globalised systems on which they have become reliant.
"The Net sees censorship as damage and routes around
it," computer science guru John Gilmore said in 1993. In the modern,
high-speed globalised system, one could say the same of attempts at financial
and economic restrictions.
Many areas of the global economy have also become
effectively "ungoverned space" into which a host of actors - from
criminals to international firms such as Google and Goldman Sachs to countless
other individuals and groups - have enthusiastically jumped.
International companies and rich individuals move money -
and even entire manufacturing operations - from jurisdiction to jurisdiction to
seek low wages, avoid tax, regulation and sometimes even detection. In many
states, that helped fuel a growing wealth gap that is self-producing new
Some argue demands to impose new controls may miss the
point. In any case, many of the current crises in the system are the result of
attempts to control or distort markets and economic flows.
"Ironically, the theory was always that... the (euro)
single currency would stop the unpleasant capitalists from destabilising
Europe," says Charles Robertson, chief economist at Russian-British bank
Renaissance Capital, pointing to its intention of freeing European states from
never-ending local foreign exchange hassles.
"So the short answer is no, without massive capital
controls, states cannot stop this."
Arguably, the wider global financial system has similar
inbuilt problems and imbalances. But after decades of being largely ignored,
they look to be unravelling rapidly, by the same fast-moving markets that
previously fed them.
That is a problem not just for already struggling Western
countries, but the emerging powerhouses some hoped would replace them as a
source of global leadership.
Unsustainable systems uravelling?
"For most of the last decade, growth and economic
activity in many places has been driven by forces that were inherently
unsustainable," says Simon Derrick, head of foreign exchange at Bank of
New York Mellon.
"What's happening now is these... are coming under
pressure and it's getting to the stage where that can no longer be ignored. But
none of these issues are going to be politically easy to do anything
Low US interest rates and taxes, particularly after 9/11 and
the dot-com crash, fuelled the asset booms that produced the credit crunch.
But they were only sustainable in part because US government
spending - including on expensive foreign wars - was effectively underwritten
by emerging economies, particularly China, buying up their debt.
Beijing could make those purchases because it was earning
billions from soaring exports underpinned by what most observers agree was an
unrealistically low-pegged currency.
Those dynamics fuelled record economic growth that help to
maintain domestic stability. If that slows, some worry unrest could return -
particularly if Chinese internet controls and other domestic security measures
prove as unable to control dissent as the admittedly less sophisticated systems
of North Africa.
Critics say most attempted financial crisis fixes (bailouts
and stimuli) have simply "kicked the can down the road", providing
short-term relief but little more.
"Nobody's kicking a bigger can with more force than the
Chinese government," writes Ian Bremmer, president of political risk
consultancy Eurasia Group.
"The entrenched dominance of their state-led economy
has created the greatest near-term buffer to instability in the developing
world... (but it is also) by far, the most unsustainable and volatile (in the)