How the World Stopped Another Great Depression

“What happened in 2008 and after 2008 demonstrates not so much the fragility of the system [of global governance] but rather its resilience,” said Brookings Nonresident Senior Fellow Daniel W. Drezner in an event this week to discuss his recently published book, The System Worked: How the World Stopped Another Great Depression (Oxford). Drezner explained that “global governance is the policymaker’s pacifier” both economically and with respect to geopolitical turbulence. He added that:

There were a lot of reasons to doubt the effectiveness of global economic governance in 2008, and this was a real problem because if you take a look at what happened in 2008, the global economy suffered … a bigger shock in 2008 than it did in 1929. What happened in 2008 was actually worse than what happened at the start of the Great Depression. But the reason the Great Depression became the Great Depression wasn’t just the initial shock; it was also that international cooperation collapsed.

Drezner acknowledged the air of pessimism about the system, that “no one likes the outputs that global economic governance has … and yet everyone agrees that not enough is done by these institutions to sort of regulate the global economy.” Despite this, he argued that, with respect to the global financial crisis in 2008, “if you can actually ensure that there is cooperation, and furthermore that cooperation on the economic side keeps the system relatively open, then it prevents what would be an initial shock metastasizing into a severe depression.”

“Why is there such widespread misperception” and pessimism surrounding global financial institutions, Drezner asked, and “why did the system work?”

Drezner suggested one reason is that “most people who write about the global economy are not living in the parts of the global economy that are doing the best.” He argued that “it’s been the developed countries that have been far more sluggish in terms of their rebound than developing countries” and that “global poverty reduction has been faster over the last decade, including the global financial crisis, than it was in the 1990s.”

Listen to full audio of the event here:

As to why the system worked, Drezner highlighted the degree that interest groups were a factor, the distribution of power between states, and the importance of ideas. Instead of the traditional rise in demands for protectionism due to the global supply chain, Drezner explained that perhaps “interest groups involved couldn’t necessarily have cut themselves off from the global economy in the same way that they could have in the 1930s.” He argued that China in many ways supported the U.S. as a leader and that “with respect to the global economy, China actually acted as a responsible stakeholder.” He then argued that no country produced any new ideas significant enough to counter the “Washington Consensus, or the policy prescription for reform that countries should adopt in order to facilitate economic growth. If anything, he posited that China actually shifted closer to the Washington Consensus in the wake of the crisis.

Drezner reinforced his optimistic conclusion about the resilience of the global governance by pointing to the lack of evidence of de-globalization and the fact that the global economy still seems to be “chugging along relatively impervious to geopolitical shocks,” such as the Russian takeover of Crimea or disputes in the South China Sea.

Drezner was joined by panelists Kathleen McNamara, who is both a professor and the director of the Mortara Center for International Studies at Georgetown University, and Ely Ratner, senior fellow and deputy director in Asia-Pacific Security at the Center for a New American Security.

McNamara supported Drezner’s overall argument. Comparing global governance across different eras of globalization, McNamara added that “if we define the [global governance] system as being international cooperation, it did in fact prevent a global meltdown of the Great Depression sort, and we did not have cataclysmic collapse of the global economy.” McNamara suggested, however, that Drezner’s book “needs to be read as an opening to a conversation that moves on to a question of the system worked but for whom and what does that imply for the future of the global economy and the very future of that system,” pointing to rising levels of inequality inside and the social classes within states.

The panelists also discussed the issue of the geopolitical effects of global governance.

Ratner weighed in on the consequences of global governance on China’s rise in the global arena, comparing various causal relations between economic and security considerations. Ratner believed that the idea that China appears to be shifting even further into line with the ideas of the “Washington Consensus” “is not the result of a pitched battle in which well-developed ideas were fought against each other … it’s much more of a very nascent debate which is growing about what Chinese leadership might look like combined with the belief that time is on [the Chinese] side.” Ratner explained that:

Going forward, what I would keep my eye on is the question of this ideational consensus on the system as it exists, and I think I would put a big question mark on that on the Chinese side going forward. I think because of the financial crisis, there’s this deep narrative of American decline in Beijing combined with a belief of the continued rise of China.

The event was moderated by Bruce Jones, Brookings senior fellow and director of the Project on International Order and Strategy. Jones is the author of the recently published book, Still Ours to Lead (Brookings).