De-Globalisation - The Cycle Is Turning

Dec 28, 2016

• History doesn't repeat itself, but it often rhymes. - Attributed to Mark Twain

Globalisation refers to the economic, social, and political integration of nations. Economic globalisation can be seen in the exchange of goods - e.g. exports as a share of world GDP are estimated to have quadrupled in the last sixty years. It can also be seen in the rising movement of people and capital around the world.

A key narrative that supports globalisation is rising living standards. Increased integration has created more jobs in emerging markets, resulting in fast increases in per capita GDP in these countries. It has also resulted in cheaper goods in developed markets. A shirt manufactured in a low-cost country means more jobs there and a cheaper shirt in the developed market.

British economist David Ricardo explained this process in his theory of comparative advantage in 1817. Here is a simplified example: Assume two households, A and B, each have a piece of land to farm. Both households divide their time between farming and cooking. Household A is great at farming - they produce more output with less input (relative to B). Household B is great at cooking (relative to A). It would make a lot of sense for these two households to trade. A should farm both pieces of land and B should cook for both families. This allows the combined output (world GDP) to be much higher.

Time Capsule

Similar to the globalisation of the second half of the twentieth century, 1880 -1930 was a period of increased global integration. But the trend started to reverse with the Great Depression. We can call this reversal - deglobalisation. Several prominent countries including the UK resisted globalisation by rising tariffs. Far-right parties in Europe gained popularity in this atmosphere of financial weakness. A wealthy New Yorker was voted president of the United States in 1933.

The parallels are evident. You can replace the Great Depression with the Global Financial Crisis...the wealthy New Yorker with Donald trump. Globalisation and deglobalisation are opposing trends...opposite ends of a cycle. The cycle has happened before and the likelihood it will repeat is strong.

Globalisation - Bogeyman for Whom?

Just twenty years back, globalisation was viewed with suspicion in India. I remember significant opposition to various funding proposals from international institutions. There was - and to some extent, still is - a view that globalisation is a 'rich country conspiracy' to influence emerging markets.

But the dominant view today is a bit different. Globalisation has become a bogeyman for the developed world. The process of increased integration may have lifted a half a billion people out of poverty. But - it has also taken jobs away from developed economies.

Cracks in the Wall

Popular opinion against globalisation is evident. Large economic players - most notably the US and UK - are withdrawing from global markets. President-elect Trump recently appointed Peter Navarro, a known 'China hawk', as leader of a newly created trade council. Apart from trade, relations between the US and China are also showing signs of stress related to maritime territory (South China Sea) and political policy.

Then, of course, the UK voted for Brexit and against integration with the EU, and far-right parties in Europe are gaining popularity, most notably the National Front lead by Marine Le pen.

Meanwhile fate of the Trans-Pacific Partnership (TPP agreement) hangs in the balance as Mr Trump has promised to abandon the deal on his first day in office. The TPP is an trade agreement signed (but not yet ratified) by twelve countries accounting for 40% of global GDP and 33% of global trade. The landmark deal was slated to reduce tariffs and boost trade among the signatories. Disintegration of the agreement would a key marker of the trend reversal in the exchange of goods and economic globalisation.

Deglobalisation is further evident in economic factors including the movement of labour, the movement of capital, and politics. More on this coming soon...

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