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The Financial Express

Globalisation and deglobalisation

| Updated: February 20, 2021 21:23:37


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Globalisation and deglobalisation

As the global economy stagnates and unravels, the current global economic trend described as "deglobalisation" is increasingly becoming a source of concern around the world. For developing countries including Bangladesh there is a growing anxiety that  the deglobalisation process will negatively impact of the flow of goods from these countries to the developed countries. More alarmingly, developed economies could withdraw their manufacturing from developing countries and roll back their supply chains to either within their own borders or close to those countries.

Globalisation is a complex process and defies any simple definition. Some define it as being the intensification of world wide inter-relations leading to an increasing interdependency cutting across cultural, social, political and economic barriers. Therefore, globalisation encompasses many different elements such as cross border flows of trade, investment, data, technology as well as  ideas, labour, tourists and students.

Globalisation, includes much more than the integration of the economies of regions and  countries. Therefore, global economic integration that we have witnessed since the early 1980s  is a sub-set of the globalisation process and is narrower in scope examining only the economic characteristics of the globalisation process. In fact, the key driver of globalisation is trade. As such, if the trade openness index measured as a ratio of world trade (exports + imports) to global GDP can be considered as a reasonable proxy for global economic integration.

The period between 1980s and the onset of the Global Financial Crisis (GFC) in 2008 marked a period of rapid economic integration as reflected in the trade openness index which stood at 60.2 per cent at the time of GFC,  from 10.1 per cent in 1945 and 39.5 in 1980.  Then dipping into 52.3 per cent in 2009, it regained momentum thereafter standing at 62.2 per cent in 2019. In fact, during this period the rate of growth in global trade outpaced that of global output. This means that an increasing proportion of domestic output is produced for exports than for domestic consumption. Even a developing country like Vietnam achieved an openness  index of 208 per cent in 2018.

Such phenomenal growth in global trade has been caused by the mutual reduction  in trade barriers which in turn has led to a standardsation of goods and services produced in different countries arising from homogenising consumer preferences and tastes. High internet penetration has allowed people from around the world to access and benefit from information flows without crossing the borders.

Also since 1990 developing countries like India, more so  China have started to open up their economies; the collapse of the Soviet Union and economic liberalisation in East European countries further added to what is described as economic "convergence", where less-developed countries were now able to slowly but surely catching  up with developed countries.Glonbalisation has alwaysbeen  all about price and production efficiency, regardless of place. It was considered to  be the best guarantee for the stability of the system.

Expanded opportunities for trade were the important factor in driving this convergence. However, the response of governments to globalisation in many cases to resist it by enacting laws protecting certain industries. Even though all countries want  to have free access to their trading partners' markets, many are reluctant to accord the same trading access into their own markets. In view of the economic benefits of free trade, it is hard to understand why there is continued resistance to rapid trade liberalisation.

The reason appears to lie in unequal distribution of economic benefits  of trade. Free and open trade generates winners and losers, especially within the country. There are empirical evidence available which suggest the reduction in global inequality has been achieved at the cost of rising inequality within countries. The advocates of free trade also argue that the benefits of free trade or more precisely of globalisation are not equitably distributed between and within countries.

Now the distributional consequences of globalisation in countries like the US and the UK and others have become a political issue calling into question the benefits of free and open trade. As a consequence concerns about rising within country income inequality in these countries have led many political leaders to call for protectionism. So the gains from free and open trade can no longer be taken for granted under the current political climate.

While globalisation has lifted millions out of poverty in developing countries  over the last three decades, at the same time low inflation and low interest rates and cutting labour costs by offshoring production facilities in low wage countries  significantly boosted corporate profits in developed countries like the US. But workers in developed countries have not shared rising benefits arising out of increased volumes of output and trade around the world.  In fact, globalisation has been blamed for job insecurity, stagnant wages and unemployment in developed countries. It is estimated that one billion people have been  affected economically in the developed world. In fact, French economist Thomas Piketty provided empirical evidence of rising income and wealth inequality in the developed world.

Seizing on the issue of rising income inequality and poverty, ultra-nationalist and populist leaders in Western democracies started to push towards protectionism. Anti- globalization rhetoric by populist leaders was turned into an anti-establishment backlash which enabled Donald Trump in the US to be catapulted into power. In the UK, Brexit has enabled Boris Johnson to get to power. In fact, populist political leaders in France, Germany and Netherlands other European countries are posing  serious challenges to the mainstream political parties. The populist political parties are now calling for "restricted"  or "managed" trade in which the government plays a pivotal role to promote exports and to limit imports or both.

Some observers opine that unexpected historical events can cause breakdown of a global economic order as happened during the Great Depression of 1930s. The Covid -19 pandemic appears to have become also the catalyst to accelerate the process of deglobalisation by  exposing the fragility of global supply chains. However, it must be noted that even before the pandemic struck, the global merchandise trade-to-GDP ratio has been slowing down in the wake of the GFC. To further compound the problem, capital flows has fallen one third of the level seen before the GFC.

The main question is how the pandemic will influence  the future course of the deglobalisation process. Two alternative scenario are projected; one an accelerating process of deglobalisation as firms weigh up  benefits of  trade against overdependence on imports, the other the globalisation process itself will undergo profound transformation in view of the evolving  economic, political, cultural  circumstances and technological changes.

Many enterprises have already reshored some elements of manufacturing activity but not because of an anti-globalisation backlash, but because of rising costs, notably in China or to reduce risks of an overextended production and supply chain - a lesson learned during the current pandemic.

There is a growing fear about dependence on other countries but the inward drive such as reshoring production  will not mean the end of globalisation, but definitely it will be remodeled.  In fact, import barriers may be more likely to encourage automation than create new jobs. Even former US President Donald Trump with his "America First" rhetoric did not turn the US into a "fortress America" against imports. In fact, the US has more to lose from deglobalisation both economically and politically than any other country  in the world.

The trade restrictions imposed by the Trump administration since 2017 have been relatively limited, targeted mainly at China and selectively directed at  the EU and the withdrawal from the Trans-Pacific Partnership. What we are witnessing is the partial reversal of current globalisation process and adjustments will most likely be made by strengthening social safety net in developed economies to address the core issue of discontent,  the rising income inequality which is generally attributed to globalisation.

Deglobalisation will adversely affect developing countries like Bangladesh to secure a sustained growth trajectory because of heightened risk of future trade and strategic conflicts that  would usher in a new  climate of deeper uncertainty. Furthermore, the cost of deglobalisation for developing countries in general will be steep in terms of lost trading opportunities. Building economic  resilience with the changing economic environment does not mean tearing the system down and starting all over again.  Overall, the globalisation process is evolving into a different new form. Globalisation is not a problem that requires a solution, but a reality that needs to be managed and to make informed choices on how best to respond to it.

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