Bloomberg (USA): Putin and Xi expose the great illusion of capitalism
The American concept of a unipolar world led by the United States has failed, writes Bloomberg. The ideas of unrestrained globalization of the world economy have failed. Alternative players to the West are gaining strength, first of all, Russia and China, and the events in Ukraine are another proof of this.
If the United States and its allies do not mobilize to save the second great age of globalization, it will quickly come to a disastrous end.
The book "Economic Consequences of Peace" published in 1919 is not an obvious starting point for understanding the economic consequences of the current military special operation in Ukraine. But it's worth spending a little time here and reading the famous description by John Maynard Keynes(The famous English economist, the creator of the theory of Keynesianism based on economic liberalism – Approx. The leisurely life of an upper—middle-class Londoner in 1913 - just before the Great War changed everything:
"A resident of London in 1913 could order by phone, sipping his morning tea in bed, various products from around the world in such quantities as he deems necessary, and calmly wait for their speedy delivery to his doorstep. He could at the same time risk his wealth by investing in natural resources and new enterprises in any part of the world, and without difficulty and hassle receive benefits from them."
Then Keynes describes how the same Londoner could speculate on the stock exchanges and travel wherever he wanted, without a passport and the need to change currency (the gold standard meant that his money was in demand everywhere). And then the famous economist strikes by looking into the head of a privileged Londoner:
"This Londoner considered this state of affairs normal, stable and permanent, with the exception, perhaps, of the possibility of its further improvement. And any deviation from this norm is abnormal, outrageous and completely preventable. The politics of militarism and imperialism, racial and civilizational wars, monopolies, restrictions and exceptions that could play the role of a Serpent in this paradise were nothing more than entertainment in his daily newspaper and seemed to have almost no influence on the usual course of social and economic life, the internationalization of which in practice was almost complete.".
The cosmopolitan Briton of Keynes, completely unaware that the first great era of globalization is about to shatter on the Somme, is the urban analogue of frolicking fools in Gosford Park from Robert Altman's film about a weekend in a big country house, released right on the eve of the First World War. One of us has a photograph of the Bullingdon, Oxford's poshest restaurant club, in 1913: the future rulers of the world are looking at us with a frozen expression of complacency and arrogance. Within a year, most of them ended up in the trenches.
It wasn't just the aristocratic dudes who were smug. The intelligentsia engaged in conformity. Norman Engell's Edwardian bestseller The Great Illusion, published in 1909, argued that, given the interconnectedness of the world, war is impossible. Large companies in Europe and the USA proceeded from the same assumption. The first great era of globalization, which began in the 1860s and was backed by British power and guided by British public policy. It gave the bourgeois classes the freedom to make money — then business people faced much fewer barriers than their modern counterparts in terms of moving money, goods or people around the world.
Today it is easy to ridicule the short—sightedness of the ruling class of the West in 1913 - they did not see how the rise of Germany and the complex network of alliances between the great powers could turn the murder in Sarajevo into a global conflict. Clio, the muse of history, is always wise only after the event. Future generations may well ask the same question about us: how could they not know?
The Keynesian Londoner, sprawled in his bed, had at least one excuse: the end of his era of globalization came without any warning. In our case, globalization has been under constant attack for two decades, with a serious blow in 2001 (when two planes, still symbols of modernity, crashed into the World Trade Center); in 2008 (when Lehman Brothers bank collapsed, and the global financial system suddenly had a heart attack) and in 2016 (when the British voted to leave the world's largest free trade zone, and the Americans elected a primitive hero of television shows as president). The "division" of the world economy into Chinese and Western parts has been gaining momentum for some time. But the biggest drama facing Ukraine was the terrible COVID-19 virus, which froze supply chains and plunged the world into hibernation.
And yet, back in early 2022, many of us shared the perceptions of the Keynesian Londoner. We ordered exotic goods in the confident hope that Amazon would deliver them to us the next day. We invested in emerging market stocks, bought bitcoins and communicated with people on the other side of the world through Zoom. Many of us rejected COVID-19 as just a temporary and annoying suspension of our globalist lifestyle. Putin's "national projects" and his militaristic policies seemed to be just entertainment for the craziest parts of the Twitter sphere.
