If there had been economists in year zero, I’m sure one of them in Bethlehem would have measured a sudden, localized spike in wealth inequality. Three Wise Men delivered a small fortune unsolicited to the parents of a newborn in a stable. Beautiful gifts: frankincense, myrrh and gold. But how did the Wise Men actually get it? The answer tells a lot about the economy of that time. At the time, there had already been an extensive network of trade and shipping routes for many hundreds of years along which valuables and raw materials found their way from the producer to the consumer. In the case of frankincense, think of production in what is now Yemen or Somalia, and consumption extending from the areas around the Mediterranean well into present-day India. All those caravans and ships came back with different things. The same goes for myrrh, which was also prized for its scent and supposed medicinal properties. It is entirely possible that of the three gifts the Magi shipped to Bethlehem, gold was the least valuable.
The Christmas story takes place in a world economy that, if you follow the ‘Maddison project’ of economic historiography of the University of Groningen, was as large as the economy of the province of North Holland today. But one that was already highly globalized, and where trade therefore played a major role.
History since then reads like a tide table of globalization, in which ebb and flow alternate. The penultimate upward movement was in the nineteenth century. Then industrialization, a flood of inventions, applications and discoveries (electricity, telegraph, telephone, gas and light for everyone) and a revolution in transport (from steam engine to combustion engine) led to a then unprecedented wave of globalization.
That wave broke during the First World War. The subsequent period of ebb, with a crash, increasing protectionism, a depression and another world war, would last more than thirty years. Both the industrial elite and the labor movement were surprised by the outbreak of war. Didn’t trade create fraternization and mutual benefit? And wasn’t the class era by definition cross-border and international solidarity?
Attention was already growing at the time for the unequal distribution of the fruits of globalization. Cambridge professor Martin Daunton cites this in his standard work published this year The Economic Government of the World economists Kevin O’Rourke and Jeffrey Williamson.
They concluded that after 1914, globalization was mainly damaged by criticism of the unequal distribution of revenues. “In Europe, this criticism was concentrated among landowners and farmers, who worried about competition from the global market, and in the US among workers, who feared that their wages were being depressed by the influx of new immigrants.”
And so the two economists say about the incipient deglobalization at the time: “Globalization was not only destroyed by unforeseen and external political events, but also partly destroyed itself.” Because: “If politicians do not pay attention to who wins and who loses, they are forced by voters to stop strengthening global economic commitments, or even dismantle them.”
Hold that for a moment.
Only after the Second World War, under American leadership, would the free world economy be restored step by step. From increasingly far-reaching free trade agreements to decolonization, from increasingly complex international production chains to the breakthrough of the modern multinational company. But when did that last wave of globalization peak?
Perhaps just before the election of Donald Trump as President of the United States in 2016. He then started an era of increasing protectionism – which was continued without much delay by his successor Biden.
Or perhaps Trump’s rise was itself a product of the 2008 global financial crisis, when capitalism and especially the financial sector fell into disfavor. And perhaps the heyday of globalization can already be situated around the turn of the century, when a new generation of students turned against it in large-scale street protests. The world trade organization WTO had just been founded (and was the first target of the demonstrations at the time), and today it leads a moribund existence on the margins of international economic policy, neglected especially by the US. The latest multilateral trade negotiation, like the one that has gradually opened up trade since 1945, began in 2001 and ended 12 years later without substantial progress.
This is reflected in the trade policies of countries themselves. The American conservative think tank Heritage Foundation has been maintaining the Index of Economic Freedom for many years. It is formulated quite conservatively, but one of the sub-measures that the think tank monitors is objectively useful: the freedom of international trade. This concerns the number of trade restrictions, whether import tariffs or other measures, that limit imports – or unfairly favor our own exports.
Worldwide, this index of trade freedom is now at its lowest point since 2007. For the Netherlands and the rest of the EU, you have to go back to 2001 to find as strict a trade policy as there is today. And, surprisingly, for the US itself, this trade freedom index is lower than when it started in 1995. It is now even lower than that of the EU.
You can also see it in the hard figures. If international trade grows faster than the international economy itself, this is a sign of internationalization. In the 1980s, international trade grew on average 1.5 percent faster than the world economy itself. In the 1990s, the height of globalization, the difference was as high as 4 percent, but in the 2000s it dropped to 2.8 percent. In the 1910s it was only 0.5 percent and according to the IMF, world trade is growing even less rapidly this year than the world economy itself.
The current retreat has, as in 1914 and since, numerous geopolitical causes, of which this newspaper has been full in recent years. Once again there are ‘unforeseen and external political events’: the rise of China as a global player challenging the US’s dominance. Russia’s invasion of Ukraine creating an existential security crisis for Europe.
But is there also a question of globalization that is bringing its destruction upon itself, just like more than a century ago? At the time, the distribution issue played a major role. This is also the case now, although it is not always uncontroversial. The economist Branko Milanovic made his name with the discovery of a global trend towards inequality, which later turned out not to be so bad. Thomas Piketty’s standard work Capital in the 21st century was a hit, but was mainly based on the prediction that in this century too, retirement will yield more than working and thus promote inequality. The demographic development currently points more to a structurally very tight labor market for the younger generations, which may well contradict Piketty’s prediction. Work may pay better than ever in the future.
Yet there is a sense of increasing inequality, and open borders are quickly blamed for it in one way or another. And, honestly, that feeling comes from somewhere. A distribution issue becomes more pressing if the pie grows less quickly. In the 1980s, global average economic growth per capita was 2.5 percent annually. In the 1990s this was 1.9 percent, in the 2000s up to the financial crisis of 2008 it was 1.8 percent. And then it drops sharply: only 0.9 percent on average per year between 2008 and now.
This also applies to the US, which has seen average per capita growth fall to 1 percent per year since the financial crisis. This also applies to the Netherlands. Here, per capita growth was still 2.6 percent annually in the 1990s, and 2.1 percent in the subsequent period until the financial crisis. Since then, growth has been below a paltry 0.8 percent per year.
Growth acts as a social lubricant. If less of this is available, this means that political and social processes may become more difficult. This may also explain the growing conservative aversion to climate policy: because that is also a distribution issue in an era when the pie is only growing slowly. Or the right-wing plea for the abolition of development aid: why them and not me?
Does all this give an extra impetus to deglobalization? That may very well be the case. But is it beneficial? Economic integration has brought enormous benefits, which the British only discovered after Brexit had been taken too much for granted. The American Peterson Institute has calculated that 10 percent of prosperity, every year, is due to the fruits of international free trade. This will not be much different for the Netherlands.
Related to this is a study by three economists from the German Kiel Institute into the reign of nationalist leaders since 1900, both of left-wing and right-wing stripes. As a result, their population lost out on an average of one-tenth of GDP in prosperity.
Breaking international economic commitments could therefore prove to be a costly election promise. In that respect, 2024 will be an extremely exciting year, with the American elections on the horizon. Especially now that international cooperation is so desperately needed, it is more precarious than ever. These days you would almost say a prayer about it.