2009-03-21

Governments under pressure

Many emerging markets are especially exposed as the crisis increases the number of people in poverty and reduces the size of the middle class. As people lose confidence in the ability of governments to restore stability, protests look increasingly likely. A spate of incidents in recent months shows that the global economic downturn is already having political repercussions. This is being seen as a harbinger of worse to come. There is growing concern about a possible global pandemic of unrest.

Warnings of dire social unrest are coming with increasing frequency from the highest sources. One of the most striking and closely argued came on February 12th in testimony before the US Senate by Admiral Dennis C. Blair, the new director of national intelligence. He declared: “The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications... The longer it takes for the recovery to begin, the greater the likelihood of serious damage to US strategic interests.”

Does this amount to more than political hype? International agencies and others are suspected of magnifying risks to help secure international funding for rescue efforts (and for their respective organisations). In the US, Republican critics have pointed out that Admiral Blair’s warnings dovetail nicely with the Obama administration's domestic agenda of pushing through and gaining support for a massive stimulus package.

It is also true that politics today has little in common with the passions and conflicts that shaped people's commitments and hatreds in the 20th century, with the clash between ardent advocates of socialism and fervent defenders of the free market largely consigned to the past.

Some are reassured that, so far, most protest has not targeted mainstream—or even governing—parties. For example, opinion polls in Europe show little sign of voters flocking to far-left parties or the populist right. Europe's political centre has held steady, and possibly even gained in strength in some countries. However, it is early days; in the initial phase of a major crisis voters tend to rally around their existing leaders.

Threat posed by social unrest is real and substantial

The Economist Intelligence Unit believes that the threat of unrest is grave, and that the risk of complacency far outweighs any risk of exaggerating the dangers. In this case, the implications under our different macroeconomic scenarios are only of degree. Our central forecast includes a high risk of regime-threatening social unrest; our main risk scenario more so.

Indeed, in two important respects the prevalent warnings tend, often unwittingly, to underplay the threat. First, few observers take into account the sheer number of countries that are now at a significant risk of political instability and, second, they underplay the extent to which the risk extends to rich, established democracies. Many still think that the threats are largely confined to the world's poor and "failed states". The suggestion that disturbances in the developed West could shake the foundations of these societies is broadly dismissed. Iceland is seen as an exception, and warnings of a repetition of the social pressures that transformed Western politics in the 1930s are seen as far-fetched.

There are at least four sets of factors suggesting that the threat of widespread political unrest is substantial.

* The depth and nature of the economic crisis Sharp income falls are expected in many countries in 2009, with all the attendant repercussions, including increased poverty and unemployment. The sheer depth of the downturn is important. Clearly, it is the most serious since the 1930s and could yet match that period. It is global and synchronised as never before. In an integrated global economy, shrinking demand in the developed world is feeding quickly through the supply chain, leading to job losses worldwide. Our Political Instability Index suggests that it is the interplay of acute economic distress with underlying—previously often dormant—structural vulnerability to instability that has pushed a large number of countries into the high risk category.
* A very personalised crisis This is a very specific crisis of capitalism that is linked to the avoidable near-collapse of the financial system. It is not seen as a "normal recession", a product of impersonal social forces that are difficult to identify. Instead, there are identifiable culprits. The ineptitude and greed on display are fuelling a deep anger, which in certain circumstances could lead to a popular explosion.
* Underlying anxiety There is a suspicion that things are even worse than officials are saying, and this may fuel unrest. The anxiety is fed by the seeming powerlessness of authorities to stem the crisis.
* The contagion factor Just as the economic crisis has proved to be global in ways not seen before, so local incidents have a potential to spark unrest not only in neighbouring areas but even further afield, especially in view of the almost instantaneous nature of modern communications. The riots that erupted in the first half of 2008 in response to rising food prices illustrated the power of contagion and speed with which economically related violence can spread. Riots occurred in Cameroon, Egypt, Ethiopia, Haiti, India, Indonesia, Côte d'Ivoire and Senegal. The riots only abated when falling energy costs brought food prices down as well.

