Is the world economy globalizing or deglobalizing? The answer would have seemed obvious in 1990. Communism had just collapsed in Central and Eastern Europe. In China, Deng Xiaoping promoted the capitalist enterprise. And the political scientist Francis Fukuyama proclaimed the “end of history”, by which he meant the triumph of liberal democracy and the free market.
Years earlier, British economist Lionel Robbins, a staunch free-marketeer, warned that the shaky political foundations of the postwar international order could not support a globalized economy. But amid the euphoria and triumphalism of the early 1990s, those warnings fell on deaf ears. After all, it was a “unipolar moment” and US hegemony was the closest thing to world government. With the defeat of the Soviet Union, it was thought that 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. They would have realized that globalization tends to come in waves, which then recede. The first wave of globalization, which took place between 1880 and 1914, occurred as a result of a huge reduction in transportation and communication costs. In 1913, commodity markets were more integrated than ever, the gold standard kept exchange rates fixed, and capital—protected by empires—flowed freely and with little risk.
Unfortunately, this golden age of liberalism and economic integration led to two world wars, separated by the Great Depression. Trade slowed to 1800s levels, capital flows died out, governments imposed tariffs and capital controls to protect industry and jobs, and the largest economies broke up into regional blocs. Germany, Japan and Italy went to war to create their own blocs.
The second wave of globalization, which began in the 1980s and accelerated after the end of the Cold War and the rise of digital communications, is now rapidly receding. The global trade to GDP ratio fell in 2020 and capital movements have become increasingly restricted in recent years. With the United States and China leading the formation of separate geopolitical blocs, and the world economy gradually moving from interconnectedness to fragmentation, deglobalization appears to be well under way.
To understand why globalization has failed a second time, it is worth reviewing John Maynard Keynes’ memorable description of London on the eve of the First World War. “The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions and exclusions, which played the role of serpents in paradise,” he wrote in 1919, “were nothing more than distractions in the newspapers (investor and consumer) and seemed to exert no influence on the ordinary course of social and economic life, whose internationalization seemed complete in practice”.
In our time, geopolitics once again threatens to break the international order. Trade, as Montesquieu observed, has a pacifying effect. But free trade requires solid political foundations capable of easing geopolitical tensions; otherwise, as Robbins warned, globalization becomes a zero-sum game. In hindsight, 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.
Now, geopolitics is not the only reason for the failure of the second wave of globalization. Neoliberal economics, which came to dominate policy making in the 1980s, has fueled global instability in three relevant ways.
First, neoliberals do not take uncertainty into account. The efficient markets hypothesis—the idea that financial markets correctly price risks on average—provided an intellectual foundation for deregulation and blinded policymakers to the dangers of unleashing finance. In the run-up to the 2008 crisis, experts and multilateral institutions, including the International Monetary Fund, continued to say that the banking system was safe and that markets were self-regulating. While this sounds ridiculous in hindsight, today similar views continue to lead banks to underestimate economic risks.
Second, neoliberal economists have not paid attention to global imbalances. The pursuit of market-led economic integration accelerated the transfer of industrial production from developed to developing economies. However, contrary to all logic, it also led to a flow of capital from poor countries to rich countries. In short, Chinese workers supported Western living standards while Chinese production decimated Western industrial jobs. This imbalance has fueled protectionism, as governments respond to public pressure by restricting trade with low-cost producers. It has also contributed to the division of the world economy into antagonistic economic blocs.
Finally, neoliberal economics is indifferent to growing inequality. After four decades of hyper-globalization, tax cuts and fiscal adjustment, the richest 10% of the world’s population owns 76% of total wealth, while the poorest half barely has 2%. And, as more and more wealth finds its way into the hands of tech speculators and swindlers, the movement known as “effective altruism” has invoked Laffer curve-style logic to say that if the rich get richer, this would encourage them to make charitable donations.
Will the second wave of globalization lead to a world war, as did the first? Indeed, it is possible, especially considering the lack of intellectual weight of the current set of world leaders. To prevent another slide into global chaos, we need bold ideas that build on the economic and political legacy of Bretton Woods and the 1945 United Nations Charter. The alternative could be a more or less direct path to Armageddon.
Robert Skidelsky, a member of the British House of Lords, is Emeritus Professor of Political Economy at the University of Warwick.
Copyright: Project Syndicate, 2023. www.project-syndicate.org
