Crises of Economic Globalization International crises have been a recurrent feature of the global economic system. ranging from the 1982 Mexican debt crisis to the Asian financial crisis HOW9 9,1 to the financial crisis of 26188 to the economic meltdown of 2028. The booms and busts of international petroleum markets have been particularly volatile. As a key commodity necessary for economic growth in the industrial era. a major driver of economic success for the oilexporting countries that depend on revenue for foreign exchange. and the financier of sovereign wealth funds. petroleum plays a key role. Yet in one year. 2968. oil prices ranged from a high of $145 a barrel to a low of $33 a barrel. disrupting markets and economies worldwide. Although Marx saw such crises and volatility as a fatal weakness of the capitalist system. economic liberalism predicts that the market will regain equilibrium. Indeed. reforms were undertaken after many of the historic crises to ensure that the underlying conditions would not recur. For example. after the depression of the nals. the banking system was reformed. Financial standards in accounting. bank regulations, and ratings agencies were established to improve information and transparency. When states encountered economic difficulties, the Bretton Woods institutions were available for temporary fixes. And the volatility of petroleum markets was met for a time by the establishment of the Organization of the Petroleum Exporting Countries in 1965) to try to manage production and hence stabilize prices. But economic globalization in the hyper-connected world of the 261085 may lead to significant crises in which small actions in one place can spread rapidly to have global effects.a whether a meltdown of the global financial system or an economic contraction caused by a pandemic. The 2008-2009 Global Financial Crisis Despite all the reforms undertaken during past economic crises. the Bretton Woods institutions did not include actual surveillance and temporary fixes for richer countries or the economically strong United States. The wads and 'IQQQs saw an explosion of unregulated. highly leveraged financial instruments including oil futures and derivatives markets. U.S. based financial institutions and governmental units at all levels were participating in those markets. Excess credit against insufficient equity prevailed across the housing market, the financial sector. and consumercredit markets. That spending spree was accompanied by the importation of cheap goods from China. causing an unsustainable trade imbalance with China and the oilexporting countries. By 280?, it was clear that the U.S. economy itself was exhibiting fundamental structural weaknesses, although few policy makers were ready to take action. First to feel the impact was the subprime mortgage market. Because financial companies and international banks were carrying unsustainable debt with no assets to back up the loans, defaults increased. credit became more difficult to acquire, and private investment dried up. What began as a financial crisis centered in the United States rapidly became a global economic crisis. The U.S.based financial instruments that had spawned the excess lending had been sold abroad to investors ranging from local communities in Norway to banks in Europe and East Asia and investors in Japan and China. What safer place to invest. they thought. than the United States! That proved not to be the case. Financial institutions were unable to meet their obligations. Credit became almost impossible to obtain in the United States and Europe. Businesses cut expenditures and workforces Consumer demand plummeted States such as China. South Korea, and Japan. dependent on exports to the United States and Europe. saw their markets shrink and export earnings fall. Oil prices dropped by 69 percent between .July and December 2&88. seveme affecting such oilexporting countries as Russia, Angola. and Venezuela. In emerging markets dependent on private foreign investment, investment plummeted; in 28GB, it was less than half that of a year earlier. In late 2888, Iceland became the first state victim when its banking system collapsed. In the Baltic states, Ukraine. and Eastern Europe. economies virtually collapsed. International trade declined. The crisis rippled outward to developin countries that faced the prospect of sharply reduced or negative growth and the erosion of gains from globalizationdriven growth. The speed and depth of the collapse in global inancial and international trade markets surprised even the experts: the selfcorrecting mechanisms were not working as economic liberals had theorized. Both the United States and various EU member governments took unprecedented steps. bailing out banks and insurance companies to get credit markets functioning again and stimulate investor confidence. These same states, along with Japan and China, each responded