Is the world economy globalizing or deglobalizing? The answer would have seemed obvious in 1990. Communism had just collapsed in central and eastern Europe; then-Chinese leader Deng Xiaoping (鄧小平) was unleashing capitalist enterprise; and political scientist Francis Fukuyama famously proclaimed the “end of history,” by which he meant the triumph of liberal democracy and free markets.
Years earlier, British economist Lionel Robbins, a firm believer in free markets, warned that the shaky political foundations of the post-World War II international order could not support a globalized economy.
However, in the euphoria and triumphalism of the early 1990s, such warnings fell on deaf ears. This was, after all, a “unipolar moment,” and US hegemony was the closest thing to a world government.
With the elimination of the Soviet Union, the thinking went, the last political barrier to international economic integration had been removed.
Dazzled by abstractions, economists and political scientists should have paid more attention to history. Globalization, they would have learned, tends to come in waves, which then recede. The first wave of globalization, which took place between 1880 and 1914, was enabled by a huge reduction in transport and communications costs. By 1913, commodity markets were more integrated than ever, the gold standard maintained fixed exchange rates, and capital — protected by empires — flowed freely and with little risk.
Alas, this golden age of liberalism and economic integration gave way to two world wars, separated by the Great Depression. Trade shrank to 1800 levels, capital flows dried up, governments imposed tariffs and capital controls to protect industry and employment, and the largest economies separated into regional blocs. Germany, Japan and Italy went to war to establish blocs of their own.
The second wave of globalization, which began in the 1980s and accelerated following the end of the Cold War and the rise of digital communications, is now rapidly retreating. The global trade-to-GDP ratio fell from a peak of 61 percent just before the 2008 financial crisis to 52 percent in 2020, and capital movements have been increasingly restricted in the past few years.
As the US and China lead the formation of separate geopolitical blocs, and the world economy gradually shifts from interconnectedness to fragmentation, deglobalization seems well under way.
To understand why globalization has broken down for a second time, it is worth revisiting British economist John Maynard Keynes’ memorable description of London on the eve of World War I.
“The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions and exclusion, which were to play the serpent to this paradise were little more than the amusements of [the investor’s and consumer’s] daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice,” he wrote in 1919.
In our own time, geopolitics is once again threatening to break the international order. Commerce, as French philosopher Montesquieu observed, has a pacifying effect.
However, free trade requires strong political foundations capable of soothing geopolitical tensions; otherwise, as Robbins warned, globalization becomes a zero-sum game.
In retrospect, the failure to make the UN Security Council truly representative of the world’s population might have been the original sin that led to the current backlash against economic openness.
Geopolitics is not the only reason for the breakdown of globalization’s second wave. Neoliberal economics, which came to dominate policymaking in the 1980s, has fueled global instability in three major ways.
First, neoliberals fail to account for uncertainty. The efficient-market hypothesis — the belief that financial markets price risks correctly on average — provided an intellectual basis for deregulation and blinded policymakers to the dangers of setting finance free. In the run-up to the 2008 crisis, experts and multilateral institutions, including the IMF, were still claiming that the banking system was safe and that markets were self-regulating. While that sounds ridiculous in retrospect, similar views still lead banks to underprice economic risks today.
Second, neoliberal economists have been oblivious to global imbalances. The pursuit of market-led economic integration accelerated the transfer of manufacturing production from developed economies to developing economies. Counterintuitively, though, it also led to a flow of capital from poor to rich countries. Simply put, Chinese workers supported the West’s living standards while Chinese production decimated Western manufacturing jobs. This imbalance has fueled protectionism, as governments respond to public pressure by restricting trade with low-cost producers, and contributed to the splintering of the world economy into rival economic blocs.
Third, neoliberal economics is indifferent to rising inequality. Following four decades of hyperglobalization, tax cuts and fiscal tightening, the richest 10 percent of the world’s population owns 76 percent of the total wealth, while the poorest half owns barely 2 percent. And as more wealth ends up in the hands of tech speculators and fraudsters, the so-called “effective altruism” movement has invoked Laffer curve-style logic to argue that allowing rich people to become even richer would encourage them to donate to charity.
Will globalization’s second wave collapse into a world war, as the first one did? It is certainly possible, especially given the lack of intellectual heft among the current crop of world leaders. To prevent another descent into global chaos, we need bold ideas that build on the economic and political legacies of Bretton Woods and the 1945 UN Charter. The alternative could be a more or less direct path to Armageddon.
Robert Skidelsky, a member of the British House of Lords, is a professor emeritus of political economy at Warwick University.
Copyright: Project Syndicate
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