25 March 2009: a short but optimistic essay by George Mason economist Tyler Cowen:
Despite the financial crisis, the world remains closely tied together, whether culturally or economically. You can see this in the foods you eat, the people you see in the shopping mall, your equity portfolio, and the stamps in your passport. The internet gives you immediate connections to virtually anywhere. you wish.
Plenty of Cassandras are warning that the days of globalization are over or have slowed down. And indeed there are some troubling signs. From 1998 to 2007 the dollar value of international trade rose by 150 percent but now it is shrinking rapidly and perhaps the clock is turning back to the 1990s.
Still, unless the world sees a major war or pandemic, this is more likely a bump in the road than an end to globalization. Yes there will be temporary slowdowns but there also will be periods of catch-up and acceleration as well. Most of the major processes favoring globalization are already in place.
Globalization consists of trade, investment, and migration, plus the notion of general influence through norms and other informal channels. One of the most important (yet neglected) insights of economics is that trade, investment, and migration can all, under various conditions, substitute for each other. So if trade is cut off, investment can flow or labor can move from one country to another. If Toyota cannot ship more cars to the American market, the company will open up a plant in Kentucky. Or if Mexicans are not allowed to cross the border, more American capital and goods will flow to Mexico; American businesses in any case wish to hire Mexicans and also to sell to them. Globalization will stop only if trade, investment, and migration across borders all are halted and that would take a truly major negative event, far worse than the ongoing financial crisis.
Letâ€™s look at how the current trends â€“ which again are already in place â€“ are likely to play themselves out.
The greatest danger to globalization today is the possibility of an economic crack-up in China. The country has grown at miraculous rates for many years in an unprecedented fashion. No country has gone from poverty to wealth without having significant volatility along the way. The Chinese financial system is of unclear quality, commercial practices in the country lack transparency, and so much of what goes on there is â€œsubprime,â€ so to speak. If the Chinese economy were to crack up, capital flows would slow down, trade would be hurt, other Asian economies would be damaged, and the reverberations would be felt around the world. The United States would face a capital crisis in funding its growing government debt.
Iâ€™m not predicting that outcome, but if you are looking to identify the vulnerable point in todayâ€™s globalizing world, youâ€™ll find it in the very large country â€“ China â€“ that had resisted globalization for so very long.