with substantial economic stimulus packages to encourage economic growth. Some coordinated actions were taken among central bankers The U.S. Federal Reserve, the European Central Bank. and the Bank of England engaged in currency swaps. The IMF also responded to the crisis by making available almost $258 billion for credit lines. Iceland became the first Western country to borrow from the IMF since 19%. Substantial loans were made to Ukraine. Hungary, and Pakistan. The IMF. with an infusion of $758] billion. created the ShortTerm Liquidity Facility for emergingmarket countries suffering temporary liquidity problems. It reorganized the Exogenous Shocks Facility. designed to help low-income states by providing assistance more rapidly. The International Development Association increased its loans to the poorest developing countries. Shortterm responses were needed. as well as better longterm cross-border supervision of financial institutliglns. standards for accounting and banking regulations. and an early warning system for the world economy. But these were not yet in place for the subsequent Eurozone crisis. a year her. A number of European states. including Greece. Ireland. and Spain, had since early 26189 been spending beyond their capacity. borrowing from international banks. When the global economic crisis hit, households faced underwater mortgages, foreclosures, and even bankruptcy. Many individuals whose net worth had dramatically declined now faced unemployment and declining wages. And governments dependent on borrowing in international markets were turned away. deepening their debt obligations. But the crisis was also caused by an imbalance o trade. Germany's export trade had grown. while that of the socalled PIGS (Portugal. Italy. Greece. and Spain} had worsening balance-ofpayments positions Wages rose faster than gains in productivity. making their exports uncompetitive. while Germany's wage restraint made German exports even more competitive. The arrangements within the EU and the Eurozone with no fiscal union and no treasury made addressing the crisis even more difficult. Individual states did not have the ability to manage their monetary policy: they could not print more money. and they could not devalue their currency to make their exports more competitive. Labor mobility was constrained. and there were no agreed-upon procedures for transferring funds between states. Finally, after more than 25 summits to address the crisis, the PIGS undertook numerous reforms to reduce government debt. slashing expenditures. increasing the retirement age. promising to improve the tax collection system, and using financial transfers to avert bankruptcy. Greece. for example. was forced to take bailouts from the IMF. the European Central Bank, and the EU, promising in turn to slash public spending. improve tax collection. and renegotiate labor contracts. Just as economist C. Fred Bergsten predicted, tighter constraints imposed on government budgets have slowed the process of European integration.E COVID-'IQ and Resuiting Economic Crisis In 261928. the international community faced an economic crisis like no othera crisis not precipitated by irrational individual behavior, errant state policies, or unaccountable international elites. This crisis stemmed from an unknown virus which in a very short time gained a foothold in Wuhan. China. then like a cascading wave spread to Europe. the United States. South Asia. Latin America. and finally to Africa. In 2828 alone, COULD-19 had infected 86 million people and killed an estimated 1.3 million worldwide. [See gter 12 for more on the coronavirus pandemic.) To contain the spread of the virus. countries locked down whole economies save for essential services. Global trade flows collapsedat the peak of the pandemic. global trade flows were the lowest since the Great Depression. Unemployment skyrocketed. The financial loss was twice as great as the recession caused by the 288820991 w Even in the economically strong states. GDP dropped precipitously in just one quarter [AprilJune 2828.1 while unemployment rose dramatically, bringing years of economic growth to an abrupt halt In the developing world. the economic impact was also felt immediately. South Asian countries had the worst economic performance in 48 years Countries like Ecuador, Zambia, Nigeria. and Middle East countries. who were reliant on petroleum exports for revenue. saw profits decline as demand sank and oil prices collapsed. It is estimated that the Middle Eastern oil producers will see GDP to be 12 percent below expected precrisis levels five years into the future. Other commodity producing countries saw a similar economic decline. Countries dependent on tourism for revenuesuch as Costa Rica. Morocco. Thailand, Tanzania, and South Africasaw massive layoffs in that sector as tourism ground to a halt. Countries which depend on remittances for more than 28 percent of their GDP saw the flow of remittances slashed as migrant laborers lost theirjobs. States lost a source of income and tax revenue Unemployment rates of over 38 percent were found in many African countries. and over 15 percent in Latin American countries. Even before the pandemic. half of the almost 68 lowincome countries had high levels of public debt. With the pandemic. many emerging markets and developing governments have seen revenues collapse and private capital flows dry upjust when they need to spend more to support their critical health sector. provide help to a jobless population. support businesses and stimulate economic activities. By the end of 2828. 