LOSING CONTROL (5 page)

Since the 1950s, however, there has been a remarkable change.
Asia as a whole has delivered more than half a century of annual economic growth running at 3.5 per cent per capita, representing the fastest economic advance of any region in the entire economic history of the planet.
China has overtaken Germany to become the third-biggest economy in the world and, on some measures, is ahead of Japan, thus making China second only to the US in economic terms.
In just a handful of decades, China will probably also move ahead of the US to become the world’s dominant economic powerhouse.
Other emerging nations are also growing rapidly.
Their success is generating a new ‘gravitational pull’ in the world economy.
No longer is the global economic agenda being set by the Western powers.
The West’s influence is waning.
New relationships are being forged which, over time, threaten to leave the West economically disadvantaged.

Globalization dramatically changes the ability of incumbent governments, companies and citizens in the West to continue benefiting from their earlier rent-seeking – or cheating – ways.
Because capital can move around relatively easily, economies of scale can be created in an increasing number of countries (the US car industry is on its knees partly because of this enhanced capital mobility).
There is only a finite amount of virgin territory to exploit and, in the absence of colonization (usually frowned upon these days), competing political interests may make the extraction of ever-increasing amounts of raw materials more and more difficult (as BP discovered in its Russian ventures).
Most importantly, the
populations of previously unsuccessful economies are now beginning to make their voices heard.
China’s remarkable economic growth over the last thirty years hasn’t been enough to remove the majority of its population from poverty, but it now boasts a newly affluent middle class of roughly 300 million people.

For some, this isn’t a problem.
Globalization is a natural feature of the economic landscape, leading to a happier, more contented, global community driven on by the ideas of the Enlightenment and the spread of liberal democracy.
In this view of the world, it is relatively easy to incorporate the hopes, aspirations and economic muscle of the emerging nations into an already established world economic order.
This is the kind of message that found favour in books such as Francis Fukuyama’s
The End of History
and which still finds sympathy today in international gatherings such as the World Economic Forum in Davos, Switzerland (where the great and the good of the global community can solve mass poverty for the benefit of the international media before heading off to the nearest champagne reception or ski slope).

Admittedly it’s a seductive view.
If globalization is inevitable, the only things that can hold it back are evil men, stupid ideas and wars.
For extreme optimists, the events of the last hundred years can thus be regarded as no more than an awkward interruption, a pause for breath before the forces of globalization are allowed to scale even greater heights.
On this interpretation, we have finally returned to an economic roadmap that had apparently reached a dead end as the nineteenth century drew to a close.
With the free market restored, with world trade rising rapidly, with cross-border capital flows surging and with command economies increasingly no more than historical relics, the battle over political and economic ideas that led to the violence of the twentieth century is now over.
We are back to ‘business as usual’, only with more nations able to take advantage of the ideas that first began to develop in Europe during the Enlightenment.
Seen this way, we can all be rich.

It’s a pleasing idea, but it’s also largely wrong.
We may be living in a world of relative peace and prosperity, with capital flowing more easily across borders, but there’s no guarantee that this land of economic milk and honey will remain bountiful for ever.
There is, in fact, no ‘business as usual’.
The world economy is constantly evolving and, as it does so, it offers new challenges.
We cannot just travel back in a time machine to conditions that last prevailed at the end of the nineteenth century.
As we shall see, the world today looks very different from how it appeared then.
In any case, those who look back at the late nineteenth century with rose-tinted spectacles forget the obvious weakness in their approach: the relative peace of the nineteenth century was shattered by the destructive violence of the twentieth century.
Globalization depends on co-operation but can all too easily be knocked off course by conflict.

Before the outbreak of the First World War, the idea that globalization was inevitable was widely shared in part because the costs of any reversal were, rightly, seen to be huge.
Globalization was not, however, an immutable process.
Its pre-First World War protagonists were nicely lampooned by John Maynard Keynes in his
Economic Consequences of the Peace
⁸
in a much quoted, yet highly relevant, passage caricaturing a typical English gentleman in the summer of 1914.
The complacency it reveals is commonplace today:

From an Englishman’s perspective, at least, the early years of the twentieth century were halcyon times.
The looming disaster of the Great War and the subsequent collapse of the international economic order were impossible to imagine.
A major conflagration was clearly in nobody’s interest: war simply couldn’t happen.
Meanwhile, markets were able to function unimpeded for the most part by the actions of nations.

Keynes’s description reflected a model of globalization linked to empire, ideas, technology and cross-border mobility of both labour and capital.
By the end of the nineteenth century, Britain had an empire covering a third of the Earth’s land mass.
Other European nations, notably France and Russia, also built up sizeable empires.
Europe’s overall control of the Earth’s surface rose from 37 per cent in 1800 to 67 per cent in 1878 and 84 per cent by 1914.
⁹
Critically, by the mid-nineteenth century Britain had become the philosophical and practical cheerleader for free trade.
The Royal Navy ruled the high seas, acting as a global policeman either to enforce liberal trade or to impose Britain’s sovereign power over others.
¹⁰
The Royal Navy generally succeeded in keeping international trade afloat, bringing benefits to trading nations all over the world (it acted as a gunboat version of today’s World Trade Organization).

