Globalisation
Turning their backs on the world
Feb 19th 2009
From The Economist print edition
The integration of the world economy is in retreat on almost every front
Illustration by Claudio Munoz
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%.
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.
And yet 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. As recently
as the first half of 2008, boosted by rising commodity prices and a
falling dollar, trade was growing at an annualised 20% in dollar terms.
In the second half of 2008, as commodities sagged and the dollar rose,
growth slowed fast; by September, says the IMF, it was in reverse. In
December, says the International Air Transport Association, air-cargo
traffic (responsible for over a third of the value of the world’s traded
goods) was down 23% on December 2007—almost double the fall in the year
up to the end of September 2001, a result affected by the 9/11 terror
attacks.
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.
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.
In contrast, the biggest emerging markets are doing less badly so far.
In India, where exports are around 15% of GDP, the government recently
said growth in the year to April 2009 would be 7.1%; most forecasters
put growth for the 2009 calendar year lower, but still about 5%. In
Brazil the economy has been harder hit by falling commodity prices and
declining exports. Most economists still think output grew a bit in the
year to the fourth quarter, and put growth for 2009 at 1.5% to 2%. China
was still growing by 6.8% in the year to the fourth quarter, though like
Brazil it is probably stagnating. Chinese exports fell 18% and imports
43% in the year to January. All three countries have large domestic
markets and relatively stable banking systems, which have not been
liberalised.
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?
Emerging markets’ trade problems have been worsened by shifts in capital
flows, globalisation’s second big plank. According to the World Bank,
net private debt and equity flows to developing countries will fall from
$1 trillion in 2007 to $530 billion in 2009, or from 7.7% to 3% of those
countries’ GDPs. The Institute for International Finance sees an even
steeper fall; it says that this year banks will extract more from
emerging markets in debt repayments than they inject in new loans. Bond
markets in those countries collapsed in the last quarter of 2008, doing
less than $5 billion of business; in the second quarter, they had issued
about $50 billion of bonds.
As with trade, financial deglobalisation is hitting countries in a
variety of ways. In this case, East Asia has been less affected because
most countries there are net creditors. But eastern Europe and Russia
have been hammered because local banks went on a foreign-borrowing
binge, foreign banks piled into their markets (and piled out again) and
because some countries lacked insurance policies against tough times.
Although many big emerging markets have built up foreign-exchange
reserves and cut their external debts, in eastern Europe reserves have
been flat, external debts have risen and current- account deficits have
grown considerably in the past decade. In these countries, the reversal
of globalisation has exacerbated problems that were building up anyway.
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.
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 (see article) 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.
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.
When consensus wobbles
But is that still true? 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.
So far, this has mostly taken the form of pouring public money into
banks and selected industries, notably cars. Last week Barack Obama set
out plans for another vast bank rescue, and the French government
promised €6 billion ($7.8 billion) in preferential loans to Renault and
Peugeot-Citroën in return for pledges that no car factories would be
closed in France.
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.
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