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August 18, 2008

The Russian/Georgia Conflict and Globalization

As I noted in my last post [Influencing Russia], there is a risk (however remote) that the international economy could splinter into trading blocs which could cause this latest wave of globalization to falter or collapse. Such an outcome would be devastating for millions of people trapped in poverty. New York Times columnist Paul Krugman worries about such an outcome ["The Great Illusion," 15 August 2008]. Krugman writes:

"So far, the international economic consequences of the war in the Caucasus have been fairly minor, despite Georgia's role as a major corridor for oil shipments. But as I was reading the latest bad news, I found myself wondering whether this war is an omen — a sign that the second great age of globalization may share the fate of the first. If you're wondering what I'm talking about, here's what you need to know: our grandfathers lived in a world of largely self-sufficient, inward-looking national economies — but our great-great grandfathers lived, as we do, in a world of large-scale international trade and investment, a world destroyed by nationalism."

Krugman draws the headline for his column from the writings of Norman Angell -- namely a 1909 pamphlet entitled Europe's Optical Illusion which was published the following year as the book The Great Illusion. The well-known thesis of Angell's book was that the integration of European economies had grown to such a degree that war between them would be entirely futile, making militarism obsolete. The First World War followed shortly afterwards. Krugman continues:

"Writing in 1919, the great British economist John Maynard Keynes described the world economy as it was on the eve of World War I. 'The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth ... he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world.' And Keynes’s Londoner 'regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement ... The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion ... appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.' But then came three decades of war, revolution, political instability, depression and more war. By the end of World War II, the world was fragmented economically as well as politically. And it took a couple of generations to put it back together."

My colleague Tom Barnett equates this period of European history to America's Civil War. Following the Second World War, Europe made great strides towards a more unified system. But, as seen by the recent Irish vote that stopped further European integration, nationalism is not dead. We have seen rising nationalism around the world. As a result, Krugman asks and answers an important question:

"Can things fall apart again? Yes, they can. Consider how things have played out in the current food crisis. For years we were told that self-sufficiency was an outmoded concept, and that it was safe to rely on world markets for food supplies. But when the prices of wheat, rice and corn soared, Keynes's 'projects and politics' of 'restrictions and exclusion' made a comeback: many governments rushed to protect domestic consumers by banning or limiting exports, leaving food-importing countries in dire straits. And now comes 'militarism and imperialism.' By itself, as I said, the war in Georgia isn't that big a deal economically. But it does mark the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization."

To be accurate, no other country, even Russia, has the capacity to match the United States on the global stage. Regional strength, of course, is a different matter. What Krugman is saying is that the United States has more or less been the only major power with the means and will to use military force until the Russia operation in Georgia. He goes on to talk about the implications of Russian nationalism on globalization.

"Most obviously, Europe’s dependence on Russian energy, especially natural gas, now looks very dangerous — more dangerous, arguably, than its dependence on Middle Eastern oil. After all, Russia has already used gas as a weapon: in 2006, it cut off supplies to Ukraine amid a dispute over prices. And if Russia is willing and able to use force to assert control over its self-declared sphere of influence, won't others do the same? Just think about the global economic disruption that would follow if China — which is about to surpass the United States as the world's largest manufacturing nation — were to forcibly assert its claim to Taiwan."

Those are certainly scenarios worthy of consideration, but Krugman needs to bring in the other side of the equation as well. Without its oil income, Russia falls quickly back into economic chaos and becomes a third-rate player on the world stage. China, which holds a significant amount of Western debt, would risk losing those assets as long-term investments. One thing that Angell taught us, however, is that nationalism trumps logic. Krugman continues:

"Some analysts tell us not to worry: global economic integration itself protects us against war, they argue, because successful trading economies won't risk their prosperity by engaging in military adventurism. But this, too, raises unpleasant historical memories. [As Angell pointed out in his book], ... in the modern industrial era even military victors lose far more than they gain. He was right — but wars kept happening anyway. So are the foundations of the second global economy any more solid than those of the first? In some ways, yes. For example, war among the nations of Western Europe really does seem inconceivable now, not so much because of economic ties as because of shared democratic values. Much of the world, however, including nations that play a key role in the global economy, doesn't share those values. Most of us have proceeded on the belief that, at least as far as economics goes, this doesn't matter — that we can count on world trade continuing to flow freely simply because it's so profitable. But that's not a safe assumption. Angell was right to describe the belief that conquest pays as a great illusion. But the belief that economic rationality always prevents war is an equally great illusion. And today's high degree of global economic interdependence, which can be sustained only if all major governments act sensibly, is more fragile than we imagine."

It's too early to write the eulogy for this latest wave of globalization, and I don't believe that is what Krugman is trying to do. He does want to open our eyes to the dangers of powerful leaders acting in what appears to be irrational ways. At least those actions look irrational through the globalization lens. Through the lens of nationalism, however, the world looks very differently. All of the major powers, the U.S., Russia, and China, have spent too much time looking through that lens (hence, the challenges faced by the Kyoto Accord, the Doha Round of trade talks, the rising cries against free trade pacts, and so forth). Nationalism is a poisoned punchbowl from which leaders tend to drink too deeply. Because many nationalistic stances are immensely popular with some constituencies, politicians have a difficult time resisting them. One need look no further than the U.S. presidential election to realize that Krugman's concerns are in play in many places. Politicians too often take the popular stand, not the most wise one. Only leaders with wisdom and vision will resist these tendencies and ensure that globalization continues to make the world a better place for millions of people still longing for a better life.

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