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The 1914 effect - The globalisation counter-reaction

2017-06-15 08:54:55

Globalisation is a highly disruptive force. It provoked a reaction in the early

20th century. Are we seeing a repeat?

WHEN the Archduke Franz Ferdinand (pictured right) was assassinated in 1914,

there were few initial indications that world war would follow. In retrospect,

many people have argued that the killing was a freak event that should not have

resulted in the folly of war.

But was the subsequent war really an exogenous event? Or was it the

near-inevitable consequence of the tensions resulting from the first great era

of globalisation? If Franz Ferdinand had survived, maybe something else would

have triggered the conflict. If the latter possibility is right, that may be a

warning sign for the current era.

From 1870 to 1914, the first great era of globalisation saw rapid economic

growth, trade that grew faster than GDP, mass migration from Europe to the New

World and convergence of real wages between the old and new worlds. In Europe,

GDP per capita grew more than 70%; in the new world, (Argentina, Australia,

Brazil, Canada and the United States) it doubled. Trade grew from 5.9% of

global GDP to 8.2%. In many European countries growth was much higher; nearly

15% in the UK and 18% in Belgium. This occurred despite the restoration of

tariffs in many countries in the 1880s onwards. Transport costs were falling

fast thanks to the railway and the steamship which meant that prices for goods

like wheat, iron and copper converged across the western world.

Migration rates were remarkable. In the decade 1901-10, 5% of those from

Austria-Hungary left the country, more than 6% of Britons, 7% of the Irish, 8%

of Norwegians, and nearly 11% of Italians. Argentina added another 30% to its

population, in immigrants alone, in that decade. Europe had lots of workers;

the new world not so many. So as the workers moved, real wages nearly doubled

in Europe during the period compared with a 50% rise in America.

That globalisation had brought greater prosperity was recognised at the time.

Keynes famously said that in 1914

The inhabitant of London could order by telephone, sipping his morning tea in

bed, the various products of the whole earth, in such quantity as he might see

fit, and reasonably expect their early delivery upon his doorstep; he could at

the same moment and by the same means adventure his wealth in the natural

resources and new enterprises of any quarter of the world, and share, without

exertion or even trouble, in their prospective fruits and advantages.

Capital flowed freely. Britain financed the railways of Latin America; France

the economic expansion of Russia. In his 1909 book, The Great Illusion, Norman

Angell, argued that war between the great powers was futile because of the

economic damage it would cause.

And yet in 1914, the great powers sleepwalked into war, as one author put it.

Globalisation then went into reverse. It wasn t until the 1960s or 1970s that

trade recaptured its share of global GDP or countries like America started to

re-open their borders to immigrants in a substantial way. Capital flows weren t

freed until the 1980s. The intervening period saw two world wars and a great

Depression.

Globalisation was one of the forces that helped created the First World War

because it has profoundly destabilising effects, effects we are also seeing

today. In large part globalisation is about the more efficient allocation of

resources labour, capital, even land and that creates losers. People don t like

change, especially when they lose from it. Clearly, the mid-19th century was a

period of enormous change that were not just economic. In America, the

industrial north defeated the agricultural south; Germany and Italy became

nation states, and the multi-national Austro-Hungarian and Ottoman empires sunk

into terminal decline.

Germany and America were able to catch up and, in the latter s case, surpass

the British economy. The pax Britannica in which Britain supported global trade

through its powerful navy and financial system was weakened; the Bank of

England needed loans from other central banks when Barings collapsed in 1890.

Industrialisation meant that new sources of power emerged to challenge the old

aristocratic elites industrialists and factory workers. Workers were able to

use their muscle to demand more rights and, increasingly, the vote. Elites

turned to nationalism as a way of distracting voters from economic issues and

shoring up their support. This nationalism led to clashes with the other great

powers where their interests diverged; between Britain and Russia in Asia;

Russia and Austria in the Balkans; Germany and France in north Africa.

