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It’s not 1929

October 8, 2008

What does the current economic turmoil portend for globalization in general? Since we are now, by common consent, in the midst of the worst financial crisis since the Great Depression, and since that event put an end to the efforts of the 1920s to reconstruct pre-World War I globalization, it is perhaps worth asking whether history is poised to repeat itself on this score. On this point two observations seem worth making.

First, free-market globalization was vulnerable last time around because, among other reasons, plausible alternatives were on offer: the centrally planned economic system that the Bolsheviks had created in the former tsarist empire that seemed immune to the plagues that struck the rest of the world; and the system of (with apologies to the twentieth century’s greatest economist) military Keynesianism that the Nazis installed in Germany that lifted that country out of the Depression earlier than the other European countries managed to escape it. Subsequent events, however, have thoroughly discredited both, and neither is a candidate for a comeback. (World War II demonstrated that while manufacturing weapons can increase productive economic activity, actually using them has the opposite effect.) As Mrs. Thatcher might put it, where some form of globalization is concerned there is no alternative. To the Asian financial crises of the 1990s the afflicted governments responded with policies — the accumulation of reserves most prominently — that modified but did not fundamentally change their economic approaches. A similar response seems likely when the current storm passes.

Second, the national economic policies that make up globalization will come under political pressure even in good times. This is because globalization, like all economic activity, creates both winners and losers, and the losers will always organize themselves, where they can, to resist what is injuring them, or, if they are not directly injured, as with sovereign wealth funds, what they don’t like. This is particularly tempting because the opponents of globalization can exploit the most potent of all modern political ideas — nationalism. The sources of unpopularity that Sebastian cites — government subsidies and sovereign wealth funds — exist independently of the current crisis. As a result of this crisis globalization will be in more trouble than usual; but it always will be in trouble of some kind.

1 Comment

  • Posted by jnye

    I agree with Mike Mandelbaum. I doubt we will slip into a repeat of the 1930s. At the domestic level, we have institutions and lessons which exert a counter rather than pro-cyclical effect. After all, Herbert Hoover’s policies made things worse, and there were no programs like social security to provide a safety net under the electorate. But what worries me is that the world economy is much more globalized than in the 1930s, yet we have not developed the instituitions at the global level to keep pace. What is most striking about the past few weeks is the irrelevance of the Bretton Woods institutions. This is a change since the Asian Crisis of 1998.In part, this is because the IMF has less less leverage over rich nations like the US, but it also reflects the failure to adapt or to develop new insitutions. Even the EU has had trouble avoiding beggar thy neighbor reactions (witness Ireland). Crisis provides opportunities for leadership, and for all the complaints about the US, it is hard to see it originating anywhere else. Unfortunately, we are stuck in lame duck days (or daze). Would it be too much to hope that the next administration would take some international institutional initiatives? If so, maybe the finanacial experts can tell us what they should look like.