Follow Philippe Legrain on Twitter Follow Philippe Legrain on YouTube Follow Philippe Legrain on Facebook Email me
By Philippe Legrain 1 COMMENT

Twenty years ago, nobody foresaw the imminent fall of the Berlin Wall; two years ago, no one was predicting the partial nationalization of the Western banking system. The future is unknowable; caution, skepticism, and, above all, humility are essential in seeking to peer into it.

What, then, do we know? We know that globalization is the combination of distance-shrinking technology and market-opening government policy that is bringing the world closer together. Global connections are—for the most part—cheaper, faster, and more pervasive than ever. Technological progress is almost certain to continue, while powerful economic and political interests support further global integration. Continued globalization would therefore seem inevitable.

But it isn’t. Technology can’t (short of a nuclear winter) be uninvented, but its impact can be impeded. Today, globalization is neither uniform nor universal. It will always be incomplete. Clearly, then, it is also reversible. The cost of connectivity could rise, while governments could make foreign interactions costlier or tougher.

History shows that economic disintegration can happen: witness the devastating 1930s, the economic closure of Russia and China when they became communist, or the widespread pursuit of import-substitution policies in the 1960s and 1970s. Now, the global financial crisis has undermined faith in free markets. A long and deep recession could stoke protectionist pressures. An alliance among the losers from globalization, those who fear they might become losers, ideological opponents to globalization, and opportunistic lobby groups could conceivably throw it into reverse.

The retreat, if it happens, may be patchy rather than wholesale. Globalization is not an all-or-nothing state of the world; it is a process that can progress—or regress—to varying degrees and in different ways country by country. It operates through at least five channels: cross-border trade in goods and services; international capital mobility; the movement of labor across borders; the flow of ideas, information, and technology around the world; and politics: cooperation among national governments, international rules and institutions, and the activities of nongovernmental actors, such as Greenpeace, the Catholic Church, and even online social networks, such as Facebook.

Start with product markets. The Word Trade Organization’s (WTO) Information Technology Agreement prohibits countries from imposing tariffs on many IT products, but its scope is disputed: the United States objects to the EU’s tariffs on flat-screen monitors and multifunction printers, for instance. As new high-tech products emerge, they will be vulnerable to tariff encroachment and trade-limiting regulations. In agriculture, WTO rules have little bite. Most developing countries have plenty of scope to raise their tariffs on manufactured goods, since their current applied rates are well below the maximum allowed. Governments’ commitments to liberalizing trade in services, which account for the bulk of the global economy, are patchy.

A panoply of other measures can also be used to gum up trade, such as antidumping duties, trade-inhibiting regulations, and official tolerance of monopolies, cartels, and other anticompetitive practices. And if governments really want to, they can ignore WTO rules.

This need not involve a trade war. The WTO’s core principle of nondiscrimination is already being eroded almost daily as preferential pacts proliferate. Far from being “free-trade agreements,” these bilateral or regional deals are their antithesis, giving privileged access to some at the expense of others and tying up trade in a web of rules-of-origin requirements and other red tape. Such deals are also more prone to have quasi-protectionist labor and environmental clauses tacked on to them. Worse, they create their own infernal logic, whereby those who are discriminated against seek their own special deal.

After 13 years without a comprehensive WTO agreement, they seem like the only game in town for politicians and businesspeople, sapping efforts to conclude an ambitious Doha round and raising new obstacles to it, as countries and companies fight to preserve the preferences they have acquired.

Even where markets remain reasonably open, other factors can limit globalization. Regulations that are not protectionist in intent can nonetheless act as barriers to trade: think of food safety standards, port security inspections, and different accounting standards. Preferences can also tilt toward the local for all sorts of reasons.

Among them:

* Green initiatives: People may opt for local holidays and farm produce to shrink their carbon footprint.
* Culture: Viewers may prefer television programs that relate to their everyday experience.
* Nationalism: Some may reject cheaper and better imports because they want to consume national products.
* Politics: Witness the consumer boycott of Danish products in many countries following the Muhammad cartoon row—and the “Buy Danish” backlash.
* And, of course, economics: Rising prosperity and demographic aging tends to skew demand away from imported goods towards services—such as cleaning and social care, that can only be provided on the spot. With or without government intervention, global connections could weaken.