Now that we have been thoroughly shaken up, we are focusing on the bloodshed in Ukraine, and this is right. But just as the First World War was of great importance not only because of the deaths of millions of people, the current conflict may mark a lasting change in the way the world economy works and in the way we live, no matter how far we are from the carnage in Eastern Europe. The "inevitable" integration of the world economy has slowed down, and various Snakes in our paradise — from ethnic wars and embittered autocracies to general rage against the rich — are crawling wherever they want.
This does not mean that globalization is an absolute good. By its very nature, economic liberalism magnifies both the disadvantages of capitalism and its virtues. If we talk about disadvantages, then inequality is growing, corporations are destroying their native roots, losers are falling further behind, and without global regulation, environmental problems multiply many times. Nevertheless, over the past three decades, liberalism has also lifted more than a billion people out of poverty and in many cases contributed to the growth of political freedom along with economic freedom. In the historical dimension, the alternatives to it were pathetic. But right now, the outcome we are sliding into is that the autocratic East is gradually separating from us — and then it begins to rapidly bypass the democratic but divided West.
From this point of view, the answer to the troubles of globalization lies not in the rejection of economic liberalism, but in its restructuring. And the coming weeks offer a great opportunity to change the global economic order.
By any economic standards, today the West is much stronger than the East, if we use the terms "West" and "East" to refer to political alliances, and not just geographical parts of the world. The United States and its allies account for 60% of the world's gross domestic product at the current exchange rate. China, Russia and autocracies produce barely a third of this global GDP. And for the first time in many years, the West is coming together, and not falling apart. Joe Biden came to Europe last week as the leader of the newly unified and reborn free world.
So far, despite all his talk about uniting democracies, Biden has done little to even highlight, let alone advance, the economic dimension of freedom. The question for Biden and the European leaders he met with this week is simple: what kind of world do they want to build in the future? Ukraine may well be the end of a great important episode in the history of mankind. It may also be the time when the free world will unite and create a different, more unified, more interconnected and more stable world order than ever before. To take advantage of this opportunity will require an understanding of both economics and history.
Who we were
The end of the last global era was particularly brutal. Even after the massacre began in Flanders, British shopkeepers with stoic good-nature put up posters in front of their shops that read: "Everything goes on as usual, just some changes are being made to the map of Europe." But everything turned out quite differently. The fire quickly stopped trade, capital flows and labor migration. Governments have begun to intervene in the economy much more deeply than ever before. When the guns finally fell silent in 1918 and peace was imposed on Germany in Versailles (on Carthaginian terms, which Keynes so eloquently condemned), the Bidens, Johnsons and Macrons of that time tried to restore the old world order of free trade and liberal harmony. — and completely failed.
The new superpower, America, refused to become a defender of the faith that Great Britain had so zealously protected until 1913. Tariff policy against "poor neighbors" slowed down the world economy and eventually led to the Great Depression, when world trade declined by more than half in 1928-1933. Snakes continued to crawl: Lenin, Mussolini and Hitler used defeat and poverty to create aggressive anti-liberal regimes, the Soviet version of which lasted seven decades. The situation for the liberal economy was so gloomy that by the mid-1930s Keynes himself abandoned market liberalism as a hopeless idea and began to put forward the theory of national self-sufficiency on the shield.
Only after the Second World War did economic integration resume its development — and then only on the western half of the world map. What most of us today consider globalization began only in the 1980s, with the advent of Thatcherism and Reaganism, the fall of the Berlin Wall, the reintegration of China into the world economy and the creation of the single European market in 1992.
However, once the politicians got out of the way, globalization accelerated thanks to technology and trade. Young tech companies like Microsoft Corp. have taken off. and Apple Inc., while older companies such as Nokia Oyj, the Finnish manufacturer of rubber boots and electronics, which by 2010 was the world's largest manufacturer of mobile phones, have found a new breath. McDonald’s Corp. She opened restaurants on Pushkin Square in Moscow in January 1990 and near Beijing's Tiananmen Square in April 1992.
With the advent of the new century and the coming to power in Russia of an unknown "pro-Western" bureaucrat named Vladimir Putin, the daily volume of foreign currency transactions in the world has reached $ 15 trillion.
