The world is holding its breath, still trying to grasp the potential enormity of what is unfolding. Economic downturns and stock market crashes are hardly unfamiliar, of course, even if a decade or so seems a long time ago for western consumers habituated to rising house prices and non-stop shopping. But this crisis threatens to be rather different, a big one. The 70’s was a classic case, as huge oil price hikes fed an inflationary spiral that brought both the long boom and the postwar welfare consensus to an end, and led to the rise of neoliberalism and deregulation.

This crisis, however, threatens to be even more fundamental. While the 1973 gyrations were the result of a temporary shift of power from the industrial world to Organisation of Petroleum Exporting Countries (OPEC), the underlying cause this time is permanent and far-reaching – a fundamental shift in power from the developed world to the developing world, and above all China and India. We have not witnessed anything like this since the inception of the west as an industrial powerhouse in the 19th century.

The economic and political consequences will be of such a scale that they are impossible to comprehend. The present crisis has been long in the making, even if it has been obscured by the US spending over a decade in denial, as illustrated by the absurd post-9/11 neoconservative hubris about America becoming a latter-day Rome and the failure to address the growing imbalances between the US as a huge over-spender and East Asia as a massive saver.

There are two conclusions that we can draw from the economic crisis that began last August and might, in some form or another, last for a prolonged period. First, it heralds a major reduction in the global economic and political influence of the US, rather in the manner that the 1931 crisis announced the final and belated end of Britain’s global economic supremacy. Fundamental systemic crises are often associated with the decline of the dominant imperial power and its increasing inability to sustain the system over which it had previously presided. The profound instability of the interwar period owed much to Britain’s inability to maintain its role.

The present crisis, at root, is a consequence of the economic decline of the US and its increasing weakness at the apex of an international financial system of which it was the architect and chief beneficiary. This is most clearly expressed in the US’ chronic balance of payments deficit and its long-term dependence on East Asian inward capital flows to shore up the value of the dollar. Perhaps the present turmoil will ease, but in truth the old arrangements are now coming apart and, in anything other than the short term, seem patently unsustainable. We are entering a period of protracted instability as the old order breaks down, the US seeks to resist change and the world embarks on a conflictual and painful passage towards a new global economic order.

The second conclusion is that the political consequences of this shift will be enormous. The interwar crisis led to the second world war and the birth of Keynesianism. The less significant OPEC crisis of the 70s destroyed the social-democratic consensus and led to the triumph of neoliberalism. And this time? One thing seems certain: the neoliberal orthodoxy will be undermined. This could come in many different forms. It could lead to a rise of protectionism in the US and Europe against developing countries such as China, or new regulations designed to prevent sovereign wealth funds from taking over what are deemed key strategic assets.

When the free market and deregulation are the means by which the western world extends its global economic power over the developing world, then they are deemed highly virtuous, but it is a different matter when they become the instrument by which developing countries can extend their influence over western economies. Similarly, during a recession, the state is likely to be called into active service on a far more regular basis as western governments seek to deal with the mushrooming effects of market failure.

It is not an accident that developing countries – virtually the whole of East Asia, for example – view the role of the state in a far more interventionist way than does the Anglo-Saxon world. Laissez-faire and free markets are the favoured means of the powerful and privileged. The decline of the western world could well usher in a significant change in this mind-set.

The political terrain is shifting. Attitudes towards the US are a case in point. The move towards neoliberalism in Britain was intimately bound up with the embrace of the US as the country to be aped and copied. The American model was celebrated by Thatcherites and New Labour alike, California worshipped as the model of the future, “Anglo-Saxon” embalmed as the fitting metaphor for the shared Anglo-American legacy, Europe denigrated and the rest of the world ignored.

How perceptions of the US have changed: a country living beyond its means, dependent on large helpings of Asian credit, characterised by huge inequalities, its great financial institutions guilty of huge folly, forced to rely for their salvation on the sovereign wealth funds of China and elsewhere. And, remember, we are only at the very beginning of the biggest geopolitical shift since the dawn of the industrial era.

(The writer is visiting research fellow at the Asia research centre, London School of Economics.)

– The Guardian