Forms of unrest

In many cases upheavals, even when violent, are likely to remain localised and disorganised enough that government forces will be able to bring them under control. However, unrest does not have to result in the overthrow of a government or large-scale prolonged violence to be damaging and disruptive. In Greece, a weak government managed to survive a week of violent rioting in Athens and other cities in December 2008. Nevertheless, the damage was enormous, estimated at more than US$1bn, and this does not take into account the full impact on business confidence and possible fallout for the country's political system.

So far, only two governments have fallen as a result of the crisis and associated unrest (in Iceland and Latvia), and it can be argued that this may not even be undesirable—although bringing down governments through extra-parliamentary action is hardly consistent with a sound democracy—particularly if accompanied by violence. However, as the economic crisis worsens, some incidents will transform into far more intense and long-lasting events: armed rebellions, military coups, civil conflicts and perhaps even wars between states.

Political Instability Index pinpoints the most vulnerable countries

To assess the degree to which countries are vulnerable to unrest, we draw on our Political Instability Index, specially constructed to accompany this report. The index evaluates the vulnerability of states to social or political unrest, which we define as those events or developments that pose a serious extra-parliamentary or extra-institutional threat to governments or the existing political order. The events will almost invariably be accompanied by some violence as well as public disorder. These events need not necessarily be successful in the sense that they end up toppling a government or regime. As already argued, even unsuccessful episodes (such as recently in Greece) result in turmoil and serious disruption.

The Political Instability Index is based on 15 social, political and economic indicators. The model has two sub-indexes. The first, underlying vulnerability, is measured by 12 indicators. These include indicators of inequality, state strength and governance, levels of social provision, of proclivity to labour unrest, ethnic fragmentation, regime type, public trust in political institutions, neighbourhood effects and history of unrest. The second, economic distress, takes into account levels of development, growth in GDP per head and unemployment.

Of the 165 countries covered by the index, 95 are in the very high risk or high risk group, with 27 in the former and 68 in the latter. For 53 countries, the risk of instability is rated as moderate—which is by no means a clean bill of health—and only 17 countries, almost all highly developed states, are rated as low risk.

Because of the sharp increase in economic distress, the situation has changed fundamentally compared with the recent past. In 2007, according to the model, only 35 states (just over one-third of the current number) were rated as being at very high or high risk of instability.

Many of the members of the group seen as being the highest risk in 2009-10 will not surprise. These include countries like Afghanistan, Zimbabwe, Chad, Sudan and Pakistan, which are in a state of almost permanent conflict or upheaval. Other members of the group may be less obvious. Of the 27, 13 are from Sub-Saharan Africa—historically, Sub-Saharan African countries make up about one-half of the number of instances of serious political instability.

There are six Asian countries, four from Latin America and three from eastern Europe. There is only one Middle Eastern country in the very high risk group (Iraq). This is only surprising until one remembers that authoritarian states, which proliferate in the Middle East, are historically even less at risk of instability than fully democratic states (as noted, the intermediate regimes are most at risk). Among developed states, a fairly large number are rated as having a moderate risk of unrest, whereas until recently almost all would have been rated as low risk. The US is not considered free of risk. It has significant problems with minorities and social provision is low relative to levels of development.

China and Iran, two countries often singled out as being at considerable risk of social unrest, are not in the high risk category. Poor countries feature prominently among the countries at the highest risk, although this category also includes some medium-income countries. There is little doubt that poverty contributes to upheaval and violence; for example, researchers at the University of California have calculated that a 5% decline in national income in African countries increases the risk of civil conflict in the following year by 30%.

Mature democracies of western Europe, and even EU cohesion, may be threatened

In western Europe, there have been strikes or large-scale protests in Greece, Iceland, Ireland, France, Germany and the UK. So far, only one of the region’s governments has fallen: that of Iceland. The prime minister, Geir Haarde, resigned on January 26th after protests, some of which had turned violent. He was the first leader anywhere to fall as a direct result of the crisis. There is a fear that Europe may be only at the beginning of a far more serious cycle of instability. The region’s democracies, as well as the institutions of the EU itself, could come under threat.

