The long view on the global economy
My latest Project Syndicate piece argues that the world economy has handled the financial shock rather well so far, but that the real test for globalization is yet to come.
History teaches that global economic order is difficult to establish and maintain in the absence of a dominant economic power. The interwar period, which suffered from a similar crisis of leadership, produced not only a collapse of globalization, but a devastating armed conflict on a global scale.
So the stakes in righting the world economy could not be higher. Mismanage the process, and the consequences could be unimaginable.
Unfortunately, many of the solutions on offer are either too timid or demand too much of a global leadership that is in short supply.The conundrum of global reform is that the proposals that go far enough, such as establishing a global financial regulator, are wildly unrealistic, while those that are realistic, such as reform of the IMF, fall far short of what is needed.
What we need is a vision of globalization that is fully cognizant of its limits. We can start with a simple principle: We should strive not for maximum openness in trade and finance, but for levels of openness that leave ample room for the pursuit of domestic social and economic objectives in rich and poor countries alike. In effect, the best way to save globalization is to not push it too far.
The column offers some hints about what I have in mind, but those who are curious about the details will have to show up at LSE on Tuesday.
Read more at Dani Rodrik's Weblog













So, you're in favor of protectionism as long as you can prescribe how much. Tsk.
June 14, 2009 9:38 AM | Reply | Permalink
Hmmm
That would suggest that the long period of global stability and economic order was brought by the dominance of Great Britain as it underwent industrialization, and that the rapid industrial growth of Germany in the late '90's and years prior to WW I was a major contributor to the outbreak of WW I itself. A war, I might add, that effectively destroyed the economy and global dominance of the British Empire.
Then there was no single dominating economy after WW I although Britain, France, and the reticent and isolationist U.S. were all duking it out for dominance. The German nationalists, of course, greatly resented that they were excluded from the club they knew they belonged in. The resulting economic and political turbulence led almost inevitably into resuming the Great War on a much wider scale.
WW II then proceeded to destroy every industrialized economy of any size in the world except the U.S., leaving the U.S. as dominant by default. Since the 60's the rebuilding of most of the rest of the world has placed that U.S. dominance in severe doubt. So has the overvaluing of the dollar and the resulting shift of the American economy from predominantly production to predominantly banking. The U.S. power is now maintained by super aggressive spending on the military with its associated industrial complex, but it also depends on the dollar as the world's reserve currency. Unfortunately the previous relative dominance of our educational and university system has been allowed to decline badly.
Couple that with the effective monopoly control of oil resources by the middle east and Russia and the rise of the EU, China and India, and there's not much left of American global economic dominance.
Since banking is the last major element of American dominance other than the ability to rapidly extend military power to anywhere in the world, I'd guess that we really stepped in it by profligate and ignorant banking processes that created the severe Recession and perhaps the beginnings of Depression. Worse, we rapidly spread both the failed management of banking and the Economic woes to the rest of the world. That gives the rest of the world a really strong motivation to kick us off our privileged perch.
Unfortunately, as was true after WW I, there is no replacement in the wings for U.S. dominance. That puts the world back into the lack of a dominant economy that uses its power to control the global economy that preceded both WW I and WW II.
Those are the implications that I drew from your line (quoted above.) Mind you, I am not a historian. I am a retiree with an academic background in economics and business as well as having retired as an Army Reserve Logistics Officer. When I retired a few years ago I started reading all the history I could, with a focus on the question of how Europe took 400 years and came to dominate the world by the late 19th century. I'm also still looking for the basic causes of WW I, because its aftermath set up the international game as it is played today.
My question is whether I have this right. It seems reasonable to me, but how do I know? I'm no historian.
Just thought I would throw this out for consideration.
June 14, 2009 2:02 PM | Reply | Permalink
It does look as if the crisis is being handled well.
But unemployment is way up and unlikely to go down any time soon. Wages are stagnant. Households are retiring debt at a record rate, mostly by saving more from their income. Short-term borrowings by the United States is way, way up (a huge bomb waiting to explode if the Fed has to raise short-term rates from their present near zero). Local and state governments are in terrible trouble. The auto fixes are unlikely to work.
So how can there be a real recovery? I don't believe it. I think that in the very near future we are going to see the mother of all crashes and, this time, there won't be any rescue.
June 14, 2009 2:08 PM | Reply | Permalink
...mother of all crashes. Yes, it's happening.
Re: Rodrik's reference to "global financial regulator." This is now a day late and a SDR short. But I'm wondering, and this is a serious question: Isn't there an invisible had of market forces that serves this function in the short term until something more formal and structured evolves?
Re: Rodrik's "levels of openness that leave room..." This appears to be a delicate position between protectionism and free trade? I suppose you'll have more about this on Tuesday.
