The Fall of Globalization – It Didn’t Deliver
Globalization has failed and assertions to the contrary are hard to reconcile. Claims of widespread prosperity were wrong. It didn’t promote a more cooperative world. Nor did it solve the world’s most vexing problems – security, economic, social, or otherwise.
Rather, it contributed significantly to irrational exuberance, low productivity, enormous debt, and the worst financial crises and economic inequality in almost a century. It rewarded poor resource allocation, concentrations of wealth and power, and monopolistic behavior. It deterred innovation and capital investment by instead encouraging higher returns from shifts in existing wealth rather than creating new wealth. And ultimately, it led to the world’s highest divisiveness in decades.
As an economic system, globalization should have been brought to a stop long ago. But for lack of anticipated consequences, protected self-interest, and extraordinary debt and policy accommodation, it stretched far beyond its good. Now the snapback from its extreme is likely, and undoubtedly, should result in further global stress.
Costs of Globalization
Although many consumer items continue to be affordable, the cost of the overall globalized system is expensive. Following 9/11, the world became ever more aware of the “all-in” price of globalization. The burden of maintaining order fell mostly on the U.S. The costs of the Iraq and the Afghan wars, along with the global war on terror have been estimated at more than six trillion dollars. And that does not include the indirect drag on the economy and society, at large. Regardless of political bias, it is hard to dismiss the link between the Middle East’s turmoil over the last three decades and the region’s incursion related to oil and globalization.
Corporations are rethinking their global strategies. Protectionism, currency risks, counterfeiting, and systems security are forcing greater uncertainty on doing business abroad. Banks, industrials, consumer, and tech companies – all are feeling the blowback from globalization and share prices should begin to reflect that uncertainty.
Nationalism and trade wars are certainly developing, putting foreign assets and supply at risk. Some nations have moved to more localized alternatives, especially in energy and food production. From either foresight or sanctions, China, Russia, and Iran have been shoring up supply and production for quite some time. Meanwhile, the West stays entangled with political divisiveness. If the West is unprepared and its supply chain goes suddenly interrupted, it will indeed be very costly.
Lastly, many do not associate globalization with the world’s current environmental problems. But according to the Organization for Economic Cooperation and Development (OECD), globalization has accentuated major environmental damage. Some say those concerns are unfounded. Perhaps. But maybe the best way to decide is to look at the environments of the large global producing nations, such as China. Clearly, the potential direct and indirect costs of further environmental damage could be quite expensive.
Rationalization and Risk
Following World War II, global integration gradually expanded. Then, with the fall of the Soviet Union, a major upswing occurred, so that the sum of global imports and exports would rise to almost 60% of the world’s gross domestic product. According to the World Bank, the amount had doubled from the half-century before. Never before has low-cost foreign supply been so favored by policy, infrastructure advances, and energy abundance.
But the expansion of the global structure came with increased risks. In the idealistic world following Cold War victory, many of these risks were unknown, ignored or discounted. Former adversaries became vital suppliers. Mutually dependent financial systems and capital flows came to be relied upon. Integration was forced on cultures having opposing ideologies. Diversification and redundancy gave way to capacity and standardization. Too, trade and defense treaties were required for those nations wanting to get in. It became a losing game to buck the trend of globalization.
And although history has shown that conflict is just as likely among trading partners, and globalization outcomes could not be reasonably anticipated, rationalizations were still made for the causes of harmony and efficiency. The world’s system became ripe for unintended consequences.
Many economists agree that globalization allowed for a large increase in rent-seeking. This condition occurs when existing wealth is shifted, as opposed to new wealth created. The term “rent” does not specifically refer to the periodic payments on a lease, rather it is coined from a discussion of types of income – profit, wages, rent – in Adam Smith’s, Wealth of Nations. Rent-seeking extracts value from assets or processes that already exist, not from improving them. In extreme rent-seeking environments, growth occurs mostly through asset price inflation caused by expansion of the money supply (debt).
Robert J. Schiller, American Nobel Laureate and economist, gives a classic example of a feudal lord who develops a toll system on a river passing through his land. A toll is charged on passing commercial boats. The values of the river, the boats, or the passing goods have not been improved. But the investment in the toll system reaps a significant return.
