Is ‘globalisation’ dead?

People-flows became important for the economies of the US and the UK

Shahid Javed Burki May 22, 2017
The writer is a former caretaker finance minister and served as vice-president at the World Bank

A decade or two ago, there was great confidence on the part of most social scientists that the world was finally settling down in ways that would help all countries and all people. With the Soviet Union having collapsed in 1991, with Eastern Europe having abandoned communism and with China and its southern neighbours having adopted forms of capitalism to manage their economic systems, ideological conflict ended. The American sociologist Francis Fukuyama in his book titled The End of History celebrated these developments. He laid out the direction in which the world was headed. It was moving towards Western liberalism.

This sense of confidence led a number of economists to develop policies they lumped together in what they called The Washington Consensus. This was done to help developing countries adopt policies that would quicken the rate of growth of their economies. This policy set had two important components. The most important of these concerned the size of the state and the functions the governments should perform. The Consensus opted for a minimalistic approach to governance. The state should leave the running of the economies to private enterprises. The government should lightly regulate private activity.

The second important component concerned flow of trade, capital information and, to a limited extent, people. All these should flow across international borders without much hindrance. That way these factors will go to the places where return was high that would result in increased economic activities and add to global growth. However, with borders open, the benefits from increased global output would spread across the globe.

That is the way the world did go for a couple of decades until two things happened and the freed private sector acted irresponsibly, in particular its financial component. Banks in the US lent huge amounts for housing to those who could not afford to service the loans that were being aggressively marketed. The banks did not keep these loans on their books. They combined them into fancy products that were rated highly by the rating agencies and sold to the institutions, such as pension funds and insurance companies that had large amounts of long-term capital at their disposal. Thus was built a house of cards that collapsed in 2007, plunging the world into what came to be called the Great Recession. This lasted for a couple of years and changed for good the structure of the global economy.

A “new norm” came into being in which the rates of growth slowed down to the point that equalled increase in productivity and in the size of the labour force. However, in most developed countries natural increase in the workforce was negative unless immigration was allowed. People came in from the crowded parts of the world to fill the job markets in rich countries. People-flows became important for the economies of the US and the UK. The former received a lot of illegal labour from Mexico, while the latter had legal migrants from Eastern Europe, in particular from Poland. The migrants affected the labour market in ways that hurt the low-income earners. This group included what sociologists call “low-income, non-college educated white population.” They formed the base of support for the Donald Trump and the movement in Britain to leave the EU. In both countries this disaffected and disgruntled population was fed anti-globalism. Banning the entry of immigrants and walking out of trade deals were sold as the policies that will rescue this group from its economic troubles. With Trump elected president and with Britain’s Prime Minister Theresa May having sent the divorce letter to Brussels, the stage is set for more anti-globalisation moves. But has globalisation really hurt these countries? The answer comes from a recently published Washington-based study by the Peterson Institute for International Economics.

According to the report, trade has contributed significantly to the rise of living standards in the US. Since the end of WWII, the US has gained $2.1 trillion a year, which is equivalent to 11 per cent of the current estimate of the size of the country’s economy of $18.5 trillion. This has benefited low-income groups whose budgets are weighted towards such manufactured products as shoes, clothing and electronics. Also, only modest job losses resulted from trade. In recent years, imports displaced 312,500 jobs per year but the economy on average created 156,250 jobs. Most of the job losses were because of technological advances, not because of trade. The report also found that since 2003, benefits from trade have exceeded costs by a factor of five to one. However, as the economist Mancur Olson pointed out, some time ago, gains from trade are spread among millions of consumers while the pain of job loss is concentrated in the areas where factories close. These were the areas that voted for Trump and cast their votes in favour of Brexit.

As the economic writer Robert J Samuelson wrote in a recent article, “politically globalisation shifts blame abroad. Foreigners – their exports, subsidies, exchange rates or whatever – are the villains. We are the victims. Little wonder that Trump has found anti-globalisation an irresistible pitch. So have many others. Yet this has created a dilemma for trade policy. What’s good politics is bad economics and vice versa.” It is hard to predict what is in store for the Trump presidency. On May 17th, the Justice Department appointed a Special Counsel to investigate the nature of president’s and his team’s contacts with Russia. No matter what they find from this investigation, a great deal of damage has already been done to globalisation.

Published in The Express Tribune, May 22nd, 2017.

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COMMENTS (2)

Prada | 3 years ago | Reply | Recommend Outsourcing blue-collar work will largely be reduced by all nations. China will be the one that will be hit the worst in the long run. India will also have outsourcing of IT jobs reduced by the lack of technical resources in the west will still ensure a constant stream of work.
hzr | 3 years ago | Reply | Recommend The world is no longer flat It is getting vertical with regional trade blocks in preference to WTO. Job loss and shifting of production to low cost nations is the prime reason If government cannot give jobs and depend on low cost imports the world will give up free trade.
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