38 governments were at risk of default. more than two times the number at the end of 2889. And [he debt owed by 73 of the poorest countries is owed not only to private creditors like bondholders, banks. and multilateral institutions but also to China. a new financier. These macro figures do not tell the human story. Job losses in many African countries and in India with a large informal employment sector are in a particularly dire situation. Those workers have no social safety net. no unemployment insurance. and no savings. Recipients of remittances have lost a vital source of income. And with schools closed and adults out of work. an estimated 24 million children have been forced to tum to lowwage labor to help support their families and are unlikely to return to school. Young girls are being married off to ease financial burdens. Vaccinations for other contagious diseases are being postponed. Given these human impacts it is unlikely that states can recover fast enough to meet any of the Sustainable Development Goals In fact, the 2828 Goalkeepers Report finds that progress has now been stopped for all 13 indicators of the SDGs; the year 2828 has seen a regression back to levels last seen in the 1998sa setback of 25 years Estimates vary about how many people will fall into extreme poverty {currently defined as an income of less than $1.98 a day) from 3? million to between ?1 million and 188 million and, the gloomier still, 498 million people in 78 countries.'3 Of the developing reg ions Latin America appears to be the most severely affected. with the ranks of the poor growing from 22 million to 289 million. with ?8 million people living in extreme poverty.a The IMF estimates that $18 trillion has been spent to stimulate economies around the world. The responses of the major powers to avert an even greater crisis have been critical. During 2828, the US. Federal Reserve took an unprecedented array of monetary measures: it slashed the fund rate for lending to zero percent. purchased government bonds and securities {called quantitative easing]. created new emergency facilities to help certain sectors. eased regulatory oversight. and loosened bank capital requirements. These measures worth an estimated $6.1 trillionare designed to keep the market functioning. add liquidity, and aid households employers and governments. In addition. the U.S. Congress took fiscal measures passing the CARES Act (Coronavirus Aid. Relief. and Economic Securqy Act}. allocating $2 trillion to individuals businesses. and governments and in 2821 the $1.9 trillion American Rescue Plan. Not all countries took the same approach. Germany. with a budget surplus before the crisis, covered worker salaries so that firms would remain solvent and workers paid. They reduced the valueadded tax WAT] for consumers to stimulate spending, provided grants to small businesses. and subsidized investments in green energy. The European Union. after arduous negotiations. authorized over one trillion euros to help members like Spain and Italy most affected by the pandemic. The European Commission itself was authorized to borrow money in the international financial markets to offer employment supports and subsidize the EU 's longerterm objectives of digital transformation and climate neutrality. And the European Central Bank provided for 758 billion euros to relieve government debt. 128 billion euros for quantitative easing. and support for the European Fund for Strategic Investments. To provide such funding, the European Stability and Growth Pact that limits the amount of debt the EU can accrue was suspended. The agreement came at a "pivotal moment.' As the European Commission president optimistically stated. 