To Richardxx: Thanks for the excellent history lesson. Let us know what you come up with on the causes of WWI. Could that conflagration be related to a.) the technolgization of weaponry? and/or b.) dissipation of agricultural monarchies into industrialized democratic republics?
As for Rodrik's"absence of a dominant economic power": That void, having being expanded at the deflation of Western economies, is being filled as we speak.
China is calling the shots now in world finance and GDP growth, n'est c'pas? Presumably, their vigorous industrial output is forming a military capability that will, within a few years, match their economic clout. It is not yet a fait accompli, but it will be. How's your Mandarin? Mine is non-existent, but since I'm going there in a few weeks, I'm looking into it. First question: What's Chinese word for "renminbi?"
June 14, 2009 3:02 PM | Reply | Permalink
Carey,
The Chinese word you're thinking of is "non-convertible." The yuan won't be replacing the dollar any time soon.
Have a good time in China; it's an amazing place. I'm not a techie, so I couldn't get around their internet censorship, which is unfathomable to me. For instance, you'll have no problem getting TPM or Kos, but the Huffington Post and FiveThirtyEight.com are both blocked. I have no idea why.
Just a nit, but the French term is "n'est-ce pas."
June 14, 2009 3:52 PM | Reply | Permalink
Carey,
Thanks for the compliment and more importantly for the question. I generally see the "technolgization" of weaponry as a result, not an inherent cause. The weapons were built – using then currently known or easily anticipated technology - to meet a perceived need. There was very little big new innovation. Good technicians do that all the time with existing technology. That's no more than demanding the latest and most efficient work methods. The need that was to be met was that of the German dominant class to express their ability to compete with the international big boys (Britain.)
As you can see, I think in terms of economics first. Demand drives all social and economic innovation that lasts. The idea is frequently there, but there has to be others who want the result (the market demand.) What the market demands will be created if currently known or easily anticipated technology can be made to work and the reward is there. The social and political adjustments tend to follow such innovations when they work. You always have to ask which came first. It's as true in military technology as anywhere else. When the military culture does not want the innovation, it doesn't happen without strong and persistent outside intervention. (Technology is much easier for the military to adopt these days than social changes are.)
In the case of the German dominant class, they saw power in terms of its military expression (much as our conservatives do), so the members of German dominant class were delighted to take advantage of the massive economic gains caused by the integration of central Europe into a single market. (As a side note, the dominant classes also hated the power of labor that allowed much of those economic gains to work. Like all social and economic conservatives, they saw economic development as the result actions of the top leaders of businesses such as Krupp rather than developments by the workers who understood the technological processes involved. The dominant classes did not connect national power to the economic development of industrialism. They had to personalize the change agents in terms of the CEOs and top managers. Current American free market polemicists today similarly make this mistake.)
The real problem that I see was the rapid industrial and merchant growth of Germany combined with the tradition-oriented dominant class that saw international power as desirable but thought it was expressed by the nationalist ideas of military force rather than by diplomacy backed by a really strong economy. (Sound familiar? Remember that Bill Buckley – in many ways the intellectual father of modern conservatism - was a child of privilege, the son of a senior oil man who seriously believed that the wealth they had came entirely from personal qualities like entrepreneurship and brilliance and not at all from the great fortune of being in the right place and industry just as it was expanding to meet new social needs. Winning gamblers often get the strange belief that their own abilities made them win. It's funny how only the losers consider the larger factors.)
Your question about the effect of the "…dissipation of agricultural monarchies into industrialized democratic republics?" makes a suggestion that again seems to me to confuse a result with a cause. A major cause of WW I according to several authors I have read was the rapid industrialization of Germany, its resulting expansion of international power, and The dominant German attitude of nationalism and national pride. The industrial development happened first because a massive new market in central Europe was opened up by better transportation (railroads primarily) and the resulting demand for and elimination of political barriers to trade. Those demands were made by the wealthy traders not by the plebeians. It's those wealthy ones who can make government react to their demands. But it's the working class who make modern industrial economies work as they innovate at work and also become consumers to provide markets to sell to.
Some of that was because the dominant class saw what Great Britain was doing and wanted to emulate it. The resulting industrialization would require extreme social changes in the agricultural basis of life, and in its political control but no one was aware of that side effect.
Monarchies only work in a very stable society in which the economic basis of society is not rapidly changing. The monarch is a traditional leader, not suited at all to making decisions in such a rapidly changing society as those that industrialism creates.
But then, I view the consolidation of the German states under Chancellor Bismarck to be a result of that economic transportation revolution, not a cause. The Kaiser was very much just along for the ride. It was traditional attitudes like his together with the militaristic and nationalistic nature of the German dominant culture that allowed them to support Emperor Franz Joseph's effort to eliminate Serbia as a threat when The Austrian Emperor thought he had a chance.
