This article first appeared in the Economic & Political Weekly on 12 November 2022.
Monetary Policy Debates in the Age of Deglobalisation
This article is the first in a series of two articles on monetary policy debates in the age in which deglobalisation is a buzzword. The ongoing monetary policy debates of the age will be discussed by focusing on macroprudential measures, capital controls and central bank independence in Part II.
In a recent article, Kornprobst and Wallace (2021) defined deglobalisation as a movement towards a less connected world, characterised by powerful nation-states, local solutions, and border controls rather than global institutions, treaties, and free movement. If this is the definition of deglobalisation, then globalisation must be a movement in reverse. Karatani (2012) shows that, like a pendulum, the world has been swinging between globalisation (imperialist hegemonic mode) and deglobalisation (liberalist hegemonic mode), for centuries.
And there have been many others, among whom we mention Andre Gunder Frank. He argued in many books, articles and talks that the world had been global for millennia. Since we agree with Frank, we believe globalisation and deglobalisation are misnomers of these phases, and refer readers to Karatani (2012) for his definitions of imperialist and liberalist hegemonic modes. Nevertheless, we continue using the words globalisation and deglobalisation in the rest of the article to join the ongoing debates. We focus on the monetary aspects of the globalisation-deglobalisation cycles, leaving the trade aspects and others aside.
There is no consensus on when exactly the last round of globalisation started. Some argue it began in 1973 after the abandonment of the Bretton Woods fixed exchange rate regime on 19 March 1973 (Öncü 2019), some in 1980 after the 1978-1980 Neoliberal Revolution (Öncü 2018), others in 1990 after the Berlin Wall came tumbling down on 9 November 1989, yet others in 1992 after the dissolution of the Soviet Union on 26 December 1991. However, no one questions that globalisation became a buzzword after the inauguration of Bill Clinton on 20 January 1993 as president of the United States (US).
Although we choose 1992 as the beginning, we should mention that 1990 is as good a candidate as 1992 not only because of the collapse of the Berlin Wall in late 1989 but also because of an update in the same year to the Organisation for Economic Cooperation and Development (OECD) Code of Liberalisation of Capital Movements. This update fully liberalised all capital movements covered by the Code, including short-term transactions in securities and inter-bank markets, short-term financial credits and loans, and foreign exchange operations based on spot and forward transactions, swaps, futures, options, and other innovative instruments (Griffith-Jones, Gottschalk and Cirera, 2003).
There is almost no disagreement that the previous globalisation-deglobalisation cycle started sometime between 1870 and 1880, the genesis period of the classical international gold standard. For example, Karatani (2012) puts the onset of the previous globalisation phase (imperialist) in 1870, whereas Lenin ( 1937) puts it in 1880.
There are several significant years in the United Kingdom (UK)-centred classical gold standard that ended with the outbreak of World War I in 1914. One is 1871, when, after winning the Franco–Prussia War of 1870, the newly united Germany joined the standard. Another is 1879, in which, following the France entrance in 1878, the US entered it (Officer, n.d.). We choose 1871 as the beginning of the previous globalisation, although 1879 would also be a reasonable choice. The significance of the classical gold standard, a fixed exchange rate regime by design, is that the participating countries had virtually no capital controls, also by design.
Karatani’s dating of the dawn of the ongoing globalisation phase of the current cycle is the second candidate we mentioned above, namely, 1990. So, we differ from him by two years and note that time-stamping such turning points are always debatable. As for the beginning of the deglobalisation phase of the previous cycle, our choice is 1933, in which the inauguration of Franklin Delano Roosevelt as president of the US took place on 4 March 1933 and the New Deal arrived, while his choice is 1930, in which the Great Depression started shortly after the US stock market crash of 24 October 1929. We summarise these in Table 1.
We should mention that passage from one phase to the other never happens abruptly. There is always a not-so-short transition period that, borrowing from the Bible, we call the apocalipsis-genesis period in which the old dies while the new is born. We identify the last two of these periods in Table 2.
The reasons for the terminal years of both apocalipsis-genesis periods and the start year of the second apocalipsis-genesis period should be clear. Our reasoning for the start year of the first apocalipsis-genesis period is as follows.
Firstly, with the start of World War I in August 1914, all belligerents fully or partially suspended the gold standard temporarily, except that the US had maintained it, honouring its commitment to redeem dollars for gold at $20.67 per troy ounce, until the New Deal. And in 1920, the US operated the gold standard without restrictions, elevating the US dollar to the global reserve currency status, overtaking the British pound sterling (Crabbe 1989).
Secondly, after the armistice on 11 November 1918, a desire to return to the gold standard emerged to escape economic and financial instabilities resulting from currency and trade wars, rising trade barriers, war debts, reparation payments, hyperinflation in central Europe and the accompanying capital flight (Capie 2002).
Thirdly, although major industrial powers returned to the gold standard in the 1920s (the UK in 1925 and France in 1928, for example), the Great Depression killed this attempt to resurrect the gold standard. The UK exited the gold standard in 1931, and the US devalued the dollar in 1933. The old died, and the new was born.
