For our world in flux: Some hard lessons in history from the 1930s

There are several symptoms of the difficult times we live in. The coronavirus pandemic prompted repeated lockdowns across the world, leading to sharp contraction in output and employment everywhere. The economic recovery has been slow. In many countries, national income in 2022 just about returned to its 2019 levels. The recovery has been K-shaped, so economic inequalities have continued to rise. The pandemic also disrupted integrated global production networks, while stifling international trade and investment flows.

The situation might have improved in early 2022. But that was thwarted by the Russia-Ukraine war, which disrupted global supply-chains in food, fuels and fertilizers. The sharp rise in food and fuel prices, pushed inflation to double-digit levels in most countries. The response of central banks, driven by orthodoxy, has raised interest rates, which will stifle investment and dampen consumption, instead of curbing inflation that is caused by supply-constraints rather than excess liquidity. In fact, the prospect of recession in the world economy looms large. The continuing war in Ukraine has enhanced uncertainty and risk in the economic and political spheres, making markets nervous, inducing large international firms into relocation and re-shoring of production. Globalization is at risk.

There is also a political backlash in the form of resurgent nationalisms riding on the back of populist or chauvinist sentiments. In rich countries, nationalist-populist political parties, or far-right xenophobic populist leaders, exploit fears about openness in immigration and trade as a threat to jobs, making racism explicit. In poor countries, nationalist-populist political parties or leaders exploit religious beliefs or ethnic divides to create an identity politics seeking to exclude the perceived ‘other’. Such populist-authoritarian regimes, often elected by people themselves, now straddle the world across countries and continents.

There are many strong parallels with the world that existed a century earlier. The preceding era of globalization, 1870-1914, which seemed unstoppable at the time, was brought to an abrupt end by World War I. In 1918, when the war ended, soldiers returning home from Europe transformed the Spanish Flu into a worldwide pandemic that cost 50 million lives. Even as the United States entered the roaring 1920s, Europe struggled with problems of reconstruction, slow growth and hyperinflation. Economic inequalities between and within countries rose. This was conducive to the rise of nationalism and militarism. Benito Mussolini captured power in Italy, subverting democracy, and transforming dictatorship into fascism. Unequal terms in the Treaty of Versailles, which required Germany to pay financial reparations, disarm, lose territory and give up all its colonies, did have economic and political consequences.

In October 1929, the Great Crash in stock markets of the US led into the Great Depression. It was not long before this spread worldwide and persisted through the 1930s. Economic troubles led to political instability in many parts of the world. The political churn spurred nationalism and militarism in some countries. By 1930, the Nazis were the second largest political party in Germany, and in 1933, Adolf Hitler was appointed chancellor. By 1934, he was chancellor, president and fascist dictator. The Great Depression also led to the rise of militarism in Japan during the 1930s. Economic nationalisms surged almost everywhere as countries adopted ‘beggar-thy-neighbour’ policies, restricting imports to protect domestic output and employment.

Both Germany and Japan, rising powers that were latecomers to industrialization and empire, aspired to a larger role in a world dominated by the US and Great Britain, even if it was in transition from Pax Britannica to Pax Americana. In this quest, during the late 1930s, Germany pushed Europe closer to World War II, which was declared in September 1939. Japan did so in December 1941, when it attacked the US and the British Empire in Asia. It is an irony of history that Japan had joined the Allies in World War I, invoking its 1902 alliance with Britain, to capture Germany’s colonial possessions in Asia and the Pacific.

There are striking similarities between this past and our present. The financial crisis of 2008 spread worldwide through contagion. The Great Recession followed in its aftermath, disrupting the smooth sail of globalization.

The covid pandemic was perhaps the proverbial last straw for globalization. Inequalities in income and wealth between and within countries are unprecedented. Slow growth, persistent inflation and a possible recession might exacerbate discontent among people.

The Ukraine war could have global implications, as Russia, not quite a Union of Soviet Socialist Republics, strives to regain its seat at the world high-table. There is a pronounced shift in the balance of economic power, from the West to Asia, and from the US to China, which now seeks superpower status. Collective action is the only way to address the many challenges. But history suggests that established dominant powers are reluctant to cede economic or political space to latecomers.

Enlightened leadership and a new architecture for international cooperation are essential.

Deepak Nayyar is emeritus professor of economics, Jawaharlal Nehru University.