The fallout from Russia’s invasion of Ukraine has reminded us of the unpredictable disruptions that the global economy constantly faces. This lesson has been taught to us many times. No one could have predicted the terrorist attacks of September 11, 2001, and few anticipated the 2008 financial crisis, the COVID-19 pandemic, or the election of Donald Trump, which led the United States to turn to the protectionism and nationalism. Even those who had anticipated these crises could not have accurately predicted when they would occur.

Each of these events had enormous macroeconomic consequences. The pandemic has drawn our attention to the lack of resilience in our seemingly robust economies. America, the superpower, couldn’t produce even simple products like masks and other protective gear, let alone more sophisticated items like tests and ventilators. The crisis has reinforced our understanding of economic fragility, echoing one of the lessons of the global financial crisis, when the failure of a single company, Lehman Brothers, triggered the near collapse of the entire global financial system.

Similarly, Russian President Vladimir Putin’s war in Ukraine is worsening an already worrying rise in food and energy prices, with potentially serious ramifications for many developing countries and emerging markets, especially those whose debts have run up. skyrocketed during the pandemic. Europe is also extremely vulnerable, due to its dependence on Russian gas – a resource from which major economies like Germany cannot wean themselves quickly or cheaply. Many rightly fear that such reliance will temper the response to Russia’s egregious actions.

This particular development was predictable. More than 15 years ago, in Making Globalization Work, I asked: “Does each country simply accept [security] risks as part of the price to pay for a more efficient global economy? Is Europe simply saying that if Russia is the cheapest supplier of gas, then we should buy from Russia regardless of the security implications…? Unfortunately, Europe’s response has been to ignore the obvious dangers in the pursuit of short-term profits.

Behind the current lack of resilience lies the fundamental failure of neoliberalism and the political framework it underpins. The markets themselves are myopic, and the financialization of the economy has made them even more short-sighted. They don’t fully account for major risks – especially those that seem remote – even when the consequences can be huge. Moreover, market participants know that when risks are systemic – as has been the case in all the crises listed above – policymakers cannot sit idly by and watch.

Precisely because markets do not fully price these risks, there will be too little investment in resilience, and the costs to society will end up being even higher. The commonly proposed solution is to “price” risk, forcing companies to bear more of the consequences of their actions. The same logic also dictates that we value negative externalities such as greenhouse gas emissions. Without a carbon price, there will be too much pollution, too much use of fossil fuels, and too little green investment and innovation.

But pricing risk is much more difficult than pricing carbon. And while other options – industrial policies and regulations – can move an economy in the right direction, neoliberal “rules of the game” have made interventions to build resilience more difficult. Neoliberalism rests on a fanciful vision of rational firms seeking to maximize their long-term profits in the context of perfectly efficient markets. Under the neoliberal globalization regime, companies are supposed to buy from the cheapest source, and if individual companies do not give due consideration to the risk of being dependent on Russian gas, governments are not supposed to intervene.

Certainly, the World Trade Organization framework includes a national security exemption that European authorities could have invoked to justify interventions aimed at limiting their dependence on Russian gas. But for many years the German government appeared to be an active promoter of economic interdependence. The charitable interpretation of Germany’s position is that it hoped trade would tame Russia. But there has long been a whiff of corruption, personified by Gerhard Schröder, the German chancellor who presided over the critical stages of his country’s deepening entanglement with Russia and then went to work for Gazprom, the Russian gas giant.

The challenge now is to establish appropriate global standards to distinguish rank protectionism from legitimate responses to dependency and security issues, and to develop corresponding systemic national policies. This will require multilateral deliberations and careful policy design to prevent bad faith actions like Trump’s use of “national security” concerns to justify tariffs on Canadian autos and steel.

But it is not just about changing the neoliberal trade framework. During the pandemic, thousands of people died needlessly because WTO intellectual property rules prevented vaccine production in many parts of the world. As it spread, the virus acquired new mutations, making it more contagious and resistant to first-generation vaccines.

Clearly, there has been too much focus on the security of intellectual property and too little on the security of our economy. We need to start rethinking globalization and its rules. We have paid a high price for the current orthodoxy. Hope now lies in taking into account the lessons of the great shocks of this century.

Copyright : Project Syndicate
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Joseph E. Stiglitz

Joseph E. Stiglitz is the winner of the 2001 Nobel Prize in Economics. His most recent book is Globalization and its Discontents Revisited: Anti-Globalization in the Era of Trump.

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