Is globalization in retreat?

Production and investment have now become more global and interconnected and services are increasingly being traded across borders

The 45th president of the US has declared war on globalization. The Brexit vote did something similar in Great Britain. The two countries underwriting the postwar international order have declared their intention of putting their national interest above all else. Multilateral trading, investment, and even visa, agreements face new threats. Might this assault succeed?

Globalizing forces have been rampant ever since the first men migrated out of Africa. The Roman empire was a globalizing force in the classical age, as was the expansion of Islam during the Middle Ages, and the British empire in more recent times. So was the overland silk route and Indian Ocean trade, from China, via India to the Horn of Africa and the Mediterranean, trans-Atlantic trade, and more recently the World Trade Organization (WTO).

The cost and risk of travelling long distances through littleknown lands or seas on slow animal and wind-propelled power constrained the pace of globalization. Most people lived and died near their place of birth. Only ruling elites could afford to buy the small quantities of international goods, such as Chinese silk and porcelain, or Indian muslin and pepper, transported over long distances in modest quantities. This trade nevertheless enhanced the incomes of the artisans producing these high-value goods, and the quality of life of those consuming them. Countries connected to this international trade, such as China and India, were the most affluent. There were ebbs and flows on account of war and invasions, but world exports and imports together never exceeded 10% of global gross domestic product (GDP) till the 19th century.

The technology of the industrial revolution enabled rapid movement of large volumes of factory-produced goods, and people, over long distances at sharply reduced costs. International trade made rapid strides in the 19th century, peaking at around 30% of global GDP on the eve of World War I. There was, however, a dramatic retreat in the interwar period, as it plummeted back to around 10%. But it resumed its triumphal march in the postwar era, recovering to 30% by the 1970s, and crossing 60% in the first decade of the 21st century.

The benefits of globalization could now be more widely shared. First, industrial products were produced more cheaply and available in greater abundance than those produced by local artisans. Second, the range and quality of goods increased, enriching material life, with even the poorest enjoying a better material life than preindustrial elites. Third, large external demand raised the prospect of hyper growth and, therefore, a more rapid rise in the standard of living, which had inched forward at a glacial pace for millennia.

But there were also losers over the short term. Traditional industry became uncompetitive and unviable. A large number of people in the colonies lost a source of income through ‘deindustrialization’. At a time when agriculturists in industrializing countries were moving into more productive and higher income yielding jobs, workers in the colonies were compelled to fall back exclusively on low-productivity agriculture. Their material life nevertheless improved as they shared the productivity gains through the increased availability of cheap industrial wage goods.

The spread of the industrial revolution to the erstwhile colonies in the postwar era is slowly reversing this great divergence because it is now cheaper to produce there. This has accelerated growth even as it has fallen off in advanced countries, improved overall well-being and facilitated the spread of liberal democracy. With declining growth in advanced countries has come higher structural unemployment and a declining labour participation rate. This is fuelling a backlash against globalization and undermining liberal democracy. It was older and semi-skilled workers in outlying, less cosmopolitan areas who voted to leave the European Union. Likewise, Donald Trump’s most trenchant supporters are relatively less-educated blue-collar poor white males in rural backwaters and crumbling industrial areas.

Ironically, this backlash is occurring at a time when the argument for extending the scope of globalization beyond free movement of goods to movement of people across borders, has never been stronger, owing to the ageing of advanced economies. It is easy to forget that the current losers were among the first beneficiaries of globalization during the colonial era, and even today their material life continues to improve despite stagnant real incomes. Like their former colonial counterparts, they also share in the productivity gains through free trade such as cheaper wage goods, and, increasingly, services enabled by the communications revolution.

The anti-globalization movement and the retreat of liberal democracy are reminiscent of the economic nationalism that brought the colonial era to an end, culminating with the unsustainable high cost ‘Import Substitution Industrialization (ISI)’ model of growth that turned its back on free trade. Unsurprisingly, it was the East Asian Tigers, and then China, who returned to the welfare-enhancing embrace of international trade that forged ahead. History seems to have turned full circle, with the former colonies defending globalization even as the original proponents turn their backs on it. There is a lesson in this for the anti-globalization movement, as a low-growing, high-cost economy is the inexorable outcome of turning our backs on international trade.

