Assumptions

Anyone seeking to draw lessons must confront the question: are the structural consequences of the crisis permanent or transitory? Will large capital flows resume, or will countries face significantly greater difficulty in accessing foreign finance? Will the financial sector no longer be the supercharged engine of growth in the US, United Kingdom, and other advanced countries? Will there be a permanent rise in US savings and fall in PRC savings or will global imbalances return? Will countries that have held down currencies and domestic demand in pursuit of export-led growth now modify their strategies? Will trade grow more slowly? Will other aspects of globalization be rolled back? Or will this too pass? Will the new normal in fact resemble nothing so much as the old normal?

For purposes of the present analysis, I assume the following. The globalization of finance will be partly rolled back, or at least gross capital flows will grow less rapidly. The crisis is a reminder of the risks when the domains of financial business and of supervision and regulation do not coincide – when banks and markets are global but regulation is national. National oversight then creates scope for regulatory arbitrage. No one national regulator will have the information and powers needed to avert and resolve problems of financial instability. One can imagine a global regulator, but governments remain unwilling to cede this authority to a supranational body. And loosely organized committees and colleges of regulators, no matter how frequently they meet, are unlikely to constitute a fully-adequate substitute. Unable to significant expand the domain of regulation beyond national borders, there will consequently be a tendency for governments to roll back the domain of financial business to coincide with the scope of oversight. The cross-border operations of banks and other financial institutions will be more tightly restricted. More stringent capital and liquidity requirements for bank and nonbank financial institutions will make intermediation more costly and cause lending, both domestic and internationally, to grow more slowly. Forcing trading in derivatives into clearinghouses and onto exchanges will limit the growth of instrument diversity and make hedging foreign exposures more costly. This is not to imply that capital flows will evaporate, but assuming that the experience of the crisis is not forgotten they are likely to grow more slowly than in the recent past.

In contrast, the globalization of trade and production will not be rolled back. The logic of global supply chains, production networks, and outsourcing remains compelling. The growth of trade in parts and components in East Asia reflects advances in transport technology – containerization – and what we have learned about containerization is not about to be forgotten.⁴ The outsourcing of call centers and back office services to India reflects the growth of global broadband and satellite communication, whose advantages the crisis has done nothing to diminish. To be sure, trade requires trade credit and the crisis severely disrupted access to such credit, for small firms in particular. But this disruption proved temporary, and credits fully collateralized by trade deliverables are the form of capital least likely to be diminished in availability as a result of the crisis.⁵

If trade grows more slowly, this will reflect protectionist pressures bequeathed by the crisis. High unemployment fuels protectionist sentiment. Governments are loath to see the benefits of expensive fiscal stimulus leak out to free riders in the form of increased domestic spending on foreign goods. Similarly, now that governments have larger stakes in domestic auto companies, they may become less committed to the maintenance of a level playing field for foreign motor-vehicle producers. Evidence of murky protectionism there has been. At the same time, the fact that a wide range of countries has proceeded with fiscal stimulus diminishes the free-rider problem. The problem of high unemployment will pass. Governments have committed to completing the Doha Round.

Similarly, world migration will not be rolled back. Cross-border migration has grown rapidly in recent years, reflecting the strong growth of the global economy but also the aforementioned advances in transportation and communication.⁶ The increase in information about living standards and job opportunities in high-income countries that has flowed to low-income regions through everything from earlier migrants to soap operas will not now evaporate. Nor will the transport and logistical support for future migration provided by past migration. Demographic imbalances between certain parts of the high- and low-income world will continue to provide a logic for large-scale migration. Again, the kicker is whether tougher economic times in the high-income countries will precipitate a backlash against foreign workers. While there is some evidence of this in Europe, it is striking that, so far at least, the crisis has provoked little hostility toward foreign workers in the US.⁷

Neither the US nor the PRC—or for that matter any other major economy—will abandon its tried-and-true growth model. To be sure, a situation where the US runs a current account deficit of 7% of gross domestic product (GDP) and absorbs 75% of the collective current account surpluses of the rest of the world is unlikely to recur. There are a number of reasons for thinking that the increase in household savings in the US will be long lasting. 8 With US demand growing more slowly, the PRC authorities will continue to boost domestic demand. The aging of the PRC's population will reinforce the trend toward lower savings rates. More US and less PRC production of traded goods necessarily implies an adjustment in the real exchange rate between the two countries. But these developments are likely to be more gradual than abrupt.

Finally, I assume that this is not the last serious global financial crisis in our lifetimes.

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