“Globalization is not dead yet, but rapidly collapsing, and we marching towards a new global order.”
I was with my friends the other day in a party, enjoying the delicious food and drink, when suddenly a friend of mine blurted, with no warning I might add, “Hi, is Globalization dead?”. As the only economist in the group, I knew that the question was directed towards me. As I was pondering on how to answer his question, he continued with a contemptuous look, “With Trump in the White House, his alliances with Putin, a communist dictator, with rapidly ascending China and India, not a beacon of free trade, am I wrong in asking that question.” You have every right to ask the question, and you deserve an unambiguous answer, I replied.
“Globalization is not dead yet, but rapidly collapsing, and we marching towards a new global order.” Globalization was always a mixed blessing. Integration of the global economy created winners and losers, and the losers are now revolting. How it will end is yet unknown, but I am sure it will be different than what we have right now.
We were wrong in assuming that internationalism is irreversible. We knew enough to understand that both the recent peaks in globalization (the first peak came before World War I and the second peak crested sometimes in the end of the 20th century), ended in a sour note. Trade is great for consumers, but bad for local producers. Trade often increases domestic unemployment as local producers lose to their international counterparts. Economic theory predicts that trade benefits the abundant factor of production but hurts the scarce factors. In the United States and in Europe labor is traditionally the scare factor, and they lost big with the integration of the global economy. They lost jobs, faced a declining wage, and as a result lost their cherished way of life. The effects of international trade were quite devastating for manufacturing in the US. Millions lost their jobs in the so-called “rust belt” which comprises of states in the upper Midwest, namely, Pennsylvania, Ohio, Michigan, and Wisconsin. Owners of capital won, as they had more options in investing their capital for higher returns. Added to this was the impact of transforming technology which benefitted capital, but hurt labor. In developing countries like India, where capital is the scare factor, trade put local capitalist at a relative disadvantage as they could not compete effectively with international capital.
Integration of the global economy thus impacted the distribution of income. In the United States and in Europe, labor income as a share of GDP plummeted, while the share of capital soared. This income and wealth disparity created a strong force against globalization. For a long time, political parties in different countries pretended that there were no losers in international trade. They ignored the plight of millions that were hurt. The huge income inequality is explained partly by this relative gain and loss resulting from international trade. If the present discourse in globalization indicates anything, it signals the need for government to step in and find ways to compensate the losers for their loss that emanated from international trade. The rise of political nationalism in almost every quarter of the world is in response to this unabetted economic integration that we witnessed in the last few decades. My fear is that economic integration might lead to political disintegration. Winners and losers cannot coexist peacefully in a society without some remedy, where individual governments fail to devise a mechanism that transfers income and wealth from the winers to the losers. These transfers, although necessary, will take different shape in different countries and the final global order will be determined by some aggregate of these individual measures. In short, we have to reinvent our public policies to sustain globalization. Our goal should be to create a global economy that rewards everyone, either directly due to the forces of globalization, or through government intervention that takes care of those left behind by the forces of globalization. I admit it is easier said than done, but only then will globalization have a future.
