15.10.2010
The World on the Verge of Troublesome Years?
№3 2010 July/September
Alexander Dynkin

Alexander Dynkin, a Member of the Russian Academy of Sciences, is director of the Institute of World Economy and International Relations (IMEMO)

Vladimir Pantin

Vladimir Pantin, Doctor of Philosophy, is the head of an IMEMO department.

The Modern Era and the Crisis of the 1970s

This article was first published in Russian in Mirovaya Ekonomika i Mezhdunarodniye Otnosheniya, No. 6, 2010.

The global financial and economic crisis of 2008-2009 has revitalized the discussions about the change of the world order. Compared with the opinions voiced in the past two decades, including the “end of history” and the “clash of civilizations” prophesies, the crisis has brought the financial-economic paradigm to the forefront of the current debates. The recent (pre-crisis) mainstream forecasts of the future world order (such as “The Age of Nonpolarity” by Richard Haass, president of the Council on Foreign Relations, or the report by the U.S. National Intelligence Council “Global Trends-2025. A Transformed World”) do not fully take into account new realities and challenges emerging under the pressure of the current global crisis.

Admittedly, the crisis was cased by the global imbalance and will result in a new equilibrium due to changes in the setup of forces in the world economy and international relations, as was the case after the 1929-1932 recession and the ensuring Great Depression, or after the 1969-1970, 1974-1975 and 1980-1982 crises. In the first case, World War II broke out which resulted in the establishment of a bipolar world. In the second case, the crises contributed to political mobilization of American society and its economic renewal, thus enabling the U.S. to emerge as the only superpower.
Will the ongoing crisis be an exception? Or have we entered another protracted age in which the world order will be changed? Will the new world order after the current crisis be more stable? What kind of world order will it be? How will the U.S.A.’s leading role in the world change and what will happen to other major powers? A review of the political consequences of the previous crises in the 1930s and the 1970s might help find a possible answer to these questions.

THE 1930s OR THE 1970s?

All historical parallels are relative, and their non-critical evaluation would be unwise. Nevertheless, researchers practically have no other opportunities for analysis and projections of the long-term development of the economic and political situation, except by comparing it with other historical precedents. This approach has already proven effective. For example, Russian scientist Nikolai Kondratiev used it to describe great cycles of economic activities (“Kondratiev’s waves”) and predicted the 1929-1932 world crisis. Arthur Schlesinger, one of the classics of U.S. political science, gave an accurate prognosis of the U.S.A.’s political development, while Frank Klingberg predicted changes in U.S. foreign policy in the 1960-1980s.

Selecting the correct platform for comparison is crucial for the assessment of what is happening or will be happening. Also, one must keep it in mind that the past is a map rather than a compass. The modern financial/economic crisis is often compared with the 1929-1932 recession, and the current situation in the world is seen against the situation in the 1930s. The similarity is seen in the unexpected and global nature of the 2008-2009 crisis and in the considerable destabilization of the world financial system, which partially reminds of the events of the 1920s and 1930s. A more detailed analysis shows that aside from the similarities there are major differences between the current situation and that of the 1920s and the 1930s.

First, the crisis of 1929 began with a panic on the New York Stock Exchange, which later spread to stock exchanges of other countries. But the 2008-2009 crisis hit the banking sector in the first place, and the downfall of stock exchanges’ indicators was not as significant as in the late 1920s and the early 1930s (in 1929-1932 the Dow Jones index plummeted by 90 percent, from 350 to 41, whereas in 2008-2009 this indicator dropped by less than 50 percent). In addition, thanks to the massive money injections in banking in 2008-2009, banks mostly kept afloat in the leading states of the world – a sharp contrast from 1930-1933, when 9,000 banks collapsed in the U.S. alone.

The main currencies – the dollar, the euro, the yen and the pound – withstood the current crisis, whereas in 1929-1932 the dollar, the pound and other currencies depreciated considerably, which, in effect, paralyzed the world trade. Hence the conclusion that the cause of the current crisis is different, as are the anti-crisis instruments used by the leading countries.

Second, and most importantly, the current international political situation differs considerably from the 1920s and the1930s, when general instability reigned the world after World War I and when there was no acknowledged leader. At that time Great Britain was already losing its status of the world leader while the U.S. could not yet become the full-fledged leader in the world economy and politics. As a result, Germany, Japan and (partly) the Soviet Union – aside from Great Britain and the U.S. – joined the struggle for world leadership. This sharply mounted tensions and caused numerous international conflicts, which eventually led to World War II. At present, the situation is different: there is no major economic or political destabilization as in the 1920s-1930s, or tensions in international relations, or conflicts. Also, nobody is seriously challenging the U.S. leadership.

