Foreign Policy In A Recession: Making Multilaterism Work
FCO Leadership Conference
March 24th, 2009
Foreign policy is defined more by crises than breakthroughs. 2008 will be remembered for the crises over Georgia and Gaza. But the greatest crisis of 2008 was the economic crisis.
Since 2001, foreign policy has been shaped by the response to September 11th. Terrorism on US soil wrenched minds back to the imperative of national security.
Today, foreign policy is again being reshaped, this time by the economic crisis: the seizing up of financial markets, now being followed by a global recession.
This is the focus of my speech today. Not the financial or economic crisis itself, but its effect on foreign policy. I don’t believe that we can put circuit breakers in place to stop the economic crisis translating into political risk. We couldn’t decouple the real economy from the financial crisis, or the impact of the crisis on the west from the east. I don’t think we can decouple political risk from economic.
September 11th challenged our assumptions about national security. The economic crisis is already forcing us to question what Roberto Unger called ‘false necessities’: the orthodoxy of economic thinking that ignored systemic risk; the relationship between states and markets; the distribution of power between the national and global levels.
The attacks on September 11th were searing and deadly. The economic crisis does not kill and maim in the same way. Its impact will be more diffuse, more long term, and less visible than September 11th. But it will be just as profound. It will affect more countries. And it will affect many aspects of a country’s life, not just security. That is why I believe the economic crisis will shape foreign policy in the second decade of the millennium in as deep a way as September 11th shaped the first. Just think what we are living through: financial leverage down; capital flows down; growth down; remittances down. Public debt up. Regulation up. Unemployment up. Instability up. The old assumptions have been broken. And the full effects are not yet known.
Issues of terrorism, conflict, and human rights will still consume the attention of diplomats. But they will be played out in a new context. And the new context will affect the solutions that are available and attainable.
The history of economic crises can inspire fear – everyone thinks of the Great Depression and the rise of fascism in Europe. The Smoot-Hawley tariff act from the 1930s is an often quoted example of how policymakers snatched depression from the jaws of recession. The Asian Crisis during 1997 to 98 is widely thought of as a missed opportunity to reform the international financial architecture.
But history also shows that sometimes risks are managed and progress emerges.
Central banking, labour laws, consumer safety regulation and competition laws emerged in response to the crashes and panics that were common in the early part of the 20th century. The Bretton Woods institutions were conceived drawing on the lessons of the reaction to the 1930s depression. The 1973 oil crisis foreshadowed the concept of a forum for the world’s major industrialised nations - now the G8.
So if there is a general lesson, it is that our fate is determined less by the crisis itself, than by how we respond. I believe that is true today. For politicians around the world, and for the diplomats trying to influence them, there is everything to play for.
Let’s start with what has gone wrong. The proximate causes of the current crisis, pivoting around the collapse of Lehman Brothers last September, are well known. But there is a longer term context to the high leverage of western banks or the absence of the early warning mechanism that the Prime Minister has long argued for.
Over the last couple of decades, the world has become unbalanced: economically, between saver and debtor countries and between rich and poor. Environmentally, between the carbon we emit and the capacity of the planet to absorb our pollution. And politically there is imbalance too, in at least two dimensions:
* between the global reach of markets and the predominantly national reach of politics; not for nothing did we identify the weakness of international governance as a policy priority in our Strategic Framework * and between the multiple poles of global power and the western dominated representation in our multilateral institutions.
These imbalances are at the heart of today’s problems: global financial imbalances helped create the conditions for excessive risk-taking and leverage in the financial system. The boom in commodity prices added to imbalances and now the bust has left several countries, including some of the poorest, dangerously exposed. And the weakness of multilateral institutions has made it hard to deliver adequate concerted policy responses.
The consequences are severe. People are losing their jobs and houses. And it is not just banks that are worried about going under. So are governments and even countries.
The Government’s aim is that the UK plays a key role in addressing these problems, shaping the debate in a progressive and reforming direction. That is what the London Summit meeting next week is all about. But the impact of the crisis will resonate through our work for longer. Economic Risk
Last year, if I’d warned of the dangers of a spiral of protectionism and the unravelling of the European single market, I would have been accused of knocking down a straw man. Today, the threat is real.
