Globalisation is fraying. Look under the Elephant Trunk

Duncan Weldon
Jun 13, 2016 · 6 min read

Globalisation is fraying. Of course in some ways it looks to be in rude health — flows of people across borders continue to rise and the internet is driving ever higher flows of information. But some of the core beliefs that many people held about the world just a decade ago are under serious challenge. It no longer seems safe to assume that the volume of goods, services and capital moving across borders will continue to rise faster than global output growth.

Take global trade growth, it has slowed sharply relative to GDP growth and the reasons for this are much debated.

The easiest way to look at that slowing, relative to pre-crisis trends comes from the Bank of England’s blog.

One possible explanation — according the World Bank — is the shifting structure of global supply chains. The imported content of Chinese production has dropped considerably, whilst US manufactured imports — as a share of GDP — look to have stabilised after a large rise.

It’s partially this sort of shift that worries Dani Rodrik when he talks about “premature deindustrialisation”, or how it will be harder for developing economies now to follow the export intensive manufactured goods route of their predecessors.

The hump‐shaped relationship between industrialization (measured by employment or output shares) and incomes has shifted downwards and moved closer to the origin. This means countries are running out of industrialization opportunities sooner and at much lower levels of income compared to the experience of early industrializers… Premature de‐industrialization has potentially significant economic and political ramifications, including lower economic growth and democratic failure.

Whilst outright protectionism hasn’t risen by anywhere near as much as many feared in the aftermath of 2008, it has been a factor. The chart below is from the World Bank report linked to above.

But a bigger factor in recent years than actual protectionist policy has been a lack of new trade liberalisation. Both TPP and TIPP look likely to struggle to win approval.

The picture as regards capital flows (between developed economies) is even more stark. The Bank of England’s Kirsten Forbes illustrated it well in two charts.

As she is argued this has been particularly driven by a pull back from cross border banking:

International capital flows are sharply lower than before the crisis, and international financial exposures are somewhat lower. Home bias is greater. This recent financial deglobalization is driven by a massive contraction in international banking flows — in which the UK plays a critical role.

Today the world economy isn’t in a great place. Post crisis growth has been weak despite record low interest rates and productivity trends are alarming. Slowing international trade is the last thing it needs.

If the lack of trade liberalisation has been an issue in the last decade, then there are plenty of reasons to worry that actual protectionism will be a pressing concern in the next.

You can see in the campaigns of Sanders and Trump in the US, in elements of the Brexit campaign in the UK and in the rise of populist parties across Europe.

Last month, the IMF’s Deputy Director David Lipton gave an excellent speech on the future of globalisation. He made an optimistic case that active policy steps and more global co-operation could propel global growth higher in the coming decade.

There is little to disagree with in his three suggested steps of resigning the global financial safety net for emerging economies, looking again at the right regulation of capital flows and encouraging more technology transfer to the developing world. But it is unlikely to be enough.

Without political buy-in from the developed world, the future of economic globalisation looks to be in doubt. And a turn to more populist politics is highly unlikely to be a turn towards more international policy co-ordination.

For a lot of people in the West, globalisation hasn’t worked out as promised.

The most important chart in the world right now is from Branco Milanovic. The story of real global income growth between the fall of the Berlin Wall and the fall of Lehman brothers.

It shows the growth of real incomes of the world’s population by global income percentile (in the above chart in PPP adjusted 2005 international dollars).

The annotations above make the story crystal clear. The two groups who have done best are the global 1% and the middle income (ion global terms) people of emerging economies. Those who have done worst are the globally poorest who aren't connected into the world economy and the lower to middle income people of the developed economies.

Using 2011 dollars and bringing the data up to 2011 (the last available) the numbers change somewhat but the graph retains the same shape.

As Milanovic himself noted, it’s elephant shaped. To see what he means, look at Toby Nangle’s illustration.

International trade between two countries makes both countries better off. But the gains within countries aren’t equally shared. To use a simple example — factory workers can lose their jobs but consumers in general could see cheaper goods and the factory owners (who have moved production abroad) could see higher profits. The gains to the winners should be enough to compensate the losers and make everyone better off.

But that hasn't been happening.

And the story across much of the West now is of the people under the elephant’s trunk starting to notice. You can see it in the rise of populist (often anti-immigration) parties and politicians. And whilst none have yet taken power, that day may eventually come.

If the fraying of globalisation starts to become an unraveling then those who voted for those pulling at the seams would be unlikely to actually benefit. Ina world of slower economic growth then yes the global rich would be hit by lower profits and asset prices but it would likely to be lower to middle income people in the West who felt the impact of lower real wages and higher unemployment.

Of course the real tragedy — on a global level — would be the potential trapping of hundreds of millions of people at lower income levels.

As Noah Smith has argued the global fall in poverty over the last few decades has been incredible.

If those trends are going to continue then globalisation needs to restarted and that won;t happen till the people under the trunk start to feel the benefits. This is what I was trying to get at on Twitter over the weekend.

In other words, the world needs to relearn an old lesson: if you want global capitalism to succeed then it needs to come with a big dose of social democracy.

Bull Market

A collection of finance and business writing by @alexisgoldstein, @delong, @dsquareddigest, @DuncanWeldon, @felixsalmon, @jamesykwak, @Mark__Buchanan, @WhelanKarl

Duncan Weldon

Written by

Economics, finance. General rambling. Head of Research at Resolution Group. All views are my own.

Bull Market

A collection of finance and business writing by @alexisgoldstein, @delong, @dsquareddigest, @DuncanWeldon, @felixsalmon, @jamesykwak, @Mark__Buchanan, @WhelanKarl