Tuesday, October 9, 2012

Understanding Globalization: Past, Present, and Future

Few phenomena have changed human society more drastically in recent decades than economic globalization. While people have always traded across borders and international commerce and finance have been important for centuries, most of the world’s major national economies were relatively closed up until the 1960s. Businesses operated primarily in their own national markets, balanced out by national governments and civil society structures such as labor rights groups and environmental advocacy organizations. One clear example of this was the U.S. car industry, which was headquartered in Detroit, bargained with the national United Auto Workers labor union (UAW), and produced and sold cars almost exclusively within the U.S. market. Under this system, a handful of industrialized wealthy nations formed the “center” of the world economy, while the traditional agricultural societies of the developing world remained on the “periphery”, with limited participation in the production and consumption of manufactured goods and an overall focus on the export of raw materials such as agricultural foodstuffs, oil and minerals. During this period, Brazil was a classic case of a country on the periphery: a poor society of rural peasants whose national economy was dependent on the export of coffee and rubber to the U.S., Western Europe and Japan.

1971-2012: Changing Patterns of Economic Trade

This global order began to rapidly change in the 1970s and 1980s based on a few key factors. New advances in shipping, trucking and railways caused transport costs to plunge, while advances in information and communication technology (computers, telephones, the Internet) reduced the barriers caused by distance. This made trade between countries significantly cheaper and reduced the benefits of local production. Liberalizing reforms and macroeconomic stabilization programs in major developing countries such as Mexico, Brazil, China and India helped to modernize these countries’ economies and unleash their potential. Government efforts to promote free trade and reduce protectionism opened up markets both in the center and on the periphery. The end of the gold standard and the Bretton-Woods financial system led to new, free floating currency markets and a new global financial order where capital could flow more freely between countries.

All of these developments enabled supply chains to finally become international, as firms began to operate across borders and take advantage of lower production costs in developing countries, primarily due to cheaper labor. Customer bases also expanded and domestic companies suddenly began to invade their rivals’ home turf (think of the expansion of Toyota and Volkswagen in the U.S.). With big businesses going from national to multinational, an incredible opportunity for knowledge transfer opened up. Whereas countries used to have to build their own domestic supply chains from scratch (such as Japan’s incredible transformation during the Meiji Restoration or Latin America’s failed approach of Import Substitution Industrialization), it suddenly became much easier for developing countries to learn on the go as multinational firms set up shop locally and shared their technological capacity and know-how, thus allowing for easier integration into global markets.

No country better exemplifies this approach than China, which established itself as the world’s low-cost manufacturing center while forcing multinational companies to work in tandem with domestic partners to stimulate knowledge transfer and “indigenous innovation”. (This topic has become polemical in discussions with Western businesses, many of whom believe the Chinese government has actively promoted the theft of their intellectual property.) China’s rapid growth itself had a profound effect on global trade patterns, as the country’s sheer size means that the share of the world’s population living in “central” economies has more than doubled in the last few decades, rebalancing the traditional center vs. periphery dynamic.

Today’s Global Economy: Advantages and Problems

As a result of this process of economic change, the world looks drastically different today than it did 50 years ago. “Emerging markets” have become a hot topic in discussions of international business and politics, as the BRIC powers continue to gain in prominence and the “Rise of the Rest” is reshaping the global order. The concept of the “center” and the “periphery” is quickly becoming an outdated relic of 20th century international relations. Across the world, people have seen their living standards rise as millions emerge from extreme poverty and become integrated into the global economy. After having accelerated for over 150 years (since the dawn of the industrial revolution), global inequality is finally falling. Globalization has without a doubt been a huge boon for the world’s poor.

These economic trends have not been uniformly positive, however. Globalization has led to much anxiety for the middle class of the traditionally powerful economies of the center. In the U.S., newly multinational firms began to move much of their supply chains overseas. This development—combined with advances in automation that replaced many workers with robots and machines—led to a drastic reduction of domestic manufacturing jobs, causing once-dynamic cities in the industrial heartland such as Detroit and Pittsburgh to fall into decline and neglect. Much noise has since been made in political circles about the scourge of outsourcing and the need to defend domestic workers by increasing protectionist barriers once again. Also, with international competition squeezing margins, multinational firms were forced to cut costs to stay alive, holding wages down and thus hurting the middle class further. Inequality has steadily crept upward as a result, with the well-educated workers of the “knowledge-based economy” pulling ahead of their peers. These trends were masked for a while by a large expansion of credit and a debt-fueled consumption boom that burst during the 2008 financial crisis, a similar event to the 1929 market crash that was in many ways caused by a structural employment shift from agriculture to manufacturing.

To understand these trends, it is important to realize that the last thirty years of economic globalization have undermined the careful capital vs. labor balance that underpinned the success of the middle class in the economies of the center during most of the 20th century. In the early decades of the industrial revolution, capital reigned supreme as wealthy industrialists made massive profits while forcing their workers to endure terrible working conditions for meager salaries. Many derisively referred to these powerful businessmen as “robber barons”. This laissez-faire free-for-all system came under enormous criticism, most notably from economist Karl Marx, whose influential and poignant critiques laid the foundation for the labor rights movement, which fought to ensure fair wages, safer working conditions, progressive tax structures and the establishment of the welfare state to guarantee retirement programs, health care and other benefits.

