Globalization at a Crossroads, The changing economic world order

By: Dr Ishfaq Ahmad

Economic globalization includes the cross-border movement of mainly three factors: capital, goods and people. With the end of the Cold War and demise of the Soviet Union, globalization was celebrated as the intellectual zenith of economic history of the world. Francis Fukuyama, in his book, “The End of History and the Last Man” had claimed that democracy and free market economy were the end of intellectual development, and emphasized on the need to spread these two philosophies across the globe. Between the fall of Soviet Union in 1989 and the global financial crisis in 2008, the international flow of capital grew from 5 percent of the world GDP to 21 percent; international trade soared from 39 percent to 59 percent of the world GDP; and people living outside their country of birth jumped by a quarter.

But, today the picture is grimmer; rising populism and return to nationalist, inward-looking policies threaten to unravel the postwar economic order. Though, since the fall of Soviet Union in 1989, cross-border trade, capital and movement of people have risen to unprecedented levels, the income inequality across countries and within countries has also increased enormously. However, after the 2008 financial crisis, as global demand has contracted, cross-border flow of capital has declined, and international trade stagnated; only cross-border movement of people is on the rise. Consequently, it has led to loss of jobs and declining purchasing power of consumers, particularly in developed economies and that has caused growing backlash against globalization in developed countries. In Europe and the USA, voters no longer take the words of experts and elites that globalization offers the potential of economic gains for all. Voters in England preferred exit from the European Union and in the US people voted for Donald Trump for his anti-globalization stand.

As the central concern of free market economy is to achieve efficiency i.e. optimal use of resources, rather than fairness i.e. distribution of economic fruits among all; therefore, globalization has created absolute winners and losers. Consequently, multinational companies prefer those locations where goods and services could be produced at low costs without having any concern for workers who lost their jobs due to shift in production locations. In the present scenario, manufacturing jobs in developed countries have been affected most because of the entry of China, Mexico and India in international labour market. Most of the manufacturing plants have been shifted to China and Mexico, and services are been outsourced from India, due to their comparatively low-cost labour vis-à-vis developed economies; all this has resulted in loss of manufacturing and service jobs in developed economies, particularly in the USA. Moreover, the international migration from developing economies to developed economies has brought wages down in these economies.

All these apprehensions were reflected in 2016 presidential election in the US and Brexit referendum. Donald Trump withdrew from Transpacific Partnership (TPP), a regional trade agreement between twelve pacific countries and the US, which was especially meant to counter China’s influence in Asia Pacific, because Trump was of opinion that it was not in interest of the USA workers. Moreover, Trump threatened to impose high tariffs on manufacturing products from China and Mexico and drive out illegal migrants from the USA. Stretching itself in various wars across the globe with struggling economy after the 2008 financial crisis, the USA is likely to give up the responsibility of global economic leadership and shift their focus on domestic economic affairs. That was clearly reflected in the Trump’s “America First” election campaign. And, more importantly, the USA wants China to take front seat and clear the mess created by the American policies.

Since the Bretton Woods consensus in 1944, the US has not only taken responsibility of “imposing democracies” across the globe but its domestic market has also provided an engine of growth in thriving globalization with the help of multilateral organizations like the IMF, WTO and the World Bank. The US economy has remained largest importer of goods and services for both developed and developing countries. However, the slowdown of the global demand and the “protectionist” measures by the US has jeopardized the fate of globalization. On the other hand, being an export-driven country, China does not seem to be in a position to accommodate the export from other countries up to a level that the USA used to be. Though, China is now shifting its focus from export-driven economic growth to domestic-market-driven growth due to its large domestic savings, it is still looking for market to export huge piles of steel lying in their factories.

On 4th Feb 2017, while speaking at the World Economic Forum in Davos, Chinese president urged the countries to further deepen the integration of the world economy, and insisted that “globalization is good for all”. However, various economists showed their reservation towards the claims of Chinese president and accused China’s approach of being “mercantilist” rather than “internationalist”. It has been widely believed among the western countries that as China real estate sector is struggling, therefore they are looking for other economies for building real estate and finding ways to export their billion of tonnes of steel.

In this direction, China has already taken two big measures as China-Pakistan Economic Corridor (CPEC) and One Belt, One Road (OBOR) initiatives. Though, officially China has claimed that these initiatives are for “peaceful integration” of the world economy, others, particularly the US and India, see not only it as a calculated move to sustain domestic economic growth of China on the cost of other economies, but also as “geopolitical move” and to shake up “old economic order”. Therefore, these apprehensions led both the US and India to restrain from participating in these projects.

The developments that took place after the 2008 financial crisis have given way to rising scepticism not only among developing countries but also the developed countries towards globalization. Diane Coyle wrote in IMF’s quarterly magazine, “Finance and Development” (March 2017) that income inequality, sluggish growth, debt overhang, and high unemployment in some cases have made for a lackluster recovery and simmering discontent with economic policy that follows business as usual. Therefore, the world is now in search of new economic development model which would be beneficial to all and would not create absolute winners and losers.