What Matters: Will globalization be derailed by the world financial crisis?

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The Debate Zone:
Will globalization be derailed by the world financial crisis?

Yes. Globalization comes and goes. Right now, it’s going.

By Harold James
Every upswing in globalization is spurred by a technical advance—structured finance, for example—that ultimately outruns our ability to manage. When the end comes, it’s followed by financial instability, protectionism and xenophobia.
No. There’s a lot more than finance and trade binding the world together.

By Moisés Naím
Despite the current collapse in trade and financial flows, the Internet will continue to make us all next door neighbors. Even problems like climate change and terrorism tie us together since they’re beyond the ability of any nation to solve alone.

Harold James

Globalization comes and goes. Right now, it’s going.

Will globalization be derailed by the world financial crisis? Inevitably, the answer is yes. Globalization is a highly dynamic process. It has produced tremendous benefits. In many countries, poverty levels have fallen. Increased trade has been transformative. But historically, globalization is also vulnerable to terrible and costly backlashes. We might think of the phenomenon as cyclical.

There are repeated historical examples of phases of dynamic and integrated global growth that ended in linked eruptions of financial instability and geopolitical disorder. The great and global British and French empires of the eighteenth century broke down in social, military, and monetary chaos with the French Revolution and Napoleonic Wars and the American Revolution. The upswing of the second half of the nineteenth century collapsed with the First World War and the subsequent financial crises of the Great Depression.

Every globalization upswing is driven by technical advance, which often runs ahead of the capacity of societies and political institutions to devise mechanisms for adjusting. The most recent wave of financially driven globalization, in the last quarter of the twentieth century, was especially problematic in that it overstretched not only the states’ ability to adapt, but also that of corporations and financial institutions. Since financial transactions lie at the heart of the way in which people measure value, the breakdown of financial globalization has produced a profound crisis of values.

The breakdown has created a political impasse. State rescues of entire banking systems are a necessary and inevitable response to the financial meltdown, but the consequence will be to try to limit banking to national units. Italian taxpayers will not want to see their money used to bail out remote eastern European debtors. The same political logic applies for fiscal stimulus packages, where voters will not want to see foreign producers in effect subsidized. Attempts to solve the banking and fiscal problems at an international rather than a national level have up to now been fiascos: there is hyperactive diplomacy, but no real results. The big G-20 summit in Washington in November 2008 produced resounding denunciations of protectionism, but was followed immediately by a slew of protectionist measures. Such measures are likely to become more common. State capitalism as practiced by China and Russia will be an increasingly powerful force, according to the US National Intelligence Council in a recent study on what the world will look like in 2025.

The reactions against globalization are as much driven by a new psychology as by economic reality or a precise weighing of the costs and benefits of globalization. Crises give rise to conspiracy theories, often directed against foreigners or foreign countries. Many people in the United States argue that the blame can be placed on Chinese surpluses. Likewise, many people in other countries claim that they are being hit by an American crisis made in America. We will see not just little measures of trade protectionism, but massive and powerful xenophobic sentiment. It may also be that many former so-called “globalization critics” will see just how good integration was when it starts to fall apart.

Moisés Naím

There’s a lot more than finance and trade binding the world together.

Will globalization be derailed by the world financial crisis? No. Not unless you believe that globalization is mainly about international trade and investment. By that definition there is no doubt that globalization is slowing down. Trade has plunged at a rate that surprised experts and financial flows have drastically fallen. They will not recover until the world’s main economic engines are reignited and even then it will take a while for global economic flows to reach the record levels of the past decade.

But globalization is far more than just international trade and investment flows. Around the world, all kinds of groups are still connecting and the economic crisis will not slow their international activities. In some cases, it might even bolster them.

Global charities, for instance, will face soaring demand for their services as the economic crisis greatly expands the number of those in need. Transnational terrorists will not be deterred by a bad economy either. After all, the collapse of the credit-default swap market didn’t prevent ten Pakistani militants from wreaking havoc in Mumbai in November 2008.

Indeed, the ability of any government to shield its economy and society from outside influences and dangers has steadily eroded in the past two decades. That’s because the current wave of globalization has unprecedented characteristics. As Internet access penetrates the most remote corners of the globe, it is touching more people in more places more cheaply than ever before. It allows Vietnamese artisans to peddle their handicrafts in Europe and South African teenagers to share music files with peers in Scotland and religious leaders to preach to believers across oceans. The latest wave of globalization has wrought such quantitative change in each of its components—economic, cultural, military, social, and political—that in the aggregate it creates a qualitative change. The current wave of globalization is different from the ones that preceded it.

