Friday, January 2, 2009

Financial Crisis and Social Conflict

Darfur refugee camp in Chad

The current financial crisis is resulting in extreme economic strains on countries around the world, and especially severe strains are being placed on developing nations. In China, the collapse of a large part of the export sector has led to massive unemployment and worries about the reintegration of workers returning to their former rural homes. Extremely poor and strife-prone nations like the Sudan appear to be vulnerable to even small increases in the general level of impoverishment. There are worries that as the financial crisis spreads, increases in poverty may stimulate civil conflict in many societies around the world.

The impact of a spike in poverty to civil conflict is addressed in a recent article, "Sudden impoverishment as a trigger of civil conflict" by Antonio Ciccone, of the Universitat Pompeu Fabra in Spain and CEPR Research Fellow. The analysis in the paper supports the hypothesis that that droughts in Sub-Saharan Africa that suddenly reduce income also raise the likelihood of civil conflict. The paper looks at data on 48 civil conflicts in Sub-Saharan Africa that started during the 1980-2006 period and concludes:

If civil conflict onset is partly driven by sudden impoverishment, conflict outbreak in Sub-Saharan Africa should be more likely following below-average rainfall years. I find this to be the case. This result, combined with the effect of rainfall on income, allows me to estimate the effect of sudden impoverishment on the probability of civil conflict onset. My estimates indicate that a negative 5% income shock raises the likelihood of civil conflict by 15 percentage points.

A Chinese migrant laborer returns to his home in Hefei, in the eastern Chinese province of Anhui, on Nov. 7, 2008, after being laid off from his job in Guangdong. Copyright © 2008, RFA. Used with the permission of Radio Free Asia, 2025 M St. NW, Suite 300, Washington DC 20036.

The economic downturn resulting from the present financial crisis is threatening workers around the world with a sudden the loss of their jobs. In China for example, the collapse of a large part of the export sector has led to massive unemployment and worries about the reintegration of workers returning to their former rural homes. Even official Chinese government press releases acknowledge that the job picture is "grim" and that labor unrest is a "top concern". In Factories Shut, China Workers Are Suffering the New York Times reported:

For decades, the steamy Pearl River Delta area of southern Guangdong Province served as a primary engine for China’s astounding economic growth. But an export slowdown that began earlier this year and that has been magnified by the global financial crisis of recent months is contributing to the shutdown of tens of thousands of small and mid-size factories here and in other coastal regions, forcing laborers to scramble for other jobs or return home to the countryside.

PLA Soldiers Enter Beijing (1949), Chinese Civil War

Fast-rising unemployment has led to an unusual series of strikes and protests, but the big impacts will occur in a reverse migration when factory workers return to their rural villages. Because factory closings are still underway in the once-booming urban centers, it is too early to have reliable estimates of how many of China’s 130 million migrant workers are heading back to their villages. However, the numbers are growing enough to raise the worry of social unrest, especially given that the recent past has raised expectations of economic progress.

Problems inside China may complicate international relations:

There has been speculation that the Chinese central bank would devalue the currency in an attempt to prop up economic activity. President-elect Barack Obama said in October that China must change its currency practices "because it pegs its currency at an artificially low rate." It is worrying that continuing economic woes will add pressure for China to do that. With many nations around the world being in the same recessionary boat, the temptations to engage in protectionism may eventually become too great for some country to resist -- setting off a round of competitive currency devalutations.

China isn't alone. The financial crisis is also forcing other major nations to raise protective trade barriers:

Boris Yeltsin, President of the Russian SFSR, standing on a tank in front of
the parliament to give an address opposing the August 1991 coup.

Ambrose Evans-Pritchard wrote an article that was published in The Telegraph with the catchy title Protectionist dominoes are beginning to tumble across the world. Russia is of course suffering financially because of the sharp decline in oil prices, and the international economic situation is adding to its woes. Now Russia is erecting trade barriers with import tariffs of 30% on cars, 15p% on farm kit, and 95% on poultry. Russia is not alone. "India and Vietnam have imposed steel tariffs. Indonesia is resorting to special "licenses" to choke off imports." As with China, Russia is facing internal unrest because of the economic crisis. The same article reported that there have already been labor protests in Russia because of a 13% fall in industrial output over the last five months. So far, there have been street protests in Moscow, St Petersburg, Kaliningrad, Vladivostok and Barnaul, and police crushed the "Dissent Marchers" in Moscow.

These initial protectionist actions are raising worries that the era of economic globalization may be coming to a close, and with unfortunate consequences. Not one to mince words, Evans-Pritchard concluded: "The last great era of globalisation peaked just before 1914. You know the rest of the story."

Australian infantry with gas masks, Ypres, 1917.

The age of globalization has not ended yet, but many more risks to the current economic regime could easily unfold during 2009. As the latest headines indicate, Israel Starts Gaza Ground Push in Bid to Halt Rockets, there are already enough potential sources of conflict in the world, without adding pressures from the financial crisis.