Global Dislocation and False Hopes

It has become fashionable among pundits to comment on the great shift which in their eyes is taking place on the globe. This view holds that the “Atlantic World”, which includes Europe and North America, is in decline. Both wealth and power are shifting to Asia, with India and China as the main beneficiaries. We would be at the dawn of the “Asian Century”.

This hypothesis is based mainly on the disparity in economic growth rates. The “advanced” economies, including the European Community, the U.S. and Japan are mired in recession and high fiscal deficits. By contrast a number of “emerging” nations are forging ahead, acquiring both new wealth and growing political power.

This new intellectual fashion closely resembles a similar trend in the 1930’s. Then also the western democracies were experiencing economic depression, combined with social instability. By contrast the totalitarian regimes – Germany, Italy, Japan (and the USSR) – were surging. Many believed them to be the wave of the future.

Yet history proved them wrong. Last century’s totalitarian regimes self-destructed, while the U.S. and democracy have endured. Will the cycle repeat again?

The now fading “old” world order was based on Western dominance: first the colonial empires, then the rise of the U.S. as world power. Politically representative democracy reigned, as did capitalist free enterprise. When the Soviet Union lost the Cold war, the western model was expanded to the entire globe. Our elites saw the future as one world, with open markets and democratic institutions tied together by a global financial network.

This benign and hopeful (as well as nave) vision never became reality. It would have required the global observance of the rules that had governed the development of western economies. This did not happen, for several reasons.

First, the rules applied to national entities. There was no model or experience available for globalized finance. “Financial engineering”, most of it questionable, then took over. Novelty and optimism gave rise to euphoria, followed by the inevitable crash.

Second, many “emerging” countries saw the opportunities the “open” global system offered for the practice of mercantilist policies. Baiting global corporations with artificially low production costs and the promise of vast new markets, they drew in massive influx of investment capital. With investment went jobs, skills, technology and foreign exchange accumulation.

According to globalization theory, the jobs transferred were the “inferior and unwanted” ones, to be replaced by better ones generated by innovative technologies and social evolution. But these “new” jobs were just as sensitive to cost as the “old” ones. Innovation was cheaper in China, so R&D was moved there too. Services are cheaper in India, so that is where the related jobs are going.

Initially employment losses in the U.S. were seen as a good thing. This was the “creative destruction” inherent in the functioning of “free markets”. “Old” industrial jobs were being eliminated, forcing us to move on. This of course raises the question of how much of this “creative destruction” our economy can sustain.

The growing anger and resentment spilling into the U.S. political system suggest that the limit may have been reached.

The same can be said of economic growth supported by the predatory commercial practices embraced by the Chinese government. Such policies eventually exhaust the source they rely upon, leading to systemic shock once the transfer of wealth ends. China will not win a trade war with the United States or Europe. In fact it may not survive one, economically and/or politically.

Globalization is to have created a world of harmony and plenty. Instead it is producing massive financial imbalances and rising acrimony, leading ultimately to  dislocation  and dashed hopes. The growing mismatch between expectations and realities underlies the uncertainty that increasingly dominates world markets.

No “international concerted action” will remove this lack of direction and understanding. For one, there is no model for such action. And even if there was one, where is the institution and authority to implement it? If we are to return to some stability, the only reliable foundation is that provided by national governments.

A pullback from globalization is therefore necessary, so as to return to governments the power and authority that they have given up to anonymous global forces. In other words, some of the safety barriers such as tariffs, or exchange and capital controls, will need to be reinstated.

This is not isolationism or protectionism, only necessary common sense. It means a reduction of the reach of financial conglomerates and multi-national corporations. They will not like it and most probably fight any such measure. However, if there is no move in that direction, we will quickly learn that the alternatives are far worse.