In our opinion, the current situation in the world is closer to the period of the late 1960s and the 1970s rather than the 1920s and the 1930s. The following arguments support this view: the financial crisis that shook the U.S. and other countries in 1969-1970 was caused both by an increased U.S. competition with Japan and Germany, and a pressure on the U.S. economy because of the Vietnam War.

The crisis of 2008-2009 is largely explained by U.S. economic competition with China and other East Asian countries on the one hand, and the financial pressure on the U.S. as a result of the drawn-out military operations in Afghanistan and Iraq, on the other. However, as in the 1970s, nobody is seriously challenging the economic, political or military leadership of the U.S. The rapid economic development of China and the gradual increase of its political influence are important factors, but similar things happened in the 1970s, when Japan posted a rapid export-based economic growth, while the Soviet Union was showing an increasing political and military might. It did not result in the U.S.A.’s losing its world leadership: after a temporary lower profile in world politics, the U.S. restored its might. This required from the U.S. a mobilization of efforts and reforms in various fields of public life. At present, U.S. society appears ready to implement a new series of important reforms.

In any case, Washington seems determined to launch reforms. It is premature to make any final conclusions about what spheres of public life are likely to host the success of the reforms and in which they might fail. The public resistance to reforms in the U.S. is quite strong and continues to increase.

The crisis of 1969-1970 resulted in noticeable changes in the international financial system, specifically in the U.S. decision to give up the Bretton Woods gold-dollar standard. This move did not cause radical changes in the financial system: the dollar remained the world’s key reserve currency, and the major world financial centers kept their role. Today, even if a world supra-national reserve currency is launched (for example, a new version of Special Drawing Rights promoted by the UN/Stiglitz Commission), the situation on the world financial markets will not change dramatically, provided no contingencies occur.

In certain respects, the current situation in the Middle East resembles that of the late 1960s and the early 1970s. In September 1969, in response to Israel’s actions (the Six Day War), the leaders of Islamic countries decided to establish the Organization of the Islamic Conference (OIC); in 1973-1974, oil prices skyrocketed due to the policy of the Organization of Petroleum Exporting Countries (OPEC). Today, these organizations vigorously pursue their policies again, playing an ever increasing role in the world economy and politics. The impasse in the Palestinian-Israeli conflict and the worsening relations between Israel and Iran may provoke new conflicts in the Middle East, while U.S. participation in military operations not only in Afghanistan but also in Pakistan (to prevent the Taliban’s coming in possession of nuclear weapons) may make the Islamic world even more resentful of the West. A similar situation occurred in the early 1970s, after the Arab-Israeli wars of 1967 and 1973. There were acts of terror and hostage-takings at the 1972 Olympic Games in Munich and elsewhere.

However, the current situation is more acute than in the 1970s. Terrorism has grown to global proportions, and the “arc of instability” now stretches from North Africa and Palestine to North Korea, Indonesia and the Philippines. Of special concern is the “Asian end of the arc,” i.e. the terrorist activity in Afghanistan and Pakistan, as well as potential conflicts in Central Asian states. According to the head of the Anti-Terrorist Center of the Commonwealth of Independent States, Andrei Novikov, the economic and social crisis in Central Asian states may force many young unemployed people to join international terrorist organizations. All these circumstances require closer cooperation between the U.S., the European Union and Russia in order to rebuff the terrorists and stabilize the world.

However, paradoxically though it may seem, the setup of the key political forces in the 2000s – despite the political changes that have occurred – somewhat resembles their setup in the 1970s. True, the world has become more complex, inter-related and globalized since then, but the main political roles are still the same, although some factors and players have been replaced. The international revolutionary communism has given way to Islamic fundamentalism, which is active in many countries of the world, and China is playing the role of the second superpower now, albeit less powerful than the Soviet Union. The European Union has taken the place of Germany and France, while South Korea, India and Brazil play the role of Japan, which developed rapidly in the 1970s. This shows certain conservatism (or succession) in the development of the architecture of international relations and world politics. The table below shows the basic similarities between the 1970s and the modern period.

The surprising similarity of the above processes and problems which, respectively, aggravated in the 1970s and at present, indicate the presence of another spiral in the global development when a new crisis replaces rapid growth, rather than the recurrence of situations in the world economy and politics. Compared with the 1970s, the world has changed dramatically, and many problems that were not resolved at the time, have re-emerged in new forms and on a larger scale.

