The 2007-9 Financial Crisis and the Future of International

Relations

Leslie Elliott ArmijoLeslie.armijo@cal.berkeley.edu

March 2011

FIVE THESES

1. Not much contagion for emerging markets (EMCs)

2. Due to a combination of virtue—and luck

3. Significance for international relations is that the wealthy democracies (finally) notice convergence

4. Emerging powers (EPs) is a more useful concept for IR than is emerging markets

5. Political regime type will influence the IR profile of EPs

ADVANCED INDUSTRIAL COUNTRIES’ FLUand

Emerging Market Countries’ hiccups

Cumulative Annual Growth Ratespercent, weighted average

Country Group 

Pre-Crisis 2000-6

Crisis2007-9

Drop

 

All advanced economies

2.6 -0.1 -2.7

G7 2.3 -0.5 -2.8

EU 2.5 -0.1 -2.7

       

All developing economies

6.2 +5.7 -0.5

Asia 8.0 +8.6 +0.6

Latin America 3.4 +2.7 -0.7

CE Europe 4.9 +1.6 -3.3

MENA 5.0 +4.3 -0.7

Sub-saharan Africa 5.8 +5.0 -0.8

Cumulative Annual Growth Rates

* All AIC aggregates shrank, 2007-9

•All developing country aggregates had positive growth, 2007-9

* The only developing country aggregates that dropped as much or more as the AICs were those closely tied: CCE and Mesoamerica and Caribbean

IMF estimates of public support costs of financial crisis in 2008-9

(% GDP, from Turner 2011)

Pledged UtilizedAlready Recovered

Net Direct Cost

Advanced economies

6.2 3.5 0.8 2.7

Emerging economies

0.8 0.3 -- 0.3

EMERGING MARKET COUNTRIES’ VIRTUE

And their luck

Sources of EMCs’ Virtue--and Luck

• High commodity prices (esp LAC & SSA)

* EMC financial crises in 1990s banking reforms (esp Brazil, Mexico, Korea, Thailand, Indonesia?)

* Capital controls (China, India, Brazil, Chile)

* Less sophisticated home financial markets no involvement in CDSs, securitized mortgages, etc (esp Andean countries, SE Asia, SSA)

THE IMMEDIATE POLITICAL CONSEQUENCE OF THE CRISISAdvanced countries wake up to convergence

The advanced countries take notice

• In 1980s developing Asia grew faster than the G7• In 1990s developing Asia, LAC, and MENA grew faster

than the G7• In 2000s every developing region grew faster than the G7• BUT THESE TRENDS ESCAPED NOTICE in the G7

foreign policy community• In Fall 2008, G.W. Bush administration realized a

coordinated global stimulus required a G20 summit, not the G7

Cumulative Annual Growth Rates(%, weighted averages)

EMERGING POWERSNot just emerging markets

“Emerging Markets” v. “Emerging Powers”

• For analysis of development trajectories, “one country, one case” research works

• For analysis of IPE and IR, it may help to focus on larger, more capable countries

• There is growing self-consciousness within the set of “emerging powers”

• This reflects an underlying material power transition

“Correlates of War” Power Index• Composite index of global capabilities by J. David Singer,

Stuart Bremer, and John Stuckey• Most used in International Relations scholarship• Calculated continuously 1820-2001• National shares in world totals in six hard power

capabilities: • Population• Urban population• Iron & steel production• Energy consumption• Military personnel• Military expenditure

“Correlates of War” Power Index

Armijo Power Index

•COW index has these problems: • No GDP• Positive valence for energy consumption, not production• No indicators of high technology

•Armijo index is global shares in 6 components:• GDP• Population• No. of telephone subscriptions (fixed & mobile)• Industrial value-added• Foreign exchange reserves• Total military spending

Armijo Power Index

POLITICAL REGIME TYPESAnd emerging powers’ behavior in the international system

Why care about political regime type?• Neorealist and structural realist approaches focus

exclusively on the balance of material capabilities• At the other extreme, one has the “Clash of Civilizations” • Neither approach is satisfactory• Shifting capabilities necessarily imply reconfiguration of

global governance institutions (as with the financial crisis, a case of “punctuated equilibrium”)

• The advanced industrial countries will find democratic emerging powers easier to partner with (even when they appear uncooperative—e.g., U.S. and de Gaulle’s France; current monetary relations among U.S., China, Brazil)

Political Regime Types

Some Implications of Variations in Political Contestation

• Authoritarian regimes bifurcate into growth miracles and disasters

• Increases in democratic contestation: • Have a U-shaped relationship with inward foreign

investment (Bayulgen)• Predict lower growth volatility (Mobarak; Chandra and

Rudra; Armijo and Gervasoni) • Predict fewer growth crises (Armijo and Gervasoni)• Predict steady, positive growth, though not miracles

Some Implications of Variations in Political Inclusion

• Transition from a low to a moderately inclusive regime leads incumbents to prioritize economic growth

• Transition from a moderately to a highly inclusive regime leads incumbents to prioritize both growth and stability (= avoid crises)

• See Dreze and Sen; Armijo & Gervasoni

Democratic Peace Theory Revisited?

• Democratic partners in global negotiations may find it easier to resolve problems of collective action than will partnerships containing one or more authoritarian states (Armijo and Gustafson; Armijo forthcoming)• Transparency of deliberations• Trust• Need to convince domestic populations difficult to

reverse or cheat• Multiple veto players

CONCLUSIONS

Conclusions

• The 2007-9 crisis is a symptom of a gradual global power transition that has been underway for awhile

• The coming multi-polarity results in the end from faster economic growth among later industrializers, some of which are countries with large populations

• Dramatic supranational construction of new institutions is always possible (EU EMU, which likely will endure)

• Nonetheless, there are new global players, e.g., China, India, Brazil

• The progress of global democratization matters