Why Crisis Ends in Connection
The thought that trade and globalization might make a comeback in the 2020s, picking up renewed vigor after the pandemic, may seem far-fetched. After all, COVID-19 is fragmenting the world, destroying multilateralism, and disrupting complex cross-border supply chains. The virus looks like it is completing the work of the 2008 financial crisis: the Great Recession produced more trade protectionism, forced governments to question globalization, increased hostility to migration, and, for the first time in over four decades, ushered in a sustained period in which global trade grew more slowly than global production. Even then, however, there was no complete reversal or deglobalization; rather, there was an uncertain, sputtering “slobalization.” In contrast, today’s vaccine nationalism is rapidly driving China, Russia, the United Kingdom, and the United States into open confrontation and sowing bitter conflict within the EU. It is all too easy to extrapolate and see a future of “nobalization”—globalization vanishing in a viral haze.
Over the past two centuries, the course of trade and globalization has been shaped by how governments and people have responded to such crises. Globalization comes in cycles: periods of increasing integration are followed by shocks, crises, and destructive backlashes. After the Great Depression, the world slid into autarky, nationalism, authoritarianism, zero-sum thinking, and, ultimately, war—a series of events often presented as a grim parable of the consequences of globalization’s reversal. Yet history shows that many crises produce more, rather than less, globalization. Challenges can generate new creative energy, better communication, and a greater willingness to learn from effective solutions adopted elsewhere. Governments often realize that their ability to competently deliver the services their populations demand requires answers found abroad.
Modern globalization, for instance, began as a response to social and financial catastrophes in the 1840s. The most recent wave of globalization followed scarring economic disruptions in the 1970s. In both cases, shocks laid the foundation for new international connections and solutions, and the volume of world trade surged dramatically. The truth is that historic ruptures often generate and accelerate new global links. COVID-19 is no exception. After the pandemic, globalization will come roaring back.
The 1840s were a disaster. Crops failed, people went hungry, disease spread, and financial markets collapsed. The best-known catastrophe was the Irish potato famine, which began in 1845 and led to the deaths of nearly one million people, mostly from diseases caused by malnutrition. The same weather that made potatoes vulnerable to fungal rot also led to widespread crop failures and famine across Europe. In The Communist Manifesto, published in 1848, Karl Marx and Friedrich Engels articulated how global integration was driving the world toward social and political upheaval. “The development of Modern Industry,” they argued, “cuts from under its feet the very foundation on which the bourgeoisie produces and appropriates products.”
Europe was a tinderbox. In 1848, it ignited in an inferno of nationalist revolution, with populations rising up in France, Italy, and central Europe. But the economic shock of the 1840s did not reverse the course of global integration. Instead, trade expanded, governments reduced tariff barriers, capital mobility surged, and people moved across continents. Migration was not only a response to social and political immiseration; it also reflected the promise of new prosperity.
Historians now think of the second half of the nineteenth century as the first age of globalization. Food shortages highlighted the need for broad and diversified supply chains, and leaders realized that a modern state needed reliable access to supplies from beyond its borders. In the United Kingdom, the British government initially responded to the Irish famine by importing corn from outside Europe. At the time, The Economist argued that “except Russia, Egypt, and the United States, there are no countries in the world able to spare any quantity of grain worthy of mention.”
Historic ruptures often generate and accelerate new global links.
Imports, however, failed catastrophically. This was in part because the new food was unfamiliar, but above all, it was because London couldn’t work out how to pay for the goods. Trade deficits generated currency shortages, which pushed up interest rates in the United Kingdom and France. This intensified a manufacturing crisis—itself the result of a decline in purchasing power caused by surging food prices. Although the best solution was to sell more goods abroad, that would have required governments to lower trade barriers and open up their markets.
These shortages generated popular demands for more competent governments. Although it was only in 1981 that the economist Amartya Sen’s pioneering work on the 1943 great Bengal famine definitively showed that famines are often manmade, that intuition was already widely shared in the 1840s. John Mitchel, an Irish nationalist who emigrated to the United States, concluded, “No sack of Magdeburg, or ravage of the Palatinate, ever approached in horror and desolation to the slaughters done in Ireland by mere official red tape and stationery, and the principles of political economy.”
