Globalisation in crisis: Not a zero-sum game, unless we make it

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February 21, 2017 5:41 AM

Whether it will come out of the current crisis soon or not is in the hands of the global political leaders

Metrics clearly show that globalisation is in crisis. Trade intensity (total trade/total global GDP) is stagnating after many decades of growth, and FDI intensity (total FDI/global GDP and global investments) is declining. (Reuters)

Globalisation is in crisis. However, what is more worrying, if one goes by the headlines in the developed countries, is it being made out to be a zero-sum game with China (and other emerging markets) as the big winners and the developed countries losing out. This narrative is not only disingenuous, but more important can become the ‘pygmalion effect’ which will continue to pro-long the global slowdown that hurts every country.

Metrics clearly show that globalisation is in crisis. Trade intensity (total trade/total global GDP) is stagnating after many decades of growth, and FDI intensity (total FDI/global GDP and global investments) is declining. Clearly, openness to cross-border flow of goods and money has come down, and lack of openness to flow of people is publicly visible from recent elections in many developed countries, ironically at a time when refugee flow is perhaps at one of its highest level.

This is not the first, but third such slowdown in the modern era of globalisation which began the second half of 19th Century. There is also a pattern to the global slowdowns—each time it was triggered by a global crisis. The first time was by the onset of World War 1, the second one by the oil price spike in the 1970s, and the current slowdown was triggered by the global financial crisis in 2008.

More important, to note is that each time globalisation emerged stronger from the crisis,’re-booting’ the global economy and lifting the next set of hundreds millions of people from poverty into middle class. There were two key ‘ingredients’ underlying this resurgence. First, was the emergence and/or wide scale adoption of a new ‘manufacturing technology’ (in its widest sense), which transformed the productivity of manufacturing, economics of businesses, and competitiveness of countries. For example, the mass manufacturing technology, perfected during WW2 was adopted by civilian industries post the war and enabled the US and other western economies to become the economic engine for the world, selling cheaper mass manufactured goods not only in their home markets, but all over the world. Similarly, the combination of internet technologies and low-cost manufacturing led by China ‘re-charged’ globalisation in the 1980s after the oil price induced crisis. We now have new ‘digital technologies’ (industry 4.0, Internet of Things, and digital platforms connecting millions of customers and machines at fraction of what it cost earlier) with the potential to transform productivity and business economics, drive new growth of services, and take globalisation to the next level.

The second, and equally important, ingredient in the resurgence of globalisation after each crisis was the geo-political alignment which delivered the global governance of trade and financial flows that allowed the new technologies to prosper and deliver its benefits to the global economy. This was achieved by progressive strengthening of multi-lateral organisations like WTO (which started as GATT) and IMF/World Bank led by G7, which in turn led to well understood ‘rules of the game’ for trade, financial flows, and also fiscal and currency management by countries.

This remarkable combination of geo-political alignment and new technology driven productivity benefits ensured that globalisation never became a zero-sum game. Benefits flowed to all in different forms. For example, in the last wave of globalisation while emerging markets saw growth in their participation in global supply chains, developed markets saw significantly lower prices of goods and services which some commentators called the ‘goldilocks’ decade. And all global companies, both in the developed and developing countries benefited enormously from this. If there was an unequal sharing of benefits, it was perhaps due to structural constraints within countries rather than between them.

Going by the rhetoric coming out from political leadership of many developed economies the geo-political alignment that led to globalisation coming out of its periodic crisis in the last century seems to have broken down, even though the potential of the new digital technologies to deliver benefits to global economy is at least at same level as the earlier technology shifts, perhaps even higher. Ironically, the potential to fully exploit the new digital technologies, and benefit from it the most are developed economies, especially the US which has the largest share of digital platforms, fastest adoption of robots and other I4.0 technologies, and which is already seeing the biggest growth in export of digital services..

But whether globalisation will come out of the current crisis soon or not is in the hands of the global political leaders. They can go forward ‘looking in the rear-view mirror’ and continue to blame the past, or look ahead beyond the rhetoric to the future, and work together to build the same consensus and the new rule-book (e.g. on data privacy and cross-country flows, on opening borders to global trade in services especially digital services, etc.) to release the full potential of the digital revolution in the 21st century as they did with manufacturing technologies in the 20th. The world is waiting—only time will tell whether this wait will be a short one like the one after the oil price spike or a long one like the one after WW1.

The author is senior partner BCG India, and director BCG Henderson Institute. Views are personal

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