One big question is whether higher oil prices will render globally scattered supply chains uncompetitive. To a certain extent, high oil prices are eventually self-limiting since they stimulate the development of additional supplies and crimp demand. Greater efficiency and the development of alternative energy sources could permanently depress oil demand. In any case, transport costs are relatively unimportant for higher value-added trade. So oil may not be that significant a drag on globalization.

Consider capital next. The global financial crisis continues to surprise; its long-term consequences are unpredictable. It could foster greater economic policy coordination, closer monetary integration in Asia, and the expansion of the eurozone. Or it could rankle national sensibilities in the Pacific and even split the eurozone.

The crisis would appear likely to curb financial globalization. Countries that maintain capital controls are less likely to lift them; poor countries that struggled to attract external finance in the go-go years will find it even tougher. Tougher international regulation could also hamper capital flows (not a bad thing in itself, admittedly). Yet tougher national rules could drive more finance offshore. Desperation has lowered the barriers to sovereign-wealth funds and other foreign investors taking big stakes in American and European banks. Ambitious reforms to the global financial system could end up prompting more, not less, financial globalization.

How so? Consider that although money flows freely, it does not reliably irrigate everywhere. The promise of financial globalization—that it will spread risk and allocate capital better—remains largely unfulfilled. Even emerging economies with excellent investment prospects cannot count on regular capital inflows; many feel obliged to pile up vast foreign-currency reserves. This is a huge waste of resources—and it perversely results in them becoming net savers. Judicious reforms, starting with the swap arrangements the Fed has started offering to a handful of emerging-economy central banks, could thus support further financial globalization.

The third channel of globalisation, labour mobility, is already tightly constrained. While a global elite can live and work more or less where they please, most of the world’s population is expected to stay put. As the United States erects a wall along its border with Mexico, European ships patrol the Mediterranean to keep out unwanted migrants, and most countries conspire through Byzantine bureaucracy to prevent foreigners coming to work there, the chances of people moving more freely 20 years from now would appear remote. Fear of foreigners, fear of change, worries about jobs, welfare, race, identity and security – all militate against greater openness. But think again. Twenty years ago, it was unthinkable that Poles could now work freely in Britain or Spain. By 2014, the citizens of all ten former communist states that have joined the EU in recent years will be free to work throughout Europe. Twenty years from now, people may be more mobile than we expect.

Ageing – and soon-to-be shrinking – wealthy societies desperately need young low-skilled labour, of which the developing world has an excess. As baby-boomers in America and Europe retire over the next 20 years, they will stop worrying about who might take their job and start fretting about who is going to look after them. Businesses are also keen to be able to tap the widest pool of talent. This will increasingly come from emerging economies. China already generates more university graduates each year than all of Europe; India is not far behind. Immigrant entrepreneurs in Silicon Valley have highlighted the huge potential gains from diversity. At every skill level, a more mobile workforce is increasingly vital to success in the fast-changing global economy. Meanwhile, young people who grow up in a multicultural environment tend to be more open to newcomers. In any case, governments have had little success in keeping out unwanted migrants, while climate change could create millions of environmental refugees – and some will move to advanced economies, legally or not.

Information can already whizz around the world instantaneously – and it is likely to be even more pervasive 20 years from now. But a note of caution is needed. The vast majority of the world’s population has never used the internet. Governments can block out foreign information: witness the great firewall of China. If the world takes a more authoritarian turn, such controls could spread. Other blockages may impede the transmission of foreign ideas: culture and language barriers; religion; a lack of education and understanding. Even in countries where people are constantly bombarded with information, many struggle to absorb it – or choose to tune out. In most countries, the TV news is resolutely parochial; the number of foreign correspondents is dwindling. Our minds will not necessarily be more open to foreign ideas in 2028.

The disconnect between a globalising economy and politics that largely remains fragmented along national lines poses a huge challenge. Global government is a pipedream; even within the EU, nation states rule the roost. Progress in tackling genuinely global challenges – such as climate change – is faltering at best. But substantive and legitimate international rules are essential. Without them, the global economy is acutely vulnerable to a nationalist and protectionist reverse. Unless politics catch up with economics, it is likely to drag it back.

Posted 25 Mar 2009 in Globalisation, McKinsey, Published articles
  1. MARIA BEAMONT says:

    You haven’t mentioned the Knowledge economy and the skills that we as global citizens need to acquire to ‘flourish’ and survive in a time of rapid globalisation. Also the important role that education has to play in promoting dialogue amongst all people and how the people of the North need to learn and listen to valuable lessons from our friends and neighbours of the global South for a change.

Leave a reply




*

rch.