Governments everywhere eventually responded to these demands. That meant learning from successful efforts elsewhere. The United Kingdom enacted a series of civil service reforms, adopting a competitive examination process in place of arcane patronage. The most striking extension of state capacity, however, occurred across the English Channel, where Louis-Napoléon, the nephew of the emperor, was elected president of France in 1848. After a coup and a series of plebiscites advertising his competence and activism, Napoleon made himself president for life and, eventually, emperor—Napoleon III. His policies were designed to show the benefits of an efficient autocrat over divided liberal regimes. He initiated large-scale public works projects—including railroad expansions and Baron Haussmann’s famous rebuilding of Paris.
Napoleon also demonstrated his competence by negotiating the Anglo-French tariff agreement of 1860, which reduced duties on important goods traded across the channel. Other countries quickly followed suit and negotiated bilateral trade deals of their own across Europe. But even before 1860, improved communication and transportation meant commerce was surging: global trade in goods accounted for just 4.5 percent of output in 1846 but shot up to 8.9 percent in 1860.
The events of the 1840s also laid the foundation for a wave of institutional changes to address the proliferation of small states with a limited ability to deal with migration. The creation of new nation-states with novel currencies and banking systems, notably Germany and Italy, and administrative reform in the Habsburg empire—ending internal customs duties and serf labor—were all designed to push economic growth. In this context, the American Civil War and the Meiji Restoration in Japan were also nation-building efforts meant to maximize the effectiveness and capacity of institutions. The abolition of slavery in the United States and feudalism in Japan were profound social and economic transformations. Both upheavals, moreover, led to monetary and banking reforms.
Business competence was also newly in demand. In 1851, the United Kingdom celebrated its industrial strength with the Great Exhibition—an international fair intended to display British ingeniousness and mechanical superiority, as well as the virtues of peaceful commerce. Some of the most stunning products, however, were neither British nor particularly peaceful—among them, the steel cannon, invented by a German, Alfred Krupp, and the revolver, developed by an American, Samuel Colt. British observers saw continental Europeans catching up and overtaking their own country. To the British scientist Lyon Playfair, the exhibition showed “very clearly and distinctly that the rate of industrial advance of many European nations, even of those who were obviously in our rear, was at a greater rate than our own.” He went on: “In a long race the fastest sailing ship will win, even though they are for a time behind.” The event taught world leaders a powerful lesson: international trade was vital for enhancing national performance. Competition was central to generating competence.
The result was an abrupt psychological shift from catastrophism to optimism, and from despair to self-confidence. This new mood initiated the first wave of globalization—its so-called golden age, in which international trade and finance expanded rapidly. Eventually, however, this optimism gave way to complacency, then doubts about the benefits of globalization and increasing disillusion among those left behind (notably European farmers). The upswing came to an end with World War I. That conflict prompted a massive international rebuilding effort that faltered bloodily with the rise of fascism in the 1930s and the advent of World War II.
A SHOCK TO THE SYSTEM
The makers of the postwar settlement in 1945 had learned a great deal from the mistakes of the last century. They created an extensive framework of international institutions but left substantial economic control in the hands of national authorities. As a result, the end of World War II did not immediately unleash waves of capital mobility like those that had characterized the nineteenth century. Nearly three decades later, however, the dilemmas raised by shortages and scarcity that had led to earlier versions of integration finally returned—setting the stage for the current era of globalization.
In the 1970s, after two large oil price hikes, the industrialized world saw its way of life threatened. Oil prices had been stable in the 1960s, but a surge in demand taught producers that they could exploit control over the world’s most important commodity. Adding to the crunch, the first oil shock, in 1973–74, was accompanied by a 30 percent rise in wheat prices, after the Soviet Union experienced poor harvests and bought up U.S. grain to compensate. Shortages reappeared. Some oil-importing countries imposed “car-free days” as a way of rationing gasoline consumption. As states spent more on oil, grain, and other commodities, they found their balance of payments squeezed. Unable to afford vital goods from abroad, governments had to make hard choices. Many floundered as they tried to ration scarce goods: mandating who could drive cars when or struggling over whether they should pay nurses more than teachers, police officers, or civil servants.