But while protectionism has emerged strengthened, so too has the case for multilateralism. Instead of theological debates about whether we need new institutions to include the new economic powers, we have chosen the G20 format to address this economic crisis at Heads of Government level. Our international economic institutions, in particular the IMF, have been given a renewed importance. However big the US stimulus – and the commitment is so far greater than the spend on the Second World War – it depends for success on other countries acting in tandem. Coordination of fiscal responses, interest rate cuts and regulatory reform signal an enhanced willingness to work together.
If the forces of cooperation are to win out, we need to use this moment of flux to reform our international financial institutions. They need to reflect the new distribution of power and the new nature of the global threats we face.
The priorities are clear. As the Prime Minister has long argued, we need an early warning mechanism at an international level to identify systemic risks. The IMF and World Bank need to have sufficient resources to address the scale and breadth of the financial crises. Instead of protectionism, we should defend the European single market – and the Commission that protects it – and we should put completion of the Doha round back on the table. You cannot be in favour of the single market and free trade, but against the very institutions that preserve the rules of the game. And to support the UK economy, the FCO and UKTI need to work to help British businesses find new markets.
All these tasks require engagement by you and your staff with your host governments. Economic risk needs to be addressed by a political bargain, and that is our core business. Environmental Risk
The same is true for the debate about climate change. The risk is that climate change becomes a second order priority, to be deferred until our economy gets back on track. “Bye, bye greens, see you in the next boom” was the headline in the Economist editorial in the last recession of 1991.
A deeper slump could produce the same result today. As the world faces its moment of decision at Copenhagen in December, the pressure to lower our level of ambition and to put off action may be strong.
However, the crisis is also strengthening the argument for urgent, bold action. In fact the arguments are stacking up.
The immediate task faced by governments is to stimulate demand. Instead of funding make-work schemes, governments should use the fiscal stimulus to restructure their economies around more energy efficient, low-carbon industries and homes.
Beyond the immediate crisis, we must also make the recovery sustainable by diversifying our sources of energy. In the short term, there is a major risk that oil and commodity prices bounce back, particularly as investment in new capacity drops off. A return to 2008 oil prices of $140 dollars a barrel would pull $800 billion per year out of the US, EU and Japan – around half of their current total stimulus packages. Rising commodity prices could force central banks to tighten monetary policy, as they did last year, and choke off growth, just when people are desperate for it to return.
So tackling climate change is not a distraction from economic recovery but a contribution to it. By accelerating the shift to low-carbon, there is potentially a triple dividend: countries can enjoy a more sustainable model of growth that is more resilient to future shocks from resource-shortages. They can gain an early-mover advantage in new industries; and they can benefit from a huge reduction in the costs of mitigating climate change or adapting to it. As Joe Stiglitz and Nick Stern have argued, climate change is a systemic risk far greater in scale than the economic crisis, but one that we can avert if we act now. Political Risk
The final risk has particular pertinence to the Foreign Office: the effect of the crisis on politics and security.
Interdependence means that crisis in one country can be contagious. As flows of money, people and products fall, political risks emerge. Let me give some examples.
First, finance. European banks lent around $3 trillion to emerging markets in recent years. The drying up of these credit lines means that in some countries fiscal deficits could become unmanageable without drastic policy action. In Europe alone, the governments of Latvia and Iceland have fallen, with Hungary the latest casualty this week.
Second, commodity prices: more than a dozen states rely on oil exports for two thirds of government revenues. For Venezuela, Nigeria and Angola, commodity exports are virtually the only source of hard currency. In Russia, oil revenues have underpinned a period of impressive growth and high degree of political consensus after the turmoil of the 1990s. Without these revenues , states will no longer be able to afford the expansion of public spending that underpinned their social and political arrangements.
Many commodity exporting states have political systems in which informal networks are more powerful than political institutions. When revenues fall, patronage networks may be disrupted, political certainties questioned and coercion used to deal with social discontent. The 1930s demonstrated how economic decline can fuel authoritarianism at home and aggression abroad.
But the slide into authoritarianism is far from inevitable. History points to where weakened regimes have been forced into reform. In Indonesia, following the crisis in late 1990s, Suharto decided to raise fuel and transport costs by 70 per cent. It led to rioting in the capital and the withdrawal of military support for his rule. In the Soviet Union, the oil price collapse in the 1980s helped to persuade the Soviet leadership to adopt a more conciliatory stance in disarmament negotiations with the US, knowing it could no longer afford an economically crippling arms race. The debt crisis in Latin America in the 1980s accelerated the transition towards democratic rule, with the number of democratic states increasing from four to 15 in a decade.
