In statistical terms, globalisation is back. The trade rebound looks V-shaped – a drop of 12.2% in 2009 followed by a projected gain of 13.5% in 2010 (WTO 2010). Global foreign direct investment (FDI) is expected to recover to $1.2 trillion this year, after plunging from $2.0 trillion in 2007 to $1.0 trillion in 2009 (UNCTAD 2010). Financial markets have rebounded, and cross-border flows are recovering. After halving from $1.3 trillion in 2007 to $0.5 trillion in 2009, net portfolio capital flows to emerging markets will rise to an estimated $0.7 trillion this year (IIF 2010). Investors with cash are eyeing bets on Europe and the US, where good companies still go for cheap prices.
While the “Great Crisis” of 2008-2009 devastated the world economy and all but halted globalisation, much went right. In contrast to the beggar-thy-neighbour protectionism in the 1930s, international commitments made over the past sixty years to liberalise world trade and finance, defended by thousands of vocal proponents of free markets ensconced in industry, academia, the media, and national governments, preserved the open global economy (Baldwin and Evenett 2009). To be sure, protection has erupted across the G20 like a thousand flowers, but collectively the damage was orders of magnitude less than in the Great Depression of the 1930s.
Yet the world economy is not home free. In our new book Globalisation at Risk: Challenges to Finance and Trade (Hufbauer and Suominen 2010), we argue that policy and institutions that defend and buttress globalisation are at risk.
Economic hardship has spurred calls to keep imports out and jobs at home, and to clamp down on global capital. Free trade is deeply unpopular in the US, not only among blue collar workers, but also among college-educated white collar employees.1 Creeping protectionism – ingenuous trade and investment barriers and subsidies that favour domestic industries and investors – have flourished (Evenett 2010). Financial markets are beset with uncertainty about the new regulations implemented around the world and worries about capital controls in nations shaken by the crisis. Nascent currency wars can be detected between the US, China, Japan, the EU, and Brazil. Every country, it seems, would like a more competitive domestic currency.
But there are no good policy alternatives that come close to generating the benefits from freer economic exchange. Consider some findings. Globalisation has stimulated growth, which the World Bank long ago found to have a direct, one-to-one relationship with poverty reduction (Dollar and Kraay 2002). A Peterson Institute study shows that the US economy alone has gained $1 trillion annually due to globalisation in the post-war era, and stands to score another $500 billion per year from future policy liberalisation (Bradford et al. 2005). The prime globalisers – multinational companies – are found to pay up to 24% higher wages in America than non-globalised firms (Slaughter 2009). Freeing portfolio capital flows enhances the value of equity in firms by 15% and boosts per capita income growth by 1% each year – even after the odds of financial failure are factored in (Ranciere et al. 2006, Chari and Henry 2004).
To be sure, while globalisation is an antidote for poverty, it also makes nations more vulnerable to external shocks. While Adam Smith’s invisible hand is a durable guide for economic life, collective actions of rational market players can result in a collective disaster. Yet new restraints on globalisation are not the answer. The paradox is that just when open markets are needed to revive growth and employment, the political system, driven by fears of lost jobs, is turning against pro-globalisation policies.
Globalisation has many drivers, from the logic of comparative advantage to economies of scale and scope, new technologies, and the compulsion to spread high R&D costs across larger markets. But a good share of globalisation – at least a third by most measures – owes to better policy, including trade and financial liberalisation. Liberal policies are now critical. Globalisation is not automatic. For it to flourish in the 21st century, much needs to be done – institutions must be revised, anxieties addressed, and some compromises struck. Some of our several policy descriptions include:
- The engine of multilateral trade liberalisation in the past six decades, the World Trade Organization (WTO) has grown, to paraphrase Tom Friedman, “hot, flat, and crowded”. While the first priority must be to conclude the languishing Doha Round, thinking must start about streamlining the clogged multilateral system. Unlike the 1940s, trade talks now tackle multiple issues among a record 153 members. The WTO needs to drop the unanimity rule and single undertaking principle to enable for faster deals among coalitions of the willing. For example, leading emitters of greenhouse gases could reconcile tough climate policies with open markets through a climate code that lays out permitted and proscribed trade measures.