The immediate and instinctual response to scarcity was protectionism. In the United Kingdom, where the balance-of-payments problem appeared earlier than elsewhere, the government tried a domestic purchasing campaign, supported by all the major political parties. Leaders encouraged citizens to wear stickers and badges with the Union Jack and the message “I’m backing Britain.” (The press magnate Robert Maxwell distributed T-shirts with a similar slogan, but they turned out to be made in Portugal.) In the mid-1970s, after the first oil shock, the government briefly flirted with what the Labour Party’s left flank called a “siege economy,” including extensive import restrictions. In the United States, there was acute anxiety about Japanese competition, and in 1981, Washington pressured Tokyo to sign an agreement that limited Japanese car exports. The move backfired, however. Because of the new restrictions, Japanese producers merely shifted their focus away from cheap, fuel-efficient cars and toward luxury vehicles.
Despite these gestures at economic nationalism, the oil shock—paradoxically at first—created more globalization. In conjunction with price increases, a financial revolution driven by the emergence of large international banks transferred huge surpluses accumulated by oil producers into lendable funds. The new availability of money made resources easily accessible for governments all over the world that wanted to push development and growth. International demand thus surged. In contrast, in the United Kingdom, Labour’s siege economy looked like it would cut off access to markets and prosperity.
Familiar historical forces will drive post-pandemic reglobalization.
Thus, crises in the 1970s led to the same realization as in the 1840s: openness produced resilience, and financing needed to be available for trade to expand. The eventual impact was obvious: trade in goods and services, which in 1970 had amounted to 12.1 percent of global GDP, increased to 18.2 percent by 1980. The cycle swung back to globalization once again. Protectionism in the 1970s also triggered a discussion of whether governments were handling the crisis competently. At first, the debate was personalized and highly caricatured: in the United States, it centered on Richard Nixon’s crookery, Gerald Ford’s supposed inability to chew gum and walk, or Jimmy Carter’s micromanagement. In the United Kingdom, commentators focused on the detached bachelor existence of Prime Minister Edward Heath and then on allegations of cronyism against his successor, Harold Wilson. France went into the oil shock under the very sick President Georges Pompidou, who died of cancer in 1974. In West Germany, the revelation that Chancellor Willy Brandt’s closest assistant was an East German spy undermined the country’s reputation for competence. His successor, Helmut Schmidt, believed that Germany was returning to the chaos of the interwar Weimar Republic.
The many examples of personal incompetence in rich industrial democracies generated the thesis that such countries had become ungovernable. The political theorist Jean-François Revel concluded that democracies were perishing and that the Soviet Union was winning the Cold War. Autocracies such as Chile under Augusto Pinochet and Iran under Mohammad Reza Shah Pahlavi appeared better suited to handle modern global challenges. The autocrats lectured others about their superiority. In reality, however, they were bloody, corrupt, and, in many cases, spectacularly unsuccessful.
The real insight of the debate over administrative effectiveness was that governments could overstretch themselves by taking on too many tasks. That realization inspired a key tenet of what was later widely derided as “neoliberalism”: the belief that if governments took on microdecisions, such as determining wage and price levels (a central part of both Nixon’s and the British government’s bids to contain inflation), they risked their legitimacy and reputation for competence. Official decisions would appear both arbitrary and unenforceable because powerful groups would quickly make sure that new settlements favored their interests.
INFLATION NATION
The shortages of the 1840s and the 1970s both seemed to have an apparent cure: inflation. Inflation can help accommodate shocks, often painlessly. Because people have more cash or bank credit, monetary abundance generates the impression that they can have everything they want. Only gradually do consumers realize that prices are rising and that their money buys less.
In the 1850s, inflation may have been partially unintended. It was largely the result of the 1849 California Gold Rush, which vastly increased the world’s gold stock. Price increases were also driven by financial innovation, primarily Europe’s adoption of new types of banking that drove money creation, such as the so-called crédits mobiliers, which developed industrial lending in France and central Europe. By giving people apparently greater wealth, this increase in the supply of money (and the resulting mild inflation) helped governments appear more competent and made businesses and consumers more confident. It prompted a genuine global surge in production, which generated greater prosperity and security.
After 1971, when Nixon finally severed the link between the dollar and gold, monetary policy was no longer constrained by a metallic standard. In times of crisis, governments could now print more money to drive growth. In many countries, the immediate response to oil price increases was therefore to accommodate the shock through expansive fiscal and monetary stimulus: people could still go on buying. That reaction spurred inflation, which by 1974 had risen to 11 percent in the United States and beyond that in some other countries: in 1975, the United Kingdom’s inflation rate reached 24 percent.
