Bolstering Globalization

Stephen DeAngelis

October 10, 2014

Shawn Donnan (@sdonnan) begins his book review of The Butterfly Defect: How Globalization Creates Systemic Risks, and What to do About It, by Ian Goldin and Mike Mariathasan, by writing, “Let’s be blunt. Books about globalization tend to come in two categories. They are either vast, often earnest, works on the economic benefits of an increasingly interconnected world. Or they take the form of ideological reportage from the front lines of disruption; heart-wrenching portraits of idled factory workers in America’s industrial heartland juxtaposed against those of sweatshop pieceworkers in Bangladesh. Of course, the realities are far more complex.” [“A qualified defence of economic complexity,” The Financial Times, 20 July 2014] Donnan is correct on all counts. Globalization has helped millions of the world’s poor wrench themselves from poverty’s grasp. It has also significantly changed manufacturing in America. And is has certainly made the world a more complex place in which to live. There has been a lot written about the advance and retreat of globalization over the past several years with activists praising each setback and economists lamenting them.

 

In August, John Plender wrote, “The shooting down of the Malaysia Airlines Flight MH17 … was a symbol of globalization in enforced retreat. There could be no more obvious indication that global commerce is under attack than this revelation that civilian air traffic is vulnerable.” [“The greatest threat is the destruction of global ties that bind,” The Financial Times, 18 August 2014] In the heated discussions about how globalization has created and/or eliminated jobs, people forget that globalization is really about how things (e.g., people, commodities, capital, and ideas) flow through the global economy. Retard any one of those flows and bad things happen. On the other hand, regulating those flows is important to help maintain order. Without regulation and/or standardization, mail wouldn’t move, airline travel would be less safe, financial transactions would be a mess, and the Internet would be a nightmare. The flow that gets most of the attention is the flow of people. The world has become xenophobic. As a result, developed countries like the United States, which built its economic strength on the backs of immigrants, are engaged in so-called border wars.

 

Admittedly, Americans are concerned about a lot of things. They are emerging from what has generally been called the American century. Americans like being on top. Even President Barack Obama has talked about American exceptionalism. As a result, Americans have a love/hate relationship with globalization. They appreciate what it did for America in the past (i.e., making it the manufacturing center and the bread basket for the world) but, as Philip Stephens (@philipstephens) notes, “The US does not see a vital national interest in upholding an order that shifts power to rivals.” [“The world is marching back from globalisation,” The Financial Times, 4 September 2014] With so much of the future depending on the continuing flows of people, goods, capital, and ideas, the question is: How can globalization be bolstered? Donnan writes, “The Butterfly Defect … both advances the case for globalization and warns of what it argues are daunting ‘systemic’ risks that come with it. ‘Globalization is worth defending because it is the source of the greatest progress the world has known,’ [Goldin and Mariathasan] conclude. ‘But it needs to be carefully managed if it is not to be overwhelmed by the forces of systemic risk that it has unleashed.'” The risks discussed by Goldin and Mariathasan largely result from the complexity created by a connected world and by doing things over a great distance. Donnan explains:

“To build their case they use examples such as the financial crisis of 2008, the shocks to the global supply chain brought about in 2011 by the earthquake and tsunami in Japan and flooding in Thailand, and the threat of pandemic posed by illnesses such as severe acute respiratory syndrome earlier this century. All were big global events set off, Goldin and Mariathasan argue, by relatively small incidents that were amplified as a result of the interconnected world in which we live.”

As result of these systemic risks, the authors insist that “governments need to focus on building a ‘resilient globalization’ that is better managed and more able to withstand shocks.” It’s not only governments that need to focus on building a resilient globalization; businesses, international organizations, and non-governmental organizations need to do the same thing. The current concern over the spread of the ebola virus is a good case in point. It will take the concerted efforts of stakeholders to overcome that challenge. Unfortunately, the ebola outbreak comes at a time when the world is anything but unified. Plender writes, “These geopolitical frictions come against the background of a retreat into parochialism precipitated by the financial crisis.” Plender’s concern is that, “if confidence in the infrastructure of globalization wanes, the free flow of capital, goods and services across boundaries will be impaired.” Unfortunately, the free flow of viruses across boundaries won’t be impaired. Plender adds:

“One question for globalisation is whether there is a tipping point at which an erosion of confidence causes people to stop flying, shun the shops and decide not to invest in new plant and machinery – the latter being crucial to sustaining the recovery. If that happens the outcome would, in the economic jargon, be a series of negative demand shocks. The global economy is in poor shape to cope with that.”

Stephens agrees with Plender that without confidence in the infrastructure that sustains globalization the world could be headed into troubled waters. Stephens insists that “an integrated global economy needs a co-operative political architecture.” Unfortunately, Stephens paints a bleak picture about the current state of globalization. He writes:

“Finance has been renationalized. Banks have retreated in the face of new regulatory controls. European financial integration has gone into reverse. Global capital flows are still only about half their pre-crisis peak. As for the digitalized world, the idea that everyone, everywhere should have access to the same information has fallen foul of authoritarian politics and concerns about privacy. China, Russia, Turkey and others have thrown roadblocks across the digital highway to stifle dissent. Europeans want to protect themselves from US intelligence agencies and the monopoly capitalism of the digital giants. The web is heading for Balkanization. The open trading system is fragmenting. The collapse of the Doha round spoke to the demise of global free-trade agreements. The advanced economies are looking instead to regional coalitions and deals – the Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact. The emerging economies are building south-south relationships. Frustrated by a failure to rebalance the International Monetary Fund, the Brics nations are setting up their own financial institutions. Domestic politics, north and south, reinforces these trends. If western leaders have grown wary of globalisation, many of their electorates have turned positively hostile. Globalization was sold in the US and Europe as an exercise in enlightened self-interest – everyone would be a winner in a world that pulled down national frontiers. It scarcely seems like that to the squeezed middle classes, as the top 1 per cent scoop up the gains of economic integration.”

Stephens concludes, “Globalization needs an enforcer – a hegemon, a concert of powers or global governance arrangements sufficient to make sure the rules are fairly applied. Without a political architecture that locates national interests in mutual endeavors, the economic framework is destined to fracture and fragment.” Unfortunately, the time is not ripe for such concert of powers to emerge. It is difficult to find any trust between political parties let alone nations. Plender adds:

“According to Michael Spence, a winner of the Nobel Prize for economics, … the main current threats to prosperity – those that urgently need effective international co-operation – are the spillover effects of regional tensions, conflict and competing claims to spheres of influence. The most powerful impediment to growth, he adds, is a loss of confidence in the systems that made rising global interdependence possible. It is a large claim. But there is no question that geopolitics is, at the very least, taking us into dangerous economic territory.”

There are no silver bullet solutions for bolstering globalization. The international community needs to work through the crisis in the Ukraine, tackle the horrific potential of the Islamic State in Iraq and Syrian, and beat back the ebola virus outbreak – then it may be able to find some common ground on which it can build the future. But I wouldn’t hold your breath. In another article Donnan reports, “People in key advanced economies, including the US, Japan and Germany, have become deeply skeptical about important elements of globalization.” [“Advanced economies take a dim view of globalisation, survey finds,” The Financial Times, 16 September 2014] Globalization’s future is, at best, is clouded and that could prove problematic.