Stress testing the global economy.

• Author: Jones, Eric
• Position: Books

Harold James, The End of Globalization: Lessons from the Great Depression (Cambridge, MA: Harvard University Press, 2001), 288 pp., $39.95.

Roger M. Kubarych, Stress Testing the System: Simulating the Global Consequences of the Next Financial Crisis (New York: Council on Foreign Relations Press, 2001), 187 pp., $15.

Kevin O'Rourke and Jeffrey Williamson, Globalization and History (Cambridge, MA: MIT Press, 1999), 355 pp., $27.95.

THE REWARDS for reducing uncertainty in an uncertain world are so large that the demand for political and economic forecasts never ends. Yet demand far outruns supply. We seem unable to predict the really big system breaks like the fall of Soviet communism or the Asian crisis, or at any rate to do so persuasively enough for society to prepare for them. How might we do better?

The answer depends to some extent on understanding the context in which forecasting takes place. The main process affecting international affairs has for some time now been the increased integration of global economic activity--"globalization" in the common parlance. That being so, do earlier manifestations of economic integration provide clues about the probable future of the current phenomenon? The sometimes violent backlash against trade and financial liberalization that we have witnessed since the final years of the 1990s gives the question a pertinence that seemed absent during the previous couple of heady decades when multinational enterprises rode high and trade barriers so conveniently fell before them. The upsurge of resistance makes it urgent to seek for indications as to whether phases of globalization are fated to be slowed, brought to a standstill, or even thrown into reverse.

Perspectives from history and concepts from economics thus seem likely to be helpful, and where we should look to find both these approaches brought into play is in economic history. Much of the unwillingness to apply economic reasoning in general history and the analysis of international affairs seems to stem from an aversion not only to many of its conclusions but even to its assumptions--that is to say, from an all-too-human reluctance to accept the fact that every course of action, including inaction, comes with a cost attached. Economic history is free from that weakness. Admittedly, some of its formal techniques suffer diminishing returns when applied to topics on the fringe, notably the interaction between economics and politics. Disagreeable though this may be to the harsh reasoners among economists, broader humanistic judgment comes into its own when dealing with such themes. As Clive Crook says in an admirable survey of globalization in The Economist, few economists nowadays learn enough history. (1 ) This tends to offset their undoubted strengths as problem solvers, because it disarms them regarding just what is and is not novel. Alvin Toffler put the point nicely: "We now have students so ignorant of the past that they see nothing unusual about the present."

A long view from economic history offers the counteracting benefit of perspective, a point that seems trite until we consider how misleading the lack of it may be. In one of the books discussed here, O'Rourke and Williamson rightly criticize the journalistic tendency to project the recent past into the indefinite future. They observe that this habit has-- since September 11 we should say had-- engendered the popular view that globalization is unstoppable. Recent protests and violent happenings mean that such an opinion is in serious doubt; indeed, as these authors demonstrate, it should always have been disputed. Before journalism threw itself into confusion over the current anti-globalization campaign, not to mention terrorism, O'Rourke and Williamson had already concluded that globalization is not unchallengeable. They were drawing on their study of the first globalization boom of 1870-1913 and how it was brought to an end. They saw that there would be a backlash this time, too.

Luckily, then, some modern writers are literate in economic history, and they have much to teach us. The work of a general historian, Harold James' The End of Globalization, stands out because the author has really done his economics homework. James appeals to the economic history of globalization in order to place the present and the future in the longer context of international economic integration. He delves as far back as the unease inspired by the Reformation and the great age of discovery in the 16th century, but concentrates on the breakdown of international order during the 1930s. An adventurous volume by Roger Kubarych, Stress Testing the System, which simulates a contemporary financial shock, counterpoints history's usefulness almost as sharply by rehearsing earlier attempts at building scenarios that failed because they did not explore past experience deeply enough. A third, slightly older, but magisterial work is O'Rourke and Williamson's Globalization and History, which, as noted, turns the searc hlight of econometrics on the 1870-1913 period.

Competition, Agriculture and Migration

EVEN EARLIER cases of economic integration than that of 1870-1913 may teach us something, despite the fact that they concerned only Europe. Although such episodes were not "global" by definition, nor in the strictest sense even international (because they partly predate the rise of the nation-state), they are still capable of illuminating the merits and discontents of integration. Oliver Volckart, for example, traces the effects of competition among multiple political units as early as the centuries between 1000 and 1800. (2) He notes that because Europe's political units were then so small and packed close together, hard-pressed individuals could move fairly readily from one to the next, either to escape oppression or to find a better life. They took their money with them. The availability of "exit" as an option induced rulers to compete for the mobile factors of labor and capital by offering more attractive constitutions, laws and customs. Princes offered commercial privileges at bargain prices to attract p articular groups to settle and pay them taxes in the future.

Competition was evident along these lines during the Middle Ages, but between the 14th and 18th centuries rulers concentrated on protecting the holders of privileges they had already sold. New entrants, or at any rate free entrants, to business were discouraged. By the early modern period, the maze of restrictive privileges was tending to smother additional market growth. Joel Mokyr tells us that this also impeded further technological advances of the types that had taken place during the phase of high medieval openness. (3) Then, in the 18th century, the rulers of mainland Europe perceived what was happening in Britain and once more reversed their policies. They grasped that skilled immigrants and more foreign investment would establish new enterprises and generate higher taxes, and began to re-open their economies to fresh talent and capital. Pre- and early-modern economic history therefore makes the association between openness and growth as apparent as it is today, and warns that growth is always vulnerab le to cumulative erosion by special interests.

Markets were internationalized more fully during the late 19th century than during any previous period and, perhaps surprisingly, the process went further in some directions than during the late 20th century. Recent globalization has focused on commodity trade and flows of financial capital more prominently than it has involved movements of people. During the 19th century, however, the bias was rather different; relative to the size of population, international migration was at a high point. Wage earners felt threatened in high-income countries such as the United States and Australia, to which migrants flocked. At the same time, landowning and cereal farming in Europe were undermined by cheap grain from the New World. The protectionist reaction came quickly. O'Rourke and Williamson do not attribute the onset of protection to the effects of the World War, nor date it to the depression years of the 1930s. They point out that as far as labor migration and agriculture were concerned, free movement and free trade were being curbed well before 1900. Societies find it agonizingly hard to adjust to openness. That is why, historically speaking, it is fair to say that the long liberal era after World War TI has been more of an anomaly than the many periods of relative closure.

Enthusiastic globalizers loudly, and reasonably, trumpet the gains from economic integration...