India and the two waves of globalization

It will soon be a hundred years since the old regimes in
Europe began to crumble as a result of World War I. The spark for the
continental conflagration was lit in June 1914 when Archduke Franz
Ferdinand of Austria was assassinated by a young Serbian nationalist.
The crisis escalated through July as the two broad alliances, the
Entente Powers led by Britain, Russia and France, and the Central Powers
led by Germany, the Austro-Hungarians and the Ottoman Empire, began to
raise nationalist fervour. Britain finally declared war on Germany in

The next four years saw massive slaughter across Europe. Many of the
old powers collapsed. Russia succumbed to a communist revolution.
Scores of new countries came into being as the Central Powers were
dismantled by the victorious Allies. Germany later fell to the Nazis.
But that was not the end of turmoil. Europe had to face political
violence, hyperinflation and mass unemployment over the next three
decades. The legacy of World War I continued well after the fighting
ended. It was only at the end of World War II that Europe could settle
to a stable social contract. Meanwhile, the US was the rising power that
would eventually replace the old European empires as the global
hegemon, printer of the global currency and defender of global shipping

The political implications of World War I will be
intensely discussed across the world in the coming months. What will
perhaps get less attention is the fact that the war marked the end of
the first great era of globalization that began around 1870. The extent
of globalization then is comparable to its reach now in terms of
standard parameters such as trade, capital flows and migration. The
imperial powers created a new international division of labour that
condemned their colonies to being suppliers of raw material. Yet it is
also true that countries such as India experienced an industrial boom in
the last three decades of the nineteenth century. The gold standard was
the pivot of a global monetary system that was perhaps inflexible but
had kept prices stable. Trade became easier thanks to falling
transaction costs.
A young John Maynard Keynes had captured the spirit of
the times very well in an essay published in 1919. “The inhabitant of
London could order by telephone, sipping his morning tea in bed, the
various products of the whole earth…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.”
Keynes also pointed out that this gentleman “regarded
this state of affairs as normal, certain, and permanent, except in the
direction of further improvement…The projects and politics of
militarism and imperialism, of racial and cultural rivalries, of
monopolies, restrictions, and exclusion…appeared to exercise almost no
influence at all on the ordinary course of social and economic life,
the internationalization of which was nearly complete in practice”.
Keynes could almost be writing about our times. But
reading him today should also serve as a warning, since it is well known
how such optimism was blown to smithereens in the war years. It is
almost akin to the overdone confidence that the end of communism marked
the final victory of liberal democracy; that confidence was shattered
when two planes were flown into the World Trade Centre buildings in
September 2011.
The three decades on both sides of World War I are a
study in contrast: optimism in the earlier period and desperation in the
latter period. The colonial economic system was riddled with injustice
but even economies such as India were more vibrant in the first era of
globalization compared with the stagnation in the decades of
protectionism that came after 1918.
Yet, the global economic system collapsed when nobody
expected it to. It is tempting to ask whether the current global system
that is based on a web of global institutions dominated by the US is
also more fragile than it seems. The next turn in history is
fundamentally unpredictable, so there is no easy answer to the question.
But it is worth pointing out that globalization did pass a stringent
test in the aftermath of the 2008 global financial crisis. No country
retreated into protectionism. There was exemplary coordination of fiscal
and monetary policies during the most trying months of 2009.
The current global economic system has served India well
despite some obvious flaws, just as it did in the last decades of the
nineteenth century. Economic xenophobia has deep roots in India partly
because the country lost its freedom first to a commercial organization
and then to a trading power. But, in this silly season of bizarre
economic policy proposals, it is useful to point out that India has a
strong reason to hope that what happened a hundred years ago to the
global economic system is never again repeated.
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