16.11.2008
The World Crisis – A Time for Creation
№4 2008 October/December
Sergei Karaganov

Doctor of History, is Dean of the Faculty of World Economy and International Affairs of the National Research University–Higher School of Economics (NRU–HSE), and Honorary Chairman of the Council on Foreign and Defense Policy, Russia.

The ideas expressed in this
article came about long ago and took their final form during the
first World Policy Conference held in early October in Evian,
France.

The main impression left by the Evian conference for current
politics, underlined in speeches by the Russian and French
presidents, is that Russia and Europe have refused to follow the
Cold War path, on which many Americans and their allies in Europe
wanted them to embark, especially after Georgia made its incursion
into South Ossetia. At the same time, differences between Russia
and the West remain – and not only over the South Ossetian
developments.

And now the main point – world history is entering a new
era.

Politically, the past 100 years can be divided into three
periods. The first period began with World War One, the Russian
Revolution and the unfair Treaty of Versailles; then it continued
with the first Cold War and ended with Stalinism, Fascism and World
War Two. The next period began with the construction of a two-bloc
confrontation, the classical Cold War and, simultaneously, the
creation of the United Nations and the system of governance over
the global economy and finance, which was dominated by the U.S. and
the West. This system should have been rebuilt after the defeat of
Communism and the breakup of the Soviet Union, which marked the
beginning of the third period in the history of the last century.
However, the international system was never rebuilt to meet the new
challenges and opportunities. The West and the U.S., ecstatic over
their new status as winners, decided to leave everything intact. A
confused and weakened Russia had nothing to offer. Developing
countries were still on the periphery of the world economy and
politics. The following decade saw the establishment of a unipolar
world based on old institutions.

In order to save NATO – which had lost its main goal – the West
began to expand the alliance; however, as time went on, NATO became
the main source of tensions in Europe, at least in relations with
Russia, and predictably began to restore Cold War stereotypes. The
UN kept losing its influence and effectiveness. Ecstatic over their
victory, the winners overlooked the beginning of nuclear
proliferation to such countries as India and Pakistan and failed to
solve a single problem in the Middle East. Having missed the
beginning of the Yugoslav war, they launched an illegal attack on
Yugoslavia. The U.S. started withdrawing from the arms control
system. The system of governance over international relations and
security, established over the previous 50 years, was gradually
disintegrating.

The tone in the global economy was set by the International
Monetary Fund, the World Bank and the Washington Consensus, whose
authors argued that the whole world could only develop according to
the super-liberal Anglo-Saxon model.

A FINANCIAL BUBBLE

The world’s increasingly rapid economic growth from the
mid-1980s throughout the next 20 years was generally interpreted as
the result of applying the Washington Consensus prescriptions,
although now it is obvious that this growth was not so much due to
them as to the huge expansion of the sphere of world capitalism.
The markets of several dozen countries and a new cheap labor force
made up of over two billion people in East, Southeast and South
Asia, Central and Eastern Europe, and the former Soviet Union
joined the world capitalist economy. Another factor that
contributed to the growth was a technological revolution – this
time with an emphasis on information technologies which ensured an
unprecedented mobility of finance.

The new growth of the world economy, albeit uneven, was
beneficial almost to all, especially to the Old West at the initial
stage. The new financial class of the West grew fabulously rich
through ever new financial instruments, whose essence many of their
creators had already ceased to understand. The U.S. continued to
get rich, as well, as it used a U.S.-oriented financial and
monetary system which let the new financiers and the country at
large live beyond their means.

No one cared to invent a new system for managing the rapidly
growing economy. Countries continued to rely on the old, seemingly
effective instruments and on the domination of the U.S. dollar.
Only Europeans created a local and more or less new system and
switched to the euro.

The patently unstable political unipolar world could have been
rebuilt after the September 11, 2001 terrorist attacks against the
U.S. There was a chance to set up a global coalition led – but not
dominated – by the United States. But Washington did not want to
share its might with others; it instigated a second wave of NATO
enlargement and decided to extend its political and economic model
to the Middle East using force. Then it attacked Iraq. Predictably,
America overstrained itself. Its reputation as a winner, prestige
and influence went downhill.

At the same time, one more powerful process emerged. By the end
of the 1990s, the globalization and the increasing openness of the
world economy, which initially gave benefits mainly to the Old
West, became more advantageous to young capitalist countries. A new
industrial revolution began, based on the cheap and relatively
educated labor force in China, India, and Southeast Asian
countries. Global industrial production began to shift to new
centers. China became the symbol of this redistribution of forces
in the world economy. The old economic winners suddenly began to
lose the competition. Resource flows moved to the younger ones.

The U.S. and the West, carried away by the establishment of the
world domination of their political system, overlooked one more
revolutionary change – the redistribution, within a surprisingly
short period of time, of control over resources, above all oil,
from Western companies to national states and their companies.

