The Impact of the Global Financial Crisis on Liberal Democracy

In the wake of the Global Financial Crisis (GFC), concerns have been raised about the future of liberal democracy. This is not surprising, as it is usually during times of economic recession that the liberal democratic ideology is called into question, with the GFC being no exception. With its two basic principles of liberty and equality, a liberal democracy requires the existence of a market economy and aims to ensure the equality of its citizens. [1] The GFC has intensified the inequality between the rich and poor and has ignited the populist movement, raising the question of whether liberal democracy is necessarily the best system for securing the economic growth and opportunities desired by citizens.

Longstanding issues with liberal democracy

The GFC has merely exacerbated existing issues and discontent with liberal democratic systems. Trust and public confidence in democratic institutions has eroded significantly around the globe in the past few decades. [2] The Economic Intelligence Unit (EIU) notes that almost half of the 167 countries covered by its democracy index registered a decline in overall scores between 2006 and 2016. Notably, the United States has deteriorated from its ranking as a “full democracy” to a “flawed democracy” in 2017; [3] ironic given America has traditionally prided itself as a defender of democracy.

Both well-established democracies and new democracies have been affected by this discontent. Newer democracies in poorer countries such as Nigeria, Venezuela and the Philippines suffer from a breakdown in democracy due to government corruption, inefficient public services and poor policy formulation and implementation. [4] On the other hand, wealthy established democracies have seen a drop-off in growth since the 1970s, despite the variety of economic policies adopted. [5] Stagnation of income seems to be a major sticking point, with large-scale forces such as globalisation and advances in technology driving incomes down and discontentment levels up.

The severe political and economic consequences of the GFC, as well as the government responses to the fallout, have served to aggravate the existing inequalities and discontentment within many democracies. [6]

In terms of economic consequences, Western countries face higher public debt levels, higher unemployment levels and a bleaker economic outlook. [7] The government’s response to the fallout served to fuel the flame. As the average Joe’s quality of life deteriorated, billions of taxpayers’ money was being used to bail out investment banks, whose unscrupulous behaviour caused the GFC. [8] This was considered particularly outrageous, given the level of remuneration that bankers were paid during the leadup to the GFC, with the biggest Wall Street firms paying out combined bonuses of $39 billion. [9] Furthermore, many governments had to take unpopular austerity measures such as cuts in social spending, again at the cost of the average Joe.

It is unsurprising that the GFC and subsequent government responses have created growing resentment and loss of trust amongst ordinary citizens in governments who have championed liberal democracy, given they failed to predict and respond favourably to the GFC.

Poor economic performance tends to erode the citizen’s trust and evaluations of democracy, especially in those countries affected more severely by the economic depression. [10] The GFC exposed the deficiencies of liberal democracy and undermined the credibility of free-market capitalism. While the Greek unemployment rate fell to 23.2%, median income has shown no growth in either the US or the UK since the 2000s. [11] In Australia, the richest 20% of Australian households has risen to 71 times the net worth of the poorest 20% of households. [12] Growing inequalities may undermine the liberal ethos of an egalitarian society and damage the ability of liberal democracies to serve as role models for the rest of the world. [13]

The rise of populism

In a time of large fiscal burden and mass immigration, policy makers are constrained to proposing policies which lead to incremental improvements. This incrementalism frustrates voters who want more dramatic solutions and a bold leader who is willing to bypass the checks and balances of liberal democracy. [14] The GFC has fuelled the rise of populists across the political spectrum, threatening the political dominance of liberal ideology that has existed for the past few decades. The Brexit vote and the election of right-wing populists such as Donald Trump in the United States and Viktor Orbán in Hungary show the widespread rejection of core liberal tenets of embracing free markets, immigration and social change. [15] This is indicative of the fact a significant number of the native working-class believe their concerns about industrial closures and immigrants are ignored by established mainstream parties that champion free trade and flexible labour. [16] Left-wing populists such as Greece’s Syriza, Spain’s Podemos and Bernie Sanders have also achieved public support for their condemnation of the European Union’s imposed austerity measures and the corrupt corporate elite respectively. Populism could have the consequence of shifting a liberal democracy towards an authoritarian direction. For instance, Orbán declared that the Hungarian government is an illiberal democracy, rejected the liberal values of individual rights and defended social or ethnic exclusion of minorities. [17]

The survival of liberal democracy

Although the GFC has caused widespread economic suffering and a surge in populism, it seems that democracies have continued to survive. In particular, established democracies were better equipped to deal with the crisis because of their higher levels of socio-economic development and the widespread legitimacy of their democratic institutions after decades of successful functioning. [18] Breakdowns in democracies, such as in Russia, Thailand and Venezuela, tend to be due to bad governance rather than bad economic situations. Even if the state recovers quickly from the recession, Diamond (2011) contends that more democracies will fail if they do not improve the quality of governance and address executive abuse of power. [19]

Moreover, the GFC made clear that successful forms of capitalism can emerge from authoritarian governments. [20]China provides an alternative political system for creating wealthy countries and continues to look more attractive to weak democracies with illiberal tendencies and existing authoritarian regimes. However, democracies should be better than autocracies in dealing with economic recessions. Liberal democracies provide a “release valve” for its citizens to vote out incumbents for poor performance and express frustration through the existence of an open market of ideas. [21] In contrast, recessions can threaten the popularity and legitimacy of authoritarian regimes that rely on economic performance. [22]

While the GFC has exposed the deficiencies of liberal democracies and shaken the trust of its citizens, it poses an opportunity for change that might enhance democracies. Ultimately, the impact of the GFC on liberal democracies is up to how well liberal democracies deal with the crisis and correct the political and institutional reforms that led to it.

