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Economic crisis brings security risks

Distress may create social unrest and new havens for criminals and violent extremists, analysts say.

October 27, 2008|Paul Richter | Richter is a Times staff writer.

WASHINGTON — The global economic crisis is destabilizing a growing number of developing countries, sharpening security risks in many regions at a time when the United States and its wealthy allies are preoccupied with their own problems.

The distress is likely to push tens of millions of people below the poverty line, stirring social unrest that weakens governments and threatens to increase the number of "stateless zones," lawless areas that are havens for criminals and violent extremists, say U.S. officials and other experts. In the poorest countries, the crisis could undermine or even topple governments, they say.

"For the next few years, the world will be a more dangerous place," predicted Mitchell B. Reiss, who was a senior State Department official during President Bush's first term.

Developing countries vital to U.S. economic and security interests such as Mexico, Turkey, South Korea and Pakistan face credit shocks, rising unemployment, slowing growth and deepening social tensions. Their problems are forcing the U.S. and other major powers to rethink foreign policy priorities. And they loom as a challenge to the administration that will take office in Washington in three months.

Many countries that are sufficiently developed to have links to global financial institutions have quietly begun urgent conversations with the International Monetary Fund, a lender of last resort.

Going to the IMF is considered a drastic step because of the sometimes burdensome conditions -- including unpopular tax increases and spending limits -- the fund imposes on borrowers.

A second set of countries, the poorest and most vulnerable, will begin feeling the crisis in the next few months.

Many of these nations will suffer as commodity prices fall and the foreign aid and investment on which some are heavily dependent dries up.

"Even a modest reduction in development assistance, along with lower foreign direct investment from the developed world, may be all it takes to tip them into anarchy," Reiss said. "The social fabric of many countries will be stretched and even torn."

The stress is likely to increase famine, disease and crime and could imperil the poorer governments, predicted Reiss, who is diplomat-in-residence at the College of William and Mary in Virginia.

The president last week voiced concern about the danger the crisis poses to the developing world and warned that if governments cut aid, it could threaten security far away.

"Some may be tempted to turn inward," Bush said. "This would be a mistake. . . . We know that our enemies recruit people to their dark ideology by exploiting despair."

Pakistan has received wide attention as it has scrambled in recent weeks to borrow billions to avoid a default that could topple its new coalition government and deal a blow to U.S.-backed efforts against extremists in Pakistan and Afghanistan.

Closer to home, Mexico's growth rate has slowed from 4% to 1% at a time when it is struggling with falling oil prices, a currency that has lost 25% of its value, a more difficult export market and rising strains on the government budget. Migrants who can't find work in the United States may not be able to find it in Mexico, either; some experts fear rising unemployment could draw some of them into the violent drug trade.

Turkey, an important U.S. ally with dangerously polarized politics, is struggling with a slowing economy and a currency that has lost 27% of its value; it has begun talks with the IMF. Turkey has a relatively strong economy, but as in many other countries, foreign investors have pulled their cash out.

Even South Korea, one of the most robust developing economies, has seen its currency and stock market fall 30% as foreign investors have fled. The exodus threatens the health of the country's banks, ratings agencies say.

A number of new U.S. allies in Eastern Europe, which have borrowed heavily from the West, have been hit hard. These include Hungary, Latvia, Ukraine and Estonia. On Sunday, Ukraine reached agreement with the IMF on a $16.5 billion stand-by loan to help support the country's financial system, news reports said.

Some analysts believe that the swoon of the Russian economy, which has been hard hit by falling energy prices, a tumbling stock market and investor flight, could pose problems for the United States.

Russia's recent strength and prosperity made it a challenge for Bush administration. But as in Russia's dark days of the 1990s, "we could be consumed by problems they have because of their weakness," said Derek Chollet of the Center for a New American Security in Washington.

Among the poorest countries, economic disruption may be most acute for those embroiled in civil strife or recovering from it, such as Nigeria, Liberia and Rwanda. "If people start losing their jobs, some of those conflicts can reignite," said Steve Radelet of the Center for Global Development, a think tank.

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