The West’s difficulty in dealing with an aggressive Russia demonstrates a broader issue: The world is having a much harder time holding to a common set of rules in the geopolitical realm than in the economic. This raises an important question: Will convergence occur, and if so, how and when?
The Ukrainian crisis is just the most vivid and recent illustration of pressures on the rule of law, many of which have been years in the making. You need only count the number of unresolved conflicts and stalled negotiations around the world, be they in Africa, Asia, Europe or the Middle East.
It’s no wonder that political nationalism has been on the rise and cross-border cooperation has declined to a worrisome level. There are no third parties that can act as effective arbitrators in so many hot spots. Even the U.S., the world’s remaining superpower, has had a harder time asserting its influence.
Things are notably different on the economic front. Even though the world has yet to emerge decisively from a deep economic downturn, and joblessness remains unusually and worrisomely high in Europe and the U.S., trade protectionism has not reared its ugly head in any consequential manner. Indeed, there are even ongoing free-trade negotiations, albeit complex ones, that involve the U.S. with Asia and Europe.
Why has this divergence occurred, and will it persist? If it doesn’t, will convergence mean fewer geopolitical tensions or greater economic ones? Let’s consider some of the drivers.
First, compared with its diplomatic and political configuration, the world has built more effective economic institutions that are anchored by a set of relatively transparent and verifiable rules, particularly when it comes to the World Trade Organization and the International Monetary Fund. Although these economic institutions are not strong enough to play an effective offense in advancing global growth, they have provided a relatively solid defense.
Second, cross-border economic interactions are notable both in their scale and their multifaceted nature. Economic and financial globalization has meant that most systemically important countries interact a lot more with each other as both producers and consumers. So the costs of protectionism are more widespread and reciprocal.
Third, many companies have seen a material increase in the importance of international sales. Quite a few have also moved part of their production chains abroad. As a result, they (and their political influence) act as a counterweight to protectionist pressures. If you doubt this, witness how effective certain companies have been in lobbying against strong sanctions on Russia.
Finally, conventional wisdom has been well anchored by a strong academic consensus on the importance of maintaining fair and free trade.
Only a few of these conditions translate to the geopolitical sphere. Those that do must deal with a much greater dispersion in national interpretations of the past, present and, therefore, the future. Further complicating things is the role of human emotion, and the temptation of national politicians to exploit it in their quest for influence and power.
This analysis leads to three major conclusions about what might happen next.
First, left to their own devices, economic and geopolitical interactions will continue to display notable divergence. Second, if they do influence one another, it is much more likely that geopolitics will pull down economics. Third, world leaders would do well to start thinking now, and a lot more seriously, about stronger global institutional underpinnings.
Anyone who doubts the importance of all this need only consider the extent to which Ukraine’s geopolitical crisis is increasing the risks of a global economic recession.
Mohamed El-Erian is the chief economic adviser at Allianz SE. He’s chairman of Barack Obama’s Global Development Council, the author of best-seller When Markets Collide, and the former chief executive officer and co-chief investment officer of Pimco