An acid test for liberal democracies

Yes, the present international system can remain viable, at least from a Western perspective, but not if such authoritarian governments increasingly influence policy trends in the world.

Quite simply, it remains to be seen how far Western societies can maintain existing levels of wealth even if they were to become smaller imitations of the more competitive US model in economic terms. As Schiff suggests (Euro Pacific Capital, November 21, 2008), for the US to compete:

Spending must be replaced with savings, and consumption with production. The service sector must shrink and manufacturing must expand to fill the void. The dollar must fall, wages in America must be brought down to a competitive level, and hopefully government spending and burdensome regulation can be reduced.

But how likely are the US and other Western societies to simply obliterate their way of life just to compete effectively against developing nations? With public-private infrastructure partnerships now also threatened by the current financial crisis, where is the money going to come from to meet a variety of economic, social and environmental policy needs?

Of course, Western leaders need to adopt a sophisticated policy approach that gives adequate attention to international economic, security and environmental needs. This is especially true today given the Pew Research Centre’s 2005 annual survey which found that 26 of 33 countries polled now have a less favourable view of the United States than they did in 2002 with even 50 per cent of Brits wanting the EU to become as powerful as the US.

Once it becomes clear that Western economies cannot compete against nations like China and India, there will be just two general policy options. One: Western nations will increase taxation levels and protectionist measures, which will have an adverse effect on developing nations and may initially reduce the consumption possibilities of Western consumers as they face higher costs for many products. Two: there will be severe cutbacks to social welfare programs and wages in Western societies as any reliance upon services and debt cannot mask the need to become much more competitive if a commitment to freer trade remains.

Western nations are likely to adopt measures that will seek to maintain their influence in the world, at least if a decent national social welfare system is deemed to be necessary by such societies.

Once economic confidence is restored, this may even mean a much greater promotion of renewable energy industries in an attempt to aid wealth and employment creation, and to maintain a competitive advantage over other nations.

We live in a world where nations must adopt appropriate reform to remain competitive within the ongoing struggle for resources, but the struggle over the influence of certain ideas will long remain just as important.

There are indeed no easy policy options for Western governments as they face their toughest peacetime threat since the Great Depression.

It remains to be seen just how far Western societies will allow any reform to boost their productive capacity at the expense of hard won working conditions or extensive social welfare systems.

As the development of Western societies represents the ultimate expression of liberalism, and the wealthy liberal democracies remain most influential, it is freer trade which now faces a greater test.