In Greece, there was a week of heavy rioting in December 2008, initially sparked by the police killing of a youth in Athens. The government has so far hung on. In France, which has a tradition of unrest, up to 2.5m protesters took to the streets on January 29th, but the strike failed to paralyse the country and support from private-sector workers was limited. Guadeloupe, a region of France and part of the EU, was brought to a standstill in February by a general strike over high prices for food. France's union federations were set to hold a day of action on March 19th.

The UK has been among the worst-hit developed countries by the global downturn and the majority of the population fears a deep and long recession and the onset of mass unemployment. Popular discontent and anger are likely to rise, and populist sentiments to strengthen. The news of big personal pay-outs to bankers who have failed spectacularly has incensed public opinion.

Somewhat surprisingly given the UK’s traditions, according to a February 2009 poll for Prospect magazine, 37% of respondents (more than 50% among older age groups) predicted that “there will be serious social unrest in British cities” requiring the army to restore order. As in other countries, anti-immigrant sentiment could also intensify. In early 2009, British workers held a series of protests against the employment of foreign workers on critical energy sites. The mood of the country is also revealed by the results of a recent FT/Harris survey that showed that almost 80% of British adults believe that immigrants should be asked to leave the country if they do not have a job. A majority also oppose the right of other EU citizens to work in the UK.

In southern Europe, Greece, Cyprus and Turkey are rated as high risk. Turkey looks vulnerable as a flawed democracy, with substantial ethnic fragmentation and an unstable neighbourhood.

Most west European countries are at low risk (although France, Belgium, the Netherlands, Malta, Ireland, Italy, Spain and UK are assessed as being at moderate risk). Spain has received several million immigrants in the last 15 years. Unemployment is rising more rapidly than in any other large EU country, particular among immigrants. There are now signs that this is causing racial tensions to intensify.

Initially, there was hope that the crisis would result in deeper EU integration rather than pose a threat of disintegration. However, the crisis is not only straining political structures within European countries, but also relations among them and their shared institutions. The EU's main pillars and achievements are all under strain—the single market, the common currency, and enlargement and convergence between west and east. There have been protectionist measures and strains on the euro system. The EU could become a target now of resentment in some countries, as it is viewed as an overweening bureaucratic structure that pressures countries to agree to policies not in the nation's best interests.

Eastern Europe’s infant democracies are vulnerable in the downturn

There are three east European countries among the 27 that that are at very high risk: Ukraine, Moldova, and Bosnia and Hercegovina. Their inclusion in the very high risk cluster is unsurprising. Another 18 countries are in the high risk group—all the Balkans (apart from Bosnia, which is very high risk), the Baltic states and several other Commonwealth of Independent States (CIS) countries. Only seven countries from the region are in the moderate or low risk groups.

Many countries in eastern Europe have characteristics that are associated with vulnerability to political upheaval: new and inexperienced states and bureaucracies; a history of unrest; regimes that are neither full democracies nor autocracies—the most prone to unrest; very high levels of popular dissatisfaction; and low levels of trust in political institutions. Some suffer from ethnic fragmentation (this feature does not, of course, make unrest certain, but indicates a proclivity—especially if accompanied by other factors) and discrimination against minorities; and factional politics (one of the main predictors of unrest according to the political science literature).

And just about all countries in the region have been hit hard by the economic crisis. Unemployment is rising in many countries that already have chronically high levels and most countries in the region are likely to experience a reduction—in some cases, severe—in GDP per head this year.

Ukraine is rated as most at risk in the region. The country has been hit extremely hard by the crisis. Its real GDP is set to plummet by more than 10% this year. The metal and chemical industries that drive the country's economy have stalled; unemployment is on the rise. In recent weeks, a variety of groups have come out in protest. The largest was a crowd of 10,000 demonstrating against the Kiev local authorities. A recent survey revealed that 41% of Ukrainians are ready to go to the streets.

