Globalisation has changed. It is no more about multilateralism, but bilateral deals. It is no more about developing a global strategy, but a country-by-country strategy. It is no more about maximising value for the firm for every market—each country is asking what you can do for the development of the country in terms of jobs….” These were the words of the vice-chairman of one of the leading industrial conglomerates in the world I had interviewed as part of my ongoing research on globalisation.
These sentiments are a radical shift from our mental model of globalisation that has evolved over the last 150 years. Over these years, globalisation has not been static but a truly dynamic phenomena. It has weathered several crises and has come out stronger and transformed. We faced a crisis with the onset of World War 1, which lasted through the years of depression between the two world wars. The next big crisis was triggered by the oil price spike in the 1970s. We faced one again with the great financial crisis in 2008, and are still living through the aftermaths of it ten years later.
If we reflect back over this period, we see that one of the building blocks of globalisation, namely geopolitics, had remained largely unchanged. Yes, for sure, geo-politics got refined as it faced many challenges on the way, but the principles of multilateralism put in place in the second half of the 20th century had widespread consensus and drove globalisation forward. The statements made by the leader of one of the largest companies in the world in the interview with me was a dramatic wake-up call that this geopolitical consensus is undergoing a fundamental shift. We are clearly moving into uncharted territory.
In the weeks that followed this interview, I have been reflecting on the underlying forces that are breaking up the half-century of geopolitical consensus. The apparent reasons that we all read in the media, especially the western media and academic articles, are that societal tensions caused a large number of jobs to transfer from the west to the east in the last quarter of the 20th Century. These tensions were reflected in the political narratives that surfaced in Europe and the US around themes of anti-trade and anti-globalisation. We don’t hear the same anti-globalisation narratives in the developing countries, even though they have higher levels of unemployment, and so the western narrative is surely right.
But, I have wondered if there was a deeper transformation taking place in the global economic structure that shaped the anti-globalisation narratives in these industrialised countries who had ironically given ‘birth’ to multilateral agencies and the principles of multilateralism that drove the growth of globalisation.
These countries also pioneered the new technologies that drove globalisation forward and benefitted the most from it. After World War 2, the development of containerisation in the US made it dramatically cheaper to ship goods into new markets (by some estimates, 10x cheaper), as more developing countries joined WTO and reduced tariff and non-tariff barriers. As a group of the largest manufacturing nations in the world, G7 countries’ share of global GDP rose to 70% in 1990 from less than 40% in 1900. They then pioneered the next technology revolution that transformed globalisation, namely the internet in the 1990s. This led to the growth of global supply chains of companies in these countries. Their economy benefited hugely from imported cheaper manufactured goods. In retrospect, it is quite ironical that this shift in globalisation, pioneered by the industrialised countries, laid the seeds which have sprouted more broadly into the anti-globalisation movement in these very same countries 25 years later.
Let me explain. The internet, that developed in the 1990s, allowed the manufacturing steps in a production process to be broken up and shipped to a location with dramatically lower factor costs, which happened to be the developing countries. Without internet and its attendant communication strategies, it was just not possible to manage these complex and long supply chains. So, China became the factory to the world and developing countries became an integral part of global supply chains as highly cost efficient production locations.
The result of this new development was dramatic. G7 countries’ share of global GDP that took 90 years to climb from 40% to 70% fell back to the 1900 level in just two decades. China became the second largest economy in the world. The ‘great economic divergence’ between industrialised and developing countries in the 20th Century has turned into the great economic convergence. As this convergence continues, Asia as a continent and emerging countries as a group, will become larger than industrialised nations in the coming years. We have moved decisively from a unipolar economic and geopolitical world led by the US (and the other G6 countries) to a multipolar world with different economic and political models, a diversity of institutions and of world views.
In this great geopolitical rebalancing, it is easy for the historical leaders who had shaped this globalisation in the 20th century to see the future through the prism of self-interest rather than collective interest. To them, the ‘win-win’ has turned into a win-lose globalisation. To a more neutral observer with no bias shaped by the past, this is our world today and it will be tomorrow as well.
In this new geopolitics of new globalisation, India and Indian companies will have to shape their own destiny. The old models of trade-led economic development, which has been the historical model for developing countries, will have to be re-visited. Digital technologies are transforming the economics and business models for global companies; India will have to harness them to its advantage. For example, digital services trade is the fastest growing segment of global trade, even as goods trade stagnates. Can India, with its strengths in services, and its big digitisation push, become a digital services leader in the 21st century, as China became a manufacturing leader in the 20th? Indian companies will have to re-align their global strategies. They will have to localise their operations and contribute to the development of the countries they enter as they globalise further. The strategy of leveraging low-cost operations outside India will come under pressure. They have to recognise and deal with the uncertainty and turbulence inherent in this geopolitical transition and build more resilient business models.
The same business leader also told me, ‘I hope our political leaders realise that globalisation was never a zero-sum game and never will be, even if the geopolitical game has changed”. It is always good to hope!