Table 1. Basic Similarities of the Crises of the 1970s and of 2008-2010

The 1970s
The U.S. war in Vietnam (1965-1972)
Financial crisis in the U.S. (1969-1970)
Changes in the world financial system (renunciation of the Bretton Woods golden standard, and dollar devaluations in 1971 and 1973)
Changes in the international political system (renunciation of the active foreign policy by the U.S. in the 1970s, and the increasingly vigorous foreign policy of the Soviet Union and China)
Internal political changes in the U.S. (the growing anti-war movement in the late 1960s – early 1970s, and social and economic reforms in the 1970s)
Imbalance of the world order (OPEC’s oil embargo in 1974-1975, the revolution in Iran in 1978-1979, and conflicts between Israel and Arab countries in the Middle East in the 1970s)
Arms reduction talks (Richard Nixon’s visit to Moscow in 1972, U.S.-Russian accords on missile defense in 1972, Strategic Arms Limitation Treaty (SALT I) in 1972 and SALT II in 1979
Aggravation of problems in the world energy sector (oil price hikes, energy crisis of 1974-1975, and transfer of the U.S. and Western Europe to new energy conservation technologies in the 1970s)

2008-2010
U.S. military operations in Afghanistan (since 2001) and Iraq (since 2003)
Financial crisis in the U.S.; the global economic crisis of 2008-2009
Discussion of changes in the world financial system in 2008-2009 (discussions about a new world reserve currency and possible devaluation of the dollar)
Changes in world politics (changes in the U.S. foreign policy course under President Barack Obama as shown in his speech “A New Beginning” in Cairo on June 4, 2009, the increasing political activity of Islamic countries, China and Russia after 2007)
Internal political changes in the U.S. (changes in sentiments in U.S. society, Barak Obama’s victory in the 2008 presidential election, the beginning of social and economic reforms)
World order imbalance (North Korea’s challenge in 2009; problems around the Iranian nuclear program and internal conflicts in Iran in 2007-2009; problems in Israeli-Palestinian relations); arms reduction talks (Obama’s visit to Moscow in 2009, drawing the agreement on the reduction of strategic nuclear armaments)
Mounting problems in the world energy sector (oil price fluctuations in 2005-2009, conflicts over the transit of oil and gas in 2007-2009, discussions about the establishment of a “gas OPEC” and intensive launching of environmentally friendly sources of energy in the U.S. and Europe)

CONFLICTS AND UPHEAVALS IN THE OFFING

If comparison of the current situation with the 1970s is at least partially justified, several important conclusions would follow:

First, a certain weakening of the world leader, the U.S., is most likely temporary. The United States has encountered unprecedented challenges in the finance, economy, social sphere and international relations. But like in the 1970s, as long as there are no serious challengers to world leadership, America’s domination will persist, although this does not mean that it will continue forever and that U.S. leadership is guaranteed. In the future, the world may see a real aspirant to world leadership, or this leadership may be shared between several centers of power. This will breed the so-called multipolar world and, consequently, an increasing potential for the collision of interests and conflicts.

Second, if the analogy in question is justified, the world is likely to expect many economic upheavals and political conflicts within the next few years. The weakening of the U.S. after the defeat in Vietnam prompted some leaders in the Arab countries and the Soviet Union to make rash decisions. Several years after the financial crisis of 1969-1971, the energy crisis of 1974-1975 broke out. The latter was caused by a dramatic increase in world oil prices due to the policies of the Arab states and other oil producing countries after another war in the Middle East in 1973.

Analogy would suggest a new economic crisis, which, after a period of growth, might break out in 2012-2013. The general instability of the world financial and political system indicates a high probability of new upheavals.

New conflicts in the Middle East or serious upheavals in the post-Soviet space may directly cause a new crisis. This primarily concerns Central Asia (one of the states of the region, namely Kazakhstan, has considerable oil reserves, while Turkmenistan boasts tremendous reserves of natural gas), where the U.S., Russia and China are competing for influence. Of no less danger are the simmering conflicts in the Caucasus which accommodates oil-rich Azerbaijan and Georgia where an oil pipeline to Europe runs. A political conflict in Ukraine threatening its integrity would be of even greater danger. It may provoke outside interference in its affairs. In this event, a dramatic worsening of relations between Russia and the West is quite likely.

However, a possible new crisis and even a minute political retreat by the U.S. will not imply the defeat of the West. In 1975, U.S. troops had to pull out from South Vietnam, which temporarily weakened U.S. foreign policy positions and offered the Soviet Union an opportunity to strengthen its influence in the third world. But while the Soviet Union was busy supporting revolutions in Asia, Africa and Central America, and funding the “Socialist camp,” the U.S., having learnt a lesson from the Vietnam War, used the chance to reform its army, making it truly strong, mobile and professional.