A big element of those traditional upper class attitudes was the failure to understand modern war. Not only did they fail to understand the economic bases of war, they mistakenly saw it as the source of international power. It's not the cause. It's the expression of power. Napoleon wan his battles largely because he was the first general in centuries to involve all of his society in the war. (Not to detract from his strategic genius. He understood the tools he used.) Clausewitz recognized this, perhaps not completely – but I am no Clausewitz scholar so I am unsure of the degree of his understanding.
The dominant decision-making social classes in Europe did not understand the nature of industrial war. They had warning. The American Civil War was the first modern industrialized war, with total involvement of the civilian society but it did not happen in Europe. The Boer War gave real strong indications of the power of barbed wire and machine guns, but again it did not happen in Europe. Finally the Russo – Japanese war was as technological, total and nasty as the Great War was later to become, but again it was not in Europe. Instead, the European dominant classes looked back at the Franco-Prussian War which was fought in the traditional European manner of professional armies operating with no real involvement by the populations of the countries involved. It was an international power game like "risk", not what we today consider a total war that involves whole nations.
That traditionalism among the decision-making classes, especially in Germany, was a key factor in causing WW I. The technologies available, the militarism of the German Junkers, and the economic conflicts only set the stage. The similar attitudes of the Austro-Hungarian decision-making classes and their fear of adapting to the Serbian Slavs, was a similar problem, but that was a local and relatively minor problem in itself. There is no question that the Austro-Hungarian monarchy was in trouble and was unable to adapt, but the problems could have been isolated and dealt with if anyone understood the alternatives. Serbia, Russia and Austro-Hungary Empire were traditional societies which did not understand the new wave of industrialized society suffering nationalism and who attempted to deal with those problems in traditional ways. The conflict did not have to spread as it did, but the fears and ignorance of the Kaiser and the Germans permitted it.
Still, it's really important to understand that everyone was thinking in terms of the kinds of limited war that the Franco-Prussian War demonstrated.
That's my best understanding of what started the Great War. It is a combination of Macroeconomic forces, history and biography. Industrialism, the insular attitudes of the dominant classes, German militarism, the general failure to understand both the nature of international power as well as the new tactics to be demanded in an industrial war, and the biography of Kaiser Wilhelm seem to me to be key. If I've missed something that is not a part of those elements, please let me know.
A lot of this is based on the best single book I have found that pulls the current research together. It is "The Origins of the First World War" 3rd Ed, by Gordon Martel. It is part of the Seminar Studies in History by Pearson Longman. Some of what I have written is based on my own understanding of economic history and on organizational decision-making. If you are interested, then Gordon Martel is a great source and the Internet is your friend. There's also another very good book called "The origins of the Second World War" 2nd Ed by R. J. Overy. Unfortunately they don't seem to have a similar book on the origins of the Great Depression.
As long as I am recommending books, let me very strongly suggest "The Great Transformation: the political and economic origins of our time" by Karl Polanyi. Published in 1944 it is still a graduate level text for economic historians. He gets both history and economics.
Similarly there is "The Age of Revolution: 1789-1848" by Eric Hobsbawm. It is very good read about the French Revolution and the British Industrial Revolution during those dates. Ignore the complaints that Hobsbawm is a Communist author. No one can write about that level of economic and social history without taking a somewhat Marxist view of it. Marx was there first. Hobsbawm's book is highly explanatory, and he writes very well. (Unlike a lot of otherwise good historians and almost all economists.)
Finally, but not least, if you are wondering about our current war in Afghanistan, it is a counterinsurgency war. The finest single book on that is "Learning to Eat Soup with a knife: Counterinsurgency lessons from Malaya and Vietnam. LtC John a Nagle is currently on active duty with the Army and this book has been read by any Army or Marine Officer who wants to understand what is going right in Afghanistan and Iraq. Also what is going wrong. Nagl lays it out clearly, but using rather academic concepts at times (organization theory - it's important! He explains it rather well, but I've studied the subject.)
The American military does not deal well with counterinsurgencies because that is not our tradition of a "real war." The Civil War, WW I, WW II and Korea are real wars. Massive troop movements and a lot of artillery, Air Force and bombs - like Rumsfeld, a Navy aviator, thought. So we do not consider counterinsurgencies to be political wars. General Westmoreland (Vietnam Commander when I was originally on active duty) made this mistake, and it led to America losing in South Vietnam. No, I have no idea if we could have WON, but with the wrong strategy and the resulting tactics we were sure to lose. I strongly recommend Nagl's book. (And hey, I'm retired military. Buy his book and support my brother in arms.)
Anyway, that's my answer to your question. Any more?
June 14, 2009 8:34 PM | Reply | Permalink