Harold James: New wave of globalization is the aftermath of supply shocks

I think it is important to distinguish when you look at analogies with the past of what types of  crises we are confronting and it seems to me to be helpful to distinguish between supply shocks and demand shocks. The great depression was fundamentally a collapse of demand and the global financial crises in 2008 was also fundamentally a crisis of demand when the credit bubble burst. This crisis is supply shock because we see supply shortages in crucial areas – says prof. Harold James, Princeton University.

Grzegorz Jeż, Obserwator Finansowy: There are different possible scenarios of what the final outcome of the war between Russia and Ukraine could be. What do you think the most probable scenario is and what does it mean for policy and the economy in Europe?

Professor Harold James: It’s that the events are very undetermined and you don’t know exactly how long something will last. You know, for instance, the First World War, in the beginning in August 1914 people thought that the First World War couldn’t last for very long because it required such a dramatic economic mobilisation that the society, the economy wasn’t really capable of bearing that cost for a long time. And then, as the war doesn’t end quickly, the calculation shifts to the idea that if you really press on with the war and if you step up the mobilisation for war, you can destroy the other side. So, I think we’ve really reached that point actually quite quickly in the aftermath of Russia’s attack on Ukraine. And the calculation, from the point of view of Russia, is that the West will fall apart and that NATO will fall apart, the European Union will fall apart and Russia will be able to assert itself in the East. And I think if you think of the mirror image of that – if that calculation doesn’t succeed, and if the war is prosecuted as incompetently as it has been up to now – and again I think it is not unrealistic to expect at some point a really dramatic change in the Russian regime. And Russian history is full of this and Russians are very aware of this, that military defeats in Russia provoked really large changes in the government, in the policy. So in the middle of the 19th century when Russia was defeated in the Crimean war, that produces the big reforms. And the Japanese war, the beginning of the 20th century, a new wave of reform, the parliamentarisation, the breakup of the Tsarist empire was the result of loss in the First World War. And I think the defeat in Afghanistan was a contributor to the collapse of the Soviet Union. So given that, and I think what I see at the moment is that the Russian attack is clearly stagnating and is not likely to be successful and the result of that failure is that there will be a pressure to change the regime in Russia. So I expect a new regime to start to talk about peace, but I don’t expect Mr Putin to make a negotiation.

But, can we know for sure that their calculation was wrong? Or even if there is a change in the Russian regime – can it be for worse or for better? I know that it’s very difficult to predict something, but what’s your opinion? What’s your angle on this?

Well, you’re absolutely right and there are many uncertainties. So far, the Western relationship has held up very well and we’re speaking just, I think, a day before President Biden is going to come to Poland. And if you look at the attitudes to the United States in Europe, they’re much more positive than they were a few years ago, even last year. So the Atlantic community is really strengthened by this. And, of course there are tensions in the European Union, there are long-standing tensions, but actually I’m impressed for instance by the commitment of the new Italian government to the general cause. So I think the Western side is better. Your other question, is there likely to be a change in a more radical direction in Russia? Yes, that’s possible but I don’t think it would ever be successful. I think such a change, for instance, a coup by hardliners or people in the intelligence apparatus or the army – that would exactly provoke the kind of popular unrest that we haven’t seen up to now.

As a historian, do you think we could compare today’s situation with the economic crises of the past, for example the 1929 crisis or the Yom Kippur war in the 1970s? Are there any similarities? Do we face the same problems or do we face the same threats that may come with those crises as well?

I think it’s important to distinguish when you look at analogies with the past with exactly what type of crises we were confronting and it seems to me to be helpful to distinguish between supply shocks and demand shocks. So the Great Depression for instance. Sometimes, obviously whenever there is a crisis, people make comparisons with the Great Depression with 1929. But the Great Depression was fundamentally a collapse of demand. The global financial crisis 2008 was also fundamentally a crisis of demand after a credit bubble burst. And what this crisis is is fundamentally a supply shock. We see supply shortages in crucial areas. It’s been really since the pandemic, and I see the war as a continuation of this kind of supply pressure. At first there was a shortage of medical equipment, then there was a shortage of computer chips, then the computer chips lead to a shortage of automobiles or washing machines. Because everything or almost everything in the modern world involves chips, so you get a crisis that ripples out. And to some extent it seems to me also plausible to think that Russia was using this tightness in the energy market as a way of supporting its policy at the beginning of 2022 when it decided to make the invasion. So we’re more like the 1970s. I look also to the previous supply shocks in the middle of the 19th century, that also, the 1840s, the harvest failures in Europe that generated the same kind of problem. In the aftermath of it, I think it’s an interesting aftermath because I see a kind of pattern – that you get shortages and surging prices, so what looks like a temporary inflation, and then people wrestle, they look for alternatives how can they deal with this crisis. And what both the 1840s and the 1970s did is to push actually in the end for more globalisation, more global opening. And so the aftermath to this kind of supply shocks is generally a new wave of globalisation rather than the reversal of globalisation, which followed from something like the demand shock with the Great Depression.

So still we may say that sometimes crises may be a source of new hope, right?

Yes, we see exactly in these moments that you can apply new technologies. That was the 1970s, then it was technology for transportation, container shipping that revolutionised the world that led really to a big, big surge in the trade in goods. Today’s advances I think are scientific  – we’re here at a scientific congress – so we’re thinking of, for instance the pandemic, the immediate response to the pandemic was to use a technology that had already been developed in the 1990s, the mRNA vaccine to use against the pandemic. Then people realised that they could use this against a much broader array of diseases. So they start to think of using vaccines against cancers, really common and deadly diseases. And that’s a great advance. The application of technology to remote working is transforming the world of work. And in general I think we’re seeing enormous advances in artificial intelligence. That really is going to drive another big surge of internationalisation.

Let’s switch for a moment to Great Britain. What are the consequences of Brexit three years after that happened? Some people say that Brexit has cast a long shadow on the British economy. Is it true or is it exaggerated?

It’s not exaggerated. There is a distinct price to be paid for Brexit and it was a series of consequences, some of which were anticipated in advance, many of which were not anticipated. So just doing routine commercial transactions has become more difficult, the amount of paperwork that needs to be filled out is more difficult. There are all kinds of costs, so you can really see that the UK’s trade with Europe has decreased since Brexit. You can also see that the UK, of the big industrial economies, is the poorest performing economy at the moment. In last year the United States grows, Germany, Japan, France grow, China grows, the UK doesn’t. So is it all due to Brexit? Of course not. I mean some of the difficulties and some of the malaise predates Brexit. It really reflects a long period of poor productivity growth. And that poor productivity growth is also responsible for the disenchantment that led to the electoral consequence of Brexit. What people voted for was a kind of utopia that they couldn’t possibly achieve.

My last question concerns the eurozone. What may we say about the eurozone? Do you think that the enlargement of the eurozone will be an ongoing process? Or what may be the future of the euro as a currency?

I think the future is indeed likely to lie with enlargement and so you can trace the steps in Slovenia. It’s really already there and …

In Croatia …

Yes, Croatia has joined. Bulgaria looks as if it’s on a stable path to getting into the euro, so I think this process of enlargement is going to go on. Clearly, the different levels of inflation in different parts of the eurozone produce problems and new tensions. In fact, the observation that inflation is higher in Northern Europe than it is in Southern Europe is actually a good sign of balancing. So you can even derive a little bit of optimism from that. So I think it’s related to your first question. Is Europe going to disintegrate? You know, with the calculation of Mr Putin and the answer at the moment I think is “no, Europe is not going to disintegrate” and this is going to push for more European integration.


The interview was held on the 19th of February 2023

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