Globalization Has Run Its Course…But What Comes Next?
Searching for a New Paradigm for Global Growth
While economists may believe in a smoothly adjusting system of checks and balances to keep supply and demand in reasonable equilibrium, capitalist systems rarely work as efficiently as theory requires for market efficiency to perform as advertised. We are continuously in a race between under and over capacity with price as a moderating factor. This process of creative destruction (of weaker enterprises and resale of older capital) provides the forward momentum for the economy with business fixed investment the usual mechanism for recovery from cyclical declines acting to drive the recovery. Unfortunately in this age of global companies and long distance supply chains, the net result of this creative destruction is the concentration of supply in fewer companies as the weaker firms are eliminated. Natural selection and survival of the fittest then is the natural law of nature and of modern capitalism in an age of globalization.
Since the 1930’s the usual signal to businesses that the end is near has been government intervention in the form of Keynesian pump priming and changes in monetary policy (lower interest rates). In a globalized world, the link between capacity in one country (or over capacity) and demand in others is less direct. Add in subsidies of governments to keep firms in business and it is easy to see that normal signals to investors can fail and any equilibrium in markets is random and short-lived. One final element is the Internet allowing near instantaneous changes in prices and information on available suppliers no matter how distant or remote. The usual friction coming from less information is eliminated reducing the protection of domestic suppliers and ultimately leading to their bankruptcy and to rising unemployment in small towns and cities long used to near full employment.
The tendency is to add too much capacity in one country or region going through a rapid re-make (called economic development) compounds problems especially when that excess capacity (as is the case in iron and steel) can be easily exported making excess capacity not a national problem but an international one. It is possible once the over capacity is recognized weaker, less well run or capitalized companies, collapse pulling down their financial backers be they banks or equity investors. This sends tremors throughout the economy starting a new recessionary cycle that snowballs into unemployment and cascading banking failures. The impact can even spread to more firms in geographically distant countries through links of the global supply chain. In a fully globalized economy this over capacity leads to lower prices and reduces the incentives of national champions to add capacity thus short-circuiting the investment recovery cycle and forcing governments to try to compensate for the loss of income. Over dependence on companies in this region can also lead into entropic failures across the long distance supply chains until the global economy collapses. This is what is happening today as China’s over extended companies fail one after another. The year 2015 will likely be considered the year that the costs of globalization were finally realized in the economic realm and also in the more critically important political realm. This may be the year that the establishment support for global trade integration collapses in rich and poor alike – the result could be a new round of protectionism with all the unintended consequences on businesses globally. It will, if no alternative business and social paradigm is found lead to a long period of secular stagnation with global economic growth underperforming past norms leading to more people unable to move from marginal to stable consumers and producers.
In a globalized system over, not under, capacity is a more normal condition. Economies of scale are built into the cost advantage of countries with large domestic markets or where the government supports employment actively, like in the case of China by State banks offering subsidized loans to sustain this growth. This encourages inefficient over-production until the company fails taking down supplier chains that now stretch around the globe. Cheap money from State owned banks has allowed new facilities to be built in advance of demand just to insure sufficient economic growth to absorb the flow labor from agricultural areas to urban areas. Like in the Soviet era when government investments fueled industrialization, in China cheap capital offered to private firms and subsidies to State owned companies encouraged this over investment in heavy industries with more easily exported commodity-type products (semi-finished factors of production at the first stage of processing from finished plate to extruded wire or casting products).
Where banks are mainly private (as is the case in most advanced for more fully developed emerging markets), recessions tend to dry up credit (as happened in 2008-09) and weaker firms facing reduced demand and maxed out credit lines, go out of business. Foreign firms, initially hurt by the slowdown may suffer less and have more financial staying power. With wider networks of possible markets, some of which escape the worst effects of recessions in other countries, they can better survive periods of slow growth.
Companies domiciled in large natural markets (large population countries or trading areas) may fail to widen the markets they serve thus losing the resilience to outlast growth slowdowns or recessions at home. Some of the losses of smaller American companies can be laid to milking cash cows at home and failing to see the risks of this narrow focus until its too late to change. Foreign firms, even smaller companies, usually had to widen their net of customers to maintain growth and thus can, if recessions are staggered, survive and even prosper from the recovery phase. When demand picks up as the economy recovers, long-time suppliers find they can’t recover fast enough lacking economies of scale (heavy industries) that State-owned firms with backing from government controlled banks have.
Globalization also weakened the historic relationships between first tier companies and their smaller suppliers. Information economies of scale allowing companies to shop for suppliers and even change suppliers yearly. Convinced that price matters more than quality, this often adds future costs when cheaper substitutes fail or lack quality controls, but by then bonuses for saving money have been paid to the wizards of finance. This continuous competition for the lowest prices leaves long term suppliers without adequate business so that when foreign firms fail there no longer exist domestic substitutes. Lack of loyalty by