Will globalisation come apart?
Financial Express, 9 September 2008
The `first globalisation' of 1858-1914 collapsed in political disaster from 1914 till 1945. By some measures, it was only in 1983 that the world regained the globalisation of 1910. This underlines the importance of the political foundations for globalisation. Can the `second globalisation' that we are now experiencing similarly come apart? In this article, I argue that this appears unlikely.
In India, we are used to thinking of globalisation as a recent phenomenon. In the last decade, capital controls and trade barriers were eased, and the infrastructure of transportation and communications improved. But India has known good integration into the world economy before. In the early 20th century, individuals in Bombay moved money effortlessly across the boundary, travelled freely within the British Empire, built transnational firms, and freely participated in international trade. The British began closing off India to the world at the time of the second world war, and these restrictions got ossified as India became socialist.
Looking outside India, there was a golden age of globalisation pre-1914. Paul Krugman quotes Keynes about this period:The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.
As much as 9% of the British GDP left the country as capital outflows in 1911. From 1887 to 1913, the French sent 3.5% of GDP as capital outflows - which exceeds what they do today!
This world fell apart very badly, with two world wars and the Great Depression. In the contest between the nation state and globalisation, nationalism struck back with a vengeance. Enlightenment values were rolled back by the secular religions of the Nazis and the communists, who led the deglobalisation effort. Capital controls had never existed; they were invented by Hitler.
Intellectuals of the 20th century knew that political and military catastrophes are entirely possible. Can political or military catastrophes overwhelm the second globalisation, just as they destroyed the first? This is unlikely, for three reasons.
- The intellectual consensus about globalisation. The very term `globalisation' did not exist in 1914, for free movement across the boundary was the natural state of affairs. The harmful consequences of reducing these free movements were not well understood. The most prominent economist of the age, Keynes, was supportive of some kinds of interference against globalisation. Government interventions in the 20th century were prolific. As recently as 1971, US government policy included wage controls and price controls. The intellectual climate has strongly shifted towards less government interference in the private decisions of individuals and firms.
The depth of this intellectual consensus is not fully understood in India. At http://tinyurl.com/topecon are the top economists of the world, ranked by their intellectual influence. As an illustration, the top ten names of Indian origin in the list are: Raghuram Rajan (29th), Anil Kashyap (53rd), V. Chari (77th), Avinash Dixit (130th), Anjan Thakor (130th), Susanto Basu (130th), Sudipto Bhattacharya (223rd), Ravi Jagannathan (223rd), Debraj Ray (223rd) and Dilip Mookherjee (223rd). In this list, the two prominent intellectuals who advocate restrictions on globalisation are Joseph Stiglitz (29th) and Dani Rodrik (53rd). Apart from these two names, largely speaking, the bulk of the top 100 economists of the world are supportive of pro-globalisation economic policy. This marginalisation of the left is quite a difference from the situation in the early 20th century, when Marxism was the opiate of the intellectuals and Keynes the economist of the age.
- The rise of modern finance. The combination of telecommunications, computing power and financial economics has created a new world of international finance, where globalised firms finance themselves on a global scale, and globalised households invest all over the world. Any attempts at deglobalisation would directly hurt the households who are beneficiaries of superior risk-return tradeoffs and the firms who are finding cheaper debt and equity capital.
- The rise of a core of stable democracies, the OECD, all of which have floating exchange rates and open capital accounts. They will not go to war with each other. They make up the heart of the world economy. Russia, China and the Middle East are economically important blocs who continue to have autocratic political regimes. The interfaces between the OECD and these three will continue to generate political crises, such as 9/11 or Georgia. But there is now a core of democracies who make up the lions share of world GDP who will sustain globalisation.
Our `second globalisation' thus has better foundations than the first globalisation. Anti-globalisation demonstrators will periodically trash McDonalds outlets. Politicians in OECD will periodically indulge in pinpricks, like restrictions against imports of some kinds of steel to the US. But substantial restrictions against trade or capital flows in the rich countries will not happen.
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