Saturday, August 23, 2008

Globalization's Big Payoff?

Thomas Friedman argued in "The World is Flat" that one reason that the 2001-2002 India-Pakistan standoff did not turn into a war--a potentially nuclear one at that--was because of the influence of foreign investment in those countries. These foreign investors more or less threatened to pull out their current and any future investments should war break out. So no war broke out and diplomacy ruled the day. I am sure there were many other factors in the mix, but Friedman's interpretation makes for a great story on the positive externalities created by globalization. I mention this because this past week Daniel Gros had a similar take on the Russian-Georgian conflict:
Russia's occupation of Georgia and the U.S. signing of a missile-defense deal with Poland have grizzled Cold Warriors partying like it's 1979.... But don't go dusting off your copies of George Kennan's "X" Foreign Affairs article and NSC 68 just yet. It's going to be a lot harder to have a Cold War between Russia and the West in 2008 than it was in 1948.

During the Cold War (this is for all the under-40 set), the world was to a large degree divided between the Communist world—the Soviet Bloc and China—and the free world. And while there were exchanges and a limited amount of trade (in the 1970s, Pepsi began bartering Pepsi-Cola for Stolichnaya vodka, and the United States exported grain to the Soviet Union), commercial ties between the Eastern Bloc and the West were extremely limited.

Today, nearly 20 years after the fall of the Berlin Wall, Russia may not be a free-market paradise. But it has evolved into an important part of the global trading system and has built deep, enduring, and significant economic ties to the West. As a result, the implications of increasing tensions are as much economic as they are geopolitical. And a renewed chill between Moscow and Washington will trouble the sleep of CEOs as much as it will agitate peaceniks. On the other hand, the close economic ties make it less likely that political tensions will erupt into actual warfare since the executives in Moscow and New York (and London, and Frankfurt, and Milan …) will be lobbying for peace.
I hope he and Friedman are correct. One has to remain cautiously optimistic on this point, though, since similar arguments were made during the last great globalization wave just prior to the outbreak of World War I (See Krugman).

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