'Europe, as a whole. has now a big chance to come out stronger from the crisis." But that optimism may have been premature. as European economies continued to lockdown with outbreaks of COVID19 and vaccines were slow to be rolled ouL The developed world has already begun structural changes to meet the challenges posed by the pandemic. These include changes which are consistent with economic nationalism: reshoring supply chains especially for essential pharmaceuticals. diversifying distribution networks and moving away from justin-time supply chains to ensure provision of essential goods. These measures are designed to give governments greater means to respond to the epidemic at the national level. They have also taken steps consistent with liberal economic thinking: keeping interest rates low to stimulate borrowing and providing stimulus funds to get businesses back to prosperity. anticipating that the free market will pull economies out of the crisis. Some developing countries, including the Philippines. Tunisia. Democratic Republic of Congo. Brazil. and Peru, have distributed cash handouts to their populations, thanks to electronic banking. Most countries, however. are unable to provide such funds The IMF estimated that by the end of 2821, another $12 trillion may be needed. For the developing countries. that means reliance on both the multilateral institutions as well as their creditors and donors. The IMF responded in the early stage of the pandemic with the Rapid Credit Facility. providing emergency financing to over 188 countries and the ShortTerm Liquidity Line for shortterm balanceof-payments support. Grants for debt relief have been disbursed through the Catastrophe Containment and Relief Trust affecting 83 countries by the end of 2828. Faced with a \"debt pandemic,"E these countries have an urgent need for more debt restructuring. The G28 continues to extend the time frame for the suspension of bilateral debt payments for ?3 countries, but that does not affect commercial lenders. China, the biggest bilateral creditor, may not be able or willing to restructure. even though its economy bounced back as its trade surplus ballooned in 2828. The IMF. however. is limited to $1 trillion in lending and that appears not to have been enough. The other multilateral institutions, particularly the World Bank, have been slow to respond. Under the Pandemic Emergency Financing Facility [REF]. financed by bonds sold to private investors the bank could not release funds until 12 weeks after the outbreak. With that delayed response and stringent conditions. the bank has been slowly repositioning its resources. including a $168 billion infusion for relief and restructuring and 812 billion for poor countries to buy COULD-19 vaccines But as the chief World Bank economist warned. full recovery will take at least five years and will occur faster in some places and slower in others3 Crises do not affect all states equally. Responses to Economic Crises In the immediate aftermath of both the global financial crisis and the Eurozone crisis reforms were passed. The surveillance functions of the IMF to anticipate risks and threats were given new life. The G? and G28 countries became more active in trying to address the crises. Rules and regulations of the private financial institutions in many states were strengthened and made more transparent. altho ugh the latter has proven more difficult than anticipated. Reforms in the Eu rozone states gave more authority to the European Central Bank to act as a regulator of banks in member countries and gave more authority to an IMFlike institutionnamely. the European Stability Mechanismto handle bailouts and work with the European Central Bank. Economic liberals believe that these rather incremental reforms could preserve the system. giving more transparency to market transaction s. They point to the promising economic recovery after 2818 as evidence that equilibrium could reemerge. But the moral hazard is not alleviated: states rescued from the consequences of their reckless behavior may have little incentive to change that behavior in the future. The reforms spawned by the global financial crisis could not prevent the scourge of COUIDlQ. But the capacity of the international financial institutions to respond to the pandemic was enhanced by the actions taken more than ten years before: the establishment of special facilities and programs, richer states able to run deficits in order to prevent a more devastating economic impact, and the ability and willingness of the European Union to design a program to aid its member states through the issuance of EU bonds rather than bonds UISITUTION. Managing Economic TiskS Includes Insurance programs TO UISIRULE THE ECONOMIC burdens across states aflu TeyIons. The Lust and ulmicuities Connected with managing that economic risk-and the response of economic nationalism-have revived the debate over globalization. Do these economic crises point to the end of economic globalization as now practiced? The Debate over Globalization: The View from Economic Theories The debate over globalization is not new. In 1994, at a time coinciding with the beginning of NAFTA, an army of peasant guerrillas seized towns in the southern Mexican state of Chiapas to protest against an economic and political system that they viewed as biased against them. Feeling that economic decisions were beyond their control, the peasants protested against the structures of the