As the Soviet Union began to stutter at the end of the 1980s, political philosopher Francis Fukuyama described ‘The End of History’, presuming Western liberal democracy would triumph in a final, unipolar post-Cold War epoch.
Yet since then, we have seen at least three major crises shaking the foundations of this creaking system. Firstly, US advocates of the ‘Democratic Peace’ theory – believing ‘regime’ change in totalitarian states would democratise them into malleable trading partners – experienced a rude awakening when Al Qaeda attacked their country on 9/11 in 2001. Subsequent military intervention preceded chaos, poverty and mass migration from the Middle East to Europe.
Secondly, the global financial crisis (GFC) of 2007-2008 led to developed economies closing banks and triggering ‘quantitative easing’ as their central banks tapped reserves to buy bonds. “As the commercial paper market froze and liquidity vanished, the world’s capitalist system and financial markets came within a hair’s breadth of imploding,” recalls Malik Sarwar, CEO of K2 Leaders.
The latest Covid-19 crisis combines a global health emergency with mass unemployment and business losses, as economic activity grinds to a standstill, leaving this shaky liberal Western model, already tested by populist leaders in several countries, once more in a vulnerable state.
While the 25 per cent Wall Street Crash of 1929 was followed by the Great Depression of the 1930s and an eventual war between two repugnant, brutal dictators leading the Communist Soviet Union and Nazi Germany, the 2008 experience was very different.
Just five months after Lehman Brothers closed, markets took off again, as debts spiralled. The $150tn of global debt which helped trigger the GFC in 2008 took 100 years to accumulate, comments Amin Rajan, CEO of the CREATE financial research consultancy. “But the problems that caused the GFC have not gone away; they’ve got worse. Central banks have been spending money like drunken sailors and even buying junk bonds.”
The current crisis will be deeper and longer. Previously we had joined-up thinking between national neighbours during the GFC. After World War II, world leaders built transnational institutions such as the IMF and European Economic Community, turning crisis into opportunity. The trend today is in the opposite direction.
US president Donald Trump talks down uniting efforts of the World Health Organization, the UN and NATO, attempting to destroy the old order, alongside the UK prime minister’s European withdrawal mission.
Each leader, including the once-unifying figure of Germany’s Angela Merkel, has retreated to supervising responses in their own countries, with “nobody raising a finger” to help a near-bankrupt Italy, says Mr Rajan.
While the Western neo-liberal model has not yet died, the rampant inequality it has generated during the last 20 years in its US and European heartlands has led many in the lower echelons of society to lose faith in it.
Things are about to get much worse for them, as history shows the nationalist and populist leaders they are increasingly voting for fail to improve standards of living. Moreover, pension systems are being driven into deeper deficits by falling asset values and rising liabilities, turning into legalised Ponzi schemes.
But all is not yet lost. The GFC of 2008 served as a dress rehearsal for Covid-19, as the ‘firemen’ – central bankers, politicians and leaders of multilateral institutions – realised immediately they would have to act quickly to mobilise vast resources.
“They had to bridge the balance sheet gaps of firms and consumers and to mitigate the huge blow to employment and lost demand,” says Didier Duret, a former ABN Amro private banker, who now runs the Futuring Strategies family office advisory firm.
The governance of international organisations such as the WHO may be called into further question and the IMF’s controversial debt restructuring role could leave developing nations even further behind.
But new, powerful players will surface from the chaos, says Mr Duret. Educational institutions such as Johns Hopkins University in the US will give more credibility to independent experts, previously trashed as bearers of “fake news” by US and UK leaders.
Additionally, a new form of multilateralism will deal with infotech dominance, cybersecurity and cyberwar, preventing a “digital pandemic” in the making. “Fragilities, power struggles and concentrations can combine to create a huge systemic, high-tech crisis,” believes Mr Duret.
New digital business ideas finessed against this backdrop are likely to permanently change our lives. The big tech giants from China rose to prominence in 2008, after springing from the dotcom disaster. Now the likes of Alibaba smell another opportunity to launch low-cost money management products.
Alongside these, we can expect new models of asset management, predicts Mr Rajan, where investment firms pay clients to manage their funds. They must first prove their ESG credentials and ability to manage assets in volatile periods. A focus on quality stocks, displaying sensible, moral governance and transparent management will also result.
In the realm of electronic payments, the impetus is also coming from China, whose central bank is pushing ahead with digital currency trials across four major cities, in the belief that most of us are unlikely to want to handle paper money after the crisis.
“Empty toilet paper racks will refill, but fully encrypted, traceable currency that is virtually impossible to counterfeit? That’s here to stay,” says Charles Chang, deputy dean of the Fanhai School of Finance at Shanghai’s Fudan University.
While few believe capitalism and liberal democracy should similarly be confined to the history books, the damaging trend towards nationalism is likely to continue, in China as well as Western nations.
Supply chains for medicines and high-tech items are likely to become less international and more domestic, with air travel and tourism also hit. Our greatest fear as a global society is for the flow of ideas between different nations to be restricted as a result, taking us back to a new Cold War era. As Fudan University’s Mr Chang suggests: “If we allow this nationalism to spread to the core conduits for thought-sharing like education and cultural exchange, that would be the real backward step.”
