By Eric Beinhocker & Elizabeth Stephenson
Of all the trends we followed before the crisis, globalization seemed the most secure. Today, however, big and important question marks hang over some aspects of
global economic integration.
The past decade-and-a-half has witnessed a level of global integration unseen since before World War I (and arguably in history). Between the early 1990s and the current downturn, global GDP grew at robust rate--roughly 5% nominal GDP growth per year. Yet, trade flows grew nearly one-and-a-half times faster, while capital flows grew at twice the rate. The advent of viable undersea fiber networks in the late 1990s created the first real-time global data networks ever, unleashing a torrent of global information flows. In the last 2 decades, more than 200 free-trade treaties were signed, tariffs fell to unprecedented lows, and countries like China and India, after years of relative isolationism, engaged much more vigorously in the global economy.
In short, the world economy became fundamentally more interconnected and interdependent. The big question now is: Will the pendulum swing back?
In the current downturn, at least certain aspects of globalization have stalled. Trade flows, for example, are expected to fall at roughly four times the rate of global GDP in 2009; tariffs are rising; and immigration restrictions in certain countries are increasing. The crisis, which hit the US hard in the fall and in January, is having significant knock-on effects across the world--particularly in key sectors, such as manufacturing and mining.
Yet the data are not uniform. Although growth in the globalization of goods and services may stall for a period because international trade has declined along with demand, it is unlikely to reverse. There is little political appetite for further trade liberalization--for example, by completing the Doha round of negotiations - but a full frontal attack on liberal trade would threaten large numbers of jobs, raise prices for consumers, and endanger prospects for economic recovery.
While a populist backlash cannot be ruled out, the more likely outcome is increased protectionism on the margins and recovery of the global trading system as growth returns.
The US is busy restricting imports on French cheese (causing a major run on Roquefort in New York City's priciest neighborhoods), but South Korea just announced a new free trade treaty with the European Union this week. Information is flowing freely as ever, as usage of information and communications technologies continue to surge. Just witness Iran's Twitter uprising. The recent meeting of the G-20 emphasized a common commitment to open markets and free trade, but the policies of individual member nations are not so consistent.
The most pessimistic liken the pre-crisis period of global integration to that immediately preceding World War I, with the implicit proviso, "We all know how well that worked out." And the naysayers have their point: no doubt the biggest risk to the global economy is a major protectionist shut-down, and it would lead to no small measure of economic and geopolitical instability.
Admittedly, too, there are certain eerie similarities between the recent past and the early 20th century--dramatic growth in free trade, the emergence of neo-mercantilist tendencies (such as the under-the-radar agricultural land acquisitions going on in Africa by a whole suite of countries worried about food security), and of course, an exuberant belief in unfettered economic growth.
Yet, at the same time, there are key differences, not to mention innovations, which once unleashed are very hard to put back in the box--for example, the power of global communications networks that allow for instantaneous global flows of information. The telegraph is no comparison.
As for the globalization of talent, immigration will slow if governments tighten restrictions in response to popular concerns about job losses. Yet aging populations mean that many Western countries will eventually find themselves short of workers, and emerging markets will keep producing a growing share of the world's college graduates. Additionally, the relentless march of information and communications technology will enable the global distribution of knowledge work. Overall, we remain confident that the global market for managerial and technical talent will continue to grow.
Financial globalization is more vulnerable. Observers have legitimately argued that increased linkage among the world's markets allowed problems to cascade uncontrollably. We could see, as a worst case response, a return of capital controls (which prevent the allocation of resources to their most productive uses), an increase in inconsistent regulatory regimes, insular financial policies, and a regulatory environment that stifles innovation. Best case would be more transparency in the global financial system, greater regulatory and central bank coordination, and improved international approaches to risk management.
For now, strategists should stress-test their business models under different globalization scenarios--such as free and fair movement of goods and services, capital, and talent across borders; movement subject to uneven cross-border regulatory and tariff regimes; and the wild card of a return to widespread protectionism. The goal of such analysis is to uncover the circumstances under which the desirability of certain production locations might "flip" because of tariffs, the value of overseas business units might fall given capital constraints, or the ability to carry out core activities--either at home or abroad-might diminish as a result of restrictions on the movement of people.
Perhaps the most important point in all of this: it is in the economic interest of no one to reverse global integration. Protectionist backlash will slow recovery, increase prices, and drive unemployment. Yet, as history has shown, it is not beyond human ingenuity - or political process - to do, with all the best intentions, what is in the economic interest of no one.
