The free flow of ideas, people, goods, services and capital across national borders leads to greater economic integration. But globalization, the tendency for these things to move more and more freely between nations, has ebb and flow over the years. This phenomenon is under scrutiny this year as politicians work to understand and address geo-economic fragmentation. Looking at data from more than 150 years ago, the main phases of globalization are clearly visible, using trade openness as a criterion, i.e. the sum of exports and imports of all economies relative to the world’s gross domestic product. As can be seen from the relevant data, globalization has remained stable in the last nearly 15 years since the global financial crisis, a period often referred to as the “slowdown”. Looking back over the industrialization era and beyond, we see that in this first period (1880-1920) world trade was dominated by Argentina, Australia, Canada, Europe, and the US, aided by the gold standard. Much of this was due to advances in transportation systems, which in turn lowered the cost of trade and increased the volume of trade. The interwar period (1920-1940) saw a dramatic restructuring and reversal of the tide of globalization due to international military conflicts and rising protectionism. Despite pressure from the League of Nations for multilateral cooperation, trade became regional due to trade barriers and the breakdown of the gold standard into currency blocks.

Post-crisis period 2007/2008 characterized by a backlog of trade reforms.

During the (post-war) Bretton Woods era, the United States became the dominant economic power with the dollar and then pegged to gold, maintaining a system where other exchange rates were pegged to the dollar. The post-war recovery and trade liberalization spurred rapid growth in Europe, Japan, and developing countries, while many countries loosened capital controls. But expansionary US fiscal and monetary policies ultimately made the system unsustainable. The United States stopped converting dollars into gold in the early 1970s, and many countries switched to floating exchange rates. The era of liberalization was marked by the gradual removal of trade barriers in China and other major emerging markets and unprecedented international economic cooperation, including the integration of the former Soviet bloc. This liberalization, for the most part, contributed to the increase in trade. Cross-border capital flows have increased, increasing the complexity and interconnectedness of the global financial system. The “slowdown” following the 2007/2008 global financial crisis was characterized by a lag in the pace of trade reforms and weakening political support for open international trade, largely due to escalating geopolitical tensions.

* Mr. Shekar Aiyar is the IMF Mission Director in Germany, and Ms. Ana Iliina is Deputy Director of the IMF’s Policy, Strategy and Evaluation Department. The article was published on the IMF blog.