In an essay published in Time Magazine in 1941, magazine’s founder and “the most influential private citizen in the America of his day,” Henry Robinson Luce proclaimed twentieth century to be “The American Century”. But, now observers and experts of international relations such as Joseph S. Nye and of politics and economics of globalization Rawi Abdelal are declaring a close to the American Century. Speaking at an event entitled “Disordered World or New World Order? How Investors Can Make Sense of the World Today,” Prof Abdelal, said that he sees the sun setting on the American Century in the context of three cycles: the rise and fall of Great Powers; the end of an era of globalization underpinned by the economic relationship between China and the US; and the current fragility of globalization itself.
The Great Powers
Recurring cycles of the rise and fall of nations and empires are nothing new. Until the late 19th century, populous China was the single largest economy, though it wasn’t well integrated into the world economy. Following George Washington’s advice to avoid entangling alliances and the Monroe Doctrine focused on the Western Hemisphere, the US played a minor role in the global balance of power. In the late 19th century, the UK, with its huge colonial empire, was the most powerful economy, and the Pound Sterling served as the world’s principal reserve currency.
A big change was American entry into World War I when Woodrow Wilson broke with tradition and for the first time sent American men to fight in Europe. Moreover, he proposed a League of Nations to organize collective security on a global basis. Though it was now a major factor in the global power balance, the United States became virulently isolationist in the 1930s. Not even the eloquence of Franklin Roosevelt could persuade the American people to stand up to Hitler’s threat. The turning point and the beginning of the century in which the United States has been central to the global balance of power was Harry Truman’s post-war decisions that led to permanent alliances with a military presence abroad. When Britain was too weak to support Greece and Turkey in 1947, the US took its place. It invested heavily in the Marshall Plan in 1948, created NATO in 1949, and led a United Nations coalition that fought in Korea in 1950.
Jumping to 1950, an extraordinary moment came in the history of capitalism when one country, the United States, accounted for nearly one-third of world economic output and more than the next five countries combined. This dominance continued for some time. Japan’s weight in global GDP tripled by 1990, after which it entered a period of stagnation and decline (on a relative basis) from which it hasn’t recovered in 25 years.
The remarkable transformation and rise of the Chinese economy dates from 1978, when then-paramount leader Deng Xiaoping announced his “open door” policy and kicked off radical reform of the socialist system. China surpassed Japan in the 1990s to become the world’s second largest economy and, depending on which measure one uses, has either already taken the mantle from the US (when measuring GDP using purchasing power parity) or is on course to surpass the US economy within a decade (if using market exchange rates).
But this isn’t the end of US relevance; nor is it the harbinger of a Chinese century. Rather, today’s is a different world; a multipolar one rather than a unipolar system with one dominating economy. But the centre of economic gravity moving away from the US does signal an end to the post-war system where the US often wrote the rules of the global economy.
Globalization’s Ebb and Flow
As for globalization, when we look back over the past 150 years, we find that there have been wild cycles of globalization, which can be defined as the degree of integration of markets for goods, services, and capital across country borders.
The period from 1870 until 1914 marked the first great era of globalization, though this was the age of empire with far fewer political units than today e.g., global integration included England trading with overseas colonies such as India, the Netherlands with Indonesia, and France with what was known as French West Africa.
Interestingly, commentators back then, like so many today, took the march toward globalization for granted. In 1910, Norman Angell, a prominent British journalist and author — and 1933 Nobel Peace Prize winner — published ‘The Great Illusion,’ which asserted that economic interdependence among European industrial countries had developed to such a degree that war among them was futile and militarism was obsolete. Angell’s rather utopian dream was soon devastated in 1914 by the outbreak of the World War I. This was followed by the great stock market crash of 1929 and ensuing financial crisis, currency wars and the rise of protectionism in the US and around the world, and, of course, the Great Depression. By the time the Second World War broke out, the world economy had essentially de-globalized.
Over the past 30 to 40 years, we’ve rebuilt a new era of globalization in which world markets for goods, services, and capital are statistically about as integrated as on the eve of the First World War. The rise of China since 1978 is a central feature of this second era of globalization, though the important trade relationship between the US (the world’s biggest importer of merchandise and largest debtor) and China (the largest exporter and creditor) is changing. Following the financial crisis of 2008, however, Americans are saving more and the US current account deficit has been cut dramatically. China is re-orienting its economy to focus more on services and domestic consumption and less on exports.
The Future of Globalization
The main lesson which can be drawn from this study of the globalization is that, far from being an inevitable or permanent state of affairs, high levels of market integration across national borders are, rather very difficult to sustain; fragile, vulnerable, and prone to crisis. We always have to look out for the political and economic trends that might undermine globalization.
Unmistakable signs of multiple challenges in the form of debates are raging in the current US Presidential campaign and in many other political systems around the world, global macroeconomic crises, and threats to a border-less world in Europe stemming from its refugee crisis. Importantly, in almost every country (including the US), the process of globalization has contributed to greater income inequality.
Prof Abdelal encourages the investors to think probabilistically about the future of globalization over the next quarter century. He lays out three scenarios. The first — which is the least likely outcome — is a world that is even more globalized than it is today. The second possibility is that this era’s degree of globalization is sustained. But, this outcome would require all of the leaders, businesspeople and investors of the world to solve a lot of problems to allow us to maintain the level that we have today.
With the relative decline of the once-dominant US economy and the rapid rise of China, the global economy is migrating from a unipolar system to a multipolar one. During the past 150 years, globalization has moved in cycles. After three decades of rapid world economic integration, we may now be entering a period when the extent of globalization declines.