The March of Folly Part 1: Why do politicians so often damage the economies of the countries they govern? By Publius
The Politics
Russia’s invasion of the Ukraine has imposed tremendous damage on the Ukraine, but it has also inflicted almost equally impressive damage on Russia’s own economy. While the costs for the Ukraine are more visible, terrible and tangible, they are probably also more reversible when the war comes to an end. Although lives lost can never be restored, buildings and cities can be rebuilt, in Ukraine’s case likely with massive aid from the rest of Europe.
By contrast, the economic destruction of Russia is likely to last for a long time. Although the Rouble has pared its immediate post-invasion losses from 33% to around 6%, it has effectively ceased to be a convertible currency. (‘Play money’ in one commentator’s words.) In the meantime, Russia’s major exports, oil and gas, have commenced the process of permanent loss of access to their rich European markets. (They can still access Chinese markets, but these are far away and much poorer.) The consensus of economists I consulted on the internet suggests Russia’s economy could be set back 30 years to the terrible 1990s.
In fact these developments began some time ago. Martin Wolf of the FT has pointed out that in 2010, Russian and Polish GDP per capita were both about 50% of Germany’s. Today, Poland’s has advanced to an impressive 70% while Russia’s has not budged. Capital flight and sanctions after the invasion of Georgia no doubt played some role, but Russia’s failure to diversify its economy out of basic commodities did far more and has left it extremely vulnerable to the current new wave of sanctions.
All of this would be peculiar were it not an admittedly extreme case of a much more widespread phenomenon: Governments that nurture their economies carefully, and temper their foreign and domestic policies accordingly, are unusual, both in recent times and over the long arc of history. Consider four contemporary examples, picked almost at random: the UK, Turkey, Venezuela and China.
I have written in a previous post how Brexit chopped 10-15% off the dollar wealth of the UK. Six years later, it’s becoming clear that the dollar wealth loss has not recovered. A country that had built an enviable reputation since 1979 of nurturing its economic well-being saw that reputation become imperilled in a series of appeals by a string of Prime Ministers to the hard-Brexit wing of the ruling Conservative party. Only one of those Prime Ministers has survived, and maybe not for much longer.
China’s modern economic policy emerged in the same year as the UK’s, and delivered far more impressive results, although from a much lower base. The rise in living standards achieved by China since 1979 is almost incredible, yet it happened. But recent changes in government policies, a far more assertive foreign policy and a more repressive domestic policy, have been accompanied by a steep fall in China’s long-term growth rate as well as a collapse in its birth rate. Finally, Turkey and even more Venezuela are countries whose rulers appear to have pursued policies which have absolutely wrecked their country’s domestic economies.
Looking back further in time, Philip II of Spain together with Louis XIV and Napoleon of France bankrupted their countries’ economies to pursue domestic political dominance and foreign territorial expansion. Hitler actually destroyed the German economy. By contrast, the list of governments which have nurtured their domestic economies for extended periods of time, say one century, is extremely short: The USA, the 19th century UK, Switzerland and the Scandinavian countries, the Netherlands, Canada, Australia, New Zealand, Singapore, Costa Rica and Botswana. Write in with other candidates: they will be few in number.
This is strange, because what the list of countries in the last paragraph have in common is that, in relative terms (and local terms in the case of the last few), they were extremely successful. Many of them fought wars, and two of them fought civil wars (America in the South and the UK in Ireland), but none of them allowed their political agendas to derail their economic progress. As a result, these became powerful countries, able to impose their will on large parts of the rest of the world or their near-abroad, and yet also became countries to which many millions of people desired to migrate and live better lives.
A country’s economic prosperity is the fundamental source of what politicians most crave: power. If Russia had kept up with Poland since 2010, its government could probably have toppled the current government of the Ukraine without firing a shot. Furthermore, the West wouldn’t have noticed or cared. Perhaps even the Ukrainians would have been resigned. For that Russia would have been an attractive country.
If China can keep growing at over 10% per annum for 10 more years, it can probably just buy Taiwan – pay the Taiwanese off for their loss of liberties and the USA off for its loss of a potentially vital strategic asset. A deal could be done. Why hurry? (An aside: Please don’t mention islands as fixed aircraft carriers ever again. The whole point of an aircraft carrier is that it can move. Plus, I suspect carrier wars are coming to an end. The next big war, if it comes, will be fought with deadly missiles at long range, and horrific accompanying cyberwar.)
This post will be the first in a series on this topic. I named it in honour of Barbara Tuchman’s famous historical work in which she documented the dogged pursuit of a self-defeating policy by three important historical players. She documents the lunatic kleptocracy of the late medieval papacy, the self-defeating policies of the United Kingdom during the American Revolution, and the betrayal of American ideals in Vietnam. While unconvinced by her arguments in each particular case, her overall thesis is completely correct: Governments often, I would say routinely, defeat their own interests with the policies they pursue. Usually because they allow those policies to damage or destroy their own economic power, the fundamental source of all power. In future posts (interrupted by others on different topics as and when I please!), I will discuss potential answers to why powerful politicians pursue such ultimately self-defeating policies. Needless to say, I do not know the answer, although I have my suspects. Please write in!