Globalisation enters a risky phase
24 August 2009 - Globalisation has been one of the main features of global economic development for many years and has contributed substantially to rising income levels around the world. Of course, as some detractors have pointed out, the gains and losses haven’t been equally distributed. But that’s the manner in which a competitive system functions, and globalisation is the extension of market principles across all regions.
The normal way that the market operates results in both winners and losers. Those who are motivated take advantage of the opportunities offered by globalisation and leave the listless behind. Also, people do not start off from the same position with equal assets in terms of education and access to resources. The well-endowed inevitably have a signal advantage in the competition.
But, to be honest, it is also the case that the system is sometimes deliberately rigged in favour of some and against the interests of others. This may be done in a variety of ways, both overt and covert. There may be carefully calculated legal restrictions, channels for the well connected (as an example, need we just mention Goldman Sachs’ clout in the corridors of power), and plain old ethnic, gender and class discrimination. The official ideology glosses over these unpleasant realities.
However, even taking the negative aspects into account, when all is said and done, globalisation has brought great benefits in the form of rising prosperity to large parts of the population in many countries across the world. The awful economic downturn and financial crisis experienced over the past year had its genesis in extraordinarily bad government policymaking (particularly in the United States), and the unwillingness to curb greed and stupidity in the financial services sector. It had little to do with the failure of markets to function adequately when they are properly regulated.
So don’t blame globalisation for causing the crisis. But do blame it for the speed and magnitude of the transmission of the shocks generated in the US across the world. In an interconnected and interrelated global system both good and bad impulses are transmitted rapidly.
We are now at the initial stages of a global economic recovery, and the risk is that the rise of protectionism will pour enough sand into the wheels to prevent growth from rising to its full potential. There is mounting political pressure on governments to protect jobs, firms and industries. From America to China, the authorities are all responding. It’s not just the ones with weak growth or democratic forms of government who are buckling under the pressure. And, for all of them, this is a very dangerous game to play because it has a large element of retaliation built in. Once it gets going a snowball effect may take hold.
But the politicians are in a quandary and are forced to be seen to act effectively, rather than simply give verbal support to those in distress. Just because economic recovery is in sight does not mean that the rising tide of protectionism will recede quickly. The rebound in the labour market will be slower than usual and international competition will be fiercer than ever, which means that there will be plenty of distressed entities looking to the government for help.
Many countries have been busy lodging complaints about unfair trade practices with official bodies. These complaints lead to investigations and may end up in the implementation of greater protectionist measures down the road. There is a lag involved in the process and could mean a rise in protectionism next year.
Some of the reversal in globalisation trends that we have seen recently is cyclical in nature and will be corrected as economic activity picks up. International trade has fallen back significantly from the steady upward trend of recent years, but will hopefully retrace most of the losses as economies rebound. Foreign direct investment has also declined. However, its resumption is more problematic than trade as it is more dependent on forward planning and the extent of risk appetite in a more uncertain environment.
Remittances from immigrant workers in rich countries to families back home have declined along with the economic fortunes of the hosts. This has affected recipient countries as diverse as Mexico, Bangladesh and Zimbabwe. And, of course, portfolio investment flows have experienced a degree of repatriation. For example, the enormous flow of funds into emerging markets, during the past few years, went into reversal when the crisis hit.
This was partly due to the somewhat irrational fear generated by greater uncertainty and partly because, for institutional investors, large gains could be booked to pay for investment losses elsewhere. The upturn in risk appetite over the past few months has already renewed interest in emerging-market assets.
As mentioned above, to the extent that the global economy is now recovering, we should also see a resumption of globalisation trends. But it would be wise to monitor the protectionist forces at work because they have the potential to cap global growth at a level below what was experienced in the pre-recession period.
The consequences of a reversal in globalisation are considerable; for producers, consumers and investors. It could result in lower efficiency in production and higher prices for consumers, along with fewer choices. It may restrict job opportunities and lead to lower growth in incomes and profits.