Quarter of a century in an era of global capitalism

This year is the 100th anniversary of the start of the first World War, the 70th anniversary of D-Day and the 25th anniversaries of the collapse of the Soviet empire and the savage crackdown around Tiananmen Square. One hundred years ago Europe's fragile order fell apart. Seventy years ago the democracies launched an assault on totalitarian Europe. Twenty-five years ago Europe became whole and free, while China chose market economics and the party state. We have now lived for a quarter of a century in an era of global capitalism. But the political and economic pressures of such an era are also increasingly evident.

In 1913, western Europe was the economic and political centre of the world. It generated a third of world output (even measured at purchasing power parity, which raises the shares of poor countries above those at market exchange rates). European empires controlled most of the world, directly or indirectly. European business dominated world trade and finance. While the US already had the largest integrated national economy, it remained peripheral.

European rivalry

The rivalry among the European powers tore this world apart. The war led to the Russian (and so subsequent) communist revolutions. It shifted power across the Atlantic. It left global economic stability at the mercy of the US, by then the world’s principal creditor. It decisively weakened the old imperial powers. It destroyed European self-confidence. What the first World War had not done, the Great Depression, Nazism and the second World War did. By the time of D-Day the world economy had disintegrated, Europe was prostrate and the Holocaust was under way. Disaster was complete.

The success of the Allied D-Day landings on the Normandy beaches ensured victory in Europe would not lie solely with one of the totalitarian powers. A free and democratic western Europe would emerge under US protection. The postwar division of Europe was a tragedy, though an inevitable one: the US was not going to fight the Soviet Union immediately after its alliance with it. But a now engaged US protected the freedom of western Europe through Nato and launched the reintegration of the European and transatlantic economies through the Marshall plan, the Organisation for European Economic Co-operation and the General Agreement on Tariffs and Trade. Meanwhile, the creation of the European Coal and Steel Community of six members in 1951 led in time to the 28-member EU of today.

One of the most important fruits of the rise of the US and the moral and material collapse of Europe was the end of the great empires. Almost all of the newly independent countries – hostile to former colonial powers, scarred by the Great Depression and impressed by the apparent successes of Stalin's Soviet Union – chose to pursue inward-looking industrialisation, driven by import substitution. China, which fell under communist control in 1949 was particularly enthusiastic for self-sufficiency. But India, albeit democratic, also embraced planning and extensive nationalisation. So, too, did most Latin American developing countries.

While 1989 is not the only year marking the end of the post-1945 divided world, it marked the end of the cold war division of Europe and led swiftly to the collapse of the Soviet Union. Deng Xiaoping had already put China on the road to "reform and opening up" in 1978. But his repudiation of Soviet president Mikhail Gorbachev's political reforms in the year of democratic revolutions determined the nature of China's development: a synthesis between a bottom-up market economy and a top-down polity. China's rise has drawn admiration yet the challenges of raising a country from destitution to middle-income status are different from those of creating a high-income economy.

The salient characteristic of the past quarter of a century is globalisation. Driven on by the worldwide acceptance of the market economy and turbocharged by the digital revolution, humanity has created an economy that is more highly integrated than in 1913, except for the migration of people, which is smaller. Moreover, this has happened not under empire but under the aegis of global institutions, both public (such as the International Monetary Fund, the World Trade Organisation and the EU) and private (transnational companies).

Era of achievements

It has also been an era of achievements, notably a rapid fall in the proportion of people in extreme poverty and the astonishing rise of China and India, with almost 40 per cent of the world’s population between them. In Europe, too, countries that embraced structural reform, such as

Poland

, have done extremely well.

This, then, is a world that has come full circle, albeit with big changes along the way. It is a world marked by some familiar stresses: history does not repeat itself but it rhymes. The Great Recession, like the Great Depression, damaged globalisation, as the McKinsey Global Institute shows in a recent study. Affected by a collapse in cross-border finance, total flows of trade in goods and services, as well as of finance, fell sharply relative to world output. Trade has proved more robust than finance, but even it ceased to rise relative to world output between 2005 and 2012. It is not yet clear how deep-seated this slowdown in globalisation will prove. But given the damage done by the global financial crisis and evident concern about how the global market economy is operating, notably over the distribution of the gains, a bigger backlash than today’s is possible.

Possibly even more important are the political stresses, just as before 1914. The tension between economic integration and political division remain the Achilles heel of any globally integrated economy. Today, Russia defines itself as revanchist and China as assertive. Nuclear weapons reduce the chances of military conflict but they do not eliminate it. They would also make the consequences far worse.

If there is one lesson from the past 100 years it is that we are doomed to co-operate. Yet we remain tribal. This tension between co-operation and conflict is permanent. In the past century humanity experienced extremes of both. The history of the next century will be shaped by how we approach very similar choices.

– Copyright The Financial Times Ltd 2014