Globalisation is good—we must manage it better

Last week the Resolution Foundation, a UK think tank and charity that supports the interests of those on lower incomes, published a widely-noted and compelling report. Its central claim was that, contrary to what many people have argued, globalisation is not the bete noire for the less well-off. It suggested that the real problem for those on low and middle incomes has been shortcomings in domestic policy. (The RF’s Director, Torsten Bell, wrote his own synopsis for Prospect here.)

This is significant because it shows that we must be careful not to throw the baby—globalisation—out with the bathwater—its inadequately addressed consequences. Treading this line will involve fine judgement. While the chances of us demonstrating this are not zero, they are not great, either.

Since the opening up of China under Deng Xiaoping—China’s paramount leader from 1978 to 1989—and the fall of the Berlin Wall, we have experienced a form of globalisation that is unprecedented in its depth and scope. A sharp fall in global poverty over the last 30 years is a result of this. According to the UN, the share of people in less developed countries classified as poor fell from 43 to 21 per cent of the population over this time—that’s roughly one billion people whose lives have improved. Global programmes such as the Millennium Development Goals have played an important role, but without rapid globalisation we would not have had the same advances in human development, income and output. The maturing of the Asian Tiger economies, and the rise of China to become the world’s second biggest economy, might never have happened—nor the benefits that these changes had for other countries and the global economy.

Globalisation’s winter of discontent

Yet things are clearly changing. This isn’t the first time in human history that globalisation has been under threat. The silk road disintegrated, as did the Roman version of globalisation. The latter of these was followed by darker times—known more simply as the Middle Ages. The more familiar globalisation of the nineteenth century was eventually consumed by two world wars and the Great Depression.

Our globalisation reached its high-water mark just before the 2008 financial crisis. It has stalled thanks to the economic hardship that followed this, and the new focus on the adverse consequences of unfettered globalisation. This much we know. Less certain but equally important is the potential impact of Britain’s decision to leave the EU—a delayed reaction to the shock of the 2008 financial crisis.

Our own Brexit focus is, naturally, on the processes and eventual content of deliberations involving the British government and our counterparts in the EU27. What the outcomes of this will be are as uncertain today as they were before 23^rd June, and they are unlikely to become clear any time soon. The global significance of the referendum, though, is that it captures a populist backlash that echoes across the western world by citizens who feel that they have not participated in the economics of globalisation, or who dislike some of its political and cultural attributes.

Some rail against immigration. Some resent the movement of investment capital as building up the skilled middle class in emerging markets at their expense. Many instinctively feel that there is too much finance capital moving around the globe, benefitting only those with capital. While the results have included a vague rant against “the elite,” they also include a more focused contempt for corporate tax practices and abuses, and executive pay, and a concern about income stagnation and or inequality. Against this backdrop, it certainly hasn’t helped that social trends, including the glacial but steady breakdown of traditional family and income security structures, have contributed to a cycle of underachievement and alienation among less well-off and less skilled families.

For many people, then, the future is now not about adapting but restoring a mythical past. We can see this in the US presidential campaign. Unchecked, this populism could push globalisation into reverse with worrying consequences for the global economy and political stability around the world. The next several months will provide something of an acid test for the path of globalisation: there will be national elections in the US, France, Germany and possibly Italy. America will command our closest attention. Since 1945, we have relied on the US to champion an open global system for commerce and finance. Yet, the changed political climate in the US has caused even Hilary Clinton to become lukewarm over some of the aspects of the Trans Pacific Partnership and other proposed US trade deals, including with Europe. If Donald Trump goes to the White House—an isolationist who has attacked this system in many ways—there is a high risk that he would use his executive power to wreck it.

Globalisation is already weakening

People sometimes ask in Monty Python-style “What’s globalisation done for us?” The answers, which are about the benefits of open trading relationships and economic integration, and their role as the drivers of long-term economic growth, probably count for nothing to many.

Yet the reality is that globalisation has been key to the development and diffusion of human development from steamship and long-distance communications technologies to modern ones embracing aerospace and computing technologies and digitisation. What we sometimes forget, and are then reminded about in very direct ways, is that globalisation also requires robust, inclusive institutions, and benign leadership. According to Dani Rodrik’s “globalisation trilemma” framework, it is not possible to have more than two of the following: deep economic integration (aka globalisation), democracy, and national sovereignty. That is, unless you have well-respected and trusted institutions such as those that prevailed in the era of Bretton Woods. Since our global institutions, including the IMF and WTO, are seen to be less robust or inclusive, and the US is, for the time being at least, otherwise distracted, it is easy to see how globalisation has become more vulnerable. There are three ways in particular that this manifests.

First, until 2007, world trade expanded at twice the rate of world GDP, but since then it has only grown in line with or less than GDP, leaving it well below trend. Emerging markets, which have relied on export-led growth, have been especially badly affected. Some of the reasons are relatively benign. For example: the completion of China’s surge to become the world’s biggest exporter; its falling reliance on imports of parts and components as domestic producers have become more sophisticated; and the turn in the commodity cycle.

A more worrying trend in recent years has been the rising tendency among G20 countries, in particular, to engage in commercial practices designed to steal competitive advantage. According to Global Trade Alert, an initiative which monitors policies that affect the world economy, the number of protectionist measures introduced in 2015 was 50 per cent higher than the prior year. And the level of global protectionism was higher than in 2009—the middle of the global recession. Indeed, since that time, G20 countries have introduced over 4000 individual measures of trade restraint, affecting 40 per cent of world trade. Many of these comprise non-tariff barriers, such as state aid, local content requirements, public procurement regulations, environmental and public health standards, intellectual property rights, and licensing and regulatory constraints. This is a blind spot for those imagining a rosy future for UK trade outside the EU’s Single Market.

Second, foreign direct investment (FDI), which is closely related to trends in world trade, is behaving in the same way. FDI inflows worldwide peaked at 5.2 per cent of world GDP in 2007, according to the World Bank, but then slumped to just over 2 per cent in 2009. Since then, they have behaved cyclically, but the levels remain around half of what they were before the financial crisis.

Third, cross-border international banking activity, as reported by the Bank for International Settlements, has been on the wane since the heady days of lending before 2007. In the year to the first quarter 2016, global cross-border lending fell 4.5 per cent compared with an annual average growth of 6 per cent over the last 20 years.

These three things constitute the visible signs of what is happening to globalisation. Ideally, we need global co-operation to manage globalisation and external imbalances that the G20 has patently failed to deliver. Germany, Japan, China, South Korea and Russia are G20 countries that ran up a balance of payments surplus in 2015 of over $1 trillion; a plan to run that down in favour of the rest of the world would be very helpful. We also need leadership by a US that has lacked motivation, and for now at least, lacks focus. The chances of either of these things happening any time soon is zero.

In the meantime, to stop the cracks in globalisation leading to a crumbling, look no further than the implications of the Resolution Foundation’s report. We must aim to make the benefits of globalisation more inclusive.

This is about government policies that focus on redistribution, on governance and fairness, and economic rebalancing, investment, and productivity growth. This isn’t rocket science or a complex mathematical task, but a matter of political will. I hope that something will be done—in this country at least. Theresa May’s government, lacking a coherent Opposition, will hopefully see it is in its own interest to get on with it.