The increased consumption of raw materials due to the economic
growth of young capitalist states triggered a worldwide increase in
their prices, particularly oil and gas prices. This factor caused a
new large-scale redistribution of finance – trillions of dollars
within several years – to extracting countries and their companies.
Energy-rich Russia was among the countries that gained from this
second wave of resource redistribution. Huge financial bubbles
emerged in the U.S. and other countries. An enormous surplus of
money appeared in the world due to the vast savings of Asian
citizens who had started earning money but who did not have social
security systems, and due to a money surplus in oil-producing
countries, which amounted to trillions of dollars.

But the main bubbles formed in the United States.

All these basically new phenomena occurred under the old system
of regulating global finance. The system almost did not work, but
the wealth, which “rained down from heaven,” stopped the mouths of
those who warned of the system’s inadequacy and of its inevitable
breakdown.

Oil-producing states and countries of the young non-resource
capitalism, which had freed themselves from the oppression of the
bipolar world, felt increasingly independent. Apart from investing
in U.S. government securities, thus financing debts and unbridled
consumption, they started buying up Western companies and banks,
dumbfounding the Old West and arousing fear in it that their new
economic might would inevitably be followed by a redistribution of
forces in world politics.

POLITICAL REDISTRIBUTION

The United States, weakened politically because of the Iraq war
and by the overestimation of its abilities, was not the only loser.
Western Europe was also intoxicated with victory in the Cold War.
Europe, wishing to consolidate the results of victory and having
lost strategic benchmarks for its development, launched a
recklessly rapid expansion of the European Union. This caused
Europe to focus still more on itself and further complicated and
delayed the possibility of conducting a common foreign policy.
Europe continued to lose its foreign-policy influence, although,
unlike the United States of George W. Bush, its soft power – the
attractiveness of its development model and the appeal of its
lifestyle – was not weakened.

At the same time, it turned out that the Old West’s model of a
mature liberal-democratic capitalism, which seemed to have won for
good, was no longer the only ideological benchmark for the rest of
the world. States of the new capitalism – naturally more
authoritarian, in line with their stage of economic and social
development – offered a much more attractive and attainable
political development model for lagging countries. Moreover, they,
and especially China, did not impose their models in their foreign
expansion, but built roads, mines and plants to provide their
industrial complexes and markets with raw materials and
semi-finished goods.

In many ways, energy-rich Russia, which had dramatically
increased its political clout, became the symbol of all those
changes, disadvantageous to the West. In addition, unlike a more
cautious India and especially China, it assumed a contemptuous and
arrogant attitude toward the Cold War “winners” which had recently
humiliated it and which had started to lose.

The former “winners” tried to regroup. As if from a horn of
plenty, numerous projects emerged for a “union of democracies” – a
tragicomic stillborn association of liberal-democratic “elders”
against the authoritarian “younger” ones. There also was a desire
to take down a peg the “new” ones which had shot ahead. The U.S.
nurtured plans to start a kind of Cold War against China five to
seven years ago. But Beijing was cautious and, most importantly, it
strengthened too fast.

Starting in 2007, the West stepped up its efforts to curb the
rapidly growing influence of an ever mightier and more independent
Russia.

Georgia went into South Ossetia in August 2008, after which an
attempt was made to organize a new Cold War against Russia. The
attack on South Ossetia, Russia’s harsh reaction, and the attempt
to start a confrontation after that, mainly using NATO, have shown
the dangerous non-reconstruction of the European security system,
which failed to prevent the conflict. Moreover, the de facto
division of Europe into two security zones and the rivalry between
them in many ways generated this conflict.

Russia not only retaliated, stopping the killing of its citizens
and peacekeepers, but also said “no” to NATO’s further expansion
and to the inertia that suited the Old West. Now, even those who
did not want to listen can see that the present Cold War-style
system of European security, which has been artificially maintained
for over a decade and a half, can no longer exist and that it only
leads to the escalation of conflicts and ultimately to war.

AND HERE COMES THE CRISIS

Back in late August it seemed that the political semi-farcical
Cold War – unleashed by the United States and its allies and
clients in Eastern Europe and in Britain and which many Old
Europeans met with caution but also with sympathy – would be the
main political trend for the next two to three years.

But then the global financial crisis broke out, which is now
being followed by a global economic crisis. I think the United
States and the Old West will now have other things on their minds
than conducting a Cold War.

The acute crisis has forced countries to start correcting the
entire system of global economic governance. The United States and
its ideas of the superiority of liberal capitalism and the limited
role of the state in the economy have been dealt a severe blow.
Faced with a possible severe depression, comparable to the crisis
of the late 1920s-1930s, Washington has decided to nationalize
failed system-forming financial companies and banks and to invest
hundreds of billions of dollars in the economy. This policy is
directly opposite to the Washington Consensus ideology, which was
so confidently imposed in recent decades on other countries,
including Russia. True liberals should have let bankrupt
enterprises and the bankrupt policy fail completely and should have
made room for the sprouts of a new economy. The U.S. has been
followed by other countries in resorting to “socialist” methods to
save failed companies and banks.