As destabilizing as the ongoing financial crisis is, it is likely to spur new connections among nations. Globalization has multiplied the number of problems that cannot be solved by a single country: not just economic crises, but also climate change, nuclear proliferation, illegal migration, transnational crime, pandemics, and more. While the world’s multilateral institutions are more often described as dysfunctional than indispensable, these institutions are indispensable—and with the world in crisis mode, demands to shore up global governance will only increase. Would the world be as interested in the economic stability of India, Brazil, or Indonesia without the financial crisis? The G20’s newfound relevance is a direct consequence of both globalization and the financial crisis.

This does not mean that there will not be attempts to slow it. Some governments will be tempted to adopt trade-impairing policies, imposing rules that inhibit global financial integration, or taking measures to curb immigration. These policies will work for a while, but their costs are hard to sustain. Moreover, traditional power plays between rival nations will continue. China, for example, might team up with Russia to counterbalance the United States in relation to Iran. But the Chinese and US economies will still be joined at the hip, with China holding more than a trillion dollars of US debt and the United States retaining its role as the main buyer for China’s exports. Even at the height of the 1990s globalization, traditional power politics never disappeared; geopolitical games and deeper global integration have long coexisted—and will continue to do so.

Globalization is such a diverse, broad-based, and potent force that not even today’s massive economic crash will dramatically slow it down or permanently reverse it. Love it or hate it, globalization is here to stay.

For a more detailed discussion of these arguments see the author’s Think Again: Globalization.

Comment [103]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

The present financial crisis is temporary and boom condition will come on the horizon atlease during 2010. Hence,globalisation will continue and the entire world is tied up due to increase in volume of business. Further, internet revoluation will pave the way for e-business. The entire world is passing through severe financial hardships with rising unemployment and fodd insecurity. However, this is a temporary phenomenon and will not last beyond 1 more year.

Posted 5 May 2009, 05:13 by KNVS Subrahmanyam
There are merits in both James’ and Naim’s arguments. From a tactical/political expediency point of view, James is absolutely correct in viewing globalization on the defensive. At the same time, Naim’s remarks on the striking advantages of many emerging markets are also spot on: in an interconnected world, growth is a global issue and very few countries – if any – can hope to tackle it one-on-one on a piecemeal basis. The folly of such an approach, however, is not to be underestimated, since politicians are mostly accountable to local/geographical constituenciencies. The main risk lies precisely in this split between a global problem and geographically-driven decision-making: governments can win popularity battles with short-term fixes/intervention/regulation but risk losing the war by endangering long-term growth. In terms of efficiency in allocating capital and resources, the weight of empirical evidence is stacked against governments. Looking at history, only World War II, rather than the oft-touted New Deal keynesian policies so close to the hearts of politicians, was finally able to get the economy back on its feet. Though myopic or exuberant at times, the market remains a formidable opponent to beat for anybody, politicians included. While the ferocious punishment of ill-conceived administrative measures against short-selling, for instance, should be a lesson to remember, it looks like more pain to get the message. In April, the US Congress pressured FASB to relax FASB 157 concerning mark-to-market treatment of securities. So much for the popular “transparency” tune !

Posted 5 May 2009, 02:39 by Luca Celati
I agree with Harold is describing the dynamism of globalization. Historically, we have been here before and the fall of the empires herein mentioned were great examples of the organized confusion that resulted.

The cycle continues..but protectionism is not the answer.

Posted 29 April 2009, 17:15 by Stephen Ozoigbo
Globalization will continue. Internet will allow buyers and sellers to do transactions on a global basis. During economic turmoil, globalization will likely to accelerate as businesses are scrambling to reduce costs and outsource to cheaper countries, as well as to market their products beyond their local markets.

Posted 28 April 2009, 15:21 by Sovestor.com
GLOBAL PULLBACK—understandable; dangerous
In working with clients from Asia through to the Euro-zone we find a sharp but temporary pullback from aggressive global efforts. This is a natural reaction. In times of crisis the tendency is to play it safe. Thus for example a Japaneses company shifts its near term strategy to Asia-focused, making a dramatic turn from its recent western rollout. A US services company is following the mirror image strategy.
While these are normal reactions, they are also fraught with danger. Their global footprints will be disrupted. As the global economy rebounds they will be caught flat-footed.
Leading companies will avoid such reactions, staying true to long-term opportunity, even as they reduce investment to match reduced cash flow. One alert, albeit capital-constrained client, ramps up its innovation spending, a relatively low capital initiative, emphasizing its global footprint. That’s the way to maintain its connection to to world without compromising its capital base.
Those that react by cutting back will be compromised; those who continue to trust globalization will gain competive advantage.

