So far, an under-reported aspect of the current financial crisis is its geopolitical impact—but this is changing as investors and government policy-makers come to grips with the implications. For instance, in the latest edition of Foreign Affairs, Roger Altman argues that the crisis is a setback for the West (Europe/ U.S./Canada/Japan), an advance for China, neutral for India, and potentially destabilizing for other emerging economies such as Russia, Iran, and Venezuela. This is something for the business community to watch closely. Though the developed economies get more news coverage, the emerging countries are gaining attention as important players in the next phase of the crisis. Like children in a game of “snap the whip,” we must watch how well the emerging economies can hang on through the volatility of this crisis.
History shows that every financial crisis is associated with profound changes in the geopolitical landscape. At the start of the Great Depression, enactment of the infamous Smoot-Hawley tariff dampened global trade and carried to other countries what would likely have been only a bad recession in the U.S. The S&L Crisis of 1986-1989 helped to truncate George H.W. Bush’s service as President—in the memorable phrase of Bill Clinton’s 1992 campaign, “It’s the economy, stupid.” The “Tequila Crisis” in 1995 coincided with a return of populism throughout Latin America that persists to this day. The “Asian Flu” of 1997 launched the uprising of political resistance to the “Washington Consensus” that ultimately torpedoed the Doha Round of trade liberalization negotiations. In 1998, the crisis associated with the Russian bond default coincided with the decisive reversal of political liberalization in that country.
The Panic of 1907 spawned the U.S. Federal Reserve System, founded in 1913. But less well-known is its association with the Mexican Revolution of 1910. Historian Kevin Cahill wrote, “the U.S. depression crippled the Mexican economy. Generating widespread dissatisfaction with President Porfirio Diaz’s government, it thus was one of the factors that provoked the Maderistas and other revolutionaries to rebellion in 1910.” ((Kevin Cahill, “The U.S. Bank Panic of 1907 and the Mexican Depression of 1908-1909” The Historian, 1998, page 795.))
In 2008, the financial crisis had a major influence on the election of Barack Obama to the U.S. Presidency. Voters don’t like impoverishment and uncertainty. A wave of re-regulation and massive government spending seems likely. Fortunately, the resource base of the U.S. has been large enough to withstand the threat of the crisis (so far). And it looks like the big emerging economies of China, India, and Brazil will withstand it as well.
What about less well-endowed countries? The year ahead should make interesting watching, not least for the unexpected ways in which the financial crisis will affect them. Domestic stability is significantly dependent on inflows of cash. Many emerging economies are major exporters of natural resources; as commodities prices fall, so will their ability to finance domestic programs (an op-ed today urges us to think of Russia, Iran, and Venezuela). An article today notes that remittances are likely to decline in 2009—remittances are cash payments sent from migrant workers in developed countries to their kin in emerging countries. The flows of cash from remittances are so large that the stability of some countries depends on them. In the Philippines, for instance, remittances in 2007 accounted for $16 billion, or 11% of GDP.
Here are four emerging countries to watch as the financial crisis rolls on:
**Mexico: An important trading partner of the U.S. and source of major immigration-related concerns. The interests of the U.S. are served by a strong and stable neighbor. But in a recent article, Forbes magazine worries about a drift toward chaos, fueled by the U.S. recession, crime, corruption, and the free-fall in oil prices.
**Pakistan: The current crisis hit this country already in the throes of neighboring war and internal instability. In November, the country obtained an emergency loan from the IMF. Worsening financial conditions can only deepen the political crisis within the country, and indeed, the entire South Asian region.
**South Africa. The strongest democracy on the African continent, SA has been a voice of leadership within the region and of reconciliation from a colonial past. Yet the country struggles with poverty, high unemployment, refugees, xenophobia, HIV/AIDS, crime, corruption, and unstable neighbors (read: Zimbabwe). An economist at the world bank opines that SA’s reserves are adequate for now, but that currency volatility will threaten the economy.
**Latvia. Following the break-up of the Soviet Union in 1991, this country returned to a liberal economy and joined the European Union. Now, buffeted by the free markets, the country is struggling to stabilize. The central banks of Sweden and Denmark recently offered aid. With an ethnically-diverse population and a neighbor (Russia) that is reasserting its geopolitical influence, Latvia may have fewer degrees of freedom to maneuver.
The financial crisis “ain’t over ‘till it’s over.” Some economists are suggesting that a recovery will begin in the U.S. in two or three quarters. Many of the emerging economies are likely to lag behind that date; the notion that their economies are somehow “decoupled” from the crisis is false. More importantly, the economic metrics are merely a subset of what the thoughtful practitioner should watch. My argument here is that major financial crises are associated with important geopolitical change. The emerging economies are like the canary in the coal mine, giving some early indication of the likely impact of the current crisis.