An alternative perspective
15 August 2016
Dr Bob Swarup, Founder of Camdor Global
The Cycle Turns
The world is getting smaller. That has been the unbidden meme of at least the last half century. Since the end of the Second World War, the world has become more interconnected. The mushrooming and pervasive influences of multilateral organisations such as the United Nations and World Bank; the rush of free trade agreements and the policing of the World Trade Organisation; the creation of a global financial infrastructure fuelled by cross-border trade and credit; the formation and refocusing of vast pools of savings – pension funds, insurers, sovereign wealth funds and the like – to an international palette of investments; the advent of the Internet and digital economy where boundaries vanish amongst lines of code – all these and more have glued us into an unstoppable juggernaut of growth for three generations.
The beneficiaries are also global: the global takeover by Americana; the birth and, until recently, the success of the EU; the rise of Japan, China, India and others once firmly in the emerging markets firmament; the fall of the Berlin Wall and the welcoming of former Communist nations into the global financial ecosystem; the lifting of billions out of poverty; and more.
Today’s meme is globalisation and free trade is its evangelical mantra. It is an accepted foundation of society. Every business has a potential global audience. Every person (at least those with the privileges of a passport and technology) is connected many times over into the world and can move about with an ease unknown for much of human history. And every mainstream policymaker has kissed the proverbial global baby repeatedly, singing the mythical praises of globalisation and genuflecting at the altar of trade.
But the narrative has become worn and no longer fits the facts. Globalisation is dead and we are starting the journey back. The world arguably today is in the midst of a new meme in the making – deglobalisation – as people turn their backs on an interconnected world economy and societies turn iconoclastic. It is not for the first time.
The Rhyme of History
Globalisation may be defined as the economic state where trade across nations (exports and imports) is growing faster than GDP. By implication, people interact more, transact more and create more wealth through their exchanges. In contrast, deglobalisation may be defined as the alternative state where trade grows less than GDP. Countries become inward focused, international trade declines as a proportion of GDP and growth slows down as economic opportunities shrink.
Even a cursory look at history reveals a clear cycle of globalisation and deglobalisation. Prior to the nineteenth century, global trade was limited, but soon began to change under the twin influences of colonialism and rapid advances in technology that created factories and revolutionised transport through the introduction of the steam engine.
The period from 1820 to 1870 may be regarded as an initial ‘proto-globalisation’ phase, where trade grew rapidly at more than four per cent, with the main beneficiaries being Western Europe and its offshoots in North America and the Antipodes, as their models of state-sponsored capitalism began to spread tendrils around the world, though global growth was more muted.
‘Globalisation 1.0’ began in earnest in 1870 lasting through to 1913, as this expansion accelerated and empire building became the norm for advanced economies. The spread of trade was aided further by improvements in automation, the widespread expansion of transport, rapid advances in communications, the growth of an international financial system, and the accompanying rise of large financial institutions (both sovereign and private).
But beneath the surface, the creative destruction wrought by rapid economic change also led to volatile bouts of economic obsolescence and unemployment, coupled with falling returns to labour, as wages were suppressed.
A complex financial system introduced regular booms and busts, that increasingly were correlated and led to worries over financial stability. Social tensions rose, with the blame being laid on immigration and foreign competition. Bills were passed such as the 1882 Chinese Exclusion Act in the US that effectively barred China’s first attempt to export labour globally and led to the ubiquitous Chinatown. Those deemed to be inferior such as indigenous colonial populations and blacks were further disenfranchised. Various countries passed protectionist measures to control capital flows and protect domestic industries.
The expression of all this frustration was ‘Deglobalisation 1.0’ from 1913 to 1950, as the incipient tensions of limited growth and unequal outcomes coupled with political pressures and a huge overhang of (largely war) debt stoked a wave of nationalism, protectionism and populism. Domestic priorities dominated at the expense of international coordination, as policymakers began to play to the local gallery and pursued autarky. Trade fell away and a collective failure to tackle deeper structural issues ultimately resulted in the debacle of the 1930s. Since then, we have been on a tearaway expansion.
Since 1950, ‘Globalisation 2.0’ has led to a phenomenal unparalleled growth of both trade and GDP across the world. It has been a golden age where the world embraced free trade, multilateral bodies, coordination of policies, the rise of superstates and technology. But in our opinion, that period ended in 2010. And the data below indicates that we are now seeing the unveiling of ‘Deglobalisation 2.0’.
Where from and where to?
Deglobalisation 2.0 likely began around the turn of the decade, as the last financial crisis crystallised the growing sense of disenfranchisement and disillusionment amongst large swathes of the world’s populations. A toxic mix of suppressed wages, divisive politics, and an explosion of debt have all combined to destroy the allure of globalisation for many.
This is now more than a sense of ennui. Around the world, politicians are responding to shifting moods amongst their voting public. Donald Trump is in the ascendant in the US, Bernie Sanders’ acolytes have become the Tea Party of the Democrats, and the whole debate has moved to a more protectionist stance, perhaps best encapsulated by the recent U-turn on the Trans-Pacific Partnership by Hillary Clinton – once a key supporter who called it “the gold standard in trade agreements” – as she prepares to fight the presidential election.
In Europe, Brexit is another step in this journey and the bailout of the Italian banks another, both the first of a likely soon to be familiar narrative across Europe. And in Asia, even China is struggling with the after-effects of too much debt-fuelled growth and suppressed wages.
The impact on raw data is troubling. Global trade is no longer slowing down but actually has come to a grinding halt, perhaps even a decline, according to recent numbers. This is true across countries and across many sectors. Analysis by Global Trade Alert lays the blame not at the door of commodity price falls, but shifts in trade policy. Protectionism in 2015 was up 50 per cent on 2014, with over 80 per cent of the measures coming from G20 members. The deleveraging of banking balance sheets has also played a role. Cross-border lending is falling, as banks reduce their balance sheets whilst also retreating from periphery to core activities in response to state pressure.
Policymakers have blinded themselves to this emerging trend and the associated risks. Current monetary policies such as quantitative easing cannot change this dynamic. In the absence of structural change, their corrosive impact on savings and minimal impact on global growth only inflames the rhetoric of social disenfranchisement.
The ‘elite’ are increasingly at risk as new parties more sensitive to these shifting sentiments spring up with populist messages. Their effects are well documented in history – autarky, protectionism, economic naivety and a rush to grab what remains of the economic pie. Redistribution is not the answer. Trade growth is – and policymakers would be wise to think hard about how to nurture it amongst these headwinds.
The world is getting smaller. Yet the distances between us are growing and as we become smaller minded, we risk being all the poorer.
Bob Swarup is the Founder of Camdor Global, an advisory firm focused on macro trends, investment strategy, risk management and regulation. He is a Fellow at the Institute of Economic Affairs and author of the critically acclaimed book ‘Money Mania’, which examines 25 centuries of financial crises.