As the powers sought to head off these challenges, they split into the triple

entente of Britain, Russia and France and the triple alliance of Germany,

Austria-Hungary and Italy. Britain worried about the growing economic power of

Germany and entered a naval race; Germany worried about the growing power of

Russia and wanted a war sooner rather than later. Confrontation looked more

attractive than collaboration.

Globalisation also meant that events in other part of the world become more

important; if anything ought to have been an event in a far way country of

which we know nothing , it was the assassination of an archduke in Sarajevo.

But it dragged Britain into a war that ultimately sabotaged its status as a

great power.

At the same time, the great powers had to deal with much unrest at home. What

George Dangerfield called "The Strange Death of Liberal England" saw a

potential civil war in Ireland, mass strikes and suffragette protests. The

Russian regime nearly fell in 1905. France was convulsed by the Dreyfus affair,

which divided society as clearly as Brexit or the Trump presidency. And then

there were assassinations: Tsar Alexander II, the Italian king, the Spanish

prime minister, the Empress of Austria and the American president William

McKinley. In some cases, the murderers were immigrants; the clich d picture of

the anarchist with a bomb in hand dates from this era.

To sum up, globalisation disrupted both international power structures and

domestic ones. This rapid change caused a reaction that was often violent.

World War One was not inevitable but it was unsurprising.

So let us move to the current era of globalisation, during which the export

share of global GDP has more than doubled since the 1960s. New economic powers

have emerged to challenge American dominance; first, Japan, and now China and

potentially India. Imperial overstretch threatens America as it did Edwardian

Britain. The ability and, more recently, willingness of America to act as

global policeman has been eroded. Indeed, unlike Britain in 1914, America is a

net debtor not a creditor. Can it hold China s ambitions in check in the

Pacific, counterbalance Iran and the terrorists of Islamic State in the middle

east and deal with a nationalist Russian regime? It seems clear that other

powers think it can t. They are pushing to see whether America will react.

Migration has increased again, not quite to pre-1914 levels but in another

direction: from the developing world to the developed. This has led to cultural

and economic resentment among voters and imported the quarrels of other

countries. We see terrorists on the streets of London, Manchester, Paris and

Boston; all inspired by events thousands of miles away. Economic integration

means that financial crises can quickly spread; just as American subprime

mortgages hit the world in 2008, Chinese bad debt may do so in future.

Within the economy two big changes have occurred. Manufacturing capacity has

moved from the developed world to Asia. Technology has rewarded skilled workers

and widened pay gaps. Voters have rebelled by turning to parties that reject

globalisation. This didn t happen in France but generally it has made life more

difficult for centre-left parties and turned centre-right parties more

nativist. America s Republicans used to be enthusiasts for free trade. Now they

have elected Donald Trump.

Just as in the first era, globalisation has disrupted international and

domestic power structures. Thankfully this does not mean that another world war

is inevitable. But it is easy to imagine regional conflicts: Iran against Saudi

Arabia, or an American attack on North Korea that provokes a Chinese reaction.

But we will see more resistance to globalisation from governments, as they

calculate that voters will reward nativism. Foreign takeovers will be blocked.

Domestic companies will be subsidised or favoured in government programmes.

Tit-for-tat trade embargoes and tariffs will be imposed; the WTO could come

under threat. Immigration will be discouraged, even of high-skilled workers.

Populism can emerge from the left (higher taxes and nationalisation) as much as

from the right; see Britain.

The real danger is that this a zero-sum game. Governments will appear to grab a

larger share of global trade for their own countries. In doing so, they will

cause trade to shrink. That might make voters even angrier. From the early

1980s to 2008, most companies could count on a business-friendly political

environment in the developed world. But it looks as if that era has ended with

the financial crisis. Globalisation has caused another counter-reaction.

The best hope is that technology can deliver the economic growth and rising

prosperity voters want. If that happens, these threats will not disappear but

they will be much reduced. But for all the hype about new technology,

productivity has been sluggish. The omens are not great.