Should globalists give up?

Investors have sent gold, their traditional hedge against pandemonium, on a roller-coaster ride. In European capitals officials are pondering how to fight a trade war with America. Farther east, actual war rages between Russia and Ukraine. Multilateral institutions like the UN and World Trade Organisation, which exist to prevent such conflicts, seem powerless. Even paragons of international integration seem to have given up on it. “We are in the midst of a rupture,” said Mark Carney, Canada’s prime minister and the globalist’s globalist, at globalism’s recent annual jamboree in Davos.

This is a good moment, then, to step back and ask why things fall apart. In “The Doom Loop”, Eswar Prasad, a professor of economics at Cornell University, offers a sobering answer. His book contends that changes to the balance of power between countries—the rise of China and India, the waning dominance of the West—have transformed the world economy into an engine for disorder. Once, this reconfiguration might have offered “opportunities for greater stability”, with countries choosing to “deploy their power in constructive ways for fear of losing influence”. But instead “the feedback loop between economics, domestic politics and geopolitics is spiralling out of control and becoming destructive on every front.”

The idea that a shifting balance of power can cause trouble is hardly new. In the fifth century BC Thucydides, a Greek historian, wrote that the Peloponnesian war had been made “inevitable” by “the rise of Athens and the fear that this instilled in Sparta”. In a much-read essay (published in 2015) and book (2017), Graham Allison of Harvard University considered whether this “Thucydides trap” might spark a war between America and China. He identified 16 instances over the past half-millennium in which a rising power had come to rival a ruling one, noting that 12 ended in war.

Mr Prasad’s book is compelling because he takes things several steps further. As well as rising powers fuelling disorder, he thinks the world’s economic and political systems are amplifying this effect, and sets out how in some detail. The argument is all the more striking coming from a writer who is an authority on financial globalisation and former head of the IMF’s China division. Like Mr Carney, he belongs to the tribe that once cheered international integration as a spur to peace and prosperity. Now he thinks the system has mutated.

Take cross-border flows of trade and capital, which globalisation transformed from trickles to floods. In theory, these ought to have improved relations between rival powers. American firms investing in China, after all, do not want their returns interrupted by diplomatic spats, so will lobby their government accordingly. In practice, as politicians have rattled their sabres, American companies have retreated from China, and flows of trade and capital have begun to reorient along geopolitical lines.

This does not only blunt business leaders’ incentives to promote cordial international relations. If they benefit from government subsidies to build at home rather than abroad, or from tariffs shielding them from foreign competition, they have new incentives: to encourage discord that might prompt more subsidies and tariffs.

The book outlines several other “doom loops” lurking in various parts of the world economy. The race to replace the dollar as the global reserve currency (or reduce its potency) has led to “an increasingly fragmented second tier” of alternatives, such as the euro, yen and yuan, argues Mr Prasad. The erosion of norms, and of the effectiveness of the multilateral institutions supposed to enforce them, could be worsened by rival institutions led by China. The choices for middle powers caught between America and China, such as India, “vary only in their degree of bleakness”. The transactional behaviour this encourages is hardly conducive to stable alliances.

Underlying all this is an intriguing argument for an economist to make: that competition, normally thought to promote far better outcomes than unchecked monopolies in industries such as technology and health care, instead promotes chaos when applied to geopolitics. Warlords have known that since before Thucydides’s time. The uncomfortable thing today is that, as Mr Prasad writes, the idea that sharing power among many is beneficial “is the animating force behind the democratic principles the West holds dear”.

Understandably, therefore, the book’s weakness is that all the talk of doom makes for a lot of gloom. In other words, “The Doom Loop” is a thoroughly depressing read. Towards the end, Mr Prasad gamely attempts some suggestions for how to dismantle the doom loops. They are mostly far-fetched and rosy ideas, including America and China ceasing to distort trade, governments trusting each other more and the IMF treating strong countries as harshly as weak ones.

The author is right that a world would be more stable in which institutions had rebuilt their credibility and governments were honest with citizens about the trade-offs their policies entail. But how realistic does that sound to you? ■