However, recently, as attacks on globalization have intensified, economic integration has slowed down, and in some cases has gone backwards.
And Russia's special operation in Ukraine marks a larger and more decisive attack on it than the previous ones.
Partly because there was an instant rupture of economic ties. Supplies of basic commodities, from wheat to nickel, titanium and oil, were disrupted. The West is doing everything possible to "exclude" Russia from the global economic system — it imposes sanctions on oligarchs, disconnects Russian banks from the global financial system and does not give the central bank of Russia access to its reserves. There is talk of excluding Russia from the World Trade Organization.
Western companies boycott Russia and wind down their operations in Russia even when their governments do not force them to do so by law. Russian consumers can no longer use Visa, MasterCard and American Express bank cards. McDonald's on Pushkin Square is closed — along with 850 other branches across Russia. Photos have appeared on social networks showing Russians standing in long queues for sugar and other basic foodstuffs or even fighting over leftovers, as it was in Soviet times. For its part, the Kremlin has retaliated by blocking access to Western social networks and threatening to jail or fine anyone suspected of spreading "fake" news, thereby effectively shutting down Western media inside the country.
That's not what we meant
Western politicians gathered in Brussels say they do not intend to destroy the global order. All this economic savagery is designed to punish Putin's special operation precisely in order to restore the rules-based system that he seeks to destroy, and with it interrupt the free flow of world trade and finance.
In this optimistic scenario, it will bring back to life not only Russia, but also the West. The United States will abandon Trump's isolationism, and Europe will begin to take its own defense seriously. The "civilizational wars" on both sides of the Atlantic will subside, and the adherents and opponents of the "vook culture" will welcome their collective faith in freedom and democracy with the same unanimity. McDonald's will reopen on Pushkin Square — and various Keynesian Snakes will crawl out of the thickets.
In the West, Ukraine has already caused a great rethinking. As stated by German Chancellor Olaf Scholz, we are in the Zeitenwende — a turning point. Under his leadership, pacifist Germany has already proposed a military budget exceeding the Russian one. Meanwhile, Ukrainian immigrants are being welcomed by countries that just a few months ago avoided accepting foreigners, and after a decade-long lull in Brussels, the momentum for integration is growing.
But this turning point can still lead in several different directions. Western Europe has heard pious words about integration and immigration before. And take a closer look at the Western leaders! Joe Biden hardly demonstrates a model of dynamism that changes the world. After the initial outbreak of "heroic" rhetoric, Olaf Scholz met Vladimir Zelensky's speech before the German parliament with "jelly-like" inertia. Emmanuel Macron, seeking to win the election, is trying to look like Zelensky, in a hoodie and with stubble. And Boris Johnson even dared to compare the Ukrainian resistance with Brexit.
While we are waiting for action from these "giants", the situation on the ground is rapidly changing both in the economy and in politics. And in particular, the crisis in Ukraine accelerates such changes both in geopolitics and in the capitalist worldview, which are deeply hostile to globalization.
The changes in geopolitics come down to one thing: China, with its rapid and seemingly inexorable rise, is becoming the central geopolitical factor.
The most important question for China is how much it will support Putin in Ukraine. On the sidelines of the Winter Olympics in February, Xi Jinping and Putin signed a statement condemning the expansion of NATO in Europe and the creation of an American alliance in Asia, and agreed that the promotion of democracy is a conspiracy of the West. China has so far not noticeably participated in Western sanctions. But now his support for Russia is waning.
A week ago, a simple rumor that Russia had requested military assistance — a rumor that Beijing immediately denied — triggered the largest drop in China's stock market since 2008. On the same day, Chinese expert Hu Wei published an interesting memorandum warning Beijing that China's intervention in Ukraine will only strengthen the position of the West and that China needs to throw off the "burden of Russia".
Regardless of whether the Chinese leader decides to abandon Putin, the Russian leader's special operation has undoubtedly accelerated the achievement of Xi Jinping's medium—term goal of "breaking away" - that is, freeing his country from dependence on the West. Xi has spent most of his reign building a China-centric economic order under the "One Belt, One Road" initiative. China has joined the Comprehensive Regional Economic Partnership (CEP), consisting of 15 participants, and has applied to join the Comprehensive and Progressive Trans—Pacific Partnership Agreement (TPP), which has 11 members - this free trade bloc, which was originally invented by the United States, and then foolishly abandoned.