The march of history is rarely linear. But long-term trends are nevertheless discernible. The origin and persistence of international trade, and its bounce-back with renewed vigour each time it retreated, lies in the undeniable case for its welfare effects, made over two centuries ago by the economist David Ricardo. Its expansion has been accompanied by robust growth, and its retreat, with stagnation. Its welfare benefits outweigh short-term disruptive effects, which often make the former counter-intuitive. The future is unlikely to be any different, the current tide against globalization notwithstanding. Production and investment have now become more global and interconnected, services are increasingly being traded across borders, and social media is spawning a global civil society. Attempts to roll this back are as likely to succeed as the abortive Luddite assault on industrialization. The world awaits new statesmen who can articulate the counter-intuitive case for globalization to domestic constituencies, and harness its benefits.

Source: Mintepaper, 9-03-2017

Rewiring the WTO

Growing disenchantment with the existing model of globalisation is also a historic opportunity to frame new rules granting equal opportunities to all in the global marketplace

The visit of Roberto Azevêdo, Director General of the World Trade Organisation (WTO) to India, from February 8, comes at a juncture when the framework of global trade rules is undergoing a shake-up. The Trans-Pacific Partnership (TPP) — which had almost become the standard bearer of trade rules — has been dealt a death blow by the Trump presidency.

The TPP found itself in this position after the United States orchestrated the move to make the WTO virtually irrelevant during the 10th Ministerial Conference of the organisation, in Nairobi in 2015. The conference ended without a decision on the most important area of work of WTO members — the Doha Round negotiations. These negotiations were mandated by the Doha ministerial conference in 2001 to review extant trade rules in order to make the WTO more responsive to the needs of the majority of its membership — the developing countries. With the Nairobi ministerial failing to decide on the future of the Doha negotiations, the WTO’s relevance has been questioned since the organisation does not have a work programme.

The developing world has largely been questioning the relevance of the WTO for some years now, when the richer nations gained the upper hand in setting the priorities for the organisation. As a result, the efforts of the developing countries to amend several important agreements and to make them more responsive to their development needs have been seriously undermined. Similarly, issues of critical concern to the least developed countries, especially their inability to increase their presence in the global markets, have also been put on the backburner.

Silence on food stockholding

The skewed rules in the areas of agriculture and intellectual property rights have been flagged by the developing countries as their particular areas of concern. In agriculture, WTO rules have been loaded in favour of the developed countries, while the interests of small farmers have almost been completely ignored. India flagged the important issue of food security and argued that the sovereign states must have the right to decide the manner in which the poor should be provided subsidised food. This issue arose after questions were raised as to whether public stockholding of food, which is at the heart of India’s Public Distribution System (PDS), meets the WTO disciplines on agricultural subsidies. After India countered the viewpoints of the countries questioning its PDS, an understanding was reached where even if India breached agricultural subsidies’ disciplines to meet its food security needs, no penal action would be taken against it through what is commonly called a “peace clause”. But India’s insistence that there should be a permanent solution to the problem of public stockholding for food security purposes has been met with deafening silence.

While the developing country issues have not seen any progress, Mr. Azevêdo’s predecessor, Pascal Lamy, had lent support to the fast tracking of negotiations for an agreement on trade facilitation. This area covers all the measures that countries need to take in order to reduce transactions costs. Trade facilitation was not exactly an area that excited the developing countries for their shares in global trade are at very low levels. Moreover, by accepting the commitments under the agreement, they were required to undertake changes in their customs procedures and facilities, which seemed a daunting task for many of the poorer countries. The critical element was the availability of financing facilities for undertaking the modifications. However, despite their initial opposition, the developing countries eventually accepted the Agreement on Trade Facilitation at the end of the Bali Ministerial Conference in 2013.

Four years later, e-commerce

In the run-up to the 11th Ministerial Conference to be held in Buenos Aires in December 2017, ground is being prepared by the major economies for another exercise at “cherry picking”. The issues that have been identified for inclusion in the WTO are electronic commerce and investment. Their inclusion has been supported by the International Chamber of Commerce (ICC) and the B-20 (Business 20, representing the business groups of G-20 countries).

