November 29, 2011

Guns or Growth?

To understand the impact of protectionist policies on free trade, try looking at military spending.

Rebecca McReynolds

Globalization has been growing at a breathtaking pace over the past two decades, lifting millions of people out of poverty as countries around the world open their borders to free trade. However, globalization is not irreversible. Trade doors open and then close again. The last time globalization was as deep as it is today — in the early twentieth century during the heyday of the British Empire — it ended abruptly with the rise in protectionist policies following the Great Depression.

“These types of policies often appear as nationalist sentiments rise during periods of economic uncertainty,” says Pierre Yared, a Chazen Senior Scholar and associate professor at Columbia Business School, “but they put the growth that can be generated by free trade at risk.” A recent study published by Yared and Daron Acemoglu, an economics professor at the Massachusetts Institute of Technology, provides insight on how the rise of nationalism can impact international markets.

What the numbers say

Using military spending as a proxy for nationalism, the authors show that between 1985 and 2005, when globalization was booming, countries that posted an above-average increase in either military spending or the size of their military saw a slower rise in trade compared to other countries in the sample. Additionally, countries whose trading partners or neighbors experienced greater increases in militarization also saw their trade increase more slowly, even if their own military spending did not increase. “And these patterns remain consistent across international boundaries and political ideologies,” Yared says.

The authors chose military spending as their measure “because it more directly captures the preferences and intentions of the governments themselves,” Yared says. “The only other potential proxy we could have used would have been survey responses from citizens of different countries,” he says. They rejected that option because it was a subjective measure that would be difficult to track over different countries through long periods of time.

What history shows

Poland and Russia are two examples of the relationship between militarism and trade. At the end of the Cold War, both of these former Soviet Bloc countries had similar trade policies, and by the mid-1990s international trade made up 35 percent of GDP for both countries. In the ensuing years, though, Poland joined the European Union and the World Trade Organization, while Russia lagged behind in fully integrating itself into global markets. By 2007, international trade made up 80 percent of Poland’s GDP, compared to 65 percent of Russia’s GDP. What’s more, over the same period, Russia’s military spending rose by 90 percent compared to only a 45 percent increase in Poland’s military spending.

“Countries are always at a danger of turning inward and becoming more politically and economically isolated,” Yared says. “Whether the increase in globalization we saw prior to the crisis will continue in the aftermath of the crisis depends on the will of policymakers to forgo nationalist agendas in favor of openness and trade,” he says. “Openness to trade is still a political choice.”

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