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The Bumpy Road Ahead

CAMBRIDGE – If stock market and interest-rate spreads are to be believed, America’s economy has seen the worst and may be on its way to a slow recovery. But the troubles for the world economy are just starting. If globalization does not get the fix it needs, economic prospects will be dim for rich and poor countries alike.

The worst that could happen is a return to the 1930’s, when countries put up high trade barriers and retreated into isolationism, to the detriment of all. Fortunately, this is a remote scenario today. But the next worst thing is to assume that a minor patch-up will be enough to render globalization healthy and sustainable. It will take real effort and creativity to repair the deep cracks in globalization revealed by the financial crisis.

First, the good news. The global response to the crisis may not have been stellar, but neither has it been the free-for-all that might have been feared. The G-20 could not agree on coordinated fiscal stimulus or concrete steps towards banking reform. But it did coalesce behind the International Monetary Fund and provided it with additional resources. Despite scores of new protectionist measures around the world since the onset of the financial crisis, the vast majority are nothing to lose sleep over. Globalization has not received a mortal blow – at least not yet.

The real test is yet to come. The problem is that none of globalization’s underlying weaknesses is likely to be adequately addressed under the current agenda. Financial regulation and supervision will surely be strengthened, but they will remain national in character, with little safeguard against cross-border spillover and regulatory arbitrage.