The ICC and B-20 tabled a proposal in September 2016 for the adoption of a “WTO package” on e-commerce. Interestingly, this proposal speaks of promoting micro, small and medium enterprises (MSMEs) through the better adoption of e-commerce. The proposal argues that an effective e-commerce environment would level the playing field between large and small businesses, thus enabling the latter to overcome the hurdles in accessing markets. The ICC-B-20 have proposed that the “package” should also provide capacity building resources to the developing economies, “including targeted assistance to ensure that MSMEs can get online and expand their business through e-commerce”. This approach is similar to the Trade Facilitation Agreement Facility, the window for supporting developing and least-developed countries to implement the Trade Facilitation Agreement. However, the biggest challenge for the WTO is to garner financial resources, since it does not have a financing arm.

The WTO Director General has given strong endorsement to e-commerce. He has pointed out that the increase in Internet penetration (43% of the global population) provides the basis for “changing the traditional way of doing business and conducting trade”. But the number that Mr. Azevêdo cites is far removed from reality. In 2015, Internet penetration in the least-developed and low income countries was 12.6% and 9.4%, respectively. Even for the low middle income countries, the figure was below the global average. These disparities in Internet penetration should make it clear as to who would be the likely beneficiaries from e-commerce.

Divisive issue of investment

The issue of including investment in the WTO has been a deeply divisive, almost right since the inception of the organisation. While previous attempts to include an investment agreement have been met with much resistance from the developing countries, the latest bid comes at a time when the investor-friendly bilateral investment treaties (BITs) are under the scanner. The focus is on the investor state dispute settlement process, using which investors can sue their host states in private international panels. India has unilaterally revoked a majority of the 73 BITs that it was a party to and has adopted a new model BIT that would be the basis of its future BITs. The new model BIT vastly truncated the powers of the foreign investor and their right to initiate disputes.

It is quite clear that the inclusion of e-commerce and investment in the WTO would further drive the wedge between the rich and the poor nations. The growing disenchantment with the existing model of globalisation has provided a historic opportunity to frame new rules that give equal opportunities to all countries and their citizens in the global marketplace. Can Mr. Azevêdo be the harbinger of this new regime?

Biswajit Dhar is Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi.

Source: The Hindu, 7-02-2017

In defence of globalization

Despite the challenges it has created, globalization has made the world a better place. And we still need it to eradicate poverty

Are critics— those who consider it a zero-sum game—against eradicating global poverty?

Iwas recently in beautiful Chile for a Futures Congress, and I had a chance to travel south to the very tip of Latin America. I also recently made a BBC radio documentary called Fixing Globalization, in which I crisscrossed the UK in search of ideas for improving certain aspects of it and discussed topical issues with well-known experts. In both cases, I saw things that convinced me that it is past time for someone to come to globalization’s defence.
Chile today is Latin America’s richest country, with per capita gross domestic product (GDP) of around $23,000—similar to that of Central European countries. This is quite an achievement for a country that depends heavily on copper production, and it sets Chile apart from many of its neighbours. Chile is facing economic challenges, and its growth rate leaves something to be desired; but it also has many promising opportunities beyond its borders.
For example, when I led a review on antimicrobial resistance, I learnt that copper has powerful anti-bacterial properties and is an ideal material for use in healthcare facilities where bacteria often spread. This means that copper producers such as Chile, Australia and Canada can improve global health—and boost exports—by introducing affordable copper infrastructure into hospitals and other clinical settings.
Chile is also a storehouse of knowledge for managing earthquakes and tsunamis. While I was there, I visited La Serena, which in 2015 experienced the sixth-strongest earthquake ever recorded. But the ensuing tsunami killed only 11 people, though it surely would have killed far more in many other places. Chilean officials’ advanced preparation and rapid response seems to have made the difference. With so much institutional experience, Chile can be a valuable resource for other countries threatened by seismic events.
Beyond Chile, it is interesting that Chinese President Xi Jinping attended the World Economic Forum’s annual meeting in Davos this year. Now that Donald Trump has been elected president of the US, and the UK is withdrawing from the European Union, I had assumed that such an elitist event’s glory days were behind it. Xi’s presence suggests that China is exploring where it can position itself on the world stage, and which elements of globalization it can harness to its advantage.
Indeed, as the Chinese ambassador to the UK pointed out, China is already the largest importer —yes, importer —for at least 70 countries, and accounts for about 10-11% of all imports globally. Despite its supposed economic challenges, China will likely be a bigger importer than the European Union before this decade is over, and it will probably surpass the US soon thereafter.

