A Free World

The terrorists who attacked the US on September 11 were mortal enemies of the US. But the US is not just a country, it is also a set of ideas. Among the ideas it has stood for over more than half a century is a liberal world economy. One of the questions raised by September 11 was whether it marked the end of a second era of global economic integration during the past 150 years. The answer, I suggest, remains no.

We do not know our future. But we do know the past. In the late 19th century and early 20th century, the world economy achieved a high degree of integration. Yet this integration went into reverse between 1914 and 1945. That breakdown was the consequence of the combined force of ideas, interests, economic instability and calamitous international relations. The question is whether these same four horsemen will return.

First, the 20th-century collapse coincided with the rise of anti-liberal ideas: militarism, imperialism, nationalism, communism and fascism were embraced with enthusiasm. There are faint parallels in what David Henderson, former chief economist of the Organisation for Economic Co-operation and Development, has called "New Millennium Collectivists". But, for all their sound and fury, the anti-liberals of today are very different from those of a century ago.

They are rooted in no powerful social force, such as the organised working class. They do not seek power but largely reject organised politics. They offer no alternative way of running an economy. As John Lloyd makes clear in an illuminating recent pamphlet*, they have a multitude of often-contradictory objectives. Some of what protesters say - notably on the hypocrisy of the advanced countries and the plight of the poor - is valid. But one cannot beat something with nothing. Protest alone is unlikely to triumph.

Meanwhile, the ideas of economists remain strongly in favour of integration. Some, such as Dani Rodrik of Harvard University and Joseph Stiglitz, former chief economist of the World Bank, express doubts over how and how far integration should proceed. But no significant economist argues that closing off an economy makes sense. Doubts are strongest over the management of capital flows. Yet a high level of integration on the real side of the economy, through trade and direct investment, is perfectly compatible with some controls over capital movement.

The second force causing the disintegration of the earlier globalisation was protectionist interests, notably in the US, which culminated in the calamitous Smoot-Hawley tariff of 1930. Happily, contemporary economic developments have largely tamed these interests.

It is no accident that protectionist interests are strongest in predominantly nationally owned and operated industries, such as steel and agriculture. The rise of the internationally integrated multinational company has reduced the ability (and willingness) of many producers to wrap themselves in national flags. Is a Toyota factory in the US less or more American than a General Motors factory in China? How can one answer such a question?

Modern companies have global interests. This is what many protesters hate about them. The same is also true of many of their most valued employees. A consequence of investment around the world and the concomitant flows of intra-company trade is the breakdown in the ability and willingness of companies to collaborate with trade unions in the demand for protection. Similarly, inward direct investment and intra-industry and intra- company trade have weakened traditional protectionist interests in developing countries.

The decline in employment in manufacturing and the rise in the portion of the electorate in retirement have reduced the share of the population whose jobs are directly vulnerable to import competition. Consumers have also become accustomed to a variety of foreign products. They may complain, as workers, about imports. But they love the products of foreign companies.

Concern about the decline in relative wages and employment opportunities of the unskilled is widespread in high-income countries. But the political power of this group of people is modest, particularly since they have become a falling proportion of an increasingly educated population. Moreover, the general consensus of analysts is that this decline in opportunities for the unskilled reflects changes in technology far more than trade.

In addition, multilateral institutions and a web of international commitments makes it far more difficult for protectionist interests to capture legislatures. China has joined the World Trade Organisation. Even the Bush administration, wedded to unilateralism, has never said the US should simply ignore its obligations under the WTO.

Economic instability was the third source of the earlier breakdown. The decisive events in the collapse of the integrated economy of the late 19th and early 20th centuries were the series of financial and exchange-rate crises that rolled across the world in the 1930s, ably described by the Princeton university historian Harold James.**

Financial crises have come with depressing frequency over the past two decades. A report from the World Bank published last year wrote of "112 episodes of systemic banking crises in 93 countries since the late 1970s". Japan is still struggling with the aftermath of its "bubble economy". The US has suffered its bubble as well, which is now painfully deflating, revealing a sizeable amount of fraud and deception as it shrinks.

All these are signs of stress. Yet the outcome will not be another 1930s. Japan has avoided a depression. The US will surely succeed in that as well, even if a period of disappointing growth lies ahead. The move to floating exchange rates has reduced the risk of exchange-rate-cum-banking crises in emerging market economies (though, as Brazil shows, old-fashioned fiscal crises can still occur). The woes inflicted upon Argentina by the collapse of its currency board might better be viewed as the end of an era than as the beginning of a new one. It is also striking that, despite such crises, no significant country has reversed the commitment to liberal trade or even to freedom from exchange controls.

The fourth cause of the breakdown of the last liberal world order was rivalries among great powers. Today, however, the world has an undisputed hegemon. There is little chance of a war among great powers in the near future, except perhaps between the US and China. Yet China is not now a strategic rival of the US.

All great powers have abandoned the atavistic notion that prosperity derives from territorial gains plus plunder, rather than internal economic development plus peaceful exchange. In today's battle against terrorism, all the world's great powers are also on the same side.

Some fear that terrorist outrages on the scale of September 11 - or still worse ones - will end the commitment to open borders. Related fears concern weapons of mass destruction in the hands of hostile despotic regimes.

These are valid worries. If countries had to be sure of the safety of every shipment or person that crossed their borders, much of today's economic exchange and movement of people would become impossible. Yet that would hand the victory to terrorists and their sponsors.

At present, it does not appear that the world's response is to close borders. The decision to proceed with the Doha round of multilateral trade talks was an encouraging sign of that wise determination. Global co-operation against terrorists is a more appropriate and effective route.

September 11 was an attack on modernity by Islamic fascists. Safety will not now be achieved, in response, solely by applying force abroad and building fortresses at home. The task, instead, is to combine the search for security with a wider diffusion of the prosperity and hope offered only by a dynamic global market economy. This may be hard to achieve. It remains the only sane course.

*The Protest Ethic: How the anti-globalisation movement challenges social democracy (London: Demos, 2001)

**The End of Globalization: Lessons from The Great Depression (Harvard University Press, 2001)