In addition, the U.S. implemented other important reforms in the 1970s, paving the way to a dramatic increase in its international economic and political influence in the 1980s and the 1990s. The planned withdrawal of U.S. troops from Iraq may serve as an analogy of the U.S. withdrawal from Vietnam. Yet, as in the 1970s, it is unlikely to weaken the U.S.; rather, it will enable it to focus on the key economic, social and foreign policy issues.

The late 1970s were quite dramatic. In 1978-1979, a revolution broke out in Iran, which seriously compromised the U.S. positions in the Middle East and the Persian Gulf (Greater Middle East, as they say now). The revolution brought an anti-U.S. regime to power, led by charismatic religious leader Ayatollah Khomeini. But this regime was not pro-Soviet, so the weakening of the U.S. positions in the Gulf did not imply an automatic strengthening of Soviet positions. In late 1979, the Soviet Union deployed troops in Afghanistan, starting a long war. Afghanistan turned into a theater of a “world war” of the bipolar era as diverse forces came together against the Soviet Union, such as Islamic (including pro-Iranian) fundamentalists, the U.S., West European countries and even China that supplied weapons to Afghan mujahids.

Therefore, despite the fact that the U.S.A.’s foreign policy positions had noticeably weakened by the late 1970s, and its rival had attained the maximum influence in the world, the Soviet Union, in effect, entered a deep economic crisis and bogged down in Afghanistan. The United States, having rid itself of the burden of the Vietnam War, emerged from a chain of crises and upheavals as a more consolidated and powerful state, whereas the Soviet Union’s defeat in Afghanistan was the final toll of the bell before its breakup. Mere eight months after the pullout of Soviet troops from Kabul the Berlin Wall fell.

The global military and political consequences of both these wars were largely caused by economic processes. The economic crisis of 1980-1982 deeply affected the U.S. and Western states. But, unlike the crises of 1969-1971 and 1974-1975, the U.S. position in the world improved in the long run, whereas that of the Soviet Union worsened.

Throughout the 1970s, the Soviet Union squandered considerable resources aiding its satellites and supporting revolutions and national movements, which took a heavy toll on its economic and political position. Economically, the Soviet Union was stagnating, and this period was later – under Mikhail Gorbachev – named “the age of stagnation.” In the meantime, the U.S. accumulated intellectual, technological, financial and political resources for a new spurt. It began in 1983-1984, together with an economic revival that gave an impetus to a new technological revolution, the advent of modern information technologies, personal computers, Internet, etc.

Supposedly, the analogy of the events in the late 1970s and the early 1980s would be political and economic upheavals in 2012-2020. They are likely to be caused by the development of new technologies (the integration of nano-, bio-, cognitive and information technologies, environmentally friendly sources of energy and faster information transfer methods), changes in the geopolitical situation in the world, an imbalance of demographic processes in various regions of the world and ensuing mass migration, climate change, environmental problems, shortages of freshwater, and the spread of new epidemics. As a result, social and political conflicts may escalate in various regions.

A majority of states will have to coordinate their efforts to address numerous problems. In these conditions, one might expect increased demand for global governance and effective leadership which would bring together countries with different traditions, religions and cultures. Only the U.S. can be such a leader in the near future. It is important that the leader country be ready for this global challenging task and avoid the temptation to be guided by own momentary interests.

NEW TRENDS

Globalization is among the new trends that sets the beginning of the 21st century apart from the 1970s. It was globalization that caused such different and seemingly unrelated processes as the emergence of the global information market; the instantaneous overflow of financial assets from one country to another; the rapid economic growth of China and other Asian countries; the quick spreading of new technologies, institutions, democratic and semi-democratic regimes; intensive communication between millions of citizens of different countries; global migration; and global international terrorism. New global markets are emerging, providing financial, legal, educational and medical services and highly skilled specialists. The “experience economy” is gaining greater significance, as are international sports, cultural and high fashion events. The current crisis, too, largely relates to globalization processes.

Globalization has its pros and cons, obverse and reverse, advantages and shortcomings. It is necessary to learn to govern globalization, but no country can do it on its own, not even such a powerful one as the U.S. Therefore, the leading countries will have to learn to effectively interact within G20 and other international formats. Of course, finding compromises and consensus within G20 is a more laborious task compared with doing the same within G8.

