The post-pandemic world economy seems likely to be a far less globalized economy, with political leaders and publics rejecting openness in a manner unlike anything seen since the tariff wars and competitive devaluations of the 1930s. And the byproduct will be not just slower growth, but a significant fall in national incomes for all but perhaps the largest and most diversified economies.
In his prescient 2001 book The End of Globalization, the Princeton economic historian Harold James showed how an earlier era of global economic and financial integration collapsed under the pressures of unexpected events during the Great Depression of the 1930s, culminating in World War II. Today, the COVID-19 pandemic appears to be accelerating another withdrawal from globalization.
The current retreat began with Donald Trump’s victory in the 2016 US presidential election, which led to tariff wars between the United States and China. The pandemic will likely have an even larger negative long-term impact on trade, partly because governments increasingly recognize that they need to regard public-health capacity as a national-security imperative.
The risk today of a debilitating 1930s-style overshoot in deglobalization is massive, particularly if the US-China relationship continues to fray. And it is folly to think that a chaotic, crisis-driven retreat from globalization will not introduce more – and vastly more serious – problems.
Even the US, with its highly diversified economy, world-leading technology, and strong natural-resource base, could suffer a significant decline in real GDP as a result of deglobalization. For smaller economies and developing countries that are unable to reach critical mass in many sectors and often lack natural resources, a breakdown in trade would reverse many decades of growth. And that is before considering the long-lasting impact of social-distancing and quarantine measures.
The late economist Alberto Alesina, a towering figure in the field of political economy, argued that for a well-governed country in the age of globalization, small can be beautiful. But today, small countries that lack a close economic alliance with a large state or union face huge economic risks.
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True, globalization has fueled economic inequalities among the approximately one billion people who live in advanced economies. Trade competition has hammered low-wage workers in some sectors, even while making goods less expensive for everyone. Financial globalization has arguably had an even larger effect by increasing the profits of multinational corporations and offering new high-return foreign-investment instruments for the wealthy, especially since 1980.
In his 2014 bestseller Capital in the Twenty-First Century, Thomas Piketty cited rising income and wealth inequalities as evidence that capitalism has failed. But whom has it failed? Outside of the advanced economies – where 86% of the world’s population lives – global capitalism has lifted billions of people out of desperate poverty. Surely, therefore, an overshoot in deglobalization risks hurting far more people than it helps.
To be sure, the current model of globalization needs adjusting, particularly by greatly strengthening the social safety net in advanced economies and – to the extent possible – in emerging markets, too. But building resilience does not mean tearing down the entire system and starting over again.