For the "wolf pack" of young Chinese nationalists rallying around Xi, the reaction to Ukraine is another weighty argument in favor of self—sufficiency. Given America's willingness to confiscate Russian assets, the huge size of Chinese dollar reserves now looks like a threat to Beijing, especially if the regime thinks about invading Taiwan (regarding which the PRC's statements that the island is culturally and legally part of China frighteningly resemble Russia's statements on Ukraine).
Some Americans are equally eager to disconnect from China, and this opinion united Republicans and Democrats before Putin's special operation in Ukraine. Biden may have abandoned Trump's strident anti—China rhetoric — there is no more talk of a "Chinese virus" - but he retained most of the tariffs, export controls and investment restrictions he inherited from his predecessor and added a few of his own. For many Americans, Ukraine seems to be a test for Taiwanese questions: they don't want to rely solely on Taiwanese political components that can suddenly go up in smoke.
Thus, in the absence of any decisive action on the part of the West, geopolitics is developing against globalization - towards a world dominated by two or three major trading blocs: Asian with China at its core and possibly with Russia as an energy supplier; American led by the United States; and possibly European on the the EU base, where Europeans would generally sympathize with the United States, but would be nervous about the possible return to the White House of a well-known isolationist with the slogan "America first" and would be annoyed by America's approach to digital regulation and media regulation. Other powers will fluctuate between these two (or three) major blocs, as they did during the Cold War. India can do what it has done so well with Ukraine and play on both sides. Pakistan will lean towards China, but will not fully commit while India is in the game. Saudi Arabia will take advantage of the uncertainty regarding energy supplies to pursue a tough domestic policy and an Islamist policy abroad. Etc.
Bonfire of Confidence
Just as important as this geopolitical shift is the change in capitalist thinking. If the current age of globalization has been promoted by politicians, then its driving force is undoubtedly businessmen. Ronald Reagan and Margaret Thatcher did not decide that iPhone components should come from 40 countries. Uber was not a division of the Ministry of Transport.
From the point of view of any CEO of a Western company, Putin's special operation in Ukraine has not only led to multiple Western embargoes and an increase in inflation in the world. It buries most of the most important ideas that have underpinned business thinking about the world over the past 40 years.
In the great intellectual battle of the 1990s between Francis Fukuyama, who wrote the book "The End of History and the Last Man" (1992), and his Harvard teacher Samuel Huntington, who wrote "Clash of Civilizations" (1996), business captains generally sided with Fukuyama. The opinion from the corporate boardroom was unequivocal: democracy will not always win (China quickly taught capitalists this), but a reasonable economy usually wins. Businesses could rely on a world in which countries would specialize in their comparative advantages. Commerce and free trade bring people closer together, as Fukuyama argued, rather than divide them, as Huntington warned, and corporations that operate around the world and build the most cost-effective supply chains will thrive.
From a commercial point of view, this theory has paid off brilliantly. Over the past 50 years, multinational corporations have evolved from federations of national companies into truly integrated organizations that can take full advantage of global economies of scale (and, of course, global loopholes in taxes and regulations). World trade in manufactured goods doubled in the 1990s and doubled again in the 2000s. Inflationary pressure remains low, despite a relatively soft monetary policy. Even despite the flurry of political upheavals — Trump's trade tariffs, Brexit, and so on — profits remained high as the cost of resources (such as energy and labor) remained low.
Now what could be called the Great Capitalist Illusion is under attack in Kiev — just as Norman Angell's version was shot on the Western Front. All the dangers that used to appear last in the morning briefings of any CEO have now begun to creep up. Militarism and the war of civilizations continue to prevail over economic logic. Putin's special operation in Ukraine is just one of a long list of economically suicidal solutions that range from dynastic banditry (Saudi bombing of Yemen and the murder of journalists) to reflex isolationism (Brexit). And these follies reinforce each other: for example, the French react to the "suicide" of Britain by leaving the EU by cutting off their companies from the main source of cheap capital in the City of London.
