There is a specter haunting the op-ed pages. It is not the specter of creeping socialism that many observers worried about as the Great Financial Crisis broke. It is the end of globalization.
This has been a recurring theme that has its present roots in the immediate post-9/11 world. Some argued that the increased security risks raise the cost of international trade.
A decade later the doomsayers were still at it. In January 2011, the Financial Times asked five leading thinkers/policy makers to weigh-in on whether that year would see the “once-unstoppable force of economic, financial and cultural globalisation begins to reverse. On September 4, the FT’s Stephens pushed the argument further. He takes the up the charge that the sanctions against Russia undermine the “open international system.” Stephens argues that globalization has been unraveling since the onset of the financial crisis. He attributes it to America’s “steady retreat from global engagement.”
II
This is a derivative of the hegemonic stability crisis. One school of thought in political science and international relations argues that capitalism works best when there is one country sufficient strong and willing to devise and enforce the rules of the game. “Without a champion,” writes Stephens, “globalization cannot but fall into disrepair.”
Stephens frets about what he calls the “Balkanisation” of the internet and the fragmentation of the global trading system bemoaning the collapse of the Doha Round. He records the BRICS launch of their own financial institutions. However, he does recognize that both China and India are unwilling to step into the void created by a withdrawing US, which Stephens argues no longer sees its national interest in “upholding an order that redistributes power to its rivals.” He concludes that the new powers (BRICS) show little enthusiasm for multi-lateralism.
In a weekend interview with Financial Times Gillian Tett, the IMF’s Lagarde shares more nuanced observations. She is concerned about the tension between the economic system, which she judges to be increasingly integrated, and the political system that she judges to be increasingly fragmented. She is sensitive to the “backlash against the way that globalization is hurting some people.” Unlike Stephens, who concludes that “the world is marching away from globalization, Lagarde is less conclusive, “It is not clear which of these trends [for economic integration or political fragmentation] will win. I am worried. Very worried.”
While Lagarde sees continued economic integration, Stephens plays up the opposite. It is true that merchandise trade is not growing much faster than world GDP, and direct investment flows are well off the 2012 peak. McKinsey studies point to only a slow recovery in cross border capital flows after the collapse in 2008-2009.
III
On one hand, it is not clear how much this is a structural break and how much is cyclical in nature. Some observers offer to square the circle by making it part of the Summers’ revived-Hansen thesis of secular stagnation. A prolonged period of slow growth with test the commitment to multilateralism and globalization. Others eschew the secular part of the thesis and meld it with a decade of loss growth associated with the financial crisis.
On the other hand, previously many argued that the global imbalances (essentially the US current account deficit and China’s surplus) was a major threat to the world, and to globalization, as it spurred protectionism. Both these external imbalances have been sharply reduced. But the price of the reduction makes it look like less globalization. The US is a bit less dependent on foreign energy, and the shift in the global division of labor and cost structure has seen some manufacturing move back onshore. For its part, China seems less dependent on exports (at least until recently) and more reliant on domestic investment (which in practice has also meant debt-financed).
This is to say that part of what appears to be a retreat from globalization has been the reduction of imbalances and a consequence of cyclical forces, which may or may not be projected into the future. Slower growth after a financial crisis would not be surprising given the historical record. At the same time, to the extent that growth is a function of labor force growth and productivity, the prospects also do not look particularly favorable. Many countries, not just high income countries, but many developing economies in parts of Asia, including China, and eastern and central Europe, like Russia, also have deteriorating demographics.
The first wave of globalization ended with the World Wars. By some measures, it took most of the last half of the 20th century to recoup the level of integration achieved on the eve of WW1. It is possible that the post-WWII globalization is over, but it does appear to be a done deal. The financial crisis disrupted capital and trade flows. The reduction of the US and China imbalances also give the appearance of a reduction in globalization. High levels of unemployment and domestic social stress may also fan nationalistic tendencies.
Kissinger warned in his 2002 book “Does America Need a Foreign Policy?” (which he of course answers in the affirmative) of a crisis of the Westphalia Treaty. This 1648 agreement provided the broad framework of the sovereignty of the nation-state. What Kissinger had in mind was the rise of multinational states, like Russia, China and the US. However, now, with Scotland about to vote on its 300-year union with England and Catalonia pushing for its own referendum some fear a more generalized crisis of the nation-state. It is possible that an independent Scotland is not able to maintain its territorial integrity. Many see an independent Scotland bolstering the independent movements in Spain (not just Catalonia, but also the Basque Country), and adding to the centrifugal forces in Belgium.
Throughout Europe, the anti-integrationist forces find expressed. The UKIP has enjoyed some electoral success and appears to be enjoying some favorable momentum. In Germany, the AfD, which wants Germany to pullout of EMU, has won representation in three state government elections over the past two months. Le Pen is on the march in France. In Sweden’s election yesterday, the anti-immigration Democrats garnered 13% of the vote. It Italy, the 5-Star movement tapped into similar sentiment.
IV
What is striking is that the main assault on globalization and integration are taking place from the political right, not the left. Fukuyama’s 2012 Foreign Affairs essay, “The Future of History,” notes that there was not surge of populism from the political left in response to bank bailouts, the increased disparity of wealth and income. The Occupied Movement was the closest, but it has been overshadowed by the populist right response in both the US and Europe.
He explains this: “There are several reasons for this lack of left-wing mobilization, but chief among them is a failure in the realm of ideas. For the past generation, the ideological high ground on economic issues has been held by a libertarian right. The left has not been able to make a plausible case for an agenda other than a return to an unaffordable form of old-fashioned social democracy.”
Simply put, Fukuyama argues that it has been several decades since the left articulated a coherent analysis and promoted a politically realistic program of protecting and expanding middle class society. At the same time, it is not clear that the anti-immigration, anti-integrationist populist right has a compelling vision either. Yet its ability to say
“no” and propose a narrative that blames the Other, is potent.
This implies that the liberal world order may be durable and flexible than the naysayers suggest. Nowhere has the populist right come to power. The force facilitating global integration, like multinational companies and NGOs have not been weakened by the crisis. The IMF has been revised by the financial crisis and Lagarde’s leadership. Efforts to promote greater coordination of the regulation of financial institutions have been enhanced. While there are some notable exceptions, there has not been wholesale protectionism, nor beggar-thy-neighbor type of policies that materialized before and after the Great Depression.
At nearly any point over the last half century, many could and did issue similar warnings about the coming breakdown of the post-WWII order. In 1971, the economist Raymond Vernon published “Sovereignty at Bay,” which told how multinational companies were challenging the legitimacy and power of the nation-state. These arguments have many faces: the limits on sovereignty, the demise of the United States, the decline of the role of the dollar, the rise of the rest, G-zero, the return of sphere of influence, etc, etc. When Russia acquired nuclear weapons, when the US lost the war in Vietnam War, when Nixon resigned, the prevalence of voluntary export restrictions (VERs) and orderly market agreements (OMAs) in the 1980s, the rise of China and its push for the internationalization of the RMB all were cited as heralding the end of the post-WWII order.
The globalization at the end of the nineteenth century ended because of nationalism and militarism. It is possible that this wave of globalization ends by the same forces. But it seems that it is too early to deliver its eulogy. There is still another chapter (at least) to be written. Globalization has always been a work in progress. Let’s not confuse its ebb and flow, and transformation, with certainty over its demise.
via Zero Hedge http://ift.tt/1q8k1xu Marc To Market