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Global Crisis: How Far to Go?

By Branko Milanovic | YaleGlobal Online | October 13, 2008

Photo by phxpma (CC).

Contemporaries are often poor judges of historical events. People who saw a group of soldiers pushing around a man in rags before he was crucified could be excused for not realizing they were witnessing perhaps the most important event in human history. On the misty, cold morning of October 25, 1917, those who saw a few detachments of soldiers crossing the vast plazas of Petrograd did not recognize the beginning of the biggest revolution since the one in France. And when the Dow Jones Industrial Average fell 9 percent on October 24, 1929, few had heard of an Austrian citizen named Adolf Hitler.

Thus, today, too, nobody knows which way the financial crisis will go, with what force it will spill into the real sector—decline in output, higher unemployment—and finally, perhaps most importantly, to what outcomes it will lead in the political arena. But what certainly raises fear among ordinary people is that politicians and economists alike seem equally baffled, as if they were in the presence of a cyclone whose true origin and destination are unknown.

We cannot foretell the course of this cyclone nor its ultimate effects, and can only summarize its impact so far, broadly surmising the direction the world may be headed.

In the speed with which this turmoil propagates itself, how it has spread from the United States to Asia to Russia and to Europe, it's indeed the first worldwide crisis in the current era of globalization. It started in the citadel of global neoliberal capitalism, the United States, and even more centrally so, on Wall Street. The very heart of the system was discovered to be corrupt and mismanaged.

Since globalization has been so successful in rapidly encompassing the entire globe into one single system, now the crisis likewise affects all. As the means of communications have become capable of real-time transmission of information, panic in any one place spreads quickly to the other end of the globe. All the advantages of financially driven globalization have suddenly transmuted into disadvantages —the sophistication of the financial markets, the speed and volume of transactions, with $3 trillion dollars on average traded every day, the geographical reach.

This crisis's global effects differentiate it from earlier crises like the Asian 1997–98 crisis which spread only to Russia and Brazil, or from the debt crisis of the early 1980s that affected the developing world. It's different from the recessions of 1973–75 and 1979–81 because they did not propagate as fast and hardly affected China, India, and the Soviet Union.

So, how does the crisis affect the process of globalization? To see this, we ought first to recall the current makeup of globalization—a two-pronged process, resting on two pillars. On the one hand, globalization means an ever-tighter integration of markets for goods, capital, and technology—and to a much less extent, labor—undergirded by an ideology best summarized in the Washington Consensus precepts among which privatization, deregulation, and generally a lesser role of governments were key. The first pillar provides the incentives for and ideology of globalization.

But there's also a second pillar which provides the muscle. Globalization is not underwritten solely by ideology and interests but also by the military might of the United States. This part was made clear in the by-now infamous Project for the New American Century, developed in the 1990s by leading neoconservatives, which laid out the blueprint for American domination of the world, justifying it by the need to allow other nations to compete peacefully in matters of economics, but not in destructive nationalism. The invasion of Iraq was a logical consequence of this policy.

The crisis severely undermines both pillars. It sweeps the rug out from under neoliberal capitalism by making it painfully clear that the precepts dished out with abandon around the world—transparency, efficiency—were openly flouted even as they were preached. And with wealth at stake, the ideology of self-regulating markets is easily forgotten, and recourse unabashedly made to state subsidies, so reviled only months earlier. It will be a long time before the cheerleaders of globalization can flaunt its textbook advantages with a straight face. Thus the massive bailout, done in the face of obvious reluctance of the public and taxpayers, the swelling real estate crisis born of financial mismanagement by "the best and the smartest," severely undercut the first ideological pillar.

In the rest of the world, government interventionism will now be seen as more acceptable than at any time in the last quarter century. More countries will experiment with economic policies that do not fully follow the tenets of neoliberalism.

The huge costs of the crisis, probably more than $1 trillion in the United States alone—or some 7 percent of U.S. gross domestic income—weaken the second pillar of globalization also. Not only is the U.S. military already hopelessly stretched, involved in wars that it can neither lose nor win, but the financial costs of these adventures are mounting. Add to that the costs of the bailout, likely recession, and further reduction in tax receipts, plus an already weakening dollar, and the financial costs of new American military-led globalization episodes become unsustainable.

It's said that Soviet Communism collapsed because of the rebellion of nature: So long as it was cheap to exploit oil and gas, the show continued. The U.S.-led globalization may come to a temporary halt for more prosaic reasons: indigestion and over-extension, both the common diseases of the empires, from Caesar's Rome to Bush's Washington.

Yet, even if the crisis is deeper than currently conventionally expected—a cumulative gross domestic income decline of several percentage points—it will still leave the United States as, by far, the most powerful country in the world. In current dollar terms, American GDI per capita dwarfs by more than 20 times the Chinese. Were China to continue growing during the next three to five years at close to 10 percent per annum and the United States to remain mired in recession, the gap would have declined only to 15 to 1. The United States accounts for a quarter of world output, and that share is unlikely to change much. Finally, the United States spends on military more than all the other countries combined. That too is unlikely to change. Thus, the relative setback to the second pillar of globalization must be seen in context.

The crisis would likely, particularly under an Obama presidency, lead to a much more self-centered America that would try to limit its external commitments and get its own house in order first. Rather than fear such semi-isolationism, both the United States and the world should welcome it. For the United States is generally regarded, in global opinion polls, as both the country with the strongest "soft power" of attraction and the one that's the gravest danger to world peace. An America that works more on its soft power—better education and health systems, stronger protection of the poorest, and greater openness to multiculturalism—will be a better country to live in, attract more talent from abroad, and create more goodwill in the world.

A United States turn to semi-isolationism will make the world safer and more peaceful, sparing the globe unnecessary conflict, phony Crusades, and blatant disregard of the United Nations. So rather than wringing our hands at this crisis, one should see it for what every crisis is—an opportunity for a new and better start.

© 2008 YaleGlobal Online, a publication of the Yale Center for the Study of Globalization. Republished with kind permission.

Read More: Economy, Finance, Globalization, Security, United States, Americas, Global

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