Third, trade and migration: the fate of many states is tied up with their trade partners. Let me illustrate with one example: the newly independent state of Tajikistan – the base of a major trafficking route from Afghanistan to Europe. Nearly 50% of the male workforce work in Russia, sending home $1.8 billion in remittances in 2008. Many of these workers are coming home - 70% to rural areas with already chronic unemployment. The risk is that these young men will move in to drug-trafficking, destabilising networks of organised crime and pushing the Tajik government to the brink. This would impact both on our operations in Afghanistan and the wider stability of the volatile Central Asian region.
The political risks unleashed by the crisis are complex, sometimes contradictory, and imperfectly understood. Will the emergence of new powers such as China and India will be accelerated or set back? How will the sharp fall in oil and gas revenues affect Russia’s politics and foreign policy? How will Pakistan’s economic woes impact on its efforts to counter extremism? We don’t know yet. But we must already be asking ourselves these questions, because the answers matter profoundly to us.
And our policy responses must be flexible enough to adapt to different and changing circumstances.
We need to identify at the earliest possible stage where economic problems are translating into political problems, where simmering disputes over resources or power threaten stability.
We need to ensure that our international financial institutions – the IMF, with World Bank, and the EBRD for instance – have adequate funding to help not just those countries who need help now, but those that turn to them in six or twelve months time.
As poorer countries suffer, the last thing the developed world should do is reduce its commitments to aid. Development assistance is needed not just for basic services such as health and education but to uphold the law and provide safety and security.
And we also need to recognise that while more countries might want or need international political mediation or security assistance, foreign intervention will be made harder by the crisis. The familiar arguments – lack of capacity, lack of political will, lack of legitimacy for interventions – will all be exacerbated by the recession.
The challenge is clear. We need to ensure our global institutions, particularly the UN Security Council, reflect the emergence of a multipolar world. But for those institutions to be not just more legitimate, but more effective, we need to ensure our values – like the Responsibility to Protect – are shared among both emerging and existing powers. Implications For FCO
I want to end by drilling down into the implications of the economic crisis for the Foreign Office.
Max Weber once said that people with a real vocation for politics could combine two, seemingly contradictory attributes: passion and perspective.
The balance between our ideals and our reality, between a focus on what we want to achieve and an empathy with the countries we are trying to influence, is at the heart of diplomacy. It is hard task analytically and psychologically. Too much empathy leads to capture. Too inflexible a focus on results leads to righteous sounding policies which are at best ineffective, at worst counter-productive. The office has rightly stressed ‘delivery’ in the last few years. But this is no substitute for the best political analysis and prescription.
So my first point is this. When we think through the political risks that are emerging, we need continually to link the ends we seek to achieve and the means at our disposal, so the two are aligned. The volatility of the situations we face means that we have to keep adjusting our approach. Strategy is not about a plan that is made every three years; it is part of a daily, hard-headed assessment of our ends and means.
Second, we need to think about how we define the problems confronting us. Eisenhower once said: “If a problem cannot be solved, enlarge it.” I think this is a particularly valuable insight in a world of increasing interdependence. That’s why, in the last year, we have re-framed some issues: focusing on a 23 state solution involving the Arab League creating incentives for Israeli compromise, not just a 2-state solution; looking at Afghanistan and Pakistan together, recognising the link to all their regional neighbours; arguing that climate change, energy security and economic renewal can be solved more easily by addressing them together than separately.
Third, we need to ensure we integrate economic analysis into our political reporting. I’ve consumed and valued hugely the economic work of the network over the past six months. The next step is to integrate economic and political analysis more completely. So when we discuss the impact of the fall of oil and gas prices on the Iranian economy, we can understand the scale of the budget shortfall, how the regime may respond in terms of its domestic and external spending, and how the dynamics within the country may change.
Fourth, when we try to turn analysis into action, I think we need to think how we marry public and private diplomacy. In a world where power and influence is more dispersed, we need to influence societies from the bottom up – through citizens, NGOs, and business – not just through government to government relationships. I think that is true for traditional ‘hard security’ challenges as well as for climate change and the MDGs.
