Greed, the Financial Crisis, and the Linked Evolution of Global Economic and Political Arrangements

In a relevant essay in Newsweek Fareed Zakaria has advanced the thesis that the financial crisis should not be seen as a crisis of capitalism and a crisis of greed.

There is a long history of crises going back millennia to the South Sea bubble and the Dutch Tulip Bulb mania. And markets have continued to be the central mechanism used by society for resource allocation throughout them all and this is not going to change.

Rather he sees the financial crisis as a crisis of globalisation, of finance, of democracy, and ultimately of ethics.

Zakaria’s Thesis

The way he puts it is that we have globalised the nation states of the world, through trade, technology, and rapid communication while political decision making remains trapped in nation states.

He suggests this creates a mismatch, where global problems have no matching political processes that can yield global solutions. He then argues that without better international coordination, there will be more crashes, and in the long run a retreat from the very globalisation that has brought us the benefits of integration into the national economies where we began.

This thesis is fundamentally one that economic forces, and the process of economic integration even in the long run cannot overcome the political power and identity of nation states. The nation states of today, beginning in the Treaty of Westphalia are all powerful political entities, and they ultimately will fill the political void created by globalisations’ constraints on nation states by withdrawing from globalisation.

Counter Arguments

This very interesting and novel thesis is closely argued and well articulated. But like all such theses, this faces counter-arguments and nuances of interpretation that makes one think twice.

Is Globalisation Advancing on All Fronts?

First of all, is globalisation really the remorseless process of ever deeper integration that it is usually made out to be? Today, there are highly integrated world capital markets, and finance flows across national borders at the speed of light and at little cost.

Trade barriers to goods flows have been sharply reduced in GATT/WTO negotiating rounds since 1997 but trade in services and agricultural products, despite WTO, remains much closer to autarky than to free trade.

And international flows of labour are sharply constrained by visas and work permits in ways which did not exist decades ago. Before the First World War, in 1913, there was no need of a passport to travel from the UK to France.

The passport was simply to be used as proof of citizenship if you got into trouble while abroad. And in 1913 the shares of domestic production that were traded across borders were much higher than in later years as restrictions grew. Some economic historians only have the world economy returning to 1913 levels of integration by the late 1980s or early 1990s.

Measuring Globalisation

And then there is measuring globalisation. The Economist usually measures globalisation via country indices, the most significant of which is the trade/GDP ratio. Singapore emerges as the most globalised economy on this score. But can Singapore really be regarded as globalised if, as a small country, it faces large barriers on service exports to the US and Europe.

Can you really measure the degree of globalisation of a small country like Singapore independently of what is going on in large trading partners? So globalisation need not be seen as the remorseless process it is widely thought to be.

Links between Integration and Political Power

And what of the link between economic integration and realigned political power? The experience in Europe with the EU since the 1957 Treaty of Rome seems to stand in sharp contrast to the claims of Fareed.

The transfer of authority over trade policy, agricultural policy, regulatory and other power from nation states in Europe to Brussels has seemingly been real and substantive. One can argue that Europe is a special case driven by the German directive post war to avoid any return to Hitler by constraining their political process through Euro integration and Euro speak.

And the contrast to a US dominated NAFTA which stands as a one off treaty with effectively no transfer of political authority is stark. But there are processes of political change accompanying economic integration elsewhere, even if at a much slower speed and intensity than Europe.

Mercosur is one, the Southern African Customs Union (SACU) is another. The complete pullback of authority into nation states that Fareed fears is not so clear.

Emerging Global Responses at the Political Level

And then there is the issue of whether no global practical solutions to global problems are emerging. In December 2009 we had 130 heads of state in Copenhagen, and this process (admittedly from a US-China bilateral initial agreement) produced the Copenhagen Accord. Some view this as virtually contentless, but agreement it is and a platform for moving to deeper agreements it also is.

From the financial crisis we have evolved the G20 out of the G8. The G20 has declared itself to be the preeminent body for discussing international economic cooperation. We already have the Financial Stability Board (FSB) and the Sustainability Initiative.

Today’s World

The global economy and the arrangements for economic policy cooperation that shape and guide it is an ever evolving organism. Things have changed in the last 18 months. Maybe it is change that is too small and too slow, but change it is.

And it is change that can accelerate and does represent global political response. And it seems that globalisation may not be the remorseless process we believe, and it does not change discretely at points in time that could somehow trigger crises where there were none.

My sense is that we live in an ever more rapidly changing world where 10-15 years from now countries such as China and India will exorcise powerful and even dominant voices. Political process globally will adapt since it will have to effect compromise and accommodation.

And it will be shifting power more so than globalisation alone which will reshape the world. Greed may well remain, but the spoils of greed may be shared more widely and overseen by a changed global political process.

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