international market, the state, and economic globalization. This rebellion alerted the world to the challenges of globalization, and the protests and demonstrations detailed in the beginning of this chapter show that the debate over economic globalization continues unabated. Ironically, these stories have been told and magnified via the Internet, one of the by-products of globalization. Reactions to the global economic crisis of 2008-2009, Brexit in Great Britain, and the election of Donald J. Trump in the United States are manifestations of the antiglobalization sentiment, which is driven by individuals who believe that globalization has produced job loss, lower wages, and uncontrolled immigration, all of which they blame for their economic problems. The pandemic has reinforced that sentiment and accelerated trends that had already begun: a return to economic nationalism in many developed countries and, to many in developing countries, a confirmation that economic radicals were right all along. Most adherents of economic liberalism argue that globalization essentially results from changes in transportation and communication and those two trends have not changed. And the United States, despite intense competition from China, is still the financial hegemon buoyed by the dollar as reserve currency, and it enjoys key advantages of geography, demography, and energy.= Economic globalization will continue to benefit the United States and the world, perhaps modified by incremental reforms. Or as Henry Farrell and Abraham Newman put it, "Accepting and understanding the reality of chained globalization must be the first step toward limiting those risks. Policymakers cannot cling to fantasies of either decoupled isolation or benign integration." Economic nationalists prefer a different future. As they did during the pandemic, economic nationalists applaud a return to state-level policies designed to protect a state's own citizens and the rise of state-controlled enterprises. This future reinforces their belief that the state has a national interest in determining economic policy and that it sees other states growing economic prowess as a threat to its own. After all, as old-style mercantilists did in the seventeenth and eighteenth centuries, economic nationalists argue that economic policy should be subservient to the state and its interests; for them, politics determines economics. Economic nationalists, like the mercantilists before them, believe that the international system is dominated by competition among states for power; to economic nationalists, the global economy is a struggle over relative gains. States will take any action necessary to survive, protecting their self-interests. In the aftermath of crises and the consequences of economic globalization, economic nationalists support the adoption of more unilateral policies that are favorable to one's own state. Economic radical theorists have always been critical of the liberal economic path, and are especially distrustful of economic globalization. Development has not occurred, they assert, and for dependency theorists in particular, MNCs and their facilitators are the culprit; they exploit the resources of the poor, and they perpetuate the dominance of the North and the dependency of the South. Radicals detest instruments of dependency, exploitation, and imperialism. They argue that decisions made in the economic and financial centers of the world create an inherently unequal and unfair international economic system. And it was those decisions and policies that were responsible for the global financial crisis. Radicals believe that political power must be altered and international regulations aimed at redistributing wealth must be enacted. Thus, radicals recognize that delivering the hatchet to economic globalization would be necessary to achieve their goals of a more just and equitable international economic system. The economic cliff that the developing world saw in the COVID-19 nightmare reaffirms that position.BULG. SPAIN Chicago New York PORTUGAL Istan bul SAZERB UNITED TURKEY Tehran STATES GREECE Mediterranean Sea CYP SYR LEB. Baghdad North d - Atlantic Ridge MOROCCO ISR. Cairo IRAQ American JORD. Basin ALGERIA LIBYA A R EGYPT SAUDI EXICO Gulf of A H A BAHAMASS argasso ARABIA Mexico TOCUBA DOM. REP CAPE MAURITANIA o City MALI BELIZE VERDE NIGER 7404.62mi (11916.73kmju. SUDAN ERIT YEMEN GUAT. HOND. Caribbean Sea SEN. CHAD EL SALV. NICAR. GUI DJI SOM C.R. PAN CEN. VENEZUELA GUYANA S. LEONE NIGERIA SOUTH ETHIOPIA LIBERIA Lagos CAM. AF, REP. SUD. SUR. COLOMBIA EQUATOR EQ. GUINEA DEM. REP. UG. ECUADOR SAO TOME AND PRINCIPE OF THE KENYA GABON CONGO RW SEY CONGO Kinshasa TANZANIA PERU Peru BRAZIL COMOROS Basin MOZ. STONV BOLIVIA ANGOLA BRAZILIAN HIGHLANDS ZAM. NAMIBIA ZIMB. MADAGASCAR OFIC OF CAPRICORN Rio de Janeiro id - Atlantic Ridge BOTS. FARAG. Sao Paulo Johannesburg SWAZ. LESO SOUTH URU. AFRICA Buenos Aires