Finally, we need to be ready for more free thinking not just sticking to the plan – because the plan should be a platform not a straitjacket. Ready to try something even if we aren’t sure it is going to work – because what we have tried isn’t working. Ready to go for the big play not just the intermediate steps – not because we have succumbed to the belief that complex problems are susceptible to a silver bullet, but because sometimes times of change open up the big play.
In foreign policy you have to use crisis as an opportunity. There are small windows in every crisis where our leverage is at a maximum, where swift action, in public not just behind the scenes, despite uncertain reward is a risk worth taking. This is not about grandstanding. It is about recognising that when things are in flux, an external intervention can be decisive.
There is one big proviso. Free thinking, changes of approach, the big play, have a chance of working when we find the right partners. So different parts of the network need to find ways to work together:
* New York and Brussels should be points of reference for the whole network. * We need to make our full contribution to the Commonwealth as a multiplier as well as a uniter. It celebrates this year its 60th anniversary, has a new Secretary General. It remains a unique network with unique bonds of history. * And we need our bilateral efforts to be imaginative, for example in the last year we have worked with France on the DRC, the Czech republic on the Balkans, and the Dutch and Scandinavians on the Durban Conference.
Conclusion
For some the events of the last year have shaken our confidence. With everything in flux, many are writing off all the achievements of the last 30 years as illusory and empty. Traditional British pessimism is in danger of becoming something much more toxic: the myth of national decline that dominated discourse in this country for decades years is creeping back into fashion.
It is right that we take a long, hard look at our politics, our economy and our society. Where things are not working, we have to fix them. But where things have stood the test of time, we must vigorously defend them. And where there are myths we should set them straight.
The British economy is not powered solely by the City of London. In fact manufacturing is a larger share of national income than in France. Our major cities have developed distinctive identities and strengths. We have a strong base in a range of knowledge intensive industries, from pharmaceuticals to software. And with some of Europe’s top universities, we have the science and academic base that can provide a platform for innovation.
We have gained from globalisation not by a race to the bottom. Whether introducing the minimum wage and equalities legislation, or redistributing income and signing the social chapter, Britain in 2009 is not ‘sweatshop Britain’.
As Britain’s representatives abroad, your job is in part to project a coherent national story. Patriotic but also honest. Confident but also open-minded. For me that story is about strong values of fairness and responsibility. It is about openness to the world, giving and learning in equal measure. It is about cultivating difference as well as celebrating unity. It is about learning from history but not being stuck in it.
So we have a big year ahead. Helping manage the risks from the economic crisis, and projecting a confident future for Britain and for British business. In other words “better world better Britain”.
I don’t believe there is a diplomatic service in the world better placed to respond to the crisis. The next year will put increasing demands on you. Resources will be tight. The change programme will be more vital than ever. But I’m confident that the talent within this organisation will deliver. The capability review for the Foreign Office will be soon be published, looking back on the progress we’ve made since 2007. The final scores go up substantially, putting us up with the best in Whitehall. When Gus O’Donnell and the review team briefed the board they said the effort of the Foreign Office was excellent, progress was good and our prospects were very good.
Those judgements reflect my experience over the last year. Every day in this job I meet people who combine a passion for making a difference, a commitment to public service and real empathy and understanding of other countries. Your ability to adapt, your flexibility is second to none
I’ve managed to visit 41 countries in the last 18 months, and over 50 posts. Thank you to the civ-mil mission in Helmand province for showing guts and can-do in the most trying circumstances. Thank you to the staff in Islamabad for your great spirit as your children were moved out of the country. Thank you to our Embassies in Rangoon, Harare and Tehran for superb work in the face of harassment and intimidation. Thanks to all of you working for and with UKTI for showing by year on year increases in inward investment that commercial diplomacy is no longer an add-on for the FCO. Thanks to the Cluster Munitions negotiating team for an amazing job – now on to the Arms Trade Treaty. And thank you to all of you for taking the chance this week to get out and about around the UK. Over 100 meetings around the country this week are testimony to a determination not just to share our passion for foreign policy, but to ensure that we understand and recognise the concerns of the people we ultimately work for - the British people.
It is an enormous privilege to lead the Foreign Office. As you all know, representing your country abroad is a huge honour. Your work makes a difference to people’s lives here in this country and in the countries in which you serve. I hope everyone here takes back a message of thank you to all our staff – British and foreign - for all that they do to make us proud of our Diplomatic Service. A message not just from me, but from the Prime Minister, our Cabinet colleagues and the whole FCO Ministerial team.