Posted 18 April 2009, 08:50 by Thomas Doorley
Globalization was ushered in by huge advances in trade in technology. But, over the years, the advances in globalization has caused multiple countries, societies and communities to be bound in an intricate weave of economical, socio-political and cultural fabric. In my opinion, this binding cannot be undone. The advances in communications and internet technology will only better the global relationships. I do not believe globalization comes and goes, whenever an opening for a global opportunity is created, the whole global environment shifts up to a level of higher maturity. Then the knowledge and the resources available from the opportunity are shared, consumed and internalized, and globalization continues to flourish.

If anything, I believe the solution to this deep financial crisis will come out of true global thinking. Protectionism and xenophobic vision will only worsen the scenario.

The challenge is, which countries, corporations, or communities are going to be the leaders of this transformation? Who are going to be the major players?

Posted 16 April 2009, 19:50 by Rayan Chaudhuri
This debate is a false dichotomy and is lacking in a few assumptions.
Globalisation is not a linear relationship. It is not like a train that can speed up or slow down depending on the financial situation.

Globalisation needs to be seen as a process. Thus the better questions are a) who are the key players and b) how do the key players map out the terrain. This means globalisation is not an issue of speed, but more of an issue of ability to redefine the game how they so choose. Who are the winners of the financial crisis and how will they remake globalisation in their image? who are the losers and how will they hurt?

The assumptions that this debate is lacking is the question of “who” is involved in globalisation? The countries who are the most affected and have little influence are the late developers of Sub-Saharan Africa. The question I put forth is, instead of asking if the financial crisis is changing the speed of globalisation but rather is it possible with this new environment to change the rules of the games to make globalisation more ETHICAL to the people whom it affects most?

Posted 16 April 2009, 05:17 by Josephine
I agree with Naim. Globalisation will continue but may be with renewed interests and strategies. At this time period even we may look at redefining of the term Globalisation, where it survives with integrated local interests.

Posted 8 April 2009, 04:17 by Manpreet Kaur
I would agree with Naim’s view that today globalization has moved beyond the realm of trade and finance. Globalization has today come to signify the interconnection between economic, political and cultural activities across the world. It has also evolved from effecting nations to encompassing individuals in its fold. The inter-linkages between nations, enterprises and individuals and their benefits are too many to be reversed.

However, from an economic point of view, there are two important parameters that have defined globalization to a large extent:

* Free movement of capital and labour across borders.
* Minimal government control on business decisions.

Free movement of capital and labour across borders

The rise in unemployment will increase curbs on outsourcing deals and immigration. Implementing measures that go against the doctrine of free movement of labour across borders might even become a political necessity. But the effect will be temporary. The competitive advantages of sourcing goods from low-cost manufacturing units in China, textile exports from Bangladesh and India, outsourcing processes to the back-offices of technology parks in India,the Philippines et. al are too huge to be junked in the long term.

Government control

There will be an increased government control in various institutions as is evident in the bail-outs of the Financial Institutions and car-makers in the US and the Europe. While quite a few of these deals have stopped short of a majority government control, the scale of the expected losses and lack of capital could imply a capital infusion that could mean an out-right nationalization. Even before that, we are seeing a government influence on various business decisions.
The scale of the crisis does justify government control, more from the point of view that there does not seem to be an alternative in sight. The possibility of allowing the weaker ones to fail and relatively “stronger” ones to survive is too huge a gamble to experiment with, especially after the failure of Lehmann Brothers.
Surely, the process of diluting these controls (as and when it happens) will be slow and could come with a barrage of regulations (many of them even desirable), but a permanent and irreversible shift is unlikely.

In sum, there will be a visible policy tilt towards the above factors but these will be more temporary in nature. Even though the recovery from the current economic crisis will be prolonged and painful, the advantages and benefits of globalization have been too evident to help the above factors cross the threshold point of no-return.

Having said that, there is a real possibility that we will see the pace of globalization slow down for an extended period of time.

Disclaimer: The views expressed are personal

Posted 5 April 2009, 14:51 by Sushant Junnarkar
No, globalization will not disappear on account of the world financial crises. The present financial scenario is transitory, like any other economic phenomena which have their peaks and troughs. Dont we agree that we lived in a world for the last few years that witnessed too rapid a phase of innovation and development that we were not able to absorb? Even the financial markets the world over were too speculative and volatile for the boom to last too long. We are in a phase of consolidation and stabilization right now, which will take a while before the developmental forces come into action again. But in the process, the forces of globalization have set in motion a process of financial and technological integration, which is irreversible. The objectives of globalization are worth merits that cannot be questioned. Both the advocates and recipients of globalization are inter-twined, and if practised with caution, both parties will emerge as the winners. So, let’s not overdo it or become overly impatient, the finacial crises will melt down gradually and forces of economic integration will be visible again soon.

Posted 4 April 2009, 09:22 by Prof H. Chopra