Meanwhile, the Industrial Revolution was in full flow, with canals, steamships and railways all contributing to a remarkable reduction in transportation costs, while the laying of telegraph cables – the first
transatlantic success was in 1866 – marked the beginnings of an information technology revolution which that was to become a defining feature of the late twentieth century.
Labour easily moved across countries, continents and oceans, often in search of empty yet potentially productive lands.
Capital also moved around with remarkable ease.
According to Maurice Obstfeld and Alan Taylor, the stock of foreign investment (investment made by people outside their home country) rose from 7 per cent of world GDP in 1870 to nearly 20 per cent by 1914, a figure not surpassed until the early 1980s.
¹¹
Moreover, before the First World War, a big element of cross-border investment went from the developed nations to what we now label emerging markets.
And people lived in a world of ‘small government’.
In nominal terms, government spending in 1913 amounted to just over 13 per cent of GDP in the UK, 8.9 per cent in France, 13.3 per cent in Germany and 8.0 per cent in the US.
Market forces truly dominated.

Globalization in the nineteenth century ultimately depended on the redrawing of the political map of Europe (and, by extension, other parts of the world) by a group of great men representing the Great Powers.
International relations in the nineteenth century were shaped by the Congress of Vienna in 1815 (following the Napoleonic Wars), at which Europe was divided into spheres of influence, primarily reflecting the interests of the victorious Great Powers – the UK, Austria, Russia and Prussia (although, even after Napoleon’s departure following mounting defeats, France somehow still managed to get a seat at the table through the efforts of Charles-Maurice de Talleyrand, Louis XVIII’s envoy, who used his wily diplomatic skills to create friction between the victors).
The voices of the people went unheeded and unheard.
This was a world of empires and imperfect suffrage.

Under the influence of self-determination, sponsored by an increasingly powerful US hostile to colonial influence, the empires of the nineteenth century collapsed in the wars and economic crises that followed.
The biggest casualty, most obviously, was the British Empire.
The Ottoman Empire went the same way and, with the fall of the Berlin Wall in 1989, so did the Soviet Union’s twentieth-century empire.
The result was a huge proliferation of nation states.
According to Freedom House, there were only fifty-five sovereign countries in 1900, alongside thirteen empires.
That compares with the 192 states which, in 2009, were members of the United Nations.
Of today’s nations, 113 used to be part of colonial and imperial systems, while a further thirty-three were parts of other states.

Economic globalization has, therefore, been associated with political disintegration.
This is a very odd result.
At the very least, it suggests the political challenges associated with modern-day globalization are very different from the challenges that emerged, so tragic-ally, in the second decade of the twentieth century.
How, for example, can there be global agreement on capital markets, climate change or currency markets if multitudinous nation states all wish to pursue their own individual agendas?
If, as was argued in Chapter 1, good government is essential for sustained economic progress, how easy is it to deliver good government at the international level in the absence of nineteenth-century empires?

The good news is that there has been considerable progress.
Trade flows have gradually been rebuilt, partly through regional trading blocs but, most importantly, through the creation of global rules through the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization (WTO), which China signed up to in 2001, heralding a new era for international trade.
Soviet communism has gone and Chinese communism is not what it used to be.
The British Empire has been replaced by American hegemony.
As a substitute for the Gold Standard, more and more
countries have embraced the case for sound money through, most obviously, the use of inflation targets and links to the US dollar.

Meanwhile, in more recent times, cross-border capital flows have risen dramatically, reflecting in part the gradual abolition of capital controls and, for a while, a growing acceptance that cross-border capital flows subjected nations to useful market disciplines.
Even as the Berlin Wall came down in 1989, many Western European countries still routinely used such controls.
Only with the creation of the Single Market in 1992, just seven years before the creation of the euro, was a formal commitment made to free cross-border movements of capital within the European Union.

But does this really represent a return to the roadmap abandoned at the beginning of the twentieth century?
I don’t think so.
The political and economic backdrop to late-nineteenth-century globalization was fundamentally different from today’s version.
There was a global law-enforcement officer, in the form of the Royal Navy, which kept the sea lanes open.
The US, the most powerful nation on earth today, does not share the same commitment.
It has no physical empire to protect and it chooses not to offer unequivocal support to the organizations that might enforce international law.

As we shall see in Chapter 8, there were huge movements of people across borders on a scale that can hardly be imagined today, at least in proportion to the size of indigenous populations.
While border controls were, primarily, a twentieth-century innovation, they continue to distort the allocation of productive resources in the twenty-first century.
Even where immigration controls have been lifted – in parts of the European Union, for example – this has generally been a patchwork affair.