FCO Leadership Conference
March 24th, 2009
Foreign policy is defined more by crises than breakthroughs. 2008 will be remembered for the crises over Georgia and Gaza. But the greatest crisis of 2008 was the economic crisis.
Since 2001, foreign policy has been shaped by the response to September 11th. Terrorism on US soil wrenched minds back to the imperative of national security.
Today, foreign policy is again being reshaped, this time by the economic crisis: the seizing up of financial markets, now being followed by a global recession.
This is the focus of my speech today. Not the financial or economic crisis itself, but its effect on foreign policy. I don’t believe that we can put circuit breakers in place to stop the economic crisis translating into political risk. We couldn’t decouple the real economy from the financial crisis, or the impact of the crisis on the west from the east. I don’t think we can decouple political risk from economic.
September 11th challenged our assumptions about national security. The economic crisis is already forcing us to question what Roberto Unger called ‘false necessities’: the orthodoxy of economic thinking that ignored systemic risk; the relationship between states and markets; the distribution of power between the national and global levels.
The attacks on September 11th were searing and deadly. The economic crisis does not kill and maim in the same way. Its impact will be more diffuse, more long term, and less visible than September 11th. But it will be just as profound. It will affect more countries. And it will affect many aspects of a country’s life, not just security. That is why I believe the economic crisis will shape foreign policy in the second decade of the millennium in as deep a way as September 11th shaped the first. Just think what we are living through: financial leverage down; capital flows down; growth down; remittances down. Public debt up. Regulation up. Unemployment up. Instability up. The old assumptions have been broken. And the full effects are not yet known.
Issues of terrorism, conflict, and human rights will still consume the attention of diplomats. But they will be played out in a new context. And the new context will affect the solutions that are available and attainable.
The history of economic crises can inspire fear – everyone thinks of the Great Depression and the rise of fascism in Europe. The Smoot-Hawley tariff act from the 1930s is an often quoted example of how policymakers snatched depression from the jaws of recession. The Asian Crisis during 1997 to 98 is widely thought of as a missed opportunity to reform the international financial architecture.
But history also shows that sometimes risks are managed and progress emerges.
Central banking, labour laws, consumer safety regulation and competition laws emerged in response to the crashes and panics that were common in the early part of the 20th century. The Bretton Woods institutions were conceived drawing on the lessons of the reaction to the 1930s depression. The 1973 oil crisis foreshadowed the concept of a forum for the world’s major industrialised nations - now the G8.
So if there is a general lesson, it is that our fate is determined less by the crisis itself, than by how we respond. I believe that is true today. For politicians around the world, and for the diplomats trying to influence them, there is everything to play for.
Let’s start with what has gone wrong. The proximate causes of the current crisis, pivoting around the collapse of Lehman Brothers last September, are well known. But there is a longer term context to the high leverage of western banks or the absence of the early warning mechanism that the Prime Minister has long argued for.
Over the last couple of decades, the world has become unbalanced: economically, between saver and debtor countries and between rich and poor. Environmentally, between the carbon we emit and the capacity of the planet to absorb our pollution. And politically there is imbalance too, in at least two dimensions:
* between the global reach of markets and the predominantly national reach of politics; not for nothing did we identify the weakness of international governance as a policy priority in our Strategic Framework * and between the multiple poles of global power and the western dominated representation in our multilateral institutions.
These imbalances are at the heart of today’s problems: global financial imbalances helped create the conditions for excessive risk-taking and leverage in the financial system. The boom in commodity prices added to imbalances and now the bust has left several countries, including some of the poorest, dangerously exposed. And the weakness of multilateral institutions has made it hard to deliver adequate concerted policy responses.
The consequences are severe. People are losing their jobs and houses. And it is not just banks that are worried about going under. So are governments and even countries.
The Government’s aim is that the UK plays a key role in addressing these problems, shaping the debate in a progressive and reforming direction. That is what the London Summit meeting next week is all about. But the impact of the crisis will resonate through our work for longer. Economic Risk
Last year, if I’d warned of the dangers of a spiral of protectionism and the unravelling of the European single market, I would have been accused of knocking down a straw man. Today, the threat is real.
