Economic Crisis Poses Threat To Global Stability

First in a two-part report.

Part 2 Of This Report

Around the world, unemployment is rising and incomes are falling, and it isn't clear how long the recession will last or how deep it will get. The global economic situation is so serious that the head of U.S. intelligence agencies now says it has surpassed terrorism as the top threat to national security.

National Intelligence Director Dennis Blair's dramatic report last week — that the economic crisis is now the United States' top "near-term security concern" — caught some members of Congress by surprise. But it makes sense.

The global economic downturn could easily change the world. Previously stable countries could become unstable. The geopolitical lineup could shift sharply, some countries becoming more powerful while others get weaker. Allies could turn into adversaries.

And no one knows for sure how things will turn out.

Threats Of A Long Recession

"This is one of these moments where our assumptions are being challenged," says David Gordon, a former intelligence officer who now leads research at the Eurasia Group. Until last month, he was the director of policy planning at the State Department.

"I think there is a lot of uncertainty right now where things are going, and that makes it hard to plan," Gordon says. "But it also means that you have to broaden the way you think about things, include different kinds of scenarios."

One possibility is that unemployment could get so bad in some countries that there will be civil unrest. Blair cited that scenario in his threat assessment last week, saying, "Economic crises increase the risk of regime-threatening instability if they are prolonged for a one- or two-year period."

The key factor there is the duration. Gordon agrees that a long recession would be hard for countries to manage.

"Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we're in a recession of normal length," he says. "If you're in a much longer-run downturn, then all bets are off."

More Cooperation Needed

Throughout history, wars have often been preceded by serious economic crises. World War II followed the Great Depression, for instance.

With such concerns in mind, Democratic Sen. John Kerry of Massachusetts, chairman of the Senate Foreign Relations Committee, invited several experts to testify last week at a roundtable on the foreign policy implications of this economic crisis. "The biggest single step the U.S. could take to send a message abroad and try to restore confidence would be what?" he asked.

The answers were not encouraging. The steps that most need to be taken, the panel agreed, are the ones that are probably most difficult politically: Troubled U.S. banks, they all said, need to be nationalized, at least temporarily (that's probably a non-starter). The United States should lead the way in resisting protectionist pressures (but the U.S. stimulus package includes a Buy American provision). And governments around the world need to work together (the opposite has happened).

"What we've seen is a lack of coordination [among countries] of economic policy to address what is truly a global crisis," says Desmond Lachman of the American Enterprise Institute. "Otherwise, you're going to have countries very much at cross-purposes, and the danger is you're getting beggar-thy-neighbor policies pretty much in evidence."

In times of economic stress, governments may protect their own national companies from foreign competition, even if it means the global economy suffers.

The World Bank is predicting that trade this year could shrink by more than 2 percent. Some analysts even say the world is going through a period of deglobalization after years of increasing economic integration. That's a trend that could aggravate international tensions.

It's the job of intelligence agencies to focus on risk and prepare their governments for what could happen, which is why they are now rehearsing all the worrisome scenarios that could result from the international financial crisis.

The second part of this series will explore the prospect of "financial warfare" between states.

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