It wasn’t really supposed to end up like this. When the Berlin Wall came crashing down 20 years ago, the Cold War ended with triumph for the West. Instead of two superpowers, there was one. Instead of competing ideologies, there was capitalism, and a particularly brash form of capitalism at that.
Former US president George H.W. Bush said the world should learn how to do things the American way.
“We know what works,” Bush said. “Free markets work.”
The reach of the market grew longer for two decades, encompassing China and India as well as the former Soviet Union and its satellites. Rapid growth brought impressive poverty reduction in China and India, and there are few Poles or Czechs who hanker after the days when Moscow pulled the strings.
It was always inevitable, however, that sooner or later, globalization would run into a crisis and what we have seen in the past two years is just the start of it. Don’t be fooled by the sucker’s rally of the past six months — Americans are once again running down savings to consume goods they can’t afford. China’s exports are booming.
The global imbalances are back. A combination of political change and technological revolution has always produced upheaval. That was true when the spinning jenny met the Enlightenment and it was true when a second wave of inventions — cinema, electric light, automobile and aircraft — coincided with a crumbling of the 19th century balance of power.
Digital technology and bioscience will drive the third industrial revolution, but these changes take place at a time when the spread of the market has vastly increased the reserve army of labor. US hegemony is being threatened by the rise of China.
These, then, are combustible times. This crisis has been a long time in coming and history suggests that the period of upheaval will be long and painful, just as it was between 1914 and 1945.
It didn’t take long for the first cracks in the new global order to appear. The golden age lasted for barely half a decade — the period between the lifting of the iron curtain and the creation of the WTO in 1994. Even during that half-decade there were signs of trouble, not least the impact of the shock treatment on the Russian economy in the early 1990s.
It was the succession of financial crises that began on the periphery of the global economy and gradually worked their way toward the core, however, that gave the lie to the notion that there would be a smooth and steady transition to market nirvana. The warnings from Mexico, Thailand and South Korea, from the collapse of the hedge fund Long Term Capital Management and from the dot.com bubble were ignored.
Policymakers found it easy to dismiss these flash points as teething troubles. Growth was strong and inflation was low. The early 1990s to the mid-2000s were what Mervyn King, the governor of the Bank of England, once described as the NICE decade — the years of noninflationary continual expansion.
Debt, of course, was the key. The loss of bargaining and spending power of workers in the West was compensated by raging asset price booms that allowed consumers to borrow against the rising price of their homes.
This was not just true of developed economies, such as the US and the UK. The annual transition report by the European Bank for Reconstruction and Development, released on Nov. 2, said that large-scale capital inflows into eastern European countries had “contributed to credit booms and foreign currency lending. These, in turn, made the crisis deeper and complicated its management.”
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