But while protectionism has emerged strengthened, so too has the case for multilateralism. Instead of theological debates about whether we need new institutions to include the new economic powers, we have chosen the G20 format to address this economic crisis at Heads of Government level. Our international economic institutions, in particular the IMF, have been given a renewed importance. However big the US stimulus – and the commitment is so far greater than the spend on the Second World War – it depends for success on other countries acting in tandem. Coordination of fiscal responses, interest rate cuts and regulatory reform signal an enhanced willingness to work together.
If the forces of cooperation are to win out, we need to use this moment of flux to reform our international financial institutions. They need to reflect the new distribution of power and the new nature of the global threats we face.
The priorities are clear. As the Prime Minister has long argued, we need an early warning mechanism at an international level to identify systemic risks. The IMF and World Bank need to have sufficient resources to address the scale and breadth of the financial crises. Instead of protectionism, we should defend the European single market – and the Commission that protects it – and we should put completion of the Doha round back on the table. You cannot be in favour of the single market and free trade, but against the very institutions that preserve the rules of the game. And to support the UK economy, the FCO and UKTI need to work to help British businesses find new markets.
All these tasks require engagement by you and your staff with your host governments. Economic risk needs to be addressed by a political bargain, and that is our core business. Environmental Risk
The same is true for the debate about climate change. The risk is that climate change becomes a second order priority, to be deferred until our economy gets back on track. “Bye, bye greens, see you in the next boom” was the headline in the Economist editorial in the last recession of 1991.
A deeper slump could produce the same result today. As the world faces its moment of decision at Copenhagen in December, the pressure to lower our level of ambition and to put off action may be strong.
However, the crisis is also strengthening the argument for urgent, bold action. In fact the arguments are stacking up.
The immediate task faced by governments is to stimulate demand. Instead of funding make-work schemes, governments should use the fiscal stimulus to restructure their economies around more energy efficient, low-carbon industries and homes.
Beyond the immediate crisis, we must also make the recovery sustainable by diversifying our sources of energy. In the short term, there is a major risk that oil and commodity prices bounce back, particularly as investment in new capacity drops off. A return to 2008 oil prices of $140 dollars a barrel would pull $800 billion per year out of the US, EU and Japan – around half of their current total stimulus packages. Rising commodity prices could force central banks to tighten monetary policy, as they did last year, and choke off growth, just when people are desperate for it to return.
So tackling climate change is not a distraction from economic recovery but a contribution to it. By accelerating the shift to low-carbon, there is potentially a triple dividend: countries can enjoy a more sustainable model of growth that is more resilient to future shocks from resource-shortages. They can gain an early-mover advantage in new industries; and they can benefit from a huge reduction in the costs of mitigating climate change or adapting to it. As Joe Stiglitz and Nick Stern have argued, climate change is a systemic risk far greater in scale than the economic crisis, but one that we can avert if we act now. Political Risk
The final risk has particular pertinence to the Foreign Office: the effect of the crisis on politics and security.
Interdependence means that crisis in one country can be contagious. As flows of money, people and products fall, political risks emerge. Let me give some examples.
First, finance. European banks lent around $3 trillion to emerging markets in recent years. The drying up of these credit lines means that in some countries fiscal deficits could become unmanageable without drastic policy action. In Europe alone, the governments of Latvia and Iceland have fallen, with Hungary the latest casualty this week.
Second, commodity prices: more than a dozen states rely on oil exports for two thirds of government revenues. For Venezuela, Nigeria and Angola, commodity exports are virtually the only source of hard currency. In Russia, oil revenues have underpinned a period of impressive growth and high degree of political consensus after the turmoil of the 1990s. Without these revenues , states will no longer be able to afford the expansion of public spending that underpinned their social and political arrangements.
Many commodity exporting states have political systems in which informal networks are more powerful than political institutions. When revenues fall, patronage networks may be disrupted, political certainties questioned and coercion used to deal with social discontent. The 1930s demonstrated how economic decline can fuel authoritarianism at home and aggression abroad.
But the slide into authoritarianism is far from inevitable. History points to where weakened regimes have been forced into reform. In Indonesia, following the crisis in late 1990s, Suharto decided to raise fuel and transport costs by 70 per cent. It led to rioting in the capital and the withdrawal of military support for his rule. In the Soviet Union, the oil price collapse in the 1980s helped to persuade the Soviet leadership to adopt a more conciliatory stance in disarmament negotiations with the US, knowing it could no longer afford an economically crippling arms race. The debt crisis in Latin America in the 1980s accelerated the transition towards democratic rule, with the number of democratic states increasing from four to 15 in a decade.
