As a young man Keynes was a passionate liberal, and as an old man he helped design the institutions that would knit the global economy back together. In between, though, he found himself questioning the value of economic interdependence. In the face of Depression, he warmed to tariffs as an expedient means of reducing unemployment. But more broadly, he wondered whether the potential trouble caused by an intermingling of economic interests was worth the benefits of openness. In a lecture delivered in 1933, he mused:
But it does not now seem obvious that a great concentration of national effort on the capture of foreign trade, that the penetration of a country's economic structure by the resources and the influence of foreign capitalists, and that a close dependence of our own economic life on the fluctuating economic policies of foreign countries are safeguards and assurances of international peace. It is easier, in the light of experience and foresight, to argue quite the contrary.
It is interesting that he makes this judgment “in the light of experience and foresight”. Of course a terrible war did lay ahead, far worse than the terrible one which had concluded just 15 years before. The second war was generally blamed—secondarily to the belligerence of its instigating dictators and the traps laid at Versailles—on the breakdown in trade and capital flows which occurred in the 1930s. The purpose of the institutions created at Bretton Woods was to prevent an outbreak of beggar-thy-neighbor economic policies from recurring, to foster increased economic interdependence, and in so doing to secure peace and prosperity.
But consider Keynes’s perspective. The great globalization of the 19th century hadn’t prevented war at all. And the effort to reconstruct that globally integrated world in the aftermath of the first world war led, in the space of a few short years, to the worst economic calamity that the industrialized world had ever faced—one which opened the door to an horrific new conflict, whose approach Keynes and others could already sense in 1933. One could be forgiven, in such circumstances, for wondering whether it might not be best for countries to mind their own business.
Is it? In the years before the first world war, Norman Angell famously argued that economic interdependence among European powers made war between them too costly to contemplate, or would at any rate mean that any war which did break out would necessarily be short in nature. In 1996, Thomas Friedman restated the thesis for a late-20th-century context with his “Golden Arches theory”, which held that no two countries which each had McDonald’s franchises were likely to fight a war. “The question raised by the McDonald's example,” he wrote, “is whether there is a tip-over point at which a country, by integrating with the global economy, opening itself up to foreign investment and empowering its consumers, permanently restricts its capacity for troublemaking and promotes gradual democratization and widening peace.”
In a recent post explaining why invading Ukraine would be a bad idea, Matt Yglesias reframes this idea. Given the way the modern economy works today, he writes, there is simply very little to be gained from taking over specific other geographies:
[T]here’s nothing of particular value in Ukraine. Which is not a bad thing! Poland and Hungary and Slovakia and Romania are in the same boat, as are most places on the globe. But that’s just to say that for most of the world, the way to get rich is to participate in complicated international supply chains starting with low-level manufacturing and moving up to higher-end manufacturing and tradable services.
A peaceful, stable Ukraine that successfully fights corruption and that builds commercial ties to central and western Europe could become rich; Ukraine has pretty good educational attainment and decent prospects. But it’s not rich currently. It doesn’t have any riches to conquer. And its prospects as a country under quasi-occupation by the Russian military, wracked by constant political instability and with tons of people fleeing, are not good at all.
But to the extent that this is true, it may help to explain why Russia might invade Ukraine. Since the collapse of the Soviet Union, most of the economies of central and eastern Europe have done very well. They have prospered, as I wrote this week, by becoming much more economically integrated with western Europe, latching on to broader European supply chains, in a manner facilitated by accession to the European Union. Places like the Czech Republic and Lithuania are now richer than Greece and Portugal, and far richer than Russia. Indeed, Romanian GDP per person, on a purchasing power parity basis, overtook that in Russia in 2016; Bulgaria is closing fast. Ukraine is much poorer, but there is every reason to believe that a Ukraine led by a pro-western government and left alone by Russia would in time meet the EU’s accession criteria, attract lots of investment by European firms, and enjoy rapid growth and convergence toward rich-world incomes.
