In the recent past, several macroeconomic themes?demography, technology adoption, shift in economic activities and relative growth of developing economies, etc?have driven the theory of a flat world. Under this theory, technology will become ubiquitous and economic growth will be driven by young demography, which will result in geography becoming history. The world is seen as a level-playing field where all competitors have an equal opportunity. This means that the geographical and historical divisions are becoming highly irrelevant and the best in the world succeeds. There emerged the theme of the world becoming a flat world.
While the concept of a flat world still has lot of relevance, it will be tested heavily in the volatile world we live in today. The global recession following the huge sub-prime crisis in the US structurally changed the world. The resulting uncertainty and volatility is going to take years to reverse and, in the interim, could create a world full of protectionism.
All the developed economies have a structural problem of high unemployment, low economic growth and high sovereign debt, coupled with high inflation and huge budget/trade deficits. What this means is that most of the developed economies will see slower growth for years to come as the government?s focus shifts to reducing deficits and cutting social spending in the economy. The demography in those countries are also not in their favour and the governments, in their eagerness to reduce social spending, are increasing the retirement age, which, in turn, will crowd out employment opportunities for the young. The manufacturing industry, which is the biggest employment creator in any economy, has totally shifted to China with little capability left in those developed economies. Also, the large companies in the US are not necessarily large employment creators. The classic examples are companies such as Google, Facebook, Twitter, etc.
The high unemployment in developed economies is, to some extent, structural in nature. The resulting uneasiness will put heavy pressure on the political system to erect barriers to protect local employment. We have already seen several countries tightening the immigration laws and increasing visa fees. This will make it difficult for free movement of labour, which is a pre-requisite for a flat world.
The high trade deficit also will result in artificial barriers being put to protect the home market. For example, when Europe had brought in the new carbon emission norms for the airline industry, China had cancelled its orders for buying new planes from Europe, in a tit-for-tat response. All these barriers will increase friction in global trade and will impact the free movement of goods, which is again a pre-requisite for a flat world.
The developing markets are seeing a huge inflow of capital as the growth is restricted in the developed markets. This is also putting enormous pressure on the currencies of developing markets. The developing markets are also actively increasing their interest rates to fight high inflation in their economies. While the developed markets were unable to raise interest rates to fight inflation due to anaemic growth in their home markets, the developing nations are aggressively increasing interest rates to fight inflation. This is a double whammy as more and more money is flowing into the developing nations in search of better yields. Brazil has already talked about a currency war and has taken steps to protect its currency. These kinds of distortions in the world economy between developed and developing nations will result in more restrictions on capital account and will impact the free flow of capital, which is again one of the pre-requisites for a flat world.
The developed markets are the biggest preachers of open markets and of equal access to everybody. They were the ones who were spearheading the whole globalisation process. But, when their own economies are in trouble and see a structural decline in the years to come, they will be in the forefront to erect trade barriers. This will create more friction in the world trade. So, the concept of the flat world will be tested in all three dimensions?free movement of labour, free movement of capital and free trade. The resulting uncertainty will question the basic premise of the concept of a flat world. If the uncertainty and volatility continues for long, we will see a more protective world, which will not be flat.
The author is CFO of Infosys