Moreover, economic inequality among countries has declined sharply in the past 20 years, owing partly to China’s rise, as well as to economic development across Asia, Latin America, and elsewhere. By 2010, the UN had already achieved its Millennium Development Goal of halving poverty by 2015, and recent projections suggest that, by 2050, poverty will be eradicated everywhere except Africa.
This will not happen without globalization. African countries, in particular, will need to trade more with one another, and there is talk of creating an African free-trade area. But this could prove difficult now that anti-trade sentiment is on the rise. Are globalization’s critics—those who wrongly consider it a zero-sum game—against eradicating global poverty?
Policymakers can take action to alleviate anxieties about globalization. For starters, the seemingly endless growth of profits as a share of global GDP must stop. Anyone who thinks this sounds radical needs to brush up on economics. Higher profits should attract new market entrants, which would then erode incumbents’ profits through competition. The fact that this isn’t happening suggests that some markets have been rigged, or have simply failed. Policymakers need to address this with stronger regulation. For example, the current climate is far too permissive of share-repurchase programmes.
At the same time, policymakers need to pursue measures to increases wages for the lowest earners, which could boost productivity as capital becomes less expensive relative to labour. And, as World Bank president Jim Yong Kim pointed out to me, we need to strengthen enforcement of laws governing trade deals, and do more to help challenged domestic sectors that lose out as a result of those deals.
This reminds me of a sad story I heard from some laid-off Goodyear tyre workers in Wolverhampton, in England’s West Midlands. They told me that job listings for their lost positions were posted on a noticeboard, and they could reapply if they wanted to move to Mexico. The workers surmised that it was easier for the company to close its factory in the UK than to close even less productive factories in France or Germany. Surely changes like this can be handled better.
Lastly, policymakers need to prioritize development projects such as the UK’s “northern powerhouse” and “Midlands engine”. And more such initiatives should be launched elsewhere.
Despite the many challenges it has created, globalization has made the world a better place than it otherwise would have been. And we still need it to eradicate poverty and generate higher living standards for all.

Source: Mintepaper, 23-01-2017

 

Globalisation in question

It was undergirded by a set of meta-assumptions, all of which are now being contested.

Thoughtful critics of globalisation had always warned of the possibility of a backlash against it. The current conjuncture is making the spectre of that backlash more imminent. Unlike anti-globalisation movements of the recent past, the current anti-globalisation sentiment is now working through the electoral politics of almost all democracies and states. This makes it more subtle and powerful.

The desire for deepening global economic interconnections was never driven by a technical economic argument. Globalisation is more uneven and complex than presented in caricatures. But at its best, it had an ethical impulse, a new imagination about the possibilities of organising human society; at its worst, it was elites and special interests seeking new pastures of opportunity even when the overall benefits were in doubt. But for the last three decades, globalisation was undergirded by a set of meta-assumptions — part myth, part possibility — all of which are now being contested.