That seems like an outcome Russia would like to forestall, and not only because a prosperous Ukraine would reflect badly on the stagnant Russian economy. For ages, Russia has watched as would-be European empires inevitably turned their sights eastward. The EU border already encompasses land which was once Soviet; for the EU to bite off Ukraine and make it a permanent part of the western European megastate would deal a terrible blow to Russian power, prestige and the country’s very sense of itself—however much the rest of us might insist that this would simply be a democratic country opting to join other democratic countries in a mutually beneficial economic union. (Both Russia and Ukraine have McDonald’s franchises.)
The post-Soviet experience in Russia helps illustrate the limits of Angell-style thinking. We know in some broad sense how poorer countries ought to go about working to become rich. And yet there are lots of countries in the world which are substantially less rich than they seemingly could be, including Russia. And while every non-rich country is non-rich in its own way, the failure to achieve rich-world incomes can nearly always be traced to domestic political constraints—rooted in accidents of history and cultural inheritances—which frustrate attempts at reform and cannot simply be wished away.
Global economic integration means that people living in one part of the world are exposed to the effects of the political constraints which operate in another. Matthew Klein and Michael Pettis describe this dynamic in their very good book “Trade Wars Are Class Wars”. The mechanisms by which countries manage difficult-to-solve internal conflicts can affect patterns of trade and capital flows in ways which are felt elsewhere, often to the great annoyance of those on the receiving end. China’s developmental model, in which consumption is suppressed and heavy investment is channeled toward infrastructure and export-oriented industry, enabled growth and domestic political stability, but foisted a variety of economic problems onto China’s trading partners. In America, trade with China has thus been less broadly beneficial than would otherwise have been the case, and its uneven effects have fed social and political conflict here. Globalization puts different countries’ political systems in contact with each other in ways which can be very uncomfortable.
This discomfort, it is worth pointing out, was both recognized and welcomed in the heady days after the end of the Cold War, as the second great globalization was gathering momentum. “In 1995 one dominant global economic system is emerging,” wrote Jeffrey Sachs, Andrew Warner, Anders Aslund and Stanley Fischer, in a Brookings paper published in that year. They added:
[T]he international opening of the economy is the sine qua non of the overall reform process. Trade liberalization not only establishes powerful direct linkages between the economy and the world system, but also effectively forces the government to take actions on the other parts of the reform program under the pressures of international competition.
It fell to Dani Rodrik to point out that as exciting as such prospects might be to economists, the strains such interdependencies place on democratic governments could yield unwelcome consequences:
In such a [globalized] world, the shrinkage of politics would get reflected in the insulation of economic policy-making bodies (central banks, fiscal authorities, and so on) from political participation and debate, the disappearance (or privatization) of social insurance, and the replacement of developmental goals with the need to maintain market confidence. The essential point is this: once the rules of the game are set by the requirements of the global economy, the ability of mobilized popular groups to access and influence national economic policy-making has to be restricted. The experience with the gold standard, and its eventual demise, provides an apt illustration of the incompatibility: by the interwar period, as the franchise was fully extended and labor became organized, national governments found that they could no longer pursue gold standard economic orthodoxy.
Rodrik’s argument seems to yield a very clear prediction: in the absence of political integration, globalization carries with it the seeds of its own destruction. The tensions between domestic political interests and the demands of global markets will eventually become too great to bear, and the integrated order will fall apart.
Of course, governments of all sorts—not only democratic ones—value the freedom to maneuver which global integration restricts. Both China’s and Russia’s seem to have decided that close economic ties with the rich world may not be worth the trouble. The former’s technological sophistication and the latter’s resource wealth mean that so long as the two are willing to cooperate with each other, they can reduce their exposure to the democratic world and still maintain an acceptable level of incomes and growth. Or so they seem to believe, at least.
Why not embrace insularity? In 1933, Keynes ventured that self-sufficiency could be an economically reasonable choice:
A considerable degree of international specialization is necessary in a rational world in all cases where it is dictated by wide differences of climate, natural resources, native aptitudes, level of culture and density of population. But over an increasingly wide range of industrial products, and perhaps of agricultural products also, I have become doubtful whether the economic loss of national self-sufficiency is great enough to outweigh the other advantages of gradually bringing the product and the consumer within the ambit of the same national, economic, and financial organization. Experience accumulates to prove that most modem processes of mass production can be performed in most countries and climates with almost equal efficiency. Moreover, with greater wealth, both primary and manufactured products play a smaller relative part in the national economy compared with houses, personal services, and local amenities, which are not equally available for international exchange; with the result that a moderate increase in the real cost of primary and manufactured products consequent on greater national self-sufficiency may cease to be of serious consequence when weighed in the balance against advantages of a different kind. National self-sufficiency, in short, though it costs something, may be becoming a luxury which we can afford, if we happen to want it.