The success of the labor movement led to a healthy equilibrium between capital and labor. Businesses continued to grow and improve productivity, thus driving economic development, while labor organizers and their partners in civil society and government guaranteed that the benefits from such growth were, at least to a certain extent, shared by all. During this period, governments also increased their regulatory powers in areas such as antitrust enforcement and environmental protection. This stable equilibrium, organized under national economies, was the norm for the economies of the center through the 1960s.

Economic globalization changed this dynamic drastically. As firms became multinational, capital once again gained the upper hand. Although the economy continued to grow, workers lost the ability to negotiate as fear of outsourcing weakened their leverage in discussions. Governments felt pressured to slash their regulatory frameworks and tax regimes, fearing that stricter measures and higher taxes would cause multinationals to leave and set up shop in a country with a more hands-off approach. This has led to a so-called “race to the bottom”, where the countries with the lowest wages and taxes are able to attract more companies, even if this undermines their goal of building a middle class and a social safety net.

One of the best examples of this dynamic is the current political discussion in the U.S. over the corporate tax rate. In the 1950s and 1960s, when the economy was doing well, the corporate tax rate hovered at around 50%. It has since come down significantly due to the government’s desire to boost national competitiveness (it now stands at 35%). With the country’s growing fiscal crisis due to the aging of its population, politicians are now placed in a tough situation regarding the future of the tax rate: increase taxes to boost revenue and risk slowing economic growth as competitiveness falls, or keep taxes low and slash benefits for the upcoming generation of retirees. France’s recent proposal to raise taxes to solve its fiscal woes has also come under scrutiny, as leading businessmen have announced their intention to leave the country.

In addition to weakening fiscal policy, his situation has created perverse incentives for countries to loosen their regulatory and labor laws to jumpstart their economic development. In Brazil, for example, rather than developing rigorous antitrust regulation to prevent monopolies, the government has encouraged consolidation as a way to create “national champions” that can compete abroad, despite the effects this can have on domestic consumers. It is not alone in this regard. The growing benefit of size in the international economy has set off a wave of consolidations in various industries, from defense and airlines to logistics and mining, and national governments are eager for their companies to emerge with the upper hand. Furthermore, the growing pressure to improve competitiveness is beginning to undermine some of the labor protections industrial societies carefully built over the last century: overnight working is beginning to return in Western manufacturing centers, and the “right-to-work” movement has been growing even in the U.S. industrial heartland, further weakening the power of labor unions. In a world where capital is globalized and labor and government are not, it is difficult to avoid this sort of race to the bottom, as multinational businesses essentially are not forced to answer to any ultimate authority.

Finding a Way Forward: Deepening Integration

Given these problems, many are tempted to reverse course on globalization, arguing that we must return to the days of national economies, when capital was tamed by powerful civil society groups and government agencies. I do not support such an anti-globalization message. First, technological and economic changes are here to stay, and we cannot simply go back in time. Second, to do so would be to condemn many developing countries back to the periphery, abandoning the world’s poor and creating an unequal world order. This is not a realistic or desirable possibility.

To move ahead and correct the current global economic imbalances, we must deepen our economic integration. To counteract the power of global firms, we must have a global civil society and global governance structure. International labor rights standards, environmental regulations, standardized tax regimes and social welfare programs will ultimately be necessary to combat the problems caused by globalization. A sovereign central authority charged with representing the interests of all of humanity’s individuals is the only way to ultimately create the balance needed for a well-functioning and fair global economy. In addition to creating a more healthy economic equilibrium, global governance will be important to solving issues such as poverty alleviation, peace and security, and international human rights and democracy.

While a global government may seem like an unrealistic, far-fetched idea, I am confident that humanity is slowly but surely moving toward this path. It will be a long journey, probably taking multiple centuries, but I believe the end result is inevitable. Humanity is integrated today in a way it has never been before: we have instant global communication, ease of travel, a universal lingua franca (English), and new international governance structures that are slowly getting stronger and more effective over time, such as the United Nations, the G-20, and the World Trade Organization.

There are many challenges to building global governance, but there are two key steps that we can take moving forward. The first involves breaking down existing protectionist barriers that separate national economies by promoting international free trade agreements and the free movement of people. Both of these are difficult politically, as nearly every society in the world is highly resistant to liberalizing reforms to connect markets and loosen immigration controls. The second is the promotion of regional integration, as this is probably a necessary prelude to full, global integration. I have written previously about these sorts of efforts, and believe very strongly that they are ultimately pivotal to strengthening globalization. The current situation in the Euro Zone is thus a huge test for humanity’s future. If Europe’s political leaders can keep the euro intact and further integrate their economies in a successful way, it will be a model for other regions to imitate in the future. If they fail, the collapse of the euro will set global governance back for a long time to come.

I have suggested this future for global governance to several people before, and am normally met with quite a bit of skepticism. This is understandable. After all, few in early 19th century Europe would have believed that the myriad states of Germany and Italy would successfully unite into single countries. And few in post-World War II Europe would have believed that the continent would soon be united into a single currency zone with federal powers. Over the millennia of human society, we have slowly and steadily consolidated sovereignty at increasingly higher levels. We began as local bands of hunters and gatherers, moved into larger tribes and villages, then into city-states and military empires, and now live primarily under the sovereignty of nation-states. I see no reason why further consolidation should not occur, especially given the economic trends of the last thirty years. Global governance may not be around the corner, but I believe that we are marching toward such an inevitable future for humanity, and will ultimately be better off because of it.

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