Among other new trends (and political risks), one should note the threat of the proliferation of nuclear weapons, climate change, freshwater shortage and the spread of new epidemics. The danger of Iran’s or North Korea’s coming in possession of nuclear weapons is considerable, but it can never compare with the horrendous prospect of the Taliban’s getting Pakistani nukes to blackmail the world. There was no such threat in the 1970s, but now the world community will have to counteract it. The growth of the influence of aggressive Islamism poses danger to all the leading countries, including the U.S., the European Union, Russia, India and China.

As for challenges set by climate change and freshwater shortage, they, too, have a clear political dimension. Many scientists predict that the upcoming conflicts and wars will be caused not so much by oil supply problems as the fight for freshwater resources. On top of that, the world is facing global epidemics such as AIDS, atypical pneumonia or swine flue, fraught with grave economic and political consequences.

The ongoing rapid technological changes are both advantageous and risky. For example, the relatively cheap (1,500 dollars) mapping of human genome might cause a wealth of ethical and other problems in four to five years. Any insurance company or bank may demand the mapping of its client’s genome which implies an invasion of privacy and vulnerability to outside interference. Cloning, cyber-terrorism, trade in internal organs may become the side results of the rapid and uncontrollable development of new technologies.

Thus, compared with the 1970s, the present-day world is more dynamic, globalized and risk-prone. The new trends considerably influence the picture of the modern world, political processes and international relations, yet some historical situations look similar. The 1970s are already two generations away; much has changed since, but the logic and sequence of events in crises and transitional periods change much more slowly, and have a high inertia.

* * *
The above parallels of the modern time with the 1970s allow us to discern some prospects, with a certain degree of probability.

First, the next decade, as the 1970s, is unlikely to be calm: we may expect a series of crises and imbalances. We cannot rule out geopolitical upheavals and changes, especially in the Middle East and the post-Soviet space (Ukraine and Moldova and some Central Asian states in which the interests of Russia, the U.S. and China intersect). The crises will alternate with upturns; and despite pessimistic forecasts, the global trend of world development will not be disrupted. At the same time, we will certainly see pronounced turbulence in the world economy and politics, intensive restructuring, and political and economic reforms both in individual countries and at the supranational level.

Second, the U.S. will retain its world leadership in the next few decades. At the same time, the role of China and other BRIC states, and, possibly, the European Union, will increase dramatically. Therefore, the unipolar world will gradually be replaced by a multipolar one. In these new conditions, the U.S. will have to closely interact with the key centers of political power (above all the EU, Russia, China and India) and look for acceptable compromises. The United States, together with other countries, will have to make great effort to prevent the world from plunging into chaos, and preserve the governability of the global processes. There are no serious aspirants to world leadership at present, but a weakening of the U.S. may facilitate their emergence. At the same time, attempts to show strength at any cost, disregarding possible consequences will weaken the U.S. rather than strengthen it. A reckless demonstration of strength will certainly boost anti-American sentiments across the world.

Third, we should expect, as in the 1970s, serious changes in international politics and the global financial system, as well as reforms of international political, financial and economic institutions. Reforming the IMF, G8 and G20 seems to be most urgent, but the United Nations should carry out reforms of its own as well. NATO, too, is looking for a new strategy. President Dmitry Medvedev’s initiative to build a new European security architecture will require creative efforts. We can no longer postpone its modernization. The task of world leaders, including the U.S. and Russia, is to contribute to the implementation of these reforms. Meanwhile, both countries will have to decide in 2012 on the constitutional change of their leaderships or their re-election for a second term. China, too, is planning changes in its leadership in 2012. This implies a rather busy schedule of political and diplomatic work within the next three years, and by no means guarantees stability in the world.

Fourth, the uniqueness of the present moment is that it is impossible to resolve any major global issue without cooperation with Russia, be it stable development of countries in the post-Soviet space, the Israeli-Palestinian, Armenian-Azerbaijani or South Caucasian conflicts, an aggravation of the situation in Afghanistan and Pakistan, non-proliferation of nuclear weapons, a nuclear threat from Iran and North Korea, missile defense problems, international terrorism, the new financial architecture, energy and water security, climate change, control over new technologies, or the danger of epidemics.

Finally, the awareness of the interdependence of various countries in the face of a possible financial-economic disaster, the priority of the common strategic values and the de-ideologization of politics in the Euro-Atlantic space have given an unprecedented impulse to the appearance of good will in world politics. This impulse, if used correctly and on time, may prevail over national or transnational interests. If not, the “end of history” scenario will have really good chances to come true.