Globalization’s Progress — Slowed or in Retreat?

Stephen DeAngelis

March 12, 2009

No matter what standard one might use to measure the extent of the current financial crisis, all the results confirm what the average consumer has known for a long time — we are in hard times and they are getting more difficult. An article in The Economist insists that “the integration of the world economy is in retreat on almost every front” [“Turning their backs on the world,” 21 February 2009 print edition]. For the millions waiting for globalization to knock at their doors and present them with the same opportunities that brought 2 billion people out of poverty over the past couple of decades, this is not good news. In fact, the news is not good for the 2 billion that have been helped so far.

“The economic meltdown has popularised a new term: deglobalisation. Some critics of capitalism seem happy about it—like Walden Bello, a Philippine economist, who can perhaps claim to have coined the word with his book, ‘Deglobalisation, Ideas for a New World Economy’. Britain’s prime minister, Gordon Brown, is among those who fear the results will be bad. But is globalisation really ending? The world’s economies are certainly slowing fast. And the speed and scale of this recession are raising doubts about the assumptions that had underpinned the drive to integrate world markets. At the end of 2008 the IMF said the world economy would grow 2.2% in 2009, less than half the rate in 2007. Now it thinks growth will be just 0.5% this year, the lowest for 60 years. Even that may be optimistic; in the last quarter of 2008, some economies shrank at annualised rates of over 10%.”

As the article notes, critics of globalization are probably smiling secretly to themselves, while outwardly lamenting the heartache and return to poverty created by the current economic downturn. So what does the future hold for globalization? The article continues:

“Nobody ever said globalisation had ended economic ups and downs, but this feels different: prima facie evidence of big problems at least, and possibly of the failure of globalisation to deliver many of its advertised benefits, especially to the poor. True, economic slowdown is not the same as deglobalisation. And the slowdown has yet to affect one thing. For years, poor countries have been growing faster than rich ones; so far, they still are. The gap between real GDP growth in emerging markets and in rich countries widened from nothing in 1991 to about five points in 2007—and, says the IMF, it will stay at 5.3 points in 2008 and 2009. Helping poorer countries catch up has long been among the benefits touted for globalisation.”

That sounds like good news for developing countries, but The Economist is about to throw a wrench into globalization’s gears.

“The process is going into reverse. Globalisation means the global integration of the movement of goods, capital and jobs. Each of these processes is now in trouble. World trade has plunged. … The downturn has been sharpest in countries that opened up most to world trade, especially East Asia’s tigers. Singapore’s exports are 186% of GDP; its economy shrank at an annualised rate of 17% in the last three months of 2008. Taiwan’s exports are over 60% of GDP; and its economy may fall as much as 11% this year. The downturn has also hurt rich countries that specialise in staid old-fashioned manufacturing—supposedly a safer activity than the reckless delusions of finance. On average, says the IMF, rich countries will contract 2% this year. But Germany and Japan, big exporters of capital goods, cars and electronics, will do worse, their economies shrinking by 2.5% and 2.6% respectively. In the last quarter their economies contracted alarmingly, falling at an annualised rate of 8% in Germany and by 13%—the worst since 1974—in Japan.”

The article points out that air cargo has been reduced to a level even below that seen following the terrorist attacks of 11 September 2001. It’s not fear but fortune that is driving the current slump. And just was the case following 9/11, the conveyance of people, not just goods, is down.

“Small countries which went into businesses that grew in globalisation’s wake, like tourism, are also suffering. The World Tourism Organisation says international tourist arrivals fell 1% in the second half of 2008, which may not sound bad, but compares with growth of more than 5% a year for the previous four years. In the Caribbean, visitors may fall by a third this season; in some islands hotels are half empty, flights are being cancelled and national budgets, reliant on tourism, are strained.”

Not all news is bad. Some news is “not as bad as it could be.” Big emerging market countries are, as the article states, “doing less badly so far.” India still forecasts positive GDP growth of around 7 percent (although some forecasters believe that is optimistic). Brazil’s economy will be harder hit, the article states, because of “falling commodity prices and declining exports.” Nevertheless, Brazil’s economy will probably remain stable but with little growth. China’s growth rate is also expected to be around the 7 percent mark; but China’s exports have fallen dramatically and most of that growth will come from increased domestic consumerism. The news about Brazil underscores a fact that has long been known as a problem for emerging market countries — economies that rely on income from commodities are more likely to be buffeted by volatility than economies with a more diversified economic base. The Economist asks an intriguing question that goes to the heart of globalization — can one be too dependent on trade?

“The gap between toothless tigers and friskier BICs (ie, BRICs minus Russia, a special case because of oil) raises questions not so much about globalisation as a whole—after all, Brazil, India and China have been beneficiaries—as about particular aspects. Can one be too dependent on trade? How far should one liberalise banking? Is there a trade-off between taking advantage of good times and providing shock absorbers for bad ones?

The Economist admits that emerging markets have been hurt by shifts in capital flows (one of the three pillars of globalization — the other pillars being flows of resources and people). The article reports that international banks expect to withdraw more money in the form of debt payments from emerging market countries this year than they expect to inject into those economies as new loans. Bond markets in some emerging market countries have also collapsed the article reports. The effects of the financial crisis are not equally felt, however. Countries with high rates of savings (mostly in Asia) will be affected less than eastern European nations who have relied on foreign credit to grow their economies. Their debts have become crushing as local currencies fall and debts must be paid in relatively stronger foreign currencies. When it comes to development, the best indicator of whether a country is going to benefit from globalization is the amount of foreign direct investment it received. It comes as no surprise that FDI is also being affected.

“People in emerging markets have mixed feelings about financial liberalisation and may not regret its reversal. But foreign direct investment (FDI) is different. Most people welcome new factories and new jobs. FDI is also one of the commonest routes by which skills and technology are transferred from rich to poor countries. This, too, is falling. The United Nations Conference on Trade and Development (UNCTAD) says worldwide FDI inflows shrank 21% in 2008 to $1.4 trillion. The World Association of Investment Promotion Agencies says FDI will contract by a further 12-15% this year. In contrast to trade, the investment impact of the global downturn has so far been hardest on the countries where the woes began: rich ones. They have seen FDI falls of one-third on average and by half or more in Britain, Italy and Germany. Finland and Ireland have seen net outflows. FDI flows to developing countries were still growing in 2008, albeit by only 4%, after a rise of 21% in 2007. Flows to big South American countries were up by about a fifth; those to India more than doubled, though they may ebb as GDP falters.”

One reason that FDI is still flowing to some emerging market countries is that their domestic markets represent a largely untapped source of revenue. Developed countries’ markets are largely saturated. Finally, the article turns to the subject of jobs.

“The third of the three main aspects of globalisation—jobs—is following the other two, with a lag. The International Labour Organisation forecasts that unemployment worldwide will rise by around 30m above 2007’s level in 2009. Most of that rise will be the result of recession, not deglobalisation, but some will be attributable to the fall in trade (exporting companies will lay off workers) and some to declining investment (if expansion plans are cut, new jobs will not be created). Deglobalisation will have a dire impact on migrants. In the past decade, more people have been moving voluntarily than ever before; now, some are going home. Those who provided labour for the housing boom in America (notably Latinos), Ireland (Poles) and China (rural Chinese going to cities on the eastern seaboard) have been among the first to be laid off. In Spain newly jobless builders are competing with migrants there for jobs picking fruit. This will surely have an effect on the flow of remittances from rich countries to poor ones, although it has so far been quite resilient. In any case, economies that absorbed large numbers of foreign workers may take fewer. Some of the millions of South Asians who work in the Gulf, or the young Africans who flock to South Africa, or the Central Asians who work in Russia, may have to stay at home.”

Dubai is a good case in point. Foreign workers who flocked to the once thriving emirate seeking good paying jobs are leaving in droves. Many of them are abandoning their automobiles (purchased with loans that have yet to be repaid) in the airport parking lot.

“Yet for all the economic pain, the social and political fallout from deglobalisation has not yet been severe. Protests may still come. Or maybe national governments are absorbing most of the ire. In December, Greece saw riots after a police bullet killed a teenager. In France, unions brought over 1m people onto the streets for a one-day strike, and a riot in Latvia over economic policy ended in more than 100 arrests. But only in Britain, where workers have picketed refineries and power stations over the hiring of foreigners, has protest had a very anti-global tone. This lag may be explained by residual support for globalisation, especially in emerging markets. A poll in 2007 by the Pew Global Attitudes Project found that majorities in 47 countries saw international trade as good for them; majorities in 41 out of 46 welcomed multinational firms; in 39 out of 47, most felt better off with a free market. In more than half the countries where changes could be tracked, support for free markets was rising.”

As the article stresses, however, things in 2007 were significantly different than in the last half of 2008. What appears good in flush times doesn’t always look so good in the dim light of recession. The change in perception affects rich countries as well as poor.

“Last summer, on the eve of the meltdown, European Union pollsters reported that two-thirds of EU citizens saw globalisation as profitable only for large firms, not citizens. In 2002, according to the Pew poll, 78% of Americans thought foreign trade helped the country; by 2007 it was only 59%. A CNN poll in July 2008 showed that, for the first time, a small majority of Americans saw trade as a threat, not an opportunity. Of the few worldwide polls to have been completed since then, one by Edelman for the World Economic Forum found that 62% of respondents in 20 countries said they trusted companies less or a lot less now. Manifestly, popular opinion backs more state regulation.”

The only “good news” amid the current economic turmoil has been a general resistance to protectionism, which was widely credited with plunging the world into the Great Depression.

“There has been somewhat less evidence of trade protectionism. India has raised some steel tariffs. The EU has reintroduced export subsidies for some dairy products. Russia has raised import duties on vehicles. But there has also been movement the other way. The American Senate softened the ‘Buy America’ provisions of the stimulus bill. Mexico said that by 2012 it would cut tariffs on thousands of kinds of manufacture. And some countries have sought a safe harbour, rather than embracing pure nationalism. East Europeans are even keener on the shelter of the euro; Iceland has applied to the EU; the Irish are more likely than they were to vote for the EU’s Lisbon treaty. Despite the downturn, the nations of the world have not shunned globalisation. It has been protected by the belief of firms in the efficiency of global supply chains. But like any chain, these are only as strong as their weakest link. A danger point will come if firms decide that this way of organising production has had its day.”

I think The Economist‘s case that world is “deglobalizing” is weak — and that’s good news. It may be slowed, but I don’t think it’s in retreat. I suspect that current economic downturn will strengthen the trend for regionalization within the larger framework of globalization. In the long-run, however, regionalization could prove to be a good thing. It could help countries that have been outside of globalization’s supply lines become part of a regional supply chain. It will shorten supply chains, which will require less fuel, which should help constrain transportation costs. Now is the time for developing countries to position themselves for the recovery. It is not a time to exacerbate the situation by hunkering down and trying to shut out the world.