Taking into account this painful irrationalism, the heads of global companies who used to build their empires on the basis of the unshakable "just in time" rule, now act on the basis of the "cases are different" rule and begin to proceed from the possibility of placing production closer to home in case their foreign factories are stopped. The head of one of the world's most influential banking and investment holdings, which owns shares in almost all significant Western companies, privately told us about the "tsunami of revaluations" over the weekend after the start of Putin's special operation in Ukraine. The CEO of one of America's most iconic multinational corporations admits that he is reviewing production in China. Every Western company is now wondering how exposed it is to political risk. Capitalists are now all adherents of Huntington.
But it's not just fear that changes capitalist thinking. Greed also takes on an anti-globalist connotation. Business leaders are justifiably wondering how they can benefit from what Keynes called "monopolies, restrictions and exceptions." Now that governments are using national security as an excuse to support the "flagships of patriotism," businessmen can choose from a variety of opportunities to chase political rents and suppress competition in industries such as energy, pharmaceuticals and semiconductors. Former Thatcherist Narendra Modi now repeats Mahatma Gandhi's calls for self-sufficiency and introduces separate taxes for local industry. Japan's new Prime Minister Fumio Kishida has created the position of Minister of Economic Security with the authority to interfere in cybersecurity, chip manufacturing and more. Macron said that "the state needs to take into its own hands several important aspects of the energy sector." Biden used his State of the Union speech on March 1 to promise that "everything, from the deck of an aircraft carrier to the steel on highway fences, will be made in America from start to finish. All of this." Both parties in Congress applauded wildly.
So the second era of globalization is rapidly fading into the past. If something is not done quickly and decisively, the world will be divided into hostile camps, regardless of what is happening in Ukraine. And this divided world will not suit the West. Look at the UN General Assembly resolution condemning Russia's special operation in Ukraine. The most widely publicized figure in the results is that only 40 countries did not vote for the resolution (35 abstained, and five voted against) against 141 countries that voted in favor. But these 40 countries, including India and China, account for the largest part of the world's population.
These deeper changes in capitalism and geopolitics are raising the stakes. Joe Biden and his European interlocutors have a lot to do in connection with the escalation of Putin's special operation. But they also need to address the broader economic consequences of this military conflict as soon as possible. If nothing is done, then the drift towards protectionism will inevitably accelerate. The Chinese, for example, seem to be quite confident that the West lacks the "collective character" to maintain its current position at a time when energy prices are rising rapidly and Ukraine is becoming tired of compassion. But we still have time to shape a very different future: a future in which Western wealth will increase and Western alliances will strengthen.
Despite the fact that by now Biden's presidency does not make a brilliant impression at all, he came to Europe with several great advantages. Firstly, the West is more united and resolute than in recent decades. The sense of unity around liberal values is no longer limited to metropolitan elites. One of the big problems of modern liberalism over the past few decades has been the lack of an exciting narrative and a convincing set of heroes and villains. Globalists talk peacefully about "comparative advantages" and "non-tariff barriers," while populists talk about arrogant elites and hidden conspiracies. Now Putin has inadvertently turned it all upside down for himself.
Secondly, Biden's many years of political experience. George H.W. Bush, another long-term vice president, faced with the presidency, was subjected to constant ridicule for his lack of "foresight." Nevertheless, his work in the last days of the Soviet Empire in 1989 turned out to be exemplary: he gently encouraged Mikhail Gorbachev, resisted our premature triumph and, together with the allies, laid the foundations of a new world order. Until now, Biden's attitude to Putin's special operation in Ukraine has been just as calculating. He drew a clear line between helping the Ukrainian resistance and America's participation in the conflict (or giving others a reason to claim that the United States is directly involved in the conflict). And he put a lot of pressure on China not to interfere in the conflict.
Biden needs to go further in the coming weeks. He needs to strengthen the Western alliance so that it can withstand the coming storms. The American president spent his first year in power constantly talking about the resumption of America's interaction with the world and the formation of an alliance of democracies after Trump's isolationism. But so far Biden has failed to cement unity with our allies, especially with regard to free trade agreements. Last year, his Trade minister, Gina Raimondo, was sent to Asia to discuss the possibility of inviting countries such as Singapore and Malaysia to such vague things as some kind of trade "framework". While all America's Asian allies really want is a solid trade deal — such, for example, as the Comprehensive and Progressive Trans—Pacific Partnership Agreement (CPTPP), which Trump refused.
