Globalization: Where do We Go from Here?

Stephen DeAngelis

April 23, 2014

Russia’s intervention into the Crimean Peninsula has stirred up a conversation about globalization’s future. After all, the G8 quickly became the G7 as the world’s economic superpowers tried to exercise their economic clout to punish Russia for its misbehavior. “History, it appears, has restarted,” writes John Authers, “Back in 1990, after the Berlin Wall fell, Francis Fukuyama famously prognosticated that we were witnessing not just the end of the cold war but ‘the end of history as such’. Our ideological evolution, he said, was complete, with the universalisation of western liberal democracy as ‘the final form of human government’. Now it looks premature to have declared the cold war over, let alone history itself. Dialogue between Washington and Moscow these past few weeks is painfully reminiscent of an era many thought had ended some 30 years ago.” [“Shrewd investors assess history’s threat to globalisation,” Financial Times, 28 March 2014] There are two problems I see with that analysis. First, it was the collapse of the Soviet economic system rather than the fall of communist political ideology that really marked the end of the Cold War. Western liberal democracy has had a tough time getting a toehold in a lot of countries that more or less embrace the principles of a market economy. Second, the latest confrontation with Russia doesn’t mark the beginning of a new Cold War (i.e., a confrontation that pits ideologies against one another). It’s a simple land grab that Vladimir Putin believes is in Russia’s best interests. Russia still wants to be a force in the global economy and it hopes that the brouhaha over the Crimea will eventually die down. Nevertheless, Authers is correct when he writes, “Very much more history may lie ahead of us.”

 

Although Authers continues to address the issue of political ideology, his main arguments about how history is being shaped focus on economic systems. He writes:

“John-Paul Smith, head of emerging markets research at Deutsche Bank, has divided the stocks in the MSCI emerging markets index into those that are state controlled, and those that are not. Since September 2011, the non-state stocks have almost held their value, dropping only 2 per cent. State-controlled stocks fell 12 per cent. Further, countries with the most large companies under state control have fallen more. These include China (where the state runs 78 per cent of the largest quoted companies), Brazil (30 per cent) and Russia (55 per cent).”

In the end, Authers concludes, “With middle classes across the emerging world enriched and empowered, a Fukuyama-esque dynamic towards shareholder-led capitalism should be hard to thwart.” That means that globalization, far from being dead, continues to play an important global role. “There’s been a lot of talk these days that globalization is dead, even reversing,” writes Michael Schuman, “and for good reason. It seems that many of the factors that had been driving globalization have run out of steam.” [“Globalization Isn’t Dead, It’s Only Just Beginning,” Time, 19 November 2013] It’s clear from his headline that Schuman doesn’t believe that globalization’s eulogy needs to be written. He points to several factors that indicate that globalization is slowing down; nevertheless, he concludes, “Ignore the naysayers: globalization is very much alive and well.”

 

One of the “slowdown” indicators to which he points is that some U.S. firms have shortened their supply lines and some have even “reshored” manufacturing back to America (which makes production “more local and less global”). I have repeatedly argued that regionalization within the larger context of globalization is going to increase. There are many reasons for this. One reason that is often cited is that transportation costs continue to rise; therefore, shortening supply lines by nearshoring or reshoring saves money. Schuman, however, points to another even stronger reason that regionalization is going to increase. “In the past,” he writes, “globalization was to a great degree a one-way street — from the developed to the developing world. … Emerging nations had few connections between themselves, and limited influence over world politics and finance. Now, though, the rise of China, India and other emerging economies is shifting that old, one-way globalization into a new, vibrant multilateral globalization, with major consequences for how our world works.” In fact, many analysts believe that so-called south to south relations (i.e., ties between emerging market countries) are going to be what drives the global economy in the years ahead.

 

If transnational companies want to be part of that scene, they need to ensure that they are established in regions that are strengthening their intraregional ties and have put in place a supply chain that supports regional marketing. Schuman continues:

“Look at what’s happening in the global economy these days. The giant populations of China, India and Indonesia were participating in the world economy mainly as workers; they had meager economic power in their own right. Not anymore. More than half of humanity now lives in South and East Asia, and Chinese and Indian consumers have become the most sought after in the world. Global commerce is changing as a result. General Motors, for instance, sells more cars in China than in America; Yum! Brands cooks up more Kentucky Fried Chicken for Chinese diners than Americans. Hotels and travel agencies from Paris to Bali are striving to accommodate Chinese and Indian tourists. The storied design houses of Europe have opened lavish flagship stores in Asia, which is set to account for more than half of the world’s luxury-goods market within the next 10 years. Emerging-market companies are becoming equally important global players. … Most importantly, emerging markets are linking up to each other in ways never witnessed before. In the past, global trade tended to flow between poor and rich countries, but that has changed dramatically.”

One of the factors that is driving increased south-to-south connectivity is the rise of megacities. There really are no new megacities emerging in the developed world. All of the growth is found in emerging market countries. Alan Berube, of the Brookings Institute, argues that these megacities should be “at the center of international trading strategies.” [“Re-Positioning Cities at the Core of Global Trade,” by Melina Cordero, Planetizen, 29 January 2013] “Cities, Berube argues, have always been crucial to international trade. By assembling people in a common space to trade goods, services, and information, cities and market towns enabled the emergence of the earliest trading routes, from the Silk Road to the Hanseatic League. ‘In short,’ Berube claims, ‘cities make trade possible.’ … With the world’s 300 biggest cities accounting for 48% of global GDP and 51% of GDP growth, Berube argues that cities should be granted greater power in global exchanges. This means national governments should promote linkages between cities while providing them the resources to compete with each other.” Ryan Avent, from The Economist, appears to agree with Berube. He calls this phenomenon “the pull of metropolitan gravity.” [“Hyperglobalisation and metropolitan gravity,” Free Exchange, 24 October 2013] He argues that the hyperglobalization of the past, fueled by cheap labor in developing countries, has allowed the global economy to slip away from the pull of metropolitan gravity. As that labor disadvantage disappears with the rise of the global middle class, the pull of metropolitan gravity will once again assert itself.

 

Schuman concludes, “Globalization is deepening, becoming more inclusive and more balanced between different parts of the planet. And it is introducing us all to new ideas, products and arts. Globalization is not just still with us; it’s just getting started.” For good or ill, I think his conclusion is on point.