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Berger on whether globalization may come to a crashing halt

In August 1914 the first great wave of globalization crashed to an abrupt and totally unexpected end, as the outbreak of war suspended trading in all major markets. … The general lesson of this tragedy is one that shakes credence in any kind of irreversibility of globalization or triumph of interests over politics. But within the confines of the globalization story as it played out before the war, there are lessons to be gained from observing the processes of economic and political strain and adjustment. A return to the earlier period suggests, too, that there are lessons to be learned from the debates of economists and from considering whether, at the end of the day, their analyses and quarrels turned out to have identified the most important dangers to the openness and stability of the international economy or not. Today’s debates over the international flows of capital, goods, and services center around the puzzle of privilege—the possibility for some countries to enjoy “an excess return on assets relative to liabilities allowing them to sustain larger trade deficits in equilibrium”—- as Christopher Meissner and Alan Taylor define it in their contribution to this conference (p.5). Why do foreigners, at apparently such low rates of return, continue to invest so heavily in the United States? Why do American investments abroad apparently earn higher returns
than others derive operating in the same countries? How sustainable is a state of affairs in which the US current account deficit is about 7 percent of GDP with a resulting debt that over time will place a large share of the country’s capital stock in foreign hands? Absent any agreement on the basic mechanisms and relationships underlying this situation, and even any agreement on the existence or not of a serious problem for public policy, scenarios of readjustment diverge widely.

Suzanne Berger, “Historic Imbalances and Great Debates: Do the Economists See It Coming?,” MIT Working Paper. Available here.

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