The limits to globalisation: questions for Held and Wolf

Grahame Thompson
30 June 2004

The debate on openDemocracy between David Held and Martin Wolf shows that “globalisation” refuses to die as an issue. Both - and this is true also of other participants in the debate - assume that there are dominant trends in the international system, and this makes possible a serious argument over different policies for its governance.

David Held initiated openDemocracy’s latest debate over globalisation with his essay “Globalisation: the dangers and the answers (May 2004). Among his critics:

  • Martin Wolf, “The case for optimism” (June 2004)
  • David Mepham, “The far side of globalisation” (June 2004)
  • Meghnad Desai, “Social Democracy as world panacea?” (July 2004)
  • Roger Scruton, “Delusions of internationalism” (July 2004)

But it is much more important to argue that the only thing to expect in the international system is the unexpected. There is ample evidence to suggest that what has been happening in the past can quickly and quite radically change. There is no basis on which to think that things will necessarily carry on as before; seemingly deep structures are in fact shallow, apparently fixed dependencies are there to be shattered.

John Maynard Keynes pointed to this essential truth in his Economic Consequences of the Peace (1919). He asked: who would have thought in 1900 that only fourteen years later the world would be plunged into a global confrontation as terrible as the “great war”?

This observation is surely confirmed by the events of 11 September 2001, to which both David Held and Martin Wolf refer. The issues, then, become how to appreciate this “unexpected”; how to “anticipate” it as it were, and how to prepare for radical uncertainties.

How far does globalisation go?

There is an important underlying agreement behind David Held and Martin Wolf’s clash of views; that “globalisation” exists. Their debate is over the exact form and consequences of such globalisation. Held thinks it needs a reformed social democratic political covenant at the international level to properly establish and codify a legally-based cosmopolitan order, while Wolf sees a more benign face to the continuing evolution of existing trends of liberalisation and privatisation.

Also on openDemocracy, Grahame Thompson debates with George Monbiot about global trends and political possibilities.

For Wolf, the good ship globalisation is broadly on the right course, though it might not be going quite as fast as he would like, whilst for Held the ship needs some serious navigational adjustments to avoid the rocks that for him clearly lie ahead.

To challenge this mutual consensus is difficult. But I would emphasise four things:

  • it underestimates the still central role that discrete national economies play in organising and governing the international economic system (though Wolf does recognise this in part)

  • it overemphasises the development of truly transnational political and economic forces

  • it underplays how “globalisation”, such as it is, has over the last forty years mainly involved a “little dance” between the triad blocs of Europe, North America and East Asia; most of the poorer countries have been left out of the game, as Wolf also recognises

  • what is emerging in consequence is not so much economic (or any other) globalisation but supranational regionalisation, driven by ad hoc agreements between essentially still sovereign and autonomous national powers.
Two constraints: labour market and financial system

There are two key structural limitations to the development of a truly global economic system.

The first is neglected by Held and Wolf: the labour market. There is no single international labour market in the world and, despite the arguments of Nigel Harris and others in openDemocracy, there will not be one. Rather, the dominant trends are in the opposite direction, towards the restriction of international migration and the attempted relative closure of most international borders to the free flow of labour across them. It is agreed among economists that massive welfare gains could be made at the global economic level if free migration were to be allowed – but it will not be.

If anything, the big story over the last forty years has been internal migration from rural to urban areas.

openDemocracy’s People Flow debate, in association with Demos and the Dutch specialist Theo Veenkamp, explores the multiple experiences of migration and movement as they affect Europe.

The second, equally important, structural constraint on further internationalisation involves the financial system. The existence of competing currencies and financial centres forces a dual disjuncture: between domestic and international economic transactions, and between countries that can borrow internationally in their own currency and those that cannot.

These constraints mean that the international financial system becomes inherently uncertain, so that risks proliferate – hence the increasing demand for ever more detailed, prudential global banking and financial regulation, as well as recurrent crisis management by international bodies. Thus, the possibility of a fully coordinated financial system on a global scale further recedes.

These structural constraints are recognised by astute establishment economists who would like to see the US dollar become the single global currency. Indeed, full global financialisation can only occur alongside a single global currency and a single recognised central bank; but a moment’s reflection is enough to indicate that this is not going to happen, for political reasons if no other. Moreover, the surrogate “dollarisation” of the international system is also not happening to the extent that is often thought – the real story is of a decline in the financial interconnections between the United States and the rest of the world.

The American retreat from globalisation

Supranational but regional configurations are a sensible response to the instability of the international financial system. These are being developed by private decision-makers, in respect to trade and financial matters, attempting to organise their international economic transactions with shorter distances in mind, and on a definite regional basis.

