World Politics since 1989

Jonathan Holslag

• Publisher: Polity
• Year: 2021
• Print ISBN:
  9781509546725
• Edition: 1
• eBook ISBN:
  9781509546749
• Topic: History
• Subtopic: World History
• Index: History

1989 ushered in a new age of freedom and prosperity. Thirty years later, the golden era is over. What went wrong? How did the age of globalization – of growing connectivity, affluence, and growth – give way?

Jonathan Holslag navigates through the calm seas and rip tides of global politics from the Cold War to Russia's invasion of Ukraine. He tells a story of faltering momentum and squandered opportunities that explains how the West's sources of strength were lost to rising consumerism, unbalanced trade, and half-hearted diplomatic engagement. All the while, other powers, like China and Russia, grew stronger. With his trademark verve, Holslag untangles the threads of this story to reveal that it was not so much the ambition of China, the cunning of Putin, or the greed of African strongmen that led the world into this dark place; it was the failure of the West to listen to its people, to show clear leadership, and reinvent itself, in spite of ample evidence that things were going awry.

ACT 1 (1989–2000)

CHAPTER 4
MISSED OPPORTUNITIES

THE ROMAN HISTORIAN LIVY WROTE THAT IT IS IN TIMES OF PROSPERITY and growth that societies ignore the shaky fundaments on which their prosperity rests. The 1990s were such a time. The West, notwithstanding its preponderance, faced internal and external challenges. While decision makers acknowledged them, their introspection was shallow. Vigor to change course was limited. Between 1990 and 2000, many problems grew larger. In the core of the Western world, formed by the United States and the European Union, the social and economic situation became more unbalanced. Growth, this chapter shows, made adjustment less urgent. There were countries with a more sustainable and balanced economic model, in Northwestern Europe, in countries like the Netherlands, Denmark, and Sweden. Europe continued to integrate, prepared for enlargement, and introduced its own currency. Yet, each step of integration required governments to go to their hesitant electorates and public support did not keep pace with the political push for cooperation.

The detaching of America Inc.

Citizens in the West experienced the 1990s as a golden age. After a slow start, economic growth kicked in. The news that mesmerized people was not about crises but about scandals, like popstar Michael Jackson’s alleged molestation of young boys, the murder trial of football player O. J. Simpson, and President Bill Clinton’s affair with one of his interns. Big problems looked remote. Households, including the poor, saw their income increase. Consumption goods, like textiles, food, and fuel became more affordable, so that money could be spent on gadgets, a somewhat bigger car, and middle-class brands.

This was the time of the first personal computers, the Gameboy, the Walkman, and the first affordable mobile phones, of aerodynamically designed family cars, like the Ford Focus, and fashion brands like Tommy Hilfiger. Television series like Friends and Sex and the City idealized adult life as a carefree continuation of the teenage years: Livin’ la vida loca! Despite the criticism by intellectuals, the belief in the economic superiority of the West was firmly established in government circles. While Microsoft and Apple had grown into large multinationals, a new generation of giants was already in the making in American garages and campus dorms: Amazon, Google, and Facebook.

Still, it is in the pleasant and comfortable 1990s that we find causes of weakening, particularly in the United States. Bill Clinton (1993–2001) arrived in the White House with the promise to put a human face to the economy. One of his first proposals was to tax the rich a little more and yet also limit welfare benefits at the same time. The Clinton administration could ride an economic high tide that had started just before its inauguration in 1993. During the remainder of the 1990s, the American economy grew impressively. Unemployment fell and the administration could pride itself on lowering the public budget deficit. Yet, while the government budget deficit decreased, the whole nation consumed beyond its means. Not only credit card spending surged.¹ America also saw its external debt expand. As it imported more than it exported, it meant that other countries prefinanced American consumption.

Growing consumption often causes prices to go up. This is the law of supply and demand. It was not the case, though, in the United States, because products could be imported cheaply. World energy production was outstripping demand. Supermarkets tapped into products from low-wage countries like China and Mexico. At the same time, interest rates were kept high, so that foreign capital flowed in and helped spark a boom in the American stock market. That in turn benefited American shareholders and thus encouraged consumption further. The trade deficit and external debt grew steadily. Yet, the treasury secretary stated that critics of the deficit did not know what they were talking about. It was the size of the American market that attracted capital and made developing countries desperate to export to it. So, the whole trade deficit, he continued, was a meaningless concept. Foreign credit was a good thing.

