Globalization has been an immense source of prosperity and even peace.  But it has also produced massive instability through financial crises. 

Who will win?  Prosperity or instability?  Does globalization have the potential to self destruct?

Globalization – a global economy, a global society and global governance – is the product of open markets, open borders, and information and communications technologies.  We are all now connected more than we have ever been before through trade, investment, finance, migration and information communication.

This globalization has resulted in immense prosperity and poverty reduction.  It has also probably contribute to peaceful relations as neighboring countries trade and invest with each other instead of trading bombs and bullets as the basis of neighboring relations.  But financial globalization – always globalization’s weakest link – is producing growing instability.  And this instability threatens to break the whole globalization project.

Well before the global financial crisis, the potential benefits of financial globalization were questioned by many.  Volatile capital flows run hot and cold.  And exchange rates move all over the place, without any apparent rhyme or reason.

The global financial crisis has only heightened capital volatility.  And too many people found that the capital in which they invested was made of American toxic assets.

But it is much worse than that.  When the financial crisis pushed the global economy into the Great Recession, the whole world was hit by globalization’s backlash.  Our very deep trade linkages provoked the Great Trade Collapse which sent the global economy spiraling downward.  Foreign direct investment which has brought so many benefits to the emerging world collapsed by half, and showed that it can be an unreliable vector of globalization.  And migrants who contributed so much to our economies during the long economic upswing became the subject of discrimination and victimization in too many countries.

One bright spot of the global financial crisis was the emergence of the G20 as the new steering committee of the global economy.  At long last, countries like Brazil, China, India, Indonesia, Mexico and South Africa could sit side-by-side on equal terms with the G8 (US, Japan, Germany, France, UK, Italy, Canada and Russia) and chart the way out of the crisis.

The G20 seemed so effective in the heat of the crisis when it was necessary to put out the fire.  But now that we are through the eye of the storm, the urgency and necessity of cooperative action now seems less necessary.  The G20 may revert to the talk-shop/publicity-show status of the G8.  While all the G20 countries seem like systemically significant countries, in reality they are a motley bunch, and too big a bunch for doing serious business.

Some financial market reforms have been made.  Many reports have been written.  But many crucial reforms have still not been made.  Implementation of financial regulation is still not easy.  Complex financial innovation keeps charging ahead.  And the global imbalances of the US and China are just coming back.

It’s hard to escape the feeling that Wall Street will always be Wall Street, and the City of London will always be the City.  In other words, it’s just a matter of time before another financial crisis appears on the horizon.  And each successive crisis only seems more severe than the previous one.

The lessons of history are clear.  Civilizations come and go.  They usually self-destruct through political incompetence or complacency.

We may not be there yet.  But the social and political injustices of the financial crises are deep.  Working men or women lose their job.  They pick up the bill of the financial crisis as the costs are socialized through the government budget.  They also saw the golden boys and fat cats of Wall Street and the City pocket the benefits of the upward ride of the roller coaster. 

Global finance is sewing the seeds of globalization’s self destruction.  If economic growth remains weak, and unemployment stays high, people will get more angry – especially if we see a lost generation of youth on the streets.  Look at what has been happening in Tunisia and Egypt.  

Pressure will grow to shut down global markets through protectionism.  When we see another financial crisis – it is bound to happen – the social mood will get worse.  Already unstable and fractured societies will splinter and fray even more.

We cannot be sure of the consequences.  Societal breakdown can take many forms.

Of course, societal breakdown may not happen.  We have to make sure that it does not happen. 

But at the moment, we seem to be sleep walking towards globalization's self destruction.