In Defense of Globalization

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In Defense of Globalization

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Bibliographic details

• Authors: HAROLD JAMES
• Published: March 1, 2023

Overview

• Article title: In Defense of Globalization
• Author: HAROLD JAMES
• Publication: F&D Magazine
• Date: March 2023; page also lists "February 2, 2023"
• Reading time indicator: Less than a minute(0 words) Read
• Thesis: History suggests the path to taming inflation is through more international trade—not less. Today's surge in inflation arises from the interplay of supply chain disruptions with large fiscal deficits; globalization offers an antidote to inflationary spirals.

Key findings and analysis

• Causes of the current inflation surge:
  • Interplay of supply chain disruptions with large fiscal deficits.
  • The pandemic, followed by Russia’s invasion of Ukraine, upended supply chains and produced scarcities.
  • Rich industrial countries responded with large fiscal packages, increasing demand and exacerbating shortfalls.
  • Risk: rising food and fuel prices could spark discontent, protests, revolutions, and government breakdowns around the world.
• Counterproductive responses:
  • A move toward competing blocs and "friendshoring" strategies risks freezing global economic growth.
  • Attempts at self-sufficiency increase costs and fuel inflation, making attractive solutions harder to implement.
• Historical pattern:
  • Past inflationary crises (mid-19th century hunger crises, oil shocks of the 1970s) initially ignited worldwide inflation and shortages but ultimately led to expanded globalization and lengthy periods of disinflation.
  • Global labor market integration pressed wages down in rich countries and encouraged poorer countries to seek monetary stability to access global markets.
  • Policymakers and academics linked globalization and innovation to the Great Moderation; 2005 Alan Greenspan cited globalization and innovation as "essential elements" explaining events of the prior 10 years.
  • In 2021, Jay Powell referred to "sustained disinflationary forces, including technology, globalization and perhaps demographic factors."
  • Both major historical turning points—in the 1840s and 1850s and in the 1970s—began with shortages and inflationary surges.
• Role of transformational technologies:
  • 19th-century steam engine revolutionized rail and steamship transport; the shipping container in the late 20th century sharply reduced transport costs.
  • Innovations often precede wide adoption; dramatic shocks (hunger crises, oil price surges) created the conditions to realize their transformative power.
  • Widespread adoption depended on policy choices: removing impediments to commerce, government reforms, corporate forms (limited liability joint stock companies), universal banks, and financial innovations.
  • Monetary frameworks followed stabilization: the gold standard in the 19th century; modern inflation targeting in the late 20th century.
• Contemporary technological parallels:
  • Messenger RNA vaccine development since the 1990s was accelerated by COVID, demonstrating rapid application and broader potential (e.g., cancer treatments).
  • Remote medicine, education, and remote working were feasible before the pandemic; necessity accelerated their adoption and broadened access.
  • Current globalization is increasingly shaped by information flows and system optimization rather than solely by goods and complex supply chains.
  • The article frames this dynamic as "the real Inflation Reduction Act" owing to the cost-reducing and access-expanding effects of information-driven globalization.

Political dynamics and learning

• Political consequences of transitions:
  • Past transitions involved instability: governments overthrown in the mid-19th century; widespread doubt about democracy in the 1970s.
  • Comparative learning across countries enabled better-performing governments to be identified and adopted.
• Recent examples:
  • The UK’s move toward political, regulatory, and economic disengagement (Brexit vote in 2016) showed higher costs by 2022; the short-lived Truss government demonstrated the failure of attempting independent growth in isolation.
  • Populist anti-globalization movements in Europe that pushed anti-EU positions largely retreated when costs became apparent.
• Contemporary protests:
  • Rising protests against autocracies and democracies alike reflect discontent with handling pandemics, wars, and information technology.
• Implication: cross-border action and coordination are essential to address health, energy policy, climate, and security challenges.

Policy implications and recommendations

• Globalization as an anti-inflation policy:
  • History indicates expanding international trade and the adoption of transformative technologies can counter inflationary spirals.
• Avoid retreat to protectionism or forced self-sufficiency:
  • Pursuing self-sufficiency tends to raise costs and perpetuate inflation.
• Enable diffusion of innovation:
  • Policy should remove impediments to commerce, support institutional reforms (corporate law, banking, public procurement), and facilitate learning from other countries’ experiences.
• Preserve and reinforce monetary stability frameworks:
  • Stable, internationally applicable monetary frameworks (historically the gold standard, more recently inflation targeting) helped restore price stability and enable globalization.
• Foster information-driven globalization:
  • Promote cross-border flows of information, remote services, and digital cooperation to achieve system optimization and broader access to services.

HAROLD JAMES is a professor of history and international affairs at Princeton University and IMF historian. Opinions expressed are those of the author; they do not necessarily reflect IMF policy.