Just over three decades ago, the Cold War ended and former Soviet-bloc countries began their transitions to market economies, which enabled them to engage with the rest of the global economy. The world’s division into three segments — advanced capitalist economies, centrally planned socialist economies, and the “Third World” appeared increasingly outdated. It was not, as Francis Fukuyama famously claimed, “the end of history,” but it was an economic and political breakthrough, and the beginning of the contemporary era of globalization. Is that era now ending, as many suggest?
The face of globalization has changed significantly since those early years. While economic and political globalization initially went hand in hand, economic globalization soon pulled ahead. We now have a globalized economy, but without an effective system of global governance. The EU shows what an integrated economy with advanced policy coordination mechanisms looks like. But the institutions that were supposed to do this on a global scale, such as the International Monetary Fund, World Bank, World Trade Organization, International Labour Organization, and World Health Organization, lack adequate instruments for economic policy coordination.
As a result, the divergence between political and economic globalization is not only growing but also beginning to look like a clash. A political backlash against “globalism” in many countries seems set to unravel three decades of economic integration.
But looks can be deceiving.
It is true that political globalization is in retreat, driven by the COVID-19 pandemic, the new cold war between the US and China, and the hot war in Ukraine, which spurred the imposition of harsh sanctions on Russia. It is also true that these shocks have caused severe economic disruption, hampering the production and distribution of goods and services, obstructing technology transfer, testing international financial arrangements and undermining multilateral cooperation.
Moreover, public opinion has increasingly turned against globalization, which many mistakenly blame for trends such as accelerating inflation and deepening income inequality. This has often led policymakers to eschew pragmatism in favor of populism and protectionism the nemeses of global economic openness.
But politicians, media commentators and economists have been far too hasty in predicting the demise of globalization. In fact, economic globalization has only temporarily lost its momentum. Despite its drawbacks, globalization supports economic growth, not least by enabling cross-border trade, which enables producers to take advantage of economies of scale. Recent shocks have strained, not doomed, global supply chains.
Likewise, cross-border capital flows, including portfolio and direct investment, support efficiency by enabling resources to reach places where they can be used more profitably. Though the pandemic and the Ukraine war are affecting these flows, the world is big enough to absorb liquid savings. A capital surplus somewhere will soon be used elsewhere.
