The temporary exhaustion of globalization

Just over three decades ago, the Cold War ended and the former Soviet bloc countries began their transition to market economies, which allowed them to engage with the rest of the global economy. The division of the world into three segments – the advanced capitalist economies, the planned socialist economies and the “Third World” – appeared increasingly outdated. It was not, as Francis Fukuyama so aptly put it, “the end of history”, but it was an economic and political breakthrough, and the beginning of the contemporary era of globalization. Is this era ending, as many claim?

The face of globalization has changed considerably since those early years. While economic and political globalization initially went hand in hand, economic globalization quickly took hold. We now have a globalized economy, but without an effective system of global governance. The European Union shows what an integrated economy with advanced policy coordination mechanisms looks like. But the institutions supposed to do so on a global scale – such as the International Monetary Fund, the World Bank, the World Trade Organization, the International Labor Organization and the World Health Organization – lack adequate instruments for the coordination of economic policies.

As a result, the divergence between political and economic globalization is not only growing; it has recently started to look like a showdown. A political backlash against “globalism” in many countries seems poised to undo three decades of economic integration.

But appearances can be deceiving.

It is true that political globalization is retreating, driven by the Covid-19 pandemic, the new cold war between the United States and China, and the hot war in Ukraine, which has prompted the imposition of severe sanctions on Russia. It is also true that these shocks have caused severe economic disruption; they have hampered the production and distribution of goods and services, hampered the transfer of technology, strained international financial arrangements and undermined multilateral cooperation.

Moreover, public opinion has increasingly turned against globalization, which many mistakenly blame for trends such as accelerating inflation and worsening income inequality. This has often led policymakers to eschew pragmatism in favor of populism and protectionism – the enemies of global economic openness.

But politicians, media commentators and economists were much too hasty to predict the end of globalization. In fact, economic globalization has only temporarily lost momentum. Despite its drawbacks, globalization supports economic growth, in particular by allowing cross-border trade, which allows producers to take advantage of economies of scale. Recent shocks have strained, not doomed, global supply chains.

Similarly, cross-border capital flows, including portfolio and direct investments, promote efficiency by allowing resources to reach places where they can be used most profitably. Although the pandemic and the war in Ukraine are affecting these flows, the world is big enough to absorb liquid savings. Surplus capital somewhere will soon be used elsewhere.

Moreover, despite the apparent shift in public opinion against globalization, the ties that sustain it – like tourism and sport – are alive and well. As these spheres are under stress, people’s persistent desire to travel and connect will continue to facilitate demand and growth.

Ultimately, economic globalization is irreversible. After this turbulent period – and the difficult social, cultural, demographic and technological adjustments it entails – greater openness will prevail. This process, however, will be hampered until political globalization follows.

The world is currently at risk of splitting into two distinct blocs: one led by the US and the EU, and the other dominated by China and Russia. The Economist Intelligence Unit predicts that these blocs “will entrench themselves in the geopolitical landscape and use economic and military leverage to woo countries that are not aligned with either side.”

But, even if such a split occurs, confrontation is not inevitable. The two groupings can confront each other and cooperate peacefully, without resorting to “military levers” (which, in any case, could be rendered useless if the economic levers are well used). The key is a more effective form of political globalization.

The EU will be critical here; it does not have to take sides in the Sino-American rivalry, and could thus play a central role in both blocs. China, for its part, should seize the opportunity to strengthen its international position.

As for Russia, it will see its stature significantly diminished, because of its despicable aggression against Ukraine. Nevertheless, the country should not be excluded from world economic exchanges; Russia is simply too big to ignore, much less ‘cancel’. Meanwhile, African countries, as well as India, will play an increasingly important role in the global geopolitical game.

This highlights an inescapable feature of future political globalization: multipolarity. For future summits – from the G20 summit in Bali, Indonesia, to the United Nations Climate Change Conference in Sharm el-Sheikh, Egypt – to be successful, participants must accept that the times when a or two powers could impose their will on the rest is over.

Regional initiatives – such as the Regional Comprehensive Economic Partnership and the Indo-Pacific Economic Framework for Prosperity – can also provide political scaffolding for economic globalization. Companies, natural allies of economic globalization, and therefore enemies of political de-globalization, should redouble their efforts to support these processes.

Short-sighted politics can only be allowed to trump economic pragmatism for a limited time. The cascading challenges facing humanity can be managed, but only with enlightened political leadership capable of providing the kind of strategic vision needed to sustain economic globalization and achieve social and ecological balance.

Grzegorz W. Kołodko is Professor of Economics at Kozminski University and former Deputy Prime Minister and Minister of Finance of Poland.

Copyright: Project union

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