The Roaring 1890s
"Globalization has increased both the level of volatility and the exposure of developing countries to such risks," Nobel Prize-winning economist Joseph Stiglitz recently wrote. Yet perhaps emerging markets should be thankful that today’s financial shocks are not as contagious as those of the nineties — the 1890s, that is. So argue Michael Bordo of Rutgers ...
"Globalization has increased both the level of volatility and the exposure of developing countries to such risks," Nobel Prize-winning economist Joseph Stiglitz recently wrote. Yet perhaps emerging markets should be thankful that today's financial shocks are not as contagious as those of the nineties -- the 1890s, that is. So argue Michael Bordo of Rutgers University and Antu Murshid of the University of Wisconsin-Milwaukee in their recent study, "Globalization and Changing Patterns in the International Transmission of Shocks in Financial Markets" (Cambridge: National Bureau of Economic Research, 2002).
"Globalization has increased both the level of volatility and the exposure of developing countries to such risks," Nobel Prize-winning economist Joseph Stiglitz recently wrote. Yet perhaps emerging markets should be thankful that today’s financial shocks are not as contagious as those of the nineties — the 1890s, that is. So argue Michael Bordo of Rutgers University and Antu Murshid of the University of Wisconsin-Milwaukee in their recent study, "Globalization and Changing Patterns in the International Transmission of Shocks in Financial Markets" (Cambridge: National Bureau of Economic Research, 2002).
Comparing globalization in the pre–World War I era with that of 1975 to 2000, the authors conclude that while financial crises can still cross borders, the patterns of such meltdowns have changed considerably. They explain that in the earlier age of globalization, "sharp negative shocks to the center then sent impulses… wreaking havoc at the periphery." Although advanced countries were seldom affected by turmoil in less developed nations, the stability of emerging markets depended largely on the health of the British economy.
By comparison, today’s globalization seems rather tame. When shocks do spread, they are more contained, concentrated in specific regions of the world or in separate groups of advanced and emerging countries. Consequently, a global crisis was more than three times as likely to occur in any six-month period during the pre-World War I era than it was between 1975 and 2000.
Why is the newest era of globalization less volatile than its predecessors? Among the possible explanations the authors cite include the end of the gold standard, a greater command of the tools of financial stability, and the decentralization of economic power. In addition, the hubs of financial crisis have changed significantly in the past century. Some of the nations critical to spreading shocks are rather obvious — Britain and Germany still play a major role in spreading instability to their European neighbors — but others are more unexpected. Hungary, for example, can make or break the spread of a crisis across Central and Eastern Europe.
As memories of the Asian contagion and other crises of the 1990s linger, critics of greater integration will continue to warn against the dangers of a global financial meltdown. But the research of Bordo and Murshid should temper any misguided nostalgia for a kinder, gentler brand of globalization.
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