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Instead of Uniting the World, Globalization Has Set Nation against Nation

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Tags AntipoliticsCronyism and CorporatismProtectionism and Free TradeWar and Foreign Policy

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Total globalization has brought the world order into crisis. The difference of interests, conditions, and opportunities, as well as the socioeconomic regimes of the participants initially implied risks of imbalances. As a result, the wrong policy of coordination—excessive integration with resource autocracies or forced physical (military) coercion to change regimes—led the situation to economic and ideological contradictions. The world has once again clustered into democratic and authoritarian and is obviously already in a phase of conflict between the two poles, deglobalization trends and a tightening of economic and social conditions.

Integration problems and deglobalization processes have also begun in developed countries, such as the problems of the European Union's economic homogeneity and Brexit. However, these are the problems of homogeneous liberal democracies. Accordingly, whatever contradictions they possess, the processes of finding equilibrium are on a civilized track. Moreover, as the focus shifts from internal contradictions to external contradictions, to threats from the authoritarian world, internal imbalances weaken and, on the contrary, integration processes begin to strengthen again. A vivid example of this is the creation of various alliances in various areas, such as the Anglo-Saxon alliance, the alliance of a special US information-exchange regime with Pacific countries, a potential cartel of oil consumers, and, finally, the cohesion of democracies with regard to Russia's actions in Ukraine.

Until now, Western democracies have followed mainly two political directions with respect to autocracies: external military intervention or deep socioeconomic integration with a de facto agreement to maintain authoritarian regimes according to the principle "your internal affairs are your affairs." Both, as we can now see, have negative consequences.

On the one hand, attempts at institutional liberalization and democratization of autocracies and dictatorships through military intervention and forced external forms of reform of the socioeconomic frame are obviously an inefficient way to civilize autocratic regimes for a number of reasons. Métis in autocracies—that is, ethical and cultural values, customs, traditions, and established social rhetoric—contradict or are in some way inconsistent with the liberal market values of the Western world.

Elites have no positive incentives to change preferences, and the population has no positive incentives to protest. Thus, military invasion and the use of force exacerbate the social crisis, fail to create the conditions and incentives for liberalization, and delay the transformation of the mestizo for the entrenchment of market institutions and democracy.

On the other hand, the deep integration of autocracies into global value-added processes, primarily to reduce production and resource costs, has led to a significant strengthening and reinforcement of authoritarian regimes. In autocracies, elites are rent-seeking entrepreneurs unfettered by society. Their success and well-being depend on budget revenues, and under conditions of expanding global integration, such regimes ensure for themselves an increase in budget revenues and maximize their sustainability. There is no question of access to the budget: in authoritarian regimes, this is an absolute monopoly of the regime elite, and competition can only come from the inside.

When budget revenues are large, they are enough to ensure the stability of the status quo of the ruling elite. Against the background of the concept of "noninterference" in the internal affairs of such authoritarian countries, the stability of their regimes, ensured by the abovementioned factors, entails the expansion of opportunities for the ruling elites in propaganda, obtaining public support, repression of dissenters, and—most importantly—in potential external aggression.

An alternative path to the first two described above is a policy of limited integration, a policy of limiting the involvement of authoritarian regimes in global economic and social processes on the same terms. This is a necessary measure to both reduce the production and resource dependence of the developed world on resource dictatorships and create incentives to change or transform regimes in the future and to incline to the necessary cooperation in the present. Such constraints would reduce the opportunities for rent-seeking enrichment by autocratic elites, increase social discontent through falling incomes and living standards, and reduce opportunities for external aggression.

Reducing the production outsourcing and logistics potential of autocratic economies, as well as their resource exports, will reduce the dependence of the civilized world on resource and production-component imports and will strengthen production and resource security.

Limiting integration with autocracies may well give impetus to progradation in various aspects: both in alternative energy and technology, since higher costs and lower margins in the new rigid environment will be an incentive to innovative development and search for ways to improve efficiency.