Reasonable apprehensions have already been expressed that the
retreat from the former ideology of super-liberalism may go too far
toward an increased state interference and may make the Western
economy even less competitive. (I wish these warnings were first
heeded by Russia, which is successfully destroying its
competitiveness by quasi-socialist and reckless increases of labor
costs and by the massive interference of corrupt state
capitalism.)

Meanwhile, the International Monetary Fund, the World Bank and
even the financial G7 remain silent, although the crisis had been
ripening for quite some time. Only Europeans are trying to act
jointly, albeit inconsistently and with unknown results.

CONCLUSIONS FOR ALL AND FOR RUSSIA

It is clear that the global crisis is only beginning and will
affect everyone. But it is not clear how and when all countries
will jointly start overcoming it.
But we should already sum up the preliminary results of the recent
developments.

The period from August to October 2008 will likely go down in
history as the start of the fourth stage in the world’s development
over the past century, which began – really, not according to the
calendar – in August 1914, closing the door on the splendid 19th
century and ushering in the savage and revolutionary 20th century.
Actually, the 21st century is beginning right now. (This idea is
not mine, but that of Thierry de Montbrial, the founder of the
Evian Forum and an outstanding French political thinker.)

This crisis and this new period in world history threaten to
inflict inevitable hardships on billions of people, including
Russians. Coupled with the aforementioned rapid geopolitical
changes, with the collapse of the former system of international
law and security systems, and with attempts by the weakening
“elders” to stop the redistribution of forces not in their favor,
this period may bring a dramatic destabilization of the
international situation and an increased risk of conflicts. I would
have dared to describe it as a pre-war situation and compare it
with August 1914, but for one factor: huge arsenals of nuclear
weapons remain, along with their deterrent factor, which makes
politicians more civilized. Yet one must keep in mind the objective
growth of military danger anyway.

The world economic crisis will fix the new redistribution of
forces. But it can also change its speed. When the U.S. overcomes
the crisis, it will end up with even less moral and political
capital. I do not think that Barack Obama, now viewed as a ray of
hope for America, would be able to quickly restore this capital as
president. Quite possibly, the crisis will inflict even more
economic damage on new industrial giants, especially at first.
External markets, on which their growth largely depends, will
shrink. The super-fat years will come to an end for oil producing
countries, as well, including Russia, which has proved reluctant or
unable to switch to a new economy and renovate its
infrastructure.

The matter at hand is not just a deep financial and economic
crisis. This is an overall crisis of the entire system of global
governance; a crisis of ideas on which global development was
based; and a crisis of international institutions.

Overcoming this overall crisis will require a new round of
reforms, the construction of international institutions and systems
for governing the world economy and finance, and a new philosophy
for global development.

This crisis will clear out what has been artificially preserved
or not reformed since the end of the Cold War. A new global
governance system will have to be built on the ruins of the old
one.
The time will come for creation.

When this overall crisis is over, its relative beneficiaries
will include not only countries that will have been less affected
by it, but also those that will have seized the initiative in
building a new world order and new institutions. They will have to
correspond to the emerging balance of forces and effectively
respond to new challenges.

One must be morally and politically ready for that period of
creation, and already now, despite the crisis, one must start
building up one’s intellectual potential so that in a year or
several years one could be ready to put forward one’s own,
well-grounded proposals for rebuilding the international governance
system on a more just and stable basis.

Russia has so far proposed a very modest plan for rebuilding the
European security system and supported, at last, the idea to
establish a new Concert of Nations as an association of not seven
to eight old countries, but 14 to 20 of the most powerful and
responsible states capable of assuming responsibility for global
governance.

We need to go further and start thinking about the future
already now – however difficult this might be during a crisis.

I would propose for discussion some principles for building the
future system:
– Not boundless and irresponsible liberalism, but support for free
trade and a liberal economic order coupled with basically stricter
international regulation.
– Joint elaboration and coordination of policies by the most
powerful and responsible countries, rather than attempts to
establish hegemony by one country, or a struggle of all against
all.
– Collective efforts to fill the security vacuum, rather than
create new dividing lines and sources of conflict.
– Joint solution of energy problems, rather than artificial
politicization of the energy security problem.
– Renunciation of the recognition of a nation’s right to
self-determination up to secession if this is done by force. (The
wave of fragmenting countries, which began in the 1950s and which
received a fresh impetus with the recognition of the independence
of Kosovo, South Ossetia and Abkhazia, must be stopped.)
– Russia and the European Union must strive not for a strategic
partnership in their relations, but for a strategic alliance.
– The goal of development must be progress, not democracy.
Democracy is a consequence and an instrument of progress.

Surely, many of the proposed principles will be objected to and
rejected. But the habitual politically correct clich?s will not
help to improve the situation and build a new world. Meanwhile, the
time is coming for creation.