But if this sort of argument appeals to someone living in a large and technologically advanced economy, it looks different in those which have not yet found their way to the technological frontier, or which have populations too small to support industries which are subject to increasing returns to scale, or which lack access to critical raw materials. In a world without trade, places which have such national deficiencies may conclude that the only way to overcome them is to attach themselves to some other (ideally benevolent) empire—or to redraw their borders, at some other country’s expense.
Indeed, one of the risks of a policy of punishing bad behavior in other economies by subjecting them to economic sanctions is that the logic of autarky takes over. In a post which discusses a new book on the history of economic sanctions by Nicholas Mulder, Adam Tooze explains the dynamic:
The inescapable question is, did the threat of sanctions work?
Against smaller states, Mulder argues, sanctions could claim a degree of effectiveness. They helped to deter aggression and make arbitration seem more attractive…
But, as Mulder argues in a brilliant concluding section, once the Great Depression struck, the League [of Nations] regime unfolded a perverse logic. The threat of economic sanctions justified moves towards radical economic nationalism, programs of autarky and ultimately warlike aggression in pursuit of the kind of Lebensraum that could withstand the global economic might of the United States and the French and British Empires.
Yet even large economies may find that national self-sufficiency is elusive in a warming world, and thus requires territorial expansion. As extreme weather events become more common, the capacity to import basic foodstuffs from other parts of the globe becomes increasingly critical. If your grain harvest fails, and trading with others to make up the shortfall is impossible, taking what others have by force may seem the least bad option. Such are the risks of a fracturing of economic relations between America and Europe on the one hand and China and Russia on the other. Among geopolitical rivals, the future may be one in which there is no living with each other, and no living without each other either.
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Is there not some way to square these circles? If integration sows the seeds of its own destruction, and insularity invites conflict, what hope is there for long-run peace and prosperity? Rodrik, writing at a time when there was more room for optimism, put his hopes in global federalism: “What we are likely to get is a combination of traditional forms of governance (an elected global legislative body) with regulatory institutions spanning multiple jurisdictions and accountable to perhaps multiple types of representative bodies.”
That is not particularly inspiring stuff. And yet we have its example in the form of the EU, which depending on one’s perspective is either a groan-inducingly uninspiring tangle of bureaucracies or one of the most wildly ambitious and successful political experiments of the modern era. The specter of war in Ukraine should remind us all that it is at least as much the latter as the former. For all its flaws, the EU has helped to maintain peace between countries and peoples which had warred almost unceasingly for centuries before. It has fostered rapid economic development across countries which might easily have remained poor without the EU there to encourage institutional reform, provide investment funds and establish a large and well-integrated market. And it has served, imperfectly but meaningfully, as a place of mutual support for the continent’s democrats, helping them to resist institutional backsliding.
If the world gets another chance to draw more closely together, it should learn from Europe’s experience, from both its successes and its failures. Rich democracies cannot force other places to embrace political and economic liberalism. But to the extent that they find willing trading partners, they should remember that to pursue economic integration is an essentially political project, and that it should thus be done carefully, in a way which seems likely to preserve democratic governments and the rule of law—or which at least does not undermine them.
Or to quote Keynes again, “[T]he new economic modes, towards which we are blundering, are, in the essence of their nature, experiments. We have no clear idea laid up in our minds beforehand of exactly what we want. We shall discover it as we move along, and we shall have to mould our material in accordance with our experience.” We have conducted dramatic economic experiments since the middle of the 20th century. As a consequence, we have begun to discover exactly what it is that we should seek: not just cheap electronics and a diversified bond portfolio, but a system through which we safeguard both our livelihoods and our liberties. If we have the opportunity, we should put this lesson into practice.
If we have the opportunity.