Over the last few decades, production efficiency in many of the world’s underlying goods and services has seen only marginal increase (productivity). Meanwhile, the technological improvement and investment in today’s toll systems have been enormous. Production was forced toward low-cost producers and channeled through toll systems. Even with added cost of the tolls, prices have been more competitive compared to higher-cost producers without tolls.
Competition and Viability
As a result, many higher-cost producers were forced out of business. Sources of alternative supply were eliminated. The toll systems had naturally moved toward monopolistic behavior reaping enormous new business flows and wealth. However, much of it came through unfair labor practices, favorable policy, government subsidy, and excessive debt throughout the system.
But the tables may turn. These rent-seeking toll systems are at risk because they were built on the continued burden of others. This structure is fundamental to the struggle between populism (opposed to further accommodation), and globalization (needs accommodation). If the world moves away from globalization, then economic viability of the tolls becomes questionable without continued accommodation and from the potential for new competition that should follow.
Increasingly, economists are suggesting that globalization has created new variants of antitrust activity that have gone unchecked for several reasons. First, it is not widely understood as such. Second, the toll systems have influenced policy through their sway on politicians and regulators. Third, cross-border enforcement is a particularly sticky issue with geopolitical ramifications. And lastly, the masses have been convinced to look the other way through rationalizations of social benefit, peaceful coexistence, and economic efficiency. Going forward, it would not be surprising to see new policy-makers attempt to break rent-seeking tolls through antitrust enforcement.
A good example of the making of an anti-competitive toll system is the deregulation, consolidation, and subsequent “too-big-to-fail” bailouts of the FDIC-subsidized banks. Some believe that the distribution and advertising businesses of certain “technology” giants fall into this category. Similarly, the retail chains of global discounters may encounter new scrutiny.
And finally, although it is not a globalized business and is not subject to antitrust enforcement because of legislative creation, the Affordable Care Act’s health care system has significant, structurally-imposed rent-seeking. The point is that as long as rent-seeking behavior remains a formidable power in the economy, then competition, innovation, and productivity will stay subdued.
Last week, global elites again gathered for the annual World Economic Forum (WEF) in Davos, Switzerland. Since the 1990s, the WEF has been a leading proponent of globalization. Its members include top banks, hedge funds, and global corporations. The 2017 forum opened with Chinese President Xi Jinping as speaker.
This year security was tight at the exclusive winter resort. Organizers worried over repercussions from populist backlash. And along those lines, Oxfam – a global, charitable-based NGO – prepared a report for Davos, “An Economy for the 99%.” The report claims that world’s top eight wealthiest individuals now own the same wealth as the poorest half of the world’s population. Undeniably, the wealth gap has widened significantly over the last decade and has been a leading issue with the populists . Oxfam’s report did gain some attention at the forum, but mostly from the media covering the event.
Participants at the WEF again determined the upcoming year’s watch list for the top five global risks – extreme weather, involuntary migration, natural disasters, terrorist attacks, and data theft. Amazingly, the fallout from receding globalization did not rank. The disconnect of the world’s top business, financial, and political leaders’ to the issues causing the rise in populism – the biggest social movement in decades – seems surprising, but perhaps not. Many at last year’s forum proclaimed Brexit as impossible and the Trump presidential campaign was merely a preposterous stunt.
Globalization, as known over the last three decades, will recede – it has to. It is untenable and the results have been dismal – for the U.S., most western industrialized nations, and the Middle East. The world’s current operating system, evolved under globalization, is at risk, not only from populist and nationalist forces, but also stemming from its economic viability. Value cannot be created from a diminishing return – either by leverage or accommodation, both of which are finite. Inevitably, humans will move toward the innate process of advancing productivity and prosperity. Change from globalization is not a matter of if, but when.
But unplugging globalization will not be quiet. Changes in global markets, domestic order, and geopolitical relations will be turbulent, and potentially, in a very troubling manner. The world now finds itself within a very muddled mess of self-interest that crosses regional and national boundaries and pits members of the same society against each other. A similar situation was observed as the Industrial Revolution unwound in the mid-1800s. Revolt and conflict ensued across Europe, the Americas and parts of Asia.
A parallel outcome is hoped not to repeat. In facing the challenges that may lie ahead, America should also hope not to be guided by unrealistic optimism. Or be divided by disregard of its national heritage and shared interests. For that is the legacy which future generations will evaluate.
Christopher Petitt – financial executive, board advisor, and business consultant – is the author of the book, The Crucible of Global War: And the Sequence that is Leading Back to It. It is available