It is surprising that Martin Wolf does not mention this trend, since his Financial Times column has recently championed the development of an East Asian bond market and an International Monetary Fund-type body for East Asian countries.

In any case, the trend is just one indicator of a wider process, one that could – in ways that my late colleague Paul Hirst and I elaborated over several years’ joint research – challenge the very notion of globalisation itself.

The different perspectives on globalisation of David Held and Paul Hirst were clarified in an openDemocracy dialogue between these two thinkers: see “Globalisation: the argument of our time” (January 2002)

Interestingly, the correlation between the business cycles in the American economy and those of the rest of the world has been declining since the early 1990s – a tendency mirrored by comparable cycles of aggregate investment, employment, productivity, and other macro-economic variables.

In brief, the US economy has, in relation to these indices, become less rather than more “integrated” with the rest of the world (excluding Canada and Mexico) in the past dozen years; and there is evidence that the same is true (though less intensely) for financial variables also. The existing reality of “globalisation”, where it can be said to operate, may have been cooling as a result.

The US was, and remains, preoccupied by its own regional Free Trade Area of the Americas (FTAA) project, designed to consolidate and extend the gains it sees established by the Nafta process. This is much more in its interests than another truly multilateral round, and its intentions here are reinforced by the apparently easier task of persuading a small number of regional, neighbouring states to cooperate than to secure agreement between all 192 WTO parties.

Is America becoming more or less global? Tom Nairn examines the topic from another angle in openDemocracy: see his “Just another country” (September 2002) and his five-part series “America vs Globalisation” (January-February 2003).

This experience, moreover, will not be forgotten at the global level. The US has resisted supporting any more global negotiating initiatives for new mechanisms of governance (for example, an IMF-led sovereign debt restructuring mechanism or a Global Competition Authority) because of the prospective negotiating difficulties. Better, it calculates, to initiate smaller, regionally-based combinations than global ones. Peter Sutherland argued against this trend in his openDemocracy interview, but from the architect of the WTO this could be taken as evidence of its increasing importance.

East Asia and Europe: a future of turmoil?

In this perspective, the changes occurring in the Indian and Chinese economies are not proof that a single globalisation is taking place. Even if China’s economy continues its rapid growth – and the “if” is bigger than Wolf might acknowledge – it may try to lead an East Asia-based regional economic system. At present this is constrained by its relationship to the US market, but that too could quickly change.

The US is running an unsustainable balance of payments deficit and an internal budget deficit; China and the rest of East Asia largely finance both in exchange for access to the US market. But for how long can these gross imbalances in the international system continue?

Even without a collapse in confidence in the US economy, at some point there will be a rapid readjustment in the US dollar exchange rate, with unforeseen consequences. If money flows out of the dollar and into sterling, the appreciation of the pound could have profound implications for a highly open economy like Britain’s, outside the eurozone and facing the already acute domestic problems of a credit bubble driven by the booming house-price market.

The impact of a large-scale readjustment in the dollar exchange rate might also be serious for the eurozone, and the European project more generally in the wake of the European Union’s agreement over its new constitution – which has to be ratified by June 2006 by each of the twenty-five member-states. If one of the important European economies decides against the constitution, this could precipitate a more general crisis in Europe and the value of the euro could sharply fall.

Thus, from several directions the international system is likely to be in greater turmoil rather than less in the short to medium term. Here, David Held’s sobriety is more convincing than Martin Wolf’s apparent complacency.

Beyond the Washington Consensus

Despite its still tenacious hold over elites who run the institutions of international economic governance, it seems that the Washington Consensus has peaked and is in decline. Its policy programme no longer looks attractive from the viewpoint of those grappling with the actual difficulties of development.

The evidence that the world has entered a post-Washington Consensus era is multiple. Private sector reform, not public sector reform, is top of the new agenda; microeconomic conditions, not macroeconomic ones, are the focus of attention; “good governance” has replaced non-governance; upgrading and re-regulation are preferred to further privatisation and deregulation; self-surveillance and self-monitoring have replaced non-surveillance and pure market solutions. These moves, hesitant though they are, represent a real change in attitude, as David Held acknowledges.

One of the main features of the Washington Consensus approach was an extraordinary, unprecedented emphasis on the integration of economies into the international marketplace – one that almost completely neglected the plight of rural populations, whom it ignored or neglected. Yet cultivating a “prosperous peasantry” was always a mainstay of a balanced development process. It prevents flight to the urban areas and stimulates a domestically focused integration and balanced growth process. It would be beneficial if the demise of the Washington Consensus allowed space for such considerations to return to the centre of the development agenda.

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