The resource and production leverage provided by autocratic regimes is actually some kind of "resource curse" on Western economies, where the motivation to increase efficiency and innovation falls against the background of voluminous and cheap resources. Such leverage has contributed to the decline of entrepreneurial initiative and individual responsibility in the Western world, expanding state expansion, and social subsidies. As a result, agents' dependence on the state increased and redistribution of benefits became more vertical.

This is why, paradoxically, the tightening of economic conditions in advanced economies can stimulate the state to reduce social welfare and expenditures, and economic agents to increase entrepreneurial initiative and individual responsibility. In other words, it would stimulate a shift away from the "leftist" discourse of social and economic policy toward the important ethical and social values of market capitalism, individualism, and meritocracy.

In fact, such a policy could take several directions.

The first direction is the creation of so-called friendly chains—i.e., the building of close resource and production ties within friendly countries. This implies the removal of much of the productive capacity from the autocratic countries and the relocation of resource sources. 

The second direction is the creation of a maximum number of restrictions that cut off authoritarian regimes from global economic processes and create unfavorable conditions for their domestic economies. This is realized through sanctions, both direct and indirect, aimed at creating an intolerable environment for creative economic activity.

The third direction is positive incentives aimed at the elites as the force that actually makes decisions, and at the population, which can be a catalyst for such decisions. Here it is important to understand that it is possible to condition the progressive decisions of both the elites (be it the current government's voluntary change of course or a forced rotation of the elites, usually referred to as a palace coup) and the population, to impel them in the right direction, only when both of them as agents understand and correctly assess the benefits and costs. And for this, firstly, it is necessary to clearly mark up the benefits, costs, and tasks and, secondly, to create the conditions that occasion the change of preferences and maximize the elites' and the population's efforts to change political course.

In fact, all this is already relevant and is being implemented, unfortunately with a great delay and in completely different extreme conditions. The aggressive geopolitical actions of a single autocracy in eastern Europe have forced Western countries to adopt this political paradigm, putting an end to a conciliatory policy that has lasted since at least 2007.

The externalities for the developed world will certainly be significant. Moreover, they already are. They take two main forms: social and economic. Economic effects are inflation as a result of resource—and production—deficits arising from recanalizations.

The social negative effects are a continuation of the economic ones: increasing social tensions amid the falling incomes and rising costs caused by inflationary spiking. In authoritarian countries, the inevitable growth of social tensions will lead, among other things, to increased immigration to developed countries.

However, both of these externalities can be neutralized in the foreseeable future, as I will discuss in my next article. What I can say here is that models and research on this topic clearly point to acceptable ways of dealing with these problems.

Another important potential cost is geopolitical. It is the increasing alignment of autocracies. However, autocracies are different, and it is necessary to create conditions in which autocracies are more comfortable cooperating with the developed world and changing their preferences than joining the camp of authoritarian regimes. In fact, this is exactly what has been done with respect to Russia now, including all sorts of sanctions and impending restrictions on imports of hydrocarbons. Creating contradiction between the various autocracies' interests and stimulating their transformation is a necessary part of the policy of limited integration.

Limiting integration and encouraging political change is a long-term process. However, one must understand that the world order has indeed changed. It is neither possible nor dangerous to be in a state of illusory optimism and to believe that maximum rapprochement with authoritarian countries, social openness, geopolitical inclusiveness, and productive globalization are the real path to a bright future. It is precisely this conciliatory policy, or rather the policy of forced external military intervention, that has brought the world into a state of turbulence.

The path to cooperation under conditions of acute conflict and lack of empathy lies in two directions: coercion of the opposite side through negative and positive incentives and the alignment, or maximization, of the costs of both sides. 

The first is the way the developed world should go, the second is the way of direct confrontation, which should be avoided. The West with great delay is following the first path. We can only hope that there is an understanding that the second path is a disaster.


Paul Tolmachev

The Russian-born Tolmachev is portfolio manager at BlackRock (London, UK) with $500 million in personally managed assets. He also is a visiting scholar at the Stanford Institute of Economic Policy Research, where he researches institutional and political economy.

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