Extrapolating from the Current Crisis

Robert Skidelsky has written an interesting article for Project Syndicate that examines the consequences of the current financial crisis. Here is the key bit:

The global economy’s downturn increases countries’ political risk to varying degrees, depending on the severity of the shock and the nature of the implied social contract. Political systems in which power is least controlled, and the abuse of wealth greatest, are most at risk. The more corrupt the system of capitalism, the more vulnerable it is to attack.

The general problem is that all of today ’s versions of capitalism are more or less corrupt. “Enrich yourselves” is the clarion call of our era; and in that moral blind spot lies a great danger.

Despite efforts to give it precision, estimating political risk is not an exact science. It requires political theory, not econometrics. Forecasting models, based on “normal distributions” of risk over short slices of recent time, are notoriously incapable of capturing the real amount of risk in a political system.

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The lesson is clear. Autocracies, which are much praised for their decisiveness and for guaranteeing “law and order”, are paper tigers. They appear immovable until the moment they are evicted by popular anger. In the face of economic failure or military defeat, their emperors turn out to be naked.

In such situations, the great advantage of democracies is that they allow a change of rulers without a change of regime. Failure discredits only the party or coalition in power, not the entire political system. Popular anger is channelled to the ballot box. In such countries, there may be “new deals” but no revolutions.

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The Western democracies will survive with only modest changes. But strongmen who rely on the secret police and a controlled media to maintain their rule will be quaking in their shoes. Even Venezuela’s Hugo Chávez, who built his power on populist anti-Americanism, must be praying for the success of US President Barack Obama’s stimulus package to lift his falling oil revenues.

The big countries with the highest political risk are Russia and China.

The legitimacy of their autocratic systems is almost entirely dependent on their success in delivering rapid economic growth. When growth falters, or goes into reverse, there is no one to blame but “the system”.