The idea behind globalisation was that it is possible to imagine a system of economic interdependencies which are structured in such a way that mitigated the zero sum aspects of global trade. In an era that did produce some intra-country convergence, notably through the rise of China, the big beneficiary of the recent phase of globalisation, without seemingly provoking major political backlash in advanced economies, this assumption came to seem politically plausible. Even after the 2009 financial crisis, the inherited system of interdependence was strong enough to withstand calls for rolling back further liberalisation. But the basic undercurrent of contemporary politics is that further globalisation is very much a zero sum game. The stagnation of living standards in advanced economies has buttressed this argument, though the proportion of blame that should fall on technology- and productivity-related factors or globalisation is a matter of debate. But whatever the truth, globalisation will be blamed. This is in part because politicians find it hard to prepare their populations for the idea that continual growth may not be taken for granted. It could be argued that the zero sum game construction was always a fantasy; it was an ideological mystification that allowed various policies to be enacted. But in a way the paradoxical case for the Trans-Pacific Partnership (TPP), that it is about positioning some countries advantageously, only gives the idea that globalisation is not about creating a zero sum game. The inherited complexity of globalisation may make drastic disengagement difficult; but the political pressure to do so will increase. One argument is that the growing inequalities within the advanced countries are behind the resentment against globalisation. The scepticism of globalisation is really scepticism of the plutocracy, and the privilege that it produced. There is much to this argument. But this argument also has its limits. It assumes that anti-globalisation is a product of the revolt by the marginalised and dispossessed. This story is probably more mixed. In the United States, it appears to have taken roots amongst the white working class, the biggest losers in the recent phase of globalisation. It would be unfair to place the blame for xenophobia on the doors of the working class; you suspect often the interests of the working class are used by establishments to express their own nativism. But the rise of anti-immigrant sentiment, right-wing parties, and greater xenophobia cannot all be explained by inequality: Scandinavian social democracies are as much susceptible to right-wing backlash as the US; within Europe, big successes like Poland are in its grip as much as economies that have done less well. The discomforting thought is that the nationalist critique of globalisation is gaining ground. Globalisation did make many societies more deeply multi-cultural. But its proponents underestimated the political and cultural challenges to assimilation. The fears associated with globalisation have turned to embracing ethnic chauvinism. Some would argue this fear of ethnic chauvinism must not be generalised. In the contemporary era of globalisation, it has a specific target, Islam. In this view, the rise of xenophobia and nativism is less a product of globalisation; it is more straightforwardly a clash of “ideologies”. Islam has become the “other” of globalisation, in ways that now deeply threaten the globalisation project. But whether this shows the limits of Islam or the limits of liberal societies is a debatable question. But this construction of Islam has contributed to putting under stress the fantasy of globalisation replacing exclusionary nationalism. Globalisation also had a complex relationship to military power. The fantasy of globalisation was to render territoriality less salient and to mitigate great-power military conflict. Territory-based great-power tensions are back on the agenda. From China to Turkey, the temptation to use power to exercise influence is growing; the contest between assertion of ambition and pure economics is growing. The US is also in a complex position. In some ways, globalisation had this paradoxical positioning for American nationalism. At one level, it is a projection of American success, its ability to create Pax Americana. Globalisation was an intelligent way of enhancing its pre-eminence and influence. So, for a powerful hegemon like the US, it was easy to sustain the illusion of national power and globalisation both growing together. Liberal internationalism was just a smarter nationalism. But this was challenged from two directions. On the one hand, the ground realities of emerging multipolarity made sustaining that hegemony harder. But also the disastrous intervention in Iraq, the changes in global energy markets, the lowered appetite for bearing the costs of war made sustained intervention in the Middle East difficult. Barack Obama ran on a promise of that kind of disengagement. Libya was a massive mistake, not the least because it reduced options in Syria. The Syrian crisis has had far-reaching domestic political reverberations in Europe. Obama was caught in a “damned if he did, and damned if he didn’t” bind. But the net result is that in domestic politics, American engagement with the external world is now seen as being undertaken from a position of weakness. Hence the demand for a more “muscular” foreign policy is back. Globalisation’s critics had a point that it was oversold, was uneven in its effects, and did not do enough for losers. It is being felt by nations as a loss of control. But at its best, it was a hope of a non-zero sum world, a faith in the possibilities of open societies, and a hope that the prosaic demands of commerce will trump the more exalted passions of national grandeur. As nationalism gains ground, there is a real danger that nuanced debates on globalisation will be replaced by a more atavistic revolt against its possibilities. 

The writer is president, Centre for Policy Research, Delhi, and contributing editor, ‘The Indian Express’ -

Source: Indian Express, 19-03-2016