Cities have had days without heat or water because they cannot pay their bills. The currency has been under extreme pressure and a debt default seems possible. The sudden, violent protests that have erupted elsewhere in eastern Europe seem imminent here now, too. There is rising popular anger about the crisis and resentment towards a government that is preoccupied with internal squabbling. Instability in a small country like Latvia is one thing, but a collapse in a large and strategically located country like Ukraine, neighbouring Russia, could have seismic repercussions.

In the CIS, Tajikistan and the Kyrgyz Republic are under serious threat. The sharp fall in remittances is causing severe economic distress in Tajikistan. Such funds account for almost one-half of the country's income. The president, Emomali Rakhmon, may be facing his greatest challenge since the civil war of 1992-97.

Russia is experiencing a severe downturn and the country has attributes that characterise high-risk countries (inequality, low public trust in institutions, high corruption and past history of instability). If the crisis intensifies, serious disturbances cannot be ruled out. The growing dissatisfaction with the economy and the government's response to the crisis does not appear yet to have affected significantly the popular standing of the prime minister, Vladimir Putin, or the president, Dmitry Medvedev. Given the lack of a credible opposition, it seems doubtful that the rise in social discontent could threaten the leadership—Boris Yeltsin managed to survive politically through the crisis in 1998 despite a much weaker position. The liberal opposition in Russia is in disarray and the Communists are a declining force.

Protests have thus far been limited in scope and are likely to remain isolated and localised. So far, the only significant mass protests—against an increase in tariffs on imported used cars—have been reported in Vladivostok. The use of riot police to break up these protests suggests that the government is ready to use force should such unrest occur in other areas. The authorities can use a mix of repression and conciliation to ward off protests. Despite the weak threat to the government, the crisis could nevertheless lead to a further strengthening of authoritarian tendencies.

Fiscal stimulus options are not possible in most east European countries, as many are struggling with huge funding needs owing to large current-account deficits and, in some, large budget deficits. Those with imbalances and IMF programmes are having to engage in fiscal austerity. This is certainly not popular in these countries. The recent violent protests that have erupted in Latvia and Lithuania were against the governments’ austerity measures that included tax hikes, cuts in wages and curbs on social spending.

Romania and Hungary could be flashpoints for political destabilisation. The deteriorating economic situation and rising unemployment raise the spectre of social unrest in Romania. Romania, whose break with communism was the most violent in eastern Europe with the exception of the former Yugoslav republics, experienced episodes of violent political upheaval in the 1990s, with outbreaks of inter-ethnic conflict, violent demonstrations in the capital and trade union protests including forceful blockades of roads and railways. Public unrest was most notable during periods of declining economic output in 1990-92 and 1996-99.

In Hungary, falling real wages, a sharp recession and growing unemployment are affecting the government’s popularity. The country is highly indebted (the public debt stood at around 70% of GDP in 2008, and is rising) and the government has no cash to spend. A tighter fiscal policy is part of an IMF rescue package, and this could fuel unrest.

Depth of crisis may overcome Latin American reluctance to return to the streets

Many countries in Latin America have politics marred by extreme factionalism—the most powerful single predictor of political instability. A prevalence of low trust, past history, extreme inequality and exposure to contagion all underscore the region's fragility. Memories of widespread unrest are still fresh in the region, and there may be less propensity than elsewhere to take to the streets. But under our main risk scenario, where economic distress is particularly deep and prolonged, protest and rebellion may once again come to appear attractive.

Sharp falls in commodity prices will have political repercussions in some countries in the region. No longer can such states use the commodities windfall to buy off dissident groups or finance powerful security forces. Bolivia is an example of an energy producer that is at a very high risk of a political crisis. A majority of the population, many of Indian descent, supports the president, Evo Morales. But the eastern part of the country, largely controlled by a European-descended elite, resents this support. Efforts to achieve greater autonomy have led to repeated clashes with government troops and, in deteriorating times, could set the stage for a civil war.