Jasmine Nguyen is a third year Commerce and Economics student. She has a special interest in applying economics to unconventional areas, such as the sugar dating market and pop culture.

[1] Van Beek, U., & Wnuk-Lipinski, E. (2012). Democracy Under Stress: The Global Crisis and Beyond (2nd ed., pp. 13-14, 77-78, 88-108). Stellenbosch: Sun Press.

[2] Diamond, L. (2015). Facing Up to the Democratic Recession. Journal Of Democracy, 26(1), 141-155. http://dx.doi.org/10.1353/jod.2015.0009

[3] Economist. (2017). Declining trust in government is denting democracy. Retrieved from http://www.economist.com/blogs/graphicdetail/2017/01/daily-chart-20

[4] Diamond, L. (2011). Why Democracies Survive. Journal Of Democracy, 22(1), 17-30. Retrieved from http://cddrl.fsi.stanford.edu/sites/default/files/22.1.diamond.pdf

[5] Zakaria, F. (2016). Populism on the March: Why the West Is in Trouble. Foreign Affairs, 95(6), 25-30.

[6] Finighan, R. (2016). Lessons from Brexit: the fruits of globalisation must be shared with low- and middle-income groups. Retrieved from https://theconversation.com/lessons-from-brexit-the-fruits-of-globalisation-must-be-shared-with-low-and-middle-income-groups-61663

[7] Van Beek, U., & Wnuk-Lipinski, E. (2012). Democracy Under Stress: The Global Crisis and Beyond (2nd ed., pp. 13-14, 77-78, 88-108). Stellenbosch: Sun Press.

[8] Wihardja, M. (2011). The G20 and Global Democracy. In W. Hofmeister & S. Vogt, G20 – Perceptions and Perspectives for Global Governance (1st ed., pp. 81-93). Singapore

[9] Rudd, K. (2009, February). The Global Crisis. The Monthly. Retrieved from https://www.themonthly.com.au/issue/2009/february/1319602475/kevin-rudd/global-financial-crisis

[10] Cordero, G., & Simón, P. (2015). Economic Crisis and Support for Democracy in Europe.

[11] Finighan, R. (2016). Lessons from Brexit: the fruits of globalisation must be shared with low- and middle-income groups. Retrieved from https://theconversation.com/lessons-from-brexit-the-fruits-of-globalisation-must-be-shared-with-low-and-middle-income-groups-61663

[12] Australia’s Household Income and Wealth Distribution. (2017). [Blog] The McCrindle Blog. Available at: http://mccrindle.com.au/the-mccrindle-blog/australias-household-income-and-wealth-distribution

[13] Öniş, Z. (2015). Democracy in Uncertain Times: Globalization, Inequality and the Prospects for Democratic Development in the Global South. METU Studies In Development, 23, 317-336. Retrieved from http://www.networkideas.org/focus/aug2015/Democracy_Uncertain_Times.pdf

[14] Zakaria, F. (2016). Populism on the March: Why the West Is in Trouble. Foreign Affairs, 95(6), 25-30.

[15] Hankla, C. (2016). Intolerance on the march: do Brexit and Trump point to global rejection of liberal ideals? Retrieved from https://theconversation.com/intolerance-on-the-march-do-brexit-and-trump-point-to-global-rejection-of-liberal-ideals-61632

[16] Oliver, J. E. and Rahn, W. M. (2016). Rise of the Trumpenvolk: Populism in the 2016 Election. The Annals of the American Academy, 667(1), 189-206.

[17] Katsambekis, G. (2016). The Populist Surge in Post-Democratic Times: Theoretical and Political Challenges. The Political Quarterly, 1-9.

[18] Van Beek, U., & Wnuk-Lipinski, E. (2012). Democracy Under Stress: The Global Crisis and Beyond (2nd ed., pp. 13-14, 77-78, 88-108). Stellenbosch: Sun Press.

[19] Diamond, L. (2011). Why Democracies Survive. Journal Of Democracy, 22(1), 17-30. Retrieved from http://cddrl.fsi.stanford.edu/sites/default/files/22.1.diamond.pdf

[20] Öniş, Z. (2015). Democracy in Uncertain Times: Globalization, Inequality and the Prospects for Democratic Development in the Global South. METU Studies In Development, 23, 317-336. Retrieved from http://www.networkideas.org/focus/aug2015/Democracy_Uncertain_Times.pdf

[21] Diamond, L. (2015). Facing Up to the Democratic Recession. Journal Of Democracy, 26(1), 141-155. http://dx.doi.org/10.1353/jod.2015.0009

[22] Van Beek, U., & Wnuk-Lipinski, E. (2012). Democracy Under Stress: The Global Crisis and Beyond (2nd ed., pp. 13-14, 77-78, 88-108). Stellenbosch: Sun Press.

Image: ‘European Parliament Brussels plenary sessions hemicycle’ by Paasikivi, http://bit.ly/2rUWNbB. Licence at https://creativecommons.org/licenses/by-sa/4.0.