Between all the dire predictions on Wednesday by the International Monetary Fund in its latest global update, it’s no surprise that a warning by its chief economist, Pierre-Olivier Gourinchas, about the future of globalization got short shrift.
As a kind of addendum to all the economic distress being created by Russian invasion of Ukraine and the sanctions imposed by the West in response, Gourinchas had this to say in a blog accompanying the official report:
“The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies. Such a tectonic shift would cause long-run efficiency losses, increase volatility and represent a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years.”
In other words, he said, the war is not just having an immediate impact on the world economy but it constitutes a fundamental challenge to the way the world economy works. And, not just the economy but all the other elements of globalization, like the free flow of information and people, and the enforcement of norms like human rights and something resembling international rule of law.
When the house is going up in flames, it’s understandable that the residents aren’t thinking about where they’ll host next week’s dinner party. We’ve got enough problems right now, don’t we? But the collapse of globalization would create immense problems pretty quickly, and especially for us in Israel.
Globalization under attack
Long before Vladimir Putin ordered the first Russian troops across the border into Ukraine in late February, globalization was under fire. It was never popular among people at the far ends of the political spectrum. For leftists, it seemed to ride roughshod over ordinary workers and gave too much power and profit to multinational corporations. For those on the right, among whom we can include Putin, it was an affront to national sovereignty.
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Populist politics going mainstream in the West, manifested for example by the election of Donald Trump in 2016 and Brexit in 2020, was the first serious assault on globalization. The coronavirus pandemic undid it further by exposing how undependable global supply chains could be in times of crisis and how strong national rivalries can be, as expressed in the scramble for vaccines. The system was barely recovering before the war in Ukraine struck another blow to the free flow of trade.
Faced with the choice of remaining part of the global economy or enduring sanctions as the price for restoring Russia’s superpower status and national grandeur, Putin chose the latter.
For those of us in the West who have benefited economically from globalization, it must seem like a stupid decision. Russia risks losing its status as a global energy power (about its only economic asset) and is throwing away any chance of developing a prosperous high-tech economy fit for the 21st century. And, for what? There is certainly not going to be any kind of economic payback even if Moscow against all the odds succeeds in retaining control of all or part of Ukraine.
Short of Putin being toppled and the last Russian soldier brought home, the sanctions are likely to remain in place for a long time. Europe will now do its utmost to avoid being beholden to Russian energy supplies. Russia is being cut out of the globalization game.
Russia’s exit from the global economy doesn’t by itself present a fundamental threat to the rest of the planet. Russia was at best a marginal and unwilling partner to begin with, accounting for less than 2 percent of all global trade and attracting little foreign investment. Nor is it the first country to be blocked out of globalization. Iran, North Korea, Venezuela and more recently Afghanistan aren’t part of the system, but globalization survived and prospered. After it adjusts itself to the loss of Russian oil and gas, globalization can survive Russia’s exit, too.
The real threat to globalization comes from Beijing. China is a major player in the globalized economy and has profited immensely from it. It not only accounts more than a tenth of all world trade, but is intricately wound into global supply chains. It doesn’t just belch out oil and gas.
For China to opt out of the global economy would entail huge costs both for itself and the rest of the globe. Nevertheless, its leader, Xi Jinping, has been making noises of just that kind.
It appears that, on the one hand, Xi doesn’t want to sacrifice its economic benefits. On the other hand he wants to jettison the bits he doesn't like, such as the free flow of information and ideas and honoring the rule of international law, when they aren't in China’s interest.
If nothing else, he would like to end the control that the United States and its Western allies exert over the global system, and give China and other like-minded autocracies greater say or even the most say. Hence, even though Putin’s war is undermining the economic stability Xi prizes so highly, he can’t seem to bring himself to oppose it.
Israel is as much a part of the globalization phenomenon as China, and we have benefitted nearly as much. International trade (increasingly with China) comprises a major part of our economy as does foreign investment, which in 2020 amounted to a hefty 6 percent of gross domestic product. Israel’s high-tech sector, the engine of economic growth, would evaporate in an instant if it didn’t have unfettered access to international markets, foreign capital and overseas workers.
Israelis are all following the headlines about the war in Ukraine, but we should be paying at least as much attention to what Xi says and does, because in economic terms our fate is more tied up with China than with Russia or Ukraine. Tough talk emanating from Beijing about Taiwan’s continued independence should give us more chills than Putin’s nuclear threats.
I remain optimistic that Xi won’t kill the goose that laid China’s golden egg; Beijing has much more to lose from the collapse of globalization than Russia ever had. But then again Putin has no monopoly on world-leader stupidity.