Financial Crisis Tests the Durability of Globalization

Financial crisis tests durability of globalization
By Martin Wolf
Published: October 10 2008 03:00 | Last updated: October 10 2008 03:00
The first world war damaged, but did not destroy, the globalisation of late 19th and early 20th century. The world economy recovered its vitality in the 1920s. Then came the US stock market crash of 1929 and the financial melt-down of the 1930s. During the great depression, the world chose autarky. By the late 1930s, the integrated global economy of half a century before was little more than a memory. Will today's prove more robust? The good news is that it has already survived terrorism, war and a series of devastating financial crises. As Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard have shown in a seminal paper, the epoch of globalisation has been an epoch of banking crises (see chart).* While most of these crises occurred in emerging economies, they also brought Japan and the Scandinavian economies low in the early 1990s. In the case of Japan, the financial crisis afflicted the economy for more than a decade.
Attentive readers will notice that the incidence of crises, measured by the proportion of countries affected, reached its apogee in the late 1990s, whereupon it collapsed. This looked encouraging: Maybe, some hoped, the era of crises was coming to an end, as people learned how open financial systems should work.
The bad news is that this view now seems extremely naive. The current financial crisis affects the US and Europe, which account for more than half of world output (measured at market exchange rates). Judged by the share of the world economy affected, this is the most significant financial crisis since the 1930s. This crisis also affects the world's most advanced economies and financial systems. This is no crisis of backwardness, but one of sophistication.
What then might such a crisis do to globalisation, which depends on the continuation of broadly liberal economic...