END OF GLOBALIZATION?
The third wave of globalization crumbled with the onset of the global financial crisis. Is globalization over?
In fall 2008, I concluded that export-led growth will be facing overwhelming challenges. In February 2009, I thought that full U.S. recovery would take until the mid-2010s. In spring 2010, I argued that debt restructuring in Greece and other crisis economies was inevitable and problems would deteriorate when the turmoil arrives in eurozone economies that account for more than 10% of the region’s GDP, especially Italy and Spain.
For three years, the global crisis has not been taken seriously enough. In the process, precious time has been lost. Globalization is at risk.
A short history of globalization
Economic integration occurs through trade, migration, and capital flows. Starting around 1870, all these flows rapidly became substantial, driven by falling costs of transportation. This first wave was reversed by a retreat into nationalism and protectionism between 1914 and 1945.
After World War II, trade barriers came down, while transport costs continued to fall. This second wave of globalization benefited primarily the advanced economies. It was the “golden era” of the advanced economies.
Since 1980 many developing countries broke into world markets for manufactured goods and services; concurrently, foreign direct investment increased. This era triggered the rise of the large emerging economies, or the “BRICs.”
That era ended in fall 2008.
Far below the peak
In spring 2008, the Baltic Dry Index, which is often used as a short-hand for international trade, climaxed at 11,800; today, it lingers at about 1,800.
In late October, the WTO’s report said that weak growth and macroeconomic imbalances globally are “testing the political resolve of many governments to abide by the G-20 commitment to resist protectionism.”
The challenges are reflected in the financial sector, as evidenced by the market capitalization of more than 50 stock exchanges worldwide. It, too, peaked $64.5 trillion at the end of 2007. After gradual recovery, it climbed to $59.2 trillion last April. With the escalation of the eurozone crisis, it has varied around $45-$49 trillion in the past month.
In the post-recession periods, stock exchanges and international trade typically pick up. This time is different.
Surpassing the Threats
Due to the accumulation of debt, growth is likely to be sub-optimal in the advanced economies in the short-, perhaps even medium-term.
Due to the stagnation in the export markets and FDI sources, growth will also be relatively slower, though solid, in the emerging and developing economies.
What makes things worse in is that, after more than two decades of cheap energy, rising energy prices have come to stay.
As downside risks are heightened, globalization is lingering. The path of nationalism, protectionism and competitive currency devaluations was tested in the 1930s. Today, the stakes are far higher and global.
It is time to recognize the magnitude of the threats. Surpassing them can only occur through decisive, multifaceted international cooperation.