By Joshua Kurlantzick & Jodie T. Allen
US News and World ReportFebruary 11, 2002
Security is always tight when the world's political, financial, religious, and cultural elite--from Secretary of State Colin Powell and Microsoft's Bill Gates to Afghan Foreign Minister Abdullah Abdullah and U2's Bono--gather for the annual meeting of the World Economic Forum. But logistics are far more complicated when that meeting is held not amid the snowbound hills of Davos, Switzerland, but along bustling Park Avenue.
Traffic on the streets surrounding the Waldorf-Astoria, home to the confab, congealed last week among barricades and phalanxes of New York's finest. The police apologized good-humoredly for any inconvenience to the august conferees, many of whom seemed charmed by the attention of these revered heroes of September 11. Antiglobalization demonstrators limited their street protests, while sharing doubts at seminars elsewhere in the city and in a countermeeting in Brazil. Some of their leaders, by invitation, joined the WEF deliberations.
Whipsaw effect. The chandeliered halls of the venerable hotel tinkled with the chatter of Davos devotees as they meekly queued up to register. But in conference rooms, the tone was more sober. Globalization is undergoing its severest test to date, with implications for everything from stock prices and job creation to fragile alliances and government stability in many corners of the world. Globalization--a combination of advances in trade, communications, and capital flows--fostered rapid development over the past decade. During the 1990s, world trade in goods nearly doubled in value, to $6.4 trillion in 2000. But last year global integration whipsawed, delivering bad news across continents as nations' economic downturns fed on one another. Some observers fear that the September 11 attacks, like the assassination that triggered World War I and ended the last great globalization surge, will usher in an era of barbed-wire borders and populism. Last year, the World Bank finds, trade underwent "one of the most severe decelerations in modern times."
In less than a year, there has been a triple whammy: synchronized slowdown in the world's economies; the collapse of Argentina, once touted as a model of pro-globalization reform; and, at the very center of world power, devastating attacks by a truly global terror network. Small wonder that WEF founder and President Klaus Schwab chose "Leadership in Fragile Times" as the theme for this year's meeting in which sessions explored "Crisis Management: Look Out Ahead" and "Rethinking Risk: What Is Business as Usual Now?"
Not that gloom is ubiquitous. "Globalization did pass the stress test," says Robert Hormats, vice chairman of Goldman Sachs International. Although tighter security means "the global economy is no longer so frictionless," Hormats sees commercial and political ties among nations strengthened by common challenge. Still, in some less posh venues, globalization's stock is trading at all-time lows. In Thailand, street vendors offer "International Monetary Fund noodles," phat thai sold at deep discount, symbolizing some Thais' beliefs that creditors and global trade have ruined its freewheeling economy. In Argentina, four years of recession and the collapse of its dollar-pegged currency have provoked attacks on foreign bank branches and calls for protectionist measures. In America, the Richter-scale rocking collapse of energy giant Enron in a cloud of dubious accounting cast doubt on the vaunted transparency of U.S. capital markets that other countries had been urged to emulate.
Nasty knocks. "Advocates of globalization will be forced to take a step back now," says Miguel Diaz, a trade economist at the Center for Strategic and International Studies. In Asia, whose open economies depend heavily on electronics exports, 2001 was bad, and 2002 could be nastier. The global war on terrorism has exacerbated Asia's problems. India, whose millions of English speakers had staffed back offices for U.S. companies, is now perceived as an investment risk. Japan, once the region's backstop, is in no position to help. Japanese firms now wallow in red ink, while its banks hold a choking $2 trillion in bad corporate debts. If Japan's failing banks, big investors in America, liquidate their holdings, that could rattle the wheezing U.S. economy.
Across Asia, economic problems are compounded by fears that even if the region's bounty is replenished, China will eat everyone else's lunch. In 20 years, China has grown from a backward society to the world's sixth-largest economy, a many-sided market where farmers peddle fruit outside Shanghai's Louis Vuitton outlets. Some business executives see China's growth benefiting the world, as its swelling middle class snaps up imports and invests abroad. Already, Bangkok's Grammy Entertainment, a music studio that specializes in screeching Thai pop, is expanding into China, hoping to conquer the world of screeching Mandarin pop. But though some foreign products are popular in China, its exports are swamping markets overseas--in Thailand, even Buddhist monks snap up supercheap Chinese-made electronics. U.S. textile and Asian electronics firms alike are begging their governments to protect them against both Chinese investment and goods. Allowing Chinese firms to invest in certain sectors is "like drinking poison to quench a thirst," said Kao Tien-sheng, managing editor of a leading Taiwanese magazine.
Europe, too, has taken a hit from weakened consumer spending across the Pacific Rim, where European luxury goods are popular. Elsewhere, Argentina's meltdown may impose needed discipline on its free-spending politicos, who once allowed state healthcare to subsidize tummy tucks. But for now, Latin America experts worry that crises in countries like Argentina that welcomed globalization could produce a generation of populist, anti-democratic South American leaders. "The survival of democracy in Latin America is now at stake," says Diaz.
During the go-go globalization of the 1990s, a downturn in Asia or Europe never truly threatened worldwide growth, since Americans continued spending. But America has rediscovered, if not fully embraced, frugality, while tighter border security has forced U.S. firms to rethink "just in time" inventory policies. Peter Morici, senior fellow at the Economic Strategy Institute in Washington, D.C., estimates that increased security and fatter inventory policies could shave more than 0.5 percent off U.S. gross domestic product.
As the high priests of economic integration have retreated from their pinnacles, multinational tech firms have toned down their messianic ads, which once featured executives teleconferencing with vacationing partners in remote corners of the world. And though the antiglobalizers who upended trade meetings in Seattle and Quebec muted their concerns after September 11, their messages have filtered down to average citizens. "During a recession, unemployed Americans may make the connection that some of these trade deals haven't provided the benefits promised," says Robert Scott, an international economist at the Economic Policy Institute in Washington, D.C.
Still, the forces propelling globalization are most likely too strong to be halted, though they may temporarily slow. The number of E-mail addresses worldwide is expected to more than double by 2005. In November, economic ministers inaugurated a new round of World Trade Organization market-opening talks. And the war on terrorism has actually forged closer ties between some nations. A year ago, Bush administration officials were chucking Russian diplomats out of Washington after a series of spy scandals; these days, they confab with Russian oil firm executives about keeping global oil prices low.
Ultimately, globalization's prospects may rest on a few key trends. Some experts argue that the international community can best temper any antiglobalization backlash by focusing on social issues in poorer countries, rather than on debt and currency pegs. Jeffrey Sachs, director of Harvard University's Center for International Development, contends that doubling per capita healthcare spending in the developing world would add $360 billion to the world economy by 2020.
Whether Japan and China find the fortitude to tackle their internal problems also will prove vital. Most important, the U.S. economy will have to resume its role as the primary engine of globalization. Although economists differ on the timing and strength of the rebound, the U.S. economy is expected to pick up steam in late 2002 as firms, having pared down inventories, boost their imports, create jobs, and power consumer spending. Perhaps, as the WEF's Schwab envisions, other players will rival America in a multipolar "global village." But, for now, Uncle Sam's is the only game in town.
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