Still, there was an undeniable downside. Borrowing from international markets indeed did not need to be a problem if more was invested in industries that make the economy more productive, so that the debt could be repaid in the long run. That did not happen. Private investment growth in manufacturing slowed and was overtaken by investment in retail, banking, and real estate. This situation also accounts for the very slow spreading of productivity gains in the information technology sector to the rest of the economy: the so-called IT productivity paradox. Why should American companies invest in more efficient factories at home when goods could be cheaply imported? While American research centers realized scientific breakthroughs in information technology, the country imported far more IT goods and services than it exported.² Moreover, private and public investment in research and development, as a share of its total domestic production, dropped in the first half of the 1990s. There was a second negative effect: the overheating of the stock market. While investment in manufacturing or in public infrastructure was modest, the value of IT champions on the stock market grew almost threefold between 1995 and 1999. It formed a bubble that had to burst and the inflow of foreign capital made it even larger.

It coincided with a third phenomenon: the slow detachment of American companies from their home market. While the American government annually sold US$60 billion of bonds to foreign creditors and high interest rates attracted billions more to the American capital market, American companies themselves relocated more of their capital abroad (figure 4.1): a diversification of investment risk, it was explained. In reality, many investors went offshore. By 1999, 27 percent of all direct investment overseas was in holdings; 16 percent was in holdings in tax havens, like Switzerland, the Netherlands, Luxembourg, and the Bermuda Islands. If 60 percent of overseas profit on investment was still being repatriated in 1990, this declined to 50 percent in 1999. American investors restlessly searched for higher returns. Investment funds scavenged the world for profit. Interest rates in the United States were around 5 percent. Profits on debt products could still be higher in weak countries. Information technology allowed a faster response to changes in the value of currencies, commodity prices, and so forth. They called on the American government for diplomatic backing and to bail them out at times of crisis. This search for foreign markets, we will discover, shaped American foreign policy.

Figure 4.1 The detaching of America Inc.: American foreign direct investment (US$ bn, left axis) and the share of foreign direct investment earnings repatriated (%, right axis)

Source: BEA.

American hollow

In 1990, 23 percent of American citizens were satisfied with the state of the economy; in 1999 this was 71 percent. Growth in the 1990s appeared to be a tide that lifted all boats. Poverty dropped, th e number of citizens depending on welfare decreased. Crime rates went down. But not all boats were lifted equally. Inequality increased. While the richest 1 percent claimed 10 percent of the national income in 1990, this increased to 20 percent in 1999. The rich benefited disproportionally from the stock market’s growth and the large bonuses in the IT sector, while the middle class saw much less benefit from the IT boom.

While dedicated programs had led to a decrease in the poverty among African-Americans, close to three million white American families, primarily in isolated rural areas, lived in poverty by the end of the decade.³ The documentary American Hollow brought the gripping story of one of these families. It lived a hidden existence in the Appalachians and saw no opportunity to break the spiral of poverty. “You cannot go to places without money, so another great day in shithole.” It was in the rural hinterland also that the number of working poor continued to increase and that citizens felt left behind by coastal cities like New York and San Francisco.⁴ Despite economic growth and despite high consumer confidence, Americans were less happy at the end of the decade than at the beginning. There was more loneliness, more pressure at work, and longer commuting times. While the economy grew, the social fabric frayed. Interestingly, American citizens put forward morals, the decline of family cohesion, and education as their most important concerns.⁵

The 1990s were a missed opportunity in another way. While citizens again and again expressed their desire for more time with their loved ones, for a sustainable economy, and care for those who need it, the government made no effort to better explain how citizens could help make these ideas happen.⁶ Despite the intuitive longing for a humane society, they were not told how to build it. They were left adrift in a society where the main influencers tried to sell things and materialism continued to advance. As parents worked longer days, schools became bigger, more anonymous, and yet burdened with more responsibilities. “I believe that somehow every student in every college of the United States,” a prominent historian wrote, “ought to be taught fundamental lessons that say democracy is precious, democracy is perishable, democracy requires active attention and that democracy requires hard work.”⁷

The opposite happened. Pedagogues saw an overall decline in the quality of c...

Table of contents

• Cover
• Endorsement
• Title Page
• Copyright
• Dedication
• The pendulum
• Overture
• Act 1 (1989–2000)
• Act 2 (2000–2010)
• Act 3 (2010–2020)
• Watershed
• Acknowledgements
• Further reading
• Index
• End User License Agreement