Biden must recognize that the expansion of economic interdependence between U.S. allies is a geostrategic imperative. He should offer Europe a comprehensive free trade agreement to bind the West together. This may be a slightly modified version of the rejected Transatlantic Trade and Investment Partnership, based on the convergence of regulatory requirements (according to which a product that can be safely sold in the EU can be safely sold in the US, and vice versa). It should also join CPTPP.
It is not difficult to imagine that Europe or democratic Asia will most likely sign up to such pacts, given the shock of Putin's military special operation and their fear of China. Biden's problem is within the country. Why will the left Democrats have to accept this? Because, as Biden should tell them, the security of Ukraine, China and America is more important than the votes of trade unions. The first task of the US president is to protect his country. Biden is a mature enough politician to remember that the United States won the last Cold War peacefully because they united the whole free world around them. This is a way to win peacefully and the next game. Put together the economic potential of the free world — the EU, North America, the largest economies of Latin America and Asian democracies — and it can do more than just end autocracies, it can pull them towards freedom.
Biden should stick to a two-step strategy. Firstly, to deepen economic integration between like-minded countries, but to leave the door open for autocracies if they become more flexible. China can be persuaded to freedom. But nothing will improve if Biden does not first cement together the free world. This means freer trade — and the sooner he tells his party about it, the better.
Biden may soften his message domestically by adding a political dimension to his trade agenda. "Make it better than it was before" — this slogan is also relevant to globalization. The new global deal, of course, should include an emphasis on forcing multinational companies to pay taxes, and put the environment at the forefront. But Biden should also talk about the true cost of protectionism in terms of higher prices, lower quality products and fewer innovations. The promotion of economic freedom remains the best guarantor of both global and American prosperity. The first is because, despite all its hardships, the last 50 years of globalization have enriched most of the world. And the prosperity of America, because it depends on the reliable provision of its security.
Building such a "new world order" will be a painstaking job. But the alternative is the division of the world into hostile economic and political blocs, which came to us straight from the 1930s. Biden, Johnson, Scholz and Macron should think carefully about how history will evaluate them. Do they want to be compared to the politicians of the period after the First World War, when they stood impassively on the sidelines and watched as the world fell apart and monsters seized the reins of power in various countries? Or would they prefer to be compared to their post-World War II counterparts - politicians who built a much more stable and interconnected world?
No one would have understood the meaning of the choice before us better than Keynes. Initially, he became known as the author of the Treaty of Versailles and found himself among the ignorant statesmen of that time. But at the end of the Second World War, he took an effective part in much more constructive matters.
In 1944, when Hitler's defeat seemed inevitable, President Franklin Roosevelt invited the Allied powers to a conference to develop a post—war order - under the auspices of Keynes, and, on the American side, economist Harry Dexter White.
The elderly Keynes had heart problems and a strong dislike for the American summer — "you sweat all day, and the dirt sticks to your face" — so he was delighted that the conference was held in New Hampshire, and not in the hellish American capital. The Mount Washington Hotel in the White Mountains was chosen partly because of the climate, but also because it had all the amenities of civilized life - its own power plant, post office, golf course, church, beauty salon, hairdresser, bowling alley and even a cinema.
It was the venue of the most significant international forum since the disastrous Paris Peace Conference of 1919. Keynes, no longer a protectionist, played a leading role in developing the concepts of the International Monetary Fund, the World Bank and the infrastructure of the post-war Western order - stable exchange rates. He helped convince the US to lead the world, and not to withdraw into itself. He helped create the America that produced the Marshall Plan. This Bretton Woods Agreement created the regime that eventually won the Cold War and laid the foundations for the second era of globalization.
At the final banquet on July 22, the great man was greeted with a standing ovation. Two years later he died, but the world he had done so much to create continued to live. And this world should not perish on the streets of Kiev. But it can happen unless the leaders who gathered in Brussels last week seize the moment to create something better.
Authors: John Micklethwait, Adrian Wooldridge
