Heavy post-pandemic state interventions have reversed globalization in a way that neither 9/11 nor the 2007-09 crisis could
During the high water phase of globalization, it was becoming fashionable to write off the continuing relevance of the nation-state, and, by extension, the ability of national governments to shape economic, social and other outcomes within their borders. What the terrorist attacks of 11 September 2001 and the global financial crisis of 2007-09 failed to do over the span of almost two decades, the covid-19 global pandemic has managed to achieve in a matter of months: the reinvigoration of both the nation-state and national governments.
To put it simply, borders are important again, and national governments once again play a decisive role in shaping the daily lives of their citizens, as opposed to merely laying out the broad contours of economic and social policy within which private agents could freely interact.
Harvard economics professor and former US treasury secretary Lawrence Summers, one of the key intellectual architects of the “Washington consensus" that built our globalised world, has argued recently in the Financial Times (Covid-19 Looks Like a Hinge in History, 14 May 2020) that the three most cataclysmic events to shape the present century have been the 2001 terrorist attacks, the 2007-09 global financial crisis, and the covid-19 pandemic.
Taking a somewhat broader view, looking back at the past 100 years, and taking a leaf from Summers himself, I would amend the list as follows: the assassination of Austrian Archduke Francis Ferdinand by a Serbian terrorist in 1914 that triggered World War I, the stock market crash of 1929 that triggered the Great Depression of the 1930s, and the current covid-19 global public safety emergency. It is noteworthy that the first was a political event that triggered a major war, and the second was an economic event that triggered a worldwide economic crisis, while our current crisis is a global emergency triggered by the proliferation of a deadly virus.
It is remarkable that the 2001 terrorist attacks and the 2007-09 global financial crisis did not, in the end, succeed in unravelling the move toward an ever more globalized world, but rather merely stalled the movement a little bit for a few months and a few years, respectively. For instance, after a lockdown for a few days after 9/11, flights into the US resumed. (I recall being in New York City about a week later, seeing the still smouldering ruins of the twin towers.) Meanwhile, after the global financial crisis, the twin bazookas of unconventional monetary policies and large-scale fiscal stimulus managed to get the global economy back on track, and bankers and fund managers were back to their freewheeling and risk-taking ways within a half-dozen years or less.
Optimists believe that the same will hold true of the current crisis, but I have serious doubts. As I have written earlier in this space, protracted lockdowns and restrictions on normal economic activity across the world are likely to have profound “hysteresis" effects: that is, long-lasting or perhaps permanent effects emanating from a single shock to the system that itself dissipates over time. Lockdowns, while being eased, have been in place in most countries around the world for four months or more. They are likely to have a significant and potentially long-lasting impact on economic and social outcomes. This is a longer span of time than how long it took for normal life to resume after either 2001 or 2007-09. Back then, people’s daily routines sprang back rather quickly for many—or, in quite a few cases, never stopped.
Two clear trends have emerged: a disappearance of the borderless globalized world, and a sweeping away of classical liberal or libertarian fantasies of a permanently reduced role for governments in economic and private activity. Rather, hard lockdowns have made national borders more relevant than they’ve been at any time since the end of World War II—indeed, even borders between sub-national jurisdictions within federal states have assumed renewed importance—and governments everywhere have invoked emergency powers to curtail economic and personal interactions.
Meanwhile, massive fiscal stimulus across advanced economies has once again given governments an outsized role in economic activity, while a doubling down on unconventional monetary policies has reversed halting steps to return to monetary policy normalcy following the global financial crisis. In the bargain, normal democratic functioning has been suspended just about everywhere, with governments, in effect, ruling by decree and relying on enabling legislation that grants them virtually unlimited powers once a state of emergency is declared. This is the very antithesis of the globalized, liberal, democratic world that many of us, perhaps naively, believed we were living in or at least moving toward a mere six months ago.
Governments, once circumstances hand them the opportunity to expand their powers, very rarely, if ever, cede those powers voluntarily—and this proclivity to grab power and hang on to it cuts across putative distinctions of ideology and across party lines. After the assassination of Francis Ferdinand in 1914, it took the world the better part of a century to recreate the globalized, liberal world order that two world wars and a depression in between them managed to subvert. Hopefully, it will not take another century, but it is going to be quite a few years before we return to that world again.