War's Economic Side Effects
By Robert J. Samuelson
Wednesday, February 19, 2003;
Page A29
What may ultimately be said
of a war with Iraq, assuming
it occurs, is that it made the
world safe for globalization --
or that it proved the world
unfit for globalization. Wars
produce surprises, for good
and ill. No one expected that
World War I would doom the
existing global economic
system or, more
optimistically, that World
War II would herald history's
greatest prosperity. The
question now is whether a
war in Iraq, even though
much smaller, might also
trigger momentous side
effects.
Only a few years ago globalization seemed irrepressible. We
were all advancing (it was said) on flood tides of international
trade and investment. After World War II, countries were
mainly self-contained economies, with trade concentrated in
raw materials (food, fuels, minerals) and some advanced
industrial products.
This world no longer exists. In 2000 exports equaled 23
percent of global economic output (gross domestic product),
says the World Bank. That was almost double the 1960 level
(12.5 percent of GDP). Cross-border investing is routine. The
International Monetary Fund reports that foreign ownership
of stocks and bonds totaled $12.5 trillion in 2001: Americans
held $2.2 trillion in foreign securities, Japanese held $1.3
trillion, and Germans held $792 billion.
Globalization already faces problems unrelated to Iraq:
overdependence on the U.S. economy (it accounted for 64
percent of world economic growth from 1995 to 2002, says
Stephen Roach of Morgan Stanley); stagnation in Europe and
Japan; over-indebted developing countries (Argentina, Brazil);
the threat in deflation (declining prices), caused by cheap
goods from China and Asia; hostility from some labor and
environmental groups. Still, the presumption has been that
globalization is unstoppable. Freer trade and cheap
transportation and communications make it so.
Perhaps. But history suggests caution.Globalization also
flourished in the 19th century -- and then faltered. Railroads
and steamships, submarine telegraph cables (the first in
1851, under the English Channel) and the Suez Canal (1869)
all encouraged a huge expansion of trade, global investment
and migration. "By 1914, there was hardly a village or town
anywhere on the globe whose prices were not influenced by
distant foreign markets, whose infrastructure was not
financed by foreign capital, whose engineering,
manufacturing, and even business skills were not imported
from abroad," write economists Jeffrey Williamson of Harvard
University and Kevin O'Rourke of Trinity College (Dublin) in
"Globalization and History."
Even before World War I, a backlash against imports among
farmers and industrial workers inspired higher tariffs. World
War I and the Great Depression (1929-1939) were fatal. Trade
and global investment declined. Protectionism rose. By 1950,
trade (as a share of global GDP) was lower than in 1870.
The good news now is that history need not repeat itself. One
plausible outcome of a war is that globalization gains.
America's victory is swift. Civilian casualties are low. Iraqis
generally celebrate their liberation. Oil supplies aren't
disrupted. Economic and political modernization advance in
the Middle East. The climate for radicalism fades.
The bad news is that globalization could go into reverse,
damaging countries that depend on trade and international
investment. There's an eerie parallel with 1913, says Stephan
Richter of the Globalist Research Center, when hardly
anyone imagined the world economy might unravel. The
danger now is that "major economic players are divided by
noneconomic issues -- and have lost the ability to trust one
another," he warns. Proving Richter right, the Financial
Times of London reported last week that European corporate
leaders are worried that the diplomatic split between the
United States and Germany and France will widen into
commercial disputes . German companies already report a
backlash from U.S. customers, says the Financial Times.
Some American investors balked at buying French bonds.
Businesses strike bargains based on financial calculations.
War and terrorism create new uncertainties that confound
ordinary calculations and may deter global commitments. It
might make sense to invest in a South Korean company. But
how risky is it to bet on a company next door to a nuclear
megalomaniac?
Commerce flourishes when there is economic confidence and
political stability. The reconstruction of the world economy
after World War II occurred because the United States
provided both. It created a military umbrella for Europe and
Japan. It led the writing of rules for global trade. American
economic vitality aided the rest of the world. The gospel of
globalization presumed that the end of the Cold War meant
more of these good things. American ideas (democracy, free
markets) would spread and foster political consensus.
Growing global trade and investment would build economic
confidence.
It isn't so simple. Contradictions abound. American leadership
seems strong -- and countries everywhere assail it. Economic
pressures draw nations together -- and cultural and political
differences pull them apart. Some technologies favor global
commerce -- and others abet terrorism. The logic for cohesion
resists the power of fragmentation. This looming war may
help determine which prevails.
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