Tue, Feb 24, 2009 - Page 9 News List

The game’s up if the social contract fails

China and Russia are at the greatest political risk if their economies falter

By Robert Skidelsky

“Enrich yourselves,” Deng Xiaoping (鄧小平) told his fellow countrymen when he started dismantling Mao Zedong’s (毛澤東) failed socialist model. In fact, elites everywhere have always lived by this injunction, and ordinary people have not minded very much, provided that the elites fulfill their part of the bargain: protect the country against its enemies and improve living conditions. It is this implied social contract that is now endangered by economic collapse.

Of course, the terms of the contract vary with place and time. In 19th-century Europe, the rich were expected to be frugal. Conspicuous consumption was eschewed. The rich were supposed to save much of their income because saving was both a fund for investment and a moral virtue. And, in the days before the welfare state, the rich were also expected to be philanthropists.

In the opportunity culture of the US, by contrast, conspicuous consumption was more tolerated. High spending was a mark of success: What Americans demanded of their rich was conspicuous enterprise.

Societies have also differed in how wealthy they allow their elites to become — and in their tolerance of the means by which wealth is acquired and used. One dividing line is between societies that tolerate self-enrichment through politics and those that demand that the two spheres be kept separate.

In Western countries, politicians and civil servants are expected to be relatively poor. In most of the rest of the world, a political career is regarded as a quasi-legitimate road to wealth. But the broad conclusion remains: Wealth is conditional on services. When the services fail, the position of the wealthy is threatened.

In the current crisis, popular anger is — no surprise — directed against bankers. Their speculative frenzies ruined shareholders, customers and the economy. Anger has come to focus on banking executives’ huge compensation packages, composed largely of bonuses. Rewarding success is acceptable; rewarding failure is not.

Governments face a dilemma. Big banks cannot be allowed to fail, but the public expects bankers to be punished. Few will be ruined or imprisoned. But the banking system is sure to be re-regulated, as it was after the Great Crash of 1929 to 1932, when then US president Franklin Roosevelt promised to drive the moneychangers from the temple.

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 at its 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.

One of the “safest” political systems of recent times was former Indonesian president Suharto’s regime. Suharto came to power in 1966, establishing a quasi-military dictatorship and encouraging Indonesians to “enrich themselves.” Despite the depredations of his family, enough Indonesians did so over the next 30 years to make his rule seem exceptionally stable — until the East Asian financial crisis of 1997 to 1998 sent the Indonesian economy into a tailspin, triggering violent riots that forced Suharto out.

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