BY GARETH MORGAN
As the US-led invasion of Iraq draws ever closer, the important point for businesses, households and governments alike is that it threatens a sea-change in the geo-political institutional environment that has prevailed since World War II and within which we have all grown up. This, more than the eradication of the Hussein regime per se, is the importance of the US-Iraq brink– well at least to us.
It comes down to the fact that under President Bush post-September 11, the US is setting off on a new course, a course many outside the US still haven’t come to terms with. That course will change the fortunes of countries.
The US has a long history of being uncomfortable with international treaties and the implied surrender of its national to international interests. After the completion of World War I the League of Nations, an early version of the United Nations, was established as a forum within which members could reach a consensus over issues of mutual importance and this consensus be the basis of joint actions. The US had problems surrendering sovereignty to a committee of foreigners and didn’t join. Some extracts from the US Senate’s resolution to block the President’s initiative to join, illustrate the American psyche that led to the rejection at the time. For example,
“the United States reserves to itself exclusively the right to decide what questions are within its domestic jurisdiction…”, “The United States assumes no obligation to preserve the territorial integrity or political independence of any other country . . .”
By 1942, during the heat of World War II 26 of the Allied Nations including the US this time signed the Atlantic Charter, officially announced as a declaration of the United Nations. Then in 1945 the United Nations was formed. So this committee of nations is less than 60 years old.
On September 11 2001 the geo-political glue that has bound most countries in the world to pursue a consensus-driven approach to national security, changed. President Bush declared the US would no longer adopt a reactionary stance to the activities of its enemies insofar as they threatened the livelihoods of Americans. The US, he declared, now reserves the right to unilaterally undertake proactive, preventative measures. The famous words, “you are either with us or against us” ended any respect the US would have for non-aligned positions. In short this declaration in its various forms, snapped US reliance upon consensus-driven multilateral fora such as the United Nations and for that matter, NATO to determine US foreign policy.
Another Bushism – that the post-September 11 “campaign will take years not months”, has also been forgotten or dismissed by many in the West as simply a heat-of-the-moment comment.
The rapidly-escalating Iraq situation should demonstrate that both Bush declarations have legs. This reality – which is a big step toward the pre-1945 position – has not been accepted by many countries yet, although the imminent war in Iraq no doubt will bring the message home to most. It was made clear again in Bush’s ‘State of the Union’ address that non-democratic countries in his view do not effectively have sovereign rights and the US is entitled, if it sees these regimes threatening global stability through stockpiling weapons of mass destruction for instance, to bring such regimes down. Taking such a unilateralist position is being legitimised not just from the military might of the US but because the US is a democracy.
What are the economic and investment implications?
A world where the US methodically, determinedly goes about attacking Axis of Evil members Iraq, North Korea and Iran, is one where confidence in international economic stability is going to be substantially eroded. Should this be the case the cost of capital (interest rates) can be expected to lift. In particular, the cross-border investment flows – the oil that has lubricated the wheels of globalisation, can be expected to run dry.
Overall, with slower growth in international capital flows, lower economic growth will ensue. This will reduce investment returns, slow growth in employment and household incomes. No matter how difficult the evolution of the consensus-driven approach to global affairs which has been the United Nations has been, there is little doubt that in economic terms globalisation has accelerated growth of average global incomes. Of course there are issues about the distribution of that wealth, but unambiguously the economic emancipation of developing countries has been driven by inflows of foreign capital and technologies.
Right now Japan is going back into recession, the German economy is struggling and of course the US itself is moderately growing still courtesy of the American consumer. So two of the world’s largest three economies are detracting from global growth averages. If the US, emboldened by a victory in Iraq then decides it’s going to clean up other states that apparently harbour threats then concerns over further unilateralist adventures by investors has to raise the chances of a double-dip recession.
The double dip recession possibility becomes even more real, especially for those economies that maintain an aggressively anti-US stance on foreign policy. George Bush has already tied US global economic preferences with its foreign policy objectives. Terrorism would have raised the probability of a return of protectionism.