Falling living standards could fuel protests against incumbent administrations, particularly in countries that have witnessed extremely strong economic growth in recent years, reflecting resentment that administrations did not do more during boom years to address the structural causes of poverty and income inequalities. Argentina, one of the region's largest economies, is a case in point.

Against this backdrop, an upsurge in crime levels and drug-trafficking is also likely, in the context of woefully inadequate state security institutions in many countries. The combination of deteriorating domestic security conditions and rising frustrations with incumbent governments could well combine to a cause a fall in support for democracy, as larger numbers of people become frustrated by the failure of national leaders to respond to the financial crisis and its effects.

Economic failure could fuel support for extremists in Asia

In Asia, there are six countries in the very high risk group, including Bangladesh, Pakistan and North Korea, where turmoil could have major global spillover effects. Elsewhere in the region, extremist groups in the Philippines, Thailand and Indonesia could attempt to ride on social discontent spawned by the crisis. Indonesia, with the world's fourth-largest population, will be vulnerable to social unrest ahead of and during the parliamentary election in April and the presidential poll in July.

In China, the crisis has left at least 20m migrant workers jobless so far. Rising unemployment is likely to bring more local riots, protests and strikes—what officials call "mass incidents". There were over 80,000 such incidents in 2007, up from over 60,000 in 2006. However, disturbances tend to be localised and are unlikely to present a broader challenge to the government. The ability of migrant workers to organise is in doubt. China weathered the last wave of unemployment, when 35m were without work in the late 1990s, with little difficulty. And the government had less money then.

The number of unemployed migrant workers could rise to 30m and more in 2009. College graduates unable to get jobs will add several million to the tally, raising the total closer to the levels of the late 1990s. However, it has been estimated that even if the number of unemployed reached 50m, the Chinese government could cap discontent with social support payments of some US$60bn in total. Although this is a substantial sum, China can afford it. Unlike the unemployment in the 1990s, which mostly affected older workers in the state enterprise sector, the current wave affects a young cohort more capable of engaging in violent protests. An increase in the incidence of riots and demonstrations would require the mobilisation of special police and perhaps army units. In most scenarios, however, the regime would still survive even large-scale disturbances.

Many Sub-Saharan African countries are in the high risk categories

Sub-Saharan African countries are unsurprisingly well represented in the high risk categories, but not all countries in the region are affected.

In the early stages of the economic slowdown many predicted that Sub-Saharan Africa would escape the worst of the crisis because its economies are less integrated into the international financial system and rely less on global capital markets to finance investment. It is increasingly apparent, however, that Africa will be affected by reduced demand for its exports, lower capital inflows and-crucially-falling remittances from Africans working abroad. This last will have a particularly serious impact on Africa's poor, and will serve to increase income inequality, which is one of the key indicators of underlying vulnerability.

By and large, the risk in Sub-Saharan Africa is that tensions arising from the economic crisis will exacerbate existing problems, whether political weaknesses (as in Côte d'Ivoire, Guinea and Guinea-Bissau), fragile institutional frameworks (as in the Democratic Republic of Congo), or income inequalities associated with the so-called resource curse (Chad and Angola). However, there is more of a questionmark over the most obvious high-risk state: Zimbabwe. Given that the government has survived the almost-complete implosion of the economy, the rigging of numerous elections and the oppression of large sections of the population, it may yet be able to ride out the latest threat. That said, if declining commodity prices lessens its ability to buy off the military and security forces, the Mugabe government may finally fall.

The main threat to sociopolitical stability in the medium term is the return of civil unrest on a scale witnessed after the disputed election in December 2007: more than a thousand people were killed and 350,000 made homeless after the country split on ethnic and party lines, bringing Kenya to the brink of civil war. The formation of a grand coalition government stemmed the crisis, but to prevent a repeat (or worse) in future requires the settlement of long-term grievances, including over land and the constitutional dispensation, and an end to the culture of impunity. Positive steps are being taken, but progress is likely to be slow and could be derailed by in-fighting. As a result, medium-term risks remain significant.

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