Although inflation initially seemed to be the solution to the scarcity problem, it soon appeared in diagnoses of government incompetence. The economist Arthur Okun developed a popular “misery index” by simply adding inflation and unemployment. The metric became an important political weapon. The Democratic presidential challenger George McGovern used it against Nixon in 1972, Carter used it against Ford in 1976, and Ronald Reagan used it against Carter in 1980.
High inflation at first superficially stabilizes societies, but over time, it becomes a threat. Inflation often pushes interest groups—internationally, producer cartels such as OPEC, and domestically, labor unions—to mobilize, organize, and lobby in the hope of acquiring a greater share of monetary and fiscal resources. Depending on the extent of that mobilization, it can pull societies apart, as unions leapfrog each other with aggressive wage demands and inflation erodes the pay and pensions of the nonunionized and the retired. By demonstrating that governments are vulnerable to organized pressure, inflation is thus a destabilizing force in the long term. Indeed, analysts have argued that it was at least in part generalized international inflation in the 1960s that pushed oil producers to organize—leading to the price hikes of the 1970s.
Monetary experiments of this sort created demands for new ordering frameworks. After the surge in economic growth of the mid-nineteenth century, the world internationalized the gold standard to create a common framework for international payments. Although policymakers went a different route after the inflation and liberalization of the 1970s, they were also looking for a return to stability. To end the monetary disorder, central banks targeted a low inflation rate, and governments engaged in new patterns of cooperation abroad—creating the G-5 and then the G-7 and the G-20 as forums for discussing collective responses to global economic challenges. The quest for stability was also aided by the steady march of globalization. Greater global integration lowered production costs and thus helped correct the inflationary surge that initially accompanied the shortage economy. Inflation, which first fueled globalization in the 1850s, was, by the end of the twentieth century, eventually tamed by it.
PAST AS PROLOGUE
Today, the COVID-19 pandemic has produced a deep economic crisis, but it is different from many past ones. The shock is not a demand-driven downturn, like the Great Depression or the 2008 recession. Although lockdowns have interrupted supply and caused unemployment to soar, there is no overall shortage of demand. Large rescue and stimulus packages in rich countries have generated a financial buffer, and savings have shot up as people spend less. The best estimate is that in 2020, the United States piled up $1.6 trillion in excess savings, equivalent to seven percent of GDP. People are waiting to unleash their pent-up purchasing power. On top of that, finance ministers and international institutions are listening to U.S. Treasury Secretary Janet Yellen’s demand that “the time to go big is now” when it comes to fiscal relief.
Yet the current crisis does share key characteristics with the crises of the 1840s and the 1970s. The world of scarcity, for one thing, is already here. The pandemic has led to shortages of medical supplies such as face masks and glass vials for vaccine storage. Food prices have soared to their highest level since 2014—the result of a combination of dry weather in South America that has hurt wheat and soybean crops and pandemic-induced shipping disruptions. In the initial stages of the pandemic, laptops became scarce as employees scrambled to update their work-from-home setups. There is also a worldwide chip shortage, as the demand for microprocessors in medical, managerial, and leisure use has increased. Freight rates between China and Europe quadrupled at points in 2020. Steel, too, is in short supply.
Much as the crises in the 1840s and the 1970s did, the pandemic has also raised questions of government competence. At first, China seemed able to deal with the crisis better than its Western competitors—its cover-up of the severity of the pandemic notwithstanding—which prompted many observers to question whether democracies were capable of swift, effective action. Donald Trump’s presidency collapsed because of his chaotic handling of the crisis. British Prime Minister Boris Johnson faced a revolt among conservative members of Parliament because of his complex, contradictory, and constantly shifting lockdown rules. The European Commission lost credibility because of its poor management of vaccine purchases. As in the past, citizens personalized the incompetence. Americans debated, for example, how much blame to put on Trump’s son-in-law, Jared Kushner, who led part of the response. In the United Kingdom, much of the outrage focused on Dominic Cummings, the prime minister’s policy adviser, who had violated the country’s lockdown rules.
For other observers, the unifying theme behind the mismanagement was populism, with Trump, Johnson, Brazilian President Jair Bolsonaro, Indian Prime Minister Narendra Modi, and Philippine President Rodrigo Duterte all botching the response. But even in countries where the crisis has been handled relatively well, there have been surges of protests against the way governments have reacted to the pandemic. In Germany, “alternative thinkers” protesting new lockdown measures attacked the parliament building in August 2020. Even in Japan, where there is a long tradition of the use of face masks as a hygiene measure, a movement calling itself the Popular Sovereignty Party organized “cluster protests” again mask wearing.
Given these challenges, it’s easy to assume that governments and citizens alike would prioritize nationalization—cultivating supposedly resilient domestic supply chains to hedge against the next crisis. But that’s unlikely to happen. Instead, people are desperately looking for new leadership and new visions. As was true during previous supply shocks, leaders can make a good case for the importance of foreign models: some countries have done much better than others in dealing with the health and economic consequences of COVID-19. Although some of these countries are small or relatively isolated, by most metrics, the country with the most competent response was the biggest: China. That is not without irony, to put it mildly: the country responsible for unleashing the virus has also been a major beneficiary—with some states now looking to Beijing for leadership. But instead of condemning China’s response or demanding reparations for the pandemic’s costs, other countries should consider how to use Beijing’s example, just as the United Kingdom in the 1850s realized that it could learn from foreign producers.
NO SURPRISES
Familiar historical forces will drive post-pandemic reglobalization. In a world facing enormous challenges, not just the pandemic but also climate change, solutions are global public goods. In 1945, the architects of the postwar order believed that peace and prosperity were indivisible and could not be the property of one nation. Now, health and happiness are the same. Both are impossible for individual states or regions to enjoy alone.
Technology is also transforming a globalizing planet, as it did in the 1840s and the 1970s. In the mid-nineteenth century, the drivers were the steamship, the undersea cable, and the railroad. In the last quarter of the twentieth century, it was computing power: the first widely available personal computers appeared in the early 1980s. Today, data occupies the same position—linking the world and offering solutions to major problems, including government incompetence. New types of information might help leaders attack some of the inequalities and injustices highlighted by the COVID-19 pandemic. More automation might mean that machines can take on some of the repetitive and dangerous tasks performed by low-paid essential workers. Telemedicine and data-driven public health can trigger faster and more precisely targeted pharmaceutical or medical interventions.
As in past crises, there is also an immediate and powerful global demand for cheap and reliable products. In the mid-nineteenth century, it was foodstuffs, and in the 1970s, it was oil and commodities. In the 2020s, it is medical supplies, data chips, and rare-earth metals. To be resilient to new shocks, these commodities need to be produced and traded internationally, by a multiplicity of suppliers.
Governments and businesses also need to continuously innovate. As it did in the 1840s, isolationism today would mean cutting off opportunities to learn from different experiments. No single country, or its particular culture of science and innovation, was responsible for the development of an effective COVID-19 vaccine—one of the miracles of 2020. Success was the product of intense international collaboration. This story of innovation also applies to government competence. No state can succeed alone. Even if one particular decision is by chance spectacularly successful—say, Germany’s impressive testing record or the United Kingdom’s fast vaccine rollout—it is usually difficult to repeat that success in other policy areas. Policymakers may stride confidently past their first victory, only to slip on a banana peel.
The United States, in particular, may find this a hard pill to swallow. Americans have long been attached to the idea of their country’s superiority, akin to the belief held by the British in the mid-nineteenth century. COVID-19, like the 1840s famines and the 1970s oil shocks, presents both a crisis and a learning opportunity. The United States has coasted on the idea that the world needs the English language and the U.S. dollar. Neither of those assumptions can hold forever. Just as automatic translation technology is increasing linguistic accessibility, a different currency could become a new international standard. The dollar is not an adequate insurance policy or a viable basis for Washington to reject the need for change.
The challenge of the new upswing in the cycle of globalization will be to find ways to learn and adapt—increasing the effectiveness of government and business—without compromising fundamental values. As in the 1840s and the 1970s, financial and monetary innovation, or the tonic of inflation, will drive transformational change. Memories of crisis will push countries and governments to adapt in 2021 and beyond, just as they have before.
HAROLD JAMES is Professor of History and International Affairs at Princeton University and the author of the forthcoming book The War of Words: A Glossary of Globalization.Source:
Foreign Affairs
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