Harold James on financial deglobalisation

I’ll begin with what I like about the book. It is a fantastic blend of historical reference, specifically to the Wall Street Crash of 1929 and the financial crash of 1931, and to the financial crash of 2008 and its aftermath. Harold draws on his previous scholarship, including his book The End of Globalisation, to shed light on recent circumstances. He wears his learning lightly, moving smoothly between history and current policy, all put together in a compact, accessible book. His analysis and conclusions are balanced and judicious. This is an antidote to the stream of rash, melodramatic and populist writing on the crash of 2008, penned in the heat of the moment and catering to the whims of an instant global audience.

Harold’s chief historical lesson is that globalisation is reversible, often because of a financial crash. Many say so now; Harold was saying it well before 2008. The book’s core is a comparison of two pairs of turning points: the 1929 Wall Street Crash and the 1931 financial crash that started with the downfall of the Creditanstalt bank in Austria; and, fast-forwarding to the present crisis, the collapse of Bear Stearns in March 2008 and the collapse of Lehman Brothers in September 2008. The 1929 and March 2008 events were preludes; the systemic collapses took place in 1931 and from September 2008.

This method invites juicy economic as well as political comparisons. “Deglobalisation” accelerated after the 1931 crash: global finance fragmented and financial mercantilism became rampant; international trade contracted and trade protection spiralled out of control; and weak international institutions could not stem the tide. Today, in the aftermath of the September 2008 crash, deglobalisation subsumes these features of its 1930s’ forerunner.

This leads Harold to several sobering conclusions. First, he thinks financial mercantilism will be the preeminent form of early 21^st-century protectionism. Second, he is rightly sceptical that today’s international institutions – the IMF, WTO and G20 – can provide the necessary solutions. They echo the “international conferencitis” and “quackery on the epidermis” of the 1930s (quotes from the German economist Wilhelm Röpke, not Harold). They are no substitute for the “power and effectiveness of governments” (quote from Harold this time). Medium and long-term solutions to the financial crash and deglobalisation do not lie with international (over) regulation of markets. Rather technological innovation should be allowed to work its way through the system to ease structural change. That is what happened in the transition from agriculture to manufacturing in the 19^th century, and then again from manufacturing to services in the 20^th century.

Third, since 1945 there have been periodic bouts of angst about US power in the world. Once again US “declinism” is in vogue. But global confidence in the United States – in its political system, secure property rights, vibrant economy and external power – has proved surprisingly enduring. These wellsprings of American success are not to be underestimated. That is why capital has flowed “uphill” to the United States, allowing it to borrow profligately. But now the US political system faces daunting challenges. Its financial system is a mess, households and firms are trying to work their way out of debt, and public debt is mushrooming. How long will foreigners continue to have confidence in the United States and buy US securities? That is an existential question, for the United States and the world.

Fourth, Harold is justly sceptical of the EU’s ability to deal with the crisis. Indeed, the crisis has seen the resurgence of large nation-states within the EU. Crisis responses have come mainly from large member-states. Britain, France and Germany have set the pace on fiscal stimulus and financial bailouts, sidelining EU institutions. They have the power of the purse, and they will be loath to transfer real authority – not least over financial markets – to the EU. One major disadvantage is that the resurgence of big states will come at the expense of small states – another parallel with the 1930s. This is a harbinger of a more politicised, nationalistic world.

Now I turn to what I think are gaps in the book, and where I differ with Harold.

First, I think Harold is too pessimistic. His focus is financial deglobalisation. But he says very little about “real-economy” (as opposed to “symbol-economy”) globalisation. Consider the backdrop to the 1929/31 crisis. World War One wrecked nineteenth-century globalisation and fatally undermined the global economy in the 1920s. Monetary and financial systems were highly unstable and protectionism escalated, all in a climate of turbulent international politics and a noxious ideological combination of collectivist socialism and nationalism.

In stark contrast, the quarter-century up to 2007 saw a wave of technological innovation, robust growth in trade and foreign direct investment, and the opening up of the former Soviet bloc, China and India. Policy liberalisation and technological change integrated supply and demand in a much-expanded geographical space. This phase of economic globalisation contributed to the biggest increase in growth and prosperity the world has ever seen. Apart from finance, other globalisation channels were in rude health right up to the crisis.

Today, global financial vulnerability contrasts with signs of resilience in the real economy. Global supply chains in goods and services have taken a short-term battering, but they have remained intact and are recovering. They are far stronger now than they were before 1914, in the 1930s, and indeed in the first five decades after 1945. Trade protectionism in the wake of the present crisis has been remarkably restrained – strikingly different from what happened in the early 1930s. Twenty-first century economic globalisation is buttressed by relatively stable international politics, a pro-market ideology (more or less) and a phalanx of interests. All this points to a slightly brighter outlook than Harold implies.

Second, many expert commentators point to a monetary root cause of the present crisis, starting with loose monetary policy in the United States from the beginning of this decade. A cheap-money environment created excessive financial innovation, risk-taking and asset-price bubbles – so John Taylor and others contend. Harold mentions this in just one sentence. He should have said much more about the links between monetary policy and financial markets, in relation to the present crisis as well as in the late 1920s and early 1930s.

Third, Harold’s pessimism is perhaps Western-centric. Globalisation angst is now prevalent in the West. But a different mood prevails in emerging markets, and especially in Asia. There the rebound from the crisis, led by China, has been faster and more vigorous. The mood is ebullient; animal spirits abound. Globalisation continues to be embraced more than feared. That is not to deny dangers ahead. Asia has certainly not “decoupled” from the West; and crisis responses, particularly in China, have created distortions that could have serious domestic and international repercussions. But, for the moment, sunny Asian optimism contrasts with Western gloom.

Fourth, I find Harold’s portrait of China too bleak. China’s rulers are acutely aware of China’s already deep integration into the global economy and the costs it will face from an external backlash. Hence they do not want to rock the boat, and continue to pursue broadly pragmatic policies vis-à-vis key bilateral partners and in international institutions. That is most visible in US-China relations. China’s response to the crisis reflects this shades-of-grey picture. On the one hand, China’s supercharged fiscal stimulus is exacerbating the economy’s structural flaws; and, through excess investment and industrial overcapacity, it might worsen global imbalances and trade protectionism. On the other hand, China has not aggressively devalued its exchange rate, nor has it raised trade barriers significantly. Finally, the Communist Party remains in firm control, without signs that its grip on power will be endangered in the short-to-medium-term. Greater social instability leading to chaos cannot be ruled out, but it does not appear to be around the corner.

Fifth and last, Harold is clearly concerned with “values” related to globalisation – not just “material” values, but also values that go “beyond supply and demand” (to borrow the title of a book by the German economist Wilhelm Röpke). Economic globalisation, and markets more generally, generate their own values. These include the bourgeois values of reputation and trust that come with commercial contact and exchange. But that is not enough to sustain a global market society. The latter depends on a wider framework of shared meta-economic values. Without it globalisation is inherently unstable, and possibly prone to collapse.

Perhaps. But what are these shared values and how can they be nurtured? Harold points to the natural-law tradition. That is of course an intellectual tradition of the West, a confluence of Graeco-Roman and Judeo-Christian thought. But today’s globalisation is marked, more than ever before, by the rise of non-Western societies with their own religious and intellectual traditions. Where is the common ground between the latter and the meta-economic traditions of the West? How can “shared values” be created across these divides? These are huge, open questions, ranging well beyond the narrow turf of financial globalisation yesterday, today and tomorrow.