- While European social safety nets are comfortable, a sense of precariousness in the US is real and raw. A new policy paradigm – call it Capitalism 3.0 – is needed. The new system should marry security with labour mobility. Health insurance and home mortgages should not be reasons for people to stay put after their jobs have disappeared. Wage insurance and lifelong training programmes are in order. When massive job layoffs hit a community, emergency relief for prudent home mortgages should be available. Bold and comprehensive measures can sidestep the catch-22 created by the labels “trade adjustment” and “globalisation fund,” terms that cement the public perception that trade and globalisation threaten our jobs and our way of life.
- Trade deficits in America and a few other countries are a familiar precursor of protectionism and must be curbed. Perhaps the rise of materialistic Asian middle classes coupled with a young army of frugal Americans will propel a grand correction bottom-up. But there is not time to wait and see. Policies are required: A real commitment by China, India, and other well-off Asian nations to channel money into household demand, a burst of infrastructure spending in Africa and other poor developing regions, and a sharp correction of US federal budget deficits are essential top-down correctives. The G20 has a rebalancing process in place, but success depends on domestic political commitments of the main culprits – US, China, Germany, and Japan.
- Rules on FDI, especially on investments made by sovereign wealth funds, governments’ private investment arms, can be helpful when they clarify the investment review processes, and answer legitimate fears about foreign control of national assets. But muddying the waters are several other currents. Investment reviews are in many advanced and emerging countries much broader and more subjective than it is in the US, where it is limited to national security threats, often giving governments a license to limit FDI on the basis of “public order” or “economic security” concerns. Needed is a global code of conduct, proposed by David Marchick and Matthew Slaughter (2008) for reviewing foreign investments. Based on a handful of principles, such a code would apply to investments tinged by national security and strategic asset concerns. Sovereign wealth funds must not become vehicles for advancing state capitalism – and they must dispel suspicions that they are just that through greater transparency, better communication, and adherence to rules of good conduct.
Globalisation is at risk from political pressures intensified by the Great Crisis; prolonged high unemployment would be particularly hazardous. But even in a bleak scenario, the global system has built-in forces that will fight tooth and nail to safeguard openness. Economic integration is a fabulous force, if not unstoppable, at least one of the best agents the world has known for spreading growth and prosperity.
Baldwin, Richard and Simon Evenett (2009), The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20, A VoxEU.org Publication, 5 May.
Bradford, Scott C, Paul LE Grieco, and Gary Clyde Hufbauer (2005), “The Payoff to America from Global Integration,” in C Fred Bergsten and the Institute for International Economics (eds.), The US and the World Economy: Foreign Economic Policy for the Next Decade, Institute for International Economics.
Chari, Anusha, and Peter Blair Henry (2004), “Risk Sharing and Asset Prices: Evidence from a Natural Experiment”, Journal of Finance, 59:1295–1324
Dollar, David and Aart Kraay (2002), “Trade, Growth, and Poverty”, World Bank Policy Research Working Paper 2615.
Evenett, Simon (2010), “Managed exports and the recovery of world trade: The 7th GTA report”, VoxEU.org, 16 September.
Hufbauer, Gary Clyde and Kati Suominen (2010), Globalisation at Risk: Challenges to Finance and Trade, Yale University Press.
IIF (2010), “Capital Flows to Emerging Market Economies”, Research Note, 15 April.
Marchick, David M and Matthew J Slaughter (2008), “Global FDI Policy: Correcting a Protectionist Drift”, New York: Council of Foreign Relations, June.
Mitton, Todd, “Stock Market Liberalization and Operating Performance at the Firm Level,” Journal of Financial Economics 81, September 2006, pp. 625–647.
Murray, Sara and Douglas Belkin (2010), “Americans Sour on Trade”, Wall Street Journal, 4 October.
Ranciere, Romain, Aaron Tornell, and Frank Westermann (2006), “Decomposing the effects of financial liberalization: Crises vs. growth”, Journal of Banking and Finance, 4 June.
Slaughter, Matthew J (2009), “How U.S. Multinational Companies Strengthen the U.S. Economy”, Report of Business Roundtable and The US Council Foundation (spring).
UNCTAD (2010), World Investment Report 2010.
WTO (2010), “Trade likely to grow by 13.5% in 2010, WTO says”, Press Release, 20 September.
1 Americans of all income groups have progressively soured on free trade, with majorities now considering trade deals harmful. In an October 2010 Wall Street Journal/NBC News Poll, 53% of Americas thought free trade agreements had hurt the US, up from 32% in 1999, while fewer than 20% saw them as having helped, down from more than a third in 1999. See Murray and Belkin (2010).