Third, trade and migration: the fate of many states is tied up with their trade partners. Let me illustrate with one example: the newly independent state of Tajikistan – the base of a major trafficking route from Afghanistan to Europe. Nearly 50% of the male workforce work in Russia, sending home $1.8 billion in remittances in 2008. Many of these workers are coming home - 70% to rural areas with already chronic unemployment. The risk is that these young men will move in to drug-trafficking, destabilising networks of organised crime and pushing the Tajik government to the brink. This would impact both on our operations in Afghanistan and the wider stability of the volatile Central Asian region.
The political risks unleashed by the crisis are complex, sometimes contradictory, and imperfectly understood. Will the emergence of new powers such as China and India will be accelerated or set back? How will the sharp fall in oil and gas revenues affect Russia’s politics and foreign policy? How will Pakistan’s economic woes impact on its efforts to counter extremism? We don’t know yet. But we must already be asking ourselves these questions, because the answers matter profoundly to us.
And our policy responses must be flexible enough to adapt to different and changing circumstances.
We need to identify at the earliest possible stage where economic problems are translating into political problems, where simmering disputes over resources or power threaten stability.
We need to ensure that our international financial institutions – the IMF, with World Bank, and the EBRD for instance – have adequate funding to help not just those countries who need help now, but those that turn to them in six or twelve months time.
As poorer countries suffer, the last thing the developed world should do is reduce its commitments to aid. Development assistance is needed not just for basic services such as health and education but to uphold the law and provide safety and security.
And we also need to recognise that while more countries might want or need international political mediation or security assistance, foreign intervention will be made harder by the crisis. The familiar arguments – lack of capacity, lack of political will, lack of legitimacy for interventions – will all be exacerbated by the recession.
The challenge is clear. We need to ensure our global institutions, particularly the UN Security Council, reflect the emergence of a multipolar world. But for those institutions to be not just more legitimate, but more effective, we need to ensure our values – like the Responsibility to Protect – are shared among both emerging and existing powers. Implications For FCO
I want to end by drilling down into the implications of the economic crisis for the Foreign Office.
Max Weber once said that people with a real vocation for politics could combine two, seemingly contradictory attributes: passion and perspective.
The balance between our ideals and our reality, between a focus on what we want to achieve and an empathy with the countries we are trying to influence, is at the heart of diplomacy. It is hard task analytically and psychologically. Too much empathy leads to capture. Too inflexible a focus on results leads to righteous sounding policies which are at best ineffective, at worst counter-productive. The office has rightly stressed ‘delivery’ in the last few years. But this is no substitute for the best political analysis and prescription.
So my first point is this. When we think through the political risks that are emerging, we need continually to link the ends we seek to achieve and the means at our disposal, so the two are aligned. The volatility of the situations we face means that we have to keep adjusting our approach. Strategy is not about a plan that is made every three years; it is part of a daily, hard-headed assessment of our ends and means.
Second, we need to think about how we define the problems confronting us. Eisenhower once said: “If a problem cannot be solved, enlarge it.” I think this is a particularly valuable insight in a world of increasing interdependence. That’s why, in the last year, we have re-framed some issues: focusing on a 23 state solution involving the Arab League creating incentives for Israeli compromise, not just a 2-state solution; looking at Afghanistan and Pakistan together, recognising the link to all their regional neighbours; arguing that climate change, energy security and economic renewal can be solved more easily by addressing them together than separately.
Third, we need to ensure we integrate economic analysis into our political reporting. I’ve consumed and valued hugely the economic work of the network over the past six months. The next step is to integrate economic and political analysis more completely. So when we discuss the impact of the fall of oil and gas prices on the Iranian economy, we can understand the scale of the budget shortfall, how the regime may respond in terms of its domestic and external spending, and how the dynamics within the country may change.
Fourth, when we try to turn analysis into action, I think we need to think how we marry public and private diplomacy. In a world where power and influence is more dispersed, we need to influence societies from the bottom up – through citizens, NGOs, and business – not just through government to government relationships. I think that is true for traditional ‘hard security’ challenges as well as for climate change and the MDGs.
Finally, we need to be ready for more free thinking not just sticking to the plan – because the plan should be a platform not a straitjacket. Ready to try something even if we aren’t sure it is going to work – because what we have tried isn’t working. Ready to go for the big play not just the intermediate steps – not because we have succumbed to the belief that complex problems are susceptible to a silver bullet, but because sometimes times of change open up the big play.
In foreign policy you have to use crisis as an opportunity. There are small windows in every crisis where our leverage is at a maximum, where swift action, in public not just behind the scenes, despite uncertain reward is a risk worth taking. This is not about grandstanding. It is about recognising that when things are in flux, an external intervention can be decisive.
There is one big proviso. Free thinking, changes of approach, the big play, have a chance of working when we find the right partners. So different parts of the network need to find ways to work together:
* New York and Brussels should be points of reference for the whole network. * We need to make our full contribution to the Commonwealth as a multiplier as well as a uniter. It celebrates this year its 60th anniversary, has a new Secretary General. It remains a unique network with unique bonds of history. * And we need our bilateral efforts to be imaginative, for example in the last year we have worked with France on the DRC, the Czech republic on the Balkans, and the Dutch and Scandinavians on the Durban Conference.
Conclusion
For some the events of the last year have shaken our confidence. With everything in flux, many are writing off all the achievements of the last 30 years as illusory and empty. Traditional British pessimism is in danger of becoming something much more toxic: the myth of national decline that dominated discourse in this country for decades years is creeping back into fashion.
It is right that we take a long, hard look at our politics, our economy and our society. Where things are not working, we have to fix them. But where things have stood the test of time, we must vigorously defend them. And where there are myths we should set them straight.
The British economy is not powered solely by the City of London. In fact manufacturing is a larger share of national income than in France. Our major cities have developed distinctive identities and strengths. We have a strong base in a range of knowledge intensive industries, from pharmaceuticals to software. And with some of Europe’s top universities, we have the science and academic base that can provide a platform for innovation.
We have gained from globalisation not by a race to the bottom. Whether introducing the minimum wage and equalities legislation, or redistributing income and signing the social chapter, Britain in 2009 is not ‘sweatshop Britain’.
As Britain’s representatives abroad, your job is in part to project a coherent national story. Patriotic but also honest. Confident but also open-minded. For me that story is about strong values of fairness and responsibility. It is about openness to the world, giving and learning in equal measure. It is about cultivating difference as well as celebrating unity. It is about learning from history but not being stuck in it.
So we have a big year ahead. Helping manage the risks from the economic crisis, and projecting a confident future for Britain and for British business. In other words “better world better Britain”.
I don’t believe there is a diplomatic service in the world better placed to respond to the crisis. The next year will put increasing demands on you. Resources will be tight. The change programme will be more vital than ever. But I’m confident that the talent within this organisation will deliver. The capability review for the Foreign Office will be soon be published, looking back on the progress we’ve made since 2007. The final scores go up substantially, putting us up with the best in Whitehall. When Gus O’Donnell and the review team briefed the board they said the effort of the Foreign Office was excellent, progress was good and our prospects were very good.
Those judgements reflect my experience over the last year. Every day in this job I meet people who combine a passion for making a difference, a commitment to public service and real empathy and understanding of other countries. Your ability to adapt, your flexibility is second to none
I’ve managed to visit 41 countries in the last 18 months, and over 50 posts. Thank you to the civ-mil mission in Helmand province for showing guts and can-do in the most trying circumstances. Thank you to the staff in Islamabad for your great spirit as your children were moved out of the country. Thank you to our Embassies in Rangoon, Harare and Tehran for superb work in the face of harassment and intimidation. Thanks to all of you working for and with UKTI for showing by year on year increases in inward investment that commercial diplomacy is no longer an add-on for the FCO. Thanks to the Cluster Munitions negotiating team for an amazing job – now on to the Arms Trade Treaty. And thank you to all of you for taking the chance this week to get out and about around the UK. Over 100 meetings around the country this week are testimony to a determination not just to share our passion for foreign policy, but to ensure that we understand and recognise the concerns of the people we ultimately work for - the British people.
It is an enormous privilege to lead the Foreign Office. As you all know, representing your country abroad is a huge honour. Your work makes a difference to people’s lives here in this country and in the countries in which you serve. I hope everyone here takes back a message of thank you to all our staff – British and foreign - for all that they do to make us proud of our Diplomatic Service. A message not just from me, but from the Prime Minister, our Cabinet colleagues and the whole FCO Ministerial team.
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