The
financial crash will not bring about 'globalisation on steroids'
Joshua
Kurlantzick.
17
February, 2013
In
the wake of Barack Obama's re-election and the leadership change in
China, many economists, businesspeople and leaders have assumed that,
with internationalists at the helm of the world's two largest
economies, the world will see a new period of greater economic
integration.
Optimists
hope that this integration eventually will pull the globe out of its
prolonged economic malaise. Indeed, many struggling economies, such
as Greece, already are seeking closer economic integration with
China; Chinese aid and investment has helped revitalise Greece's most
important ports.
And
as developing nations such as China take the lead on trade deals,
they also are gaining a bigger role in international financial
organisations, which thus supposedly also are becoming more
integrated. The future, as one American columnist wrote, is
"globalisation on steroids".
Yet
in reality today's economic slowdown, over the long term, is likely
to have just the opposite effect. The slowdown will leave as its
legacy the worst deglobalisation in modern history, a period of
shutting down international lending, government protectionism, failed
free trade deals, and the renewed power of state capitalists. Even if
the slowdown soon ends - if Xi Jinping in China and Barack Obama in
the US can use their mandates to push for freer trade and global
integration - the long-term effects of this deglobalisation will last
decades, putting a ceiling on how much the world economy can ever
rebound.
For
at least a century, the world economy has run in cycles, in which
integration, in the form of closer trade and financial ties,
cross-border bank lending, and rising trade and migration, has been
followed by short periods of slowdown and deglobalisation, periods in
which the world economy became less linked together.
At
times, the slowdown and de-globalisation was precipitated by world
wars, as in the 1910s. At other times, it was precipitated by major
energy shocks, such as in the early 1970s.
Yet
after each period of deglobalisation, the world economy quickly
bounced back, with banks soon seeing new opportunities to lend
abroad, new trade rounds launching, new companies springing up to
increase global exports, and new financial services products emerging
to tie markets together.
Not
so this time. This de-globalisation is so severe that its effects
will not be easily reversed. In nearly every leading nation, not only
politicians on the left - the opponents of globalisation in earlier
periods - but also on the right have come to a consensus sceptical of
greater economic integration.
In
the 2012 US presidential campaign, Mitt Romney attacked trade with
China even more than Barack Obama, while both Democrats and
Republicans almost unanimously supported new measures to block
Chinese telecommunications firm Huawei from investing in 4G phone
networks in the US - and received no opposition even from the most
pro-business Republicans.
Meanwhile
in France the right-leaning Gaullist parties, under Nicolas Sarkozy
and his heirs, have become as supportive of greater protectionism as
the Socialist Party, which under the current president, Francois
Hollande, has enacted new import restrictions on major trading
partners like South Korea and pushed French supermarkets to sell only
French products.
Meanwhile,
leaders of many developing nations have become nearly as sceptical of
globalisation as their western peers.
In
the past year, major coalition partners of the Indian Congress
government have left the coalition to block the prime minister's
efforts to open up India to foreign retail.
In
Brazil, the president, Dilma Rousseff, has increasingly pushed for
greater protection of strategic Brazilian industries, telling the UN:
"We cannot accept that legitimate initiatives of commercial
defence by developing countries can be classified as protectionist."
Politicians,
at least, often exit the scene without having lasting effects. But
more frightening, the financial institutions that once propelled
globalisation have retrenched so badly that their shift will last for
years.
Today,
as crisis-hit European nations have passed legislation forcing banks
to maintain higher capital requirements and to invest more within
their own borders, these European institutions, which had been the
major sources of emerging world investments, have started a process
of massive deleveraging.
Until
two years ago, European banks accounted for about 90 per cent of all
foreign bank lending in Africa, eastern Europe, and the Middle East.
That figure is dropping rapidly.
Although
some European leaders at first thought this contraction in European
banks' balance sheets would only last through 2011 and 2012, now they
- and the world - are starting to realise that the deleveraging is a
much longer-term problem. Credit Suisse estimates that European
banks' returning to lending in their home markets will strip as much
as $1 trillion in funding from emerging markets and even developed
markets over the coming decades. In other words, expect to see a
credit crunch for decades.
Trade,
one of the other pillars of globalisation, also will take decades to
recover. The World Trade Organisation's current round of
negotiations, known as the Doha Round, has been stalled for years,
and the regional free trade agreements enacted by Asian nations in
part to replace Doha contain far less liberalisation than meets the
eye.
A
third major pillar of the globalisation of the 1990s and 2000s was
increased migration.
But
as the economic slowdown has morphed into a longer-term period of
stagnation, the tolerance of wealthier nations for migration has
ebbed.
In
the US, the Republican Party's 2012 platform called for
"self-deportation" of illegal migrants in the US.
This
tough stance is being echoed in many other wealthy nations, where the
level of anti-immigrant sentiment is high.
In
austerity-wracked southern European nations, rabidly anti-immigrant
parties already have become mainstream political power players.
Greece's anti-immigrant party, Golden Dawn, already has established a
fearsome reputation for rounding up and beating immigrants. It now
holds the fourth-largest number of seats in parliament.
Even
tiny Singapore, a country that despite the global slowdown has
maintained a GDP per capita of $61,000 at purchasing power parity and
which depends on trade and foreign workers to prosper, has seen its
public turn sour on migration. Anti-foreign worker sentiment helped
propel the Singaporean opposition, dormant for decades, to its
strongest showing ever in last year's elections, as it criticised the
ruling party for being too lenient in allowing migration.
As
trade flows, financial globalisation, and cross-border migration
recede, the state has returned to power around the world, turning
back the gains made by free markets in the 1990s and early 2000s.
While
state-owned enterprises only controlled six times as much of China's
industrial output as private firms in 2004, today they control 11
times as much.
And they are hardly unique. In the years 2004-2009,
while 120 state-owned companies made their debut on the Forbes list
of the world's largest corporations, more than 250 Western private
companies fell off that list.
Since
this round of deglobalisation involves a longer period of
protectionism and worse damage to banks, it is likely to be longer
and deeper than previous periods.
For
the global economy, this probably will mean a dearth of new
entrepreneurial companies, particularly in developing nations.
In
addition, it will mean that trade wars probably will only escalate,
since these regional trade deals do not hold world leaders to the
tough standards that previous WTO rounds did; in the long run, this
could lead to an overall decline in trade, which would make the
entire international economy far less dynamic, and could even lead to
greater political tensions between big trading powers such as the US
and China.
Joshua
Kurlantzick is Fellow for South-east Asia at the Council on Foreign
Relations
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