Globalization: Retreating or Transforming?

Stephen DeAngelis

November 06, 2012

A recent headline in the Wall Street Journal stated with some certainty that globalization is retreating. [“The Retreat of Globalization,” by Kevin Warsh and Scott Davis, 14 October 2012] Before I look at the arguments about globalization’s retreat offered by Warsh, a former Federal Reserve governor, and Davis, chairman and CEO of UPS, I’d like to remind you that there has been a lot of what The Economist calls “globaloney” written about globalization. [“The case against globaloney,” 20 April 2011] The Economist article notes that much of what journalists write involves simplification and/or exaggeration. It claims that assertion is certainly true when it comes to what has been written about globalization. It states:

“There is a lively discussion about whether it is good or bad. But everybody seems to agree that globalisation is a fait accompli: that the world is flat, if you are a (Tom) Friedmanite, or that the world is run by a handful of global corporations, if you are a (Naomi) Kleinian.”

The staff at The Economist claims that at least one academic has managed to “keep his head” on the subject of globalization. He is Professor Pankaj Ghemawat of IESE Business School in Spain. It explains:

“For more than a decade he has subjected the simplifiers and exaggerators to a barrage of statistics. He has now set out his case—that we live in an era of semi-globalisation at most—in a single volume, ‘World 3.0’, that should be read by anyone who wants to understand the most important economic development of our time.
Mr Ghemawat points out that many indicators of global integration are surprisingly low. Only 2% of students are at universities outside their home countries; and only 3% of people live outside their country of birth. Only 7% of rice is traded across borders. Only 7% of directors of S&P 500 companies are foreigners—and, according to a study a few years ago, less than 1% of all American companies have any foreign operations. Exports are equivalent to only 20% of global GDP. Some of the most vital arteries of globalisation are badly clogged: air travel is restricted by bilateral treaties and ocean shipping is dominated by cartels. Far from ‘ripping through people’s lives’, as Arundhati Roy, an Indian writer, claims, globalisation is shaped by familiar things, such as distance and cultural ties. Mr Ghemawat argues that two otherwise identical countries will engage in 42% more trade if they share a common language than if they do not, 47% more if both belong to a trading block, 114% more if they have a common currency and 188% more if they have a common colonial past. … Mr Ghemawat also explodes the myth that the world is being taken over by a handful of giant companies. The level of concentration in many vital industries has fallen dramatically since 1950 and remained roughly constant since 1980: 60 years ago two car companies accounted for half of the world’s car production, compared with six companies today. He also refutes the idea that globalisation means homogenisation. The increasing uniformity of cities’ skylines worldwide masks growing choice within them, to which even the most global of companies must adjust. McDonald’s serves vegetarian burgers in India and spicy ones in Mexico, where Coca-Cola uses cane sugar rather than the corn syrup it uses in America.”

The article concludes, “People seem to have a natural tendency to overestimate the distance-destroying quality of technology.” The point is, if globalization is in retreat, it can’t retreat very far. Considering those facts, it’s remarkable that globalization has accomplished as much as it has over the past few decades. Using that picture of globalization as a backdrop, let’s look at what Warsh and Davis have to say. They write:

“Globalization—connecting capital and labor, producers and consumers, emerging economies and their more mature counterparts—has led the world-wide surge in economic activity for the last three decades. It brought hundreds of millions out of poverty. It created hundreds of billions in shareholder value. Productivity and aggregate standards of living rose markedly. Companies, large and small, competed as never before.
In the United States, as in other mature economies, some workers were displaced. But the overall economic pie expanded. So the debate focused on how best to divide the spoils and prepare those displaced for a world ripe with new opportunity. Yet globalization is now showing signs of retreat. And so is the structural fillip that amplifies economic growth and individual opportunity for all Americans.”

Warsh and Davis point to a number of indicators that support their argument that globalization is in retreat, such as, decreasing “cross-border, private-capital flows”; corporate “self-restraint in their investment in long-lived assets”; and large banks “forgoing their global ambitions.” There is no denying that the Great Recession has had an impact on the global economy and those impacts continue to ripple around the globe. I think it’s fair to say that most developed countries are looking inward trying to wrestle their own economic problems to the ground. That introspection has indeed made an impact on international trade — which Warsh and Davis call “the glue that connects the global economy.” They continue:

“Trade has grown much faster than economic growth for most of the last few decades, thanks largely to the globalization wave. Only twice since 1982 has global trade growth trailed economic growth. But trade has weakened over recent quarters. According to the International Monetary Fund, trade growth volume is projected to slump to 3.2% this year, down from 5.8% last year and 12.6% in 2010. The World Trade Organization recently cut its forecasts for global trade by more than a full percentage point for this year and next. Absent fundamental policy changes, these data mean that the IMF’s global GDP forecasts for this year (3.3%) and next (3.6%) are challenging to meet. Yet even this cyclical weakness is not the gravest concern. What if the cyclical has become structural, and economic potential is falling? What if the world is getting more fragmented and the gains from globalization are being forgone and forgotten? What happens if policy makers remain preoccupied with short-term urgencies to the exclusion of long-term priorities?”

Those are excellent questions that deserve serious answers. For one, I’m not quite as concerned as Warsh and Davis appear to be about a fragmented world. For some time, I have argued that within the larger framework of globalization we are likely to see more regionalization. Regionalization makes sense in a lot of areas; especially in light of rising fuel/transportation costs. But Warsh and Davis are worried that regions that should be solidifying are, in some cases, fragmenting. They point, for example, to Europe. They write:

“Developments in Europe are of great consequence to the rest of the world. And these may prove a telling indicator—or a further catalyst—of a broader, growth-defeating trend away from globalization.”

To counter what they see has harmful trends, Warsh and Davis insist, “Leaders must resurrect their commitment to knocking down barriers to growth, increasing global trade, and coordinating policy actions to grow economic potential.” They continue:

“The U.S. economy, in dire need of sustainable growth, cannot afford to squander this opportunity. American leaders must find their voices in championing free markets, free people and free trade. Unless we reaffirm these first principles for economic growth in a globally connected economy—and act on our own prescriptions—the gains from globalization will be lost. This is no time for small ball and short-term fixes.”

The old adage that a rising tide lifts all boats certainly applies to the global economy. Nations cannot isolate themselves from the effects of the global economy and, therefore, it’s in their own best interests to work together to overcome systemic challenges that pose obstacles to growth. As national economies remain mired in recession, taking the long view is going to be difficult. But, as Warsh and Davis insist, hard times are when great leaders must act decisively. American leadership is particularly important because America’s economic impact on global affairs remains substantial. Unfortunately, asking U.S. policymakers to act decisively during a presidential and congressional race has been too much to ask. Whoever is elected in today, they need to act quickly and decisively once in office to put globalization and the global economy back on the right track.