Has Deglobalisation Arrived?
One of the earliest users of the word deglobalisation in the current globalisation-deglobalisation cycle (assuming it did not break) was Walden Bello (2004). The title of his book, completed in 2002, was Deglobalization: Ideas for a New World Economy.
However, he did not use the word to suggest that the world was entering a new deglobalisation period after the onset of the legitimacy crisis of the current globalisation, which he argued, among other things, the following three moments signalled: (i) the South East Asian Crisis of 1997; (ii) the collapse of the Third Ministerial of the World Trade Organization (WTO) in Seattle in December 1999, and (iii) the 2000-2001 collapse of the stock market and the end of the Clinton boom.
After providing evidence not only of the poverty, inequality and stagnation that have accompanied the spread of globalisation but also of the unsustainability and fragility of its associated production systems, he proposed an alternative global governance system. And he called it deglobalisation.
Whether or not one agrees with Bello’s claim that globalisation was in crisis mode then, no one can deny that globalisation has lost its buzzword status after the turn of the millennium. Particularly after the suicide attacks on the World Trade Centre towers in New York on 11 September 2001 by the Islamic fundamentalist network al-Qaida and the US response to them.
Then came the Global Financial Crisis (GFC) and the accompanying Great Recession in the summer of 2007, and the talk of deglobalisation started in earnest. For example, in April 2009, the well-known bond guru Bill Gross (2009) wrote, “[t]he future of the global economy will likely be dominated by deleveraging, deglobalization, and reregulation.” By deglobalisation, he meant the beginning of the signs of trade barriers, as well as government support for locally domiciled corporations suggesting an inward orientation and growing pressure on banks to retreat from international business and concentrate on domestic markets.
However, although academic studies on deglobalisation (see, for example, van Bergeijk 2018 and the references therein) started to gain traction after the GFC, the word itself had to wait until Brexit in the UK in 2016 (Öncü 2016) and the presidency of Donald Trump in the US in 2017 to gain some popularity. The Covid-19 pandemic in 2020 (Öncü 2020) increased this popularity, and after Russia invaded Ukraine in early 2022, deglobalisation became a household word.
Nowadays, we all are debating whether or not we are in deglobalisation, and on 22 May 2022, Dani Rodrik joined the debate from Project Syndicate. The answer he gave is quite clear. No, deglobalisation has not arrived yet. And we agree. We discuss why in the next section.
We first quote the following from an earlier book of Rodrik (2011: 76):
The creation of the World Trade Organization (WTO) in 1995, after nearly eight years of negotiations and as the culmination of the so-called “Uruguay Round” (the last under the GATT), ushered quite a different understanding. Along with the onset of financial globalization around 1990, the WTO marks the pursuit of a new kind of globalization that reversed the Bretton Woods priorities: hyperglobalization. Domestic economic management was to become subservient to international trade and finance rather than the other way around. Economic globalization, the international integration of markets for goods and capital (but not labor), became an end in itself, overshadowing domestic agendas.
In the above, GATT stands for the General Agreement on Tariffs and Trade, signed in 1947. Further, “the onset of financial globalisation around 1990” probably refers to the update to the OECD Code of Liberalisation of Capital Movements (effectively making the removal of capital controls a condition for membership in the OECD) in 1989 (Rodrik 2011: 104). We described this update earlier. With this background information, let us turn to his Project Syndicate article.
Rodrik (2022) informs us that the post-1990s era of hyperglobalisation is now commonly acknowledged to have come to an end. Given his definition of hyperglobalisation, we concur but remark that globalisation as we defined it (which we mapped to Karatani’s imperialist hegemonic mode) has not run its course yet, if the cycle we defined did not break. If it the cycle did not break, it is highly likely that even the apocalipsis-genesis period of the ongoing phase has not arrived.
We also concur with Rodrik that “all the talk about deglobalisation should not blind us to the possibility that the current crisis may in fact produce a better globalisation.” Mapping his better globalisation to Karatani’s liberalist hegemonic mode, which brought the New Deal in the previous cycle, assuming that the cycle remained intact, we hope that the next phase in the cycle will bring us a version of the New Deal, a Green New Deal along the lines Pettifor (2019) described. We also hope that after the arrival of the next phase, we will be able to break the cycle so that it does not repeat again. In other words, we wholeheartedly agree with the assertions Rodrik (2022) makes below:
In short, our future world need not be one where geopolitics trumps everything else and countries (or regional blocs) minimize their economic interactions with one another. If that dystopian scenario does materialize, it will not be due to systemic forces outside our control. As with hyper-globalization, it will be because we made the wrong choices.
The Age of Deglobalisation
But, then, what do we mean by the age of deglobalisation? Could it be that our aim is to confuse the readers? No. Our definition of the age of deglobalisation is that it is the age in which deglobalisation is a buzzword. And there is no doubt that we are living in such an age.
In our next article, we will discuss the ongoing monetary policy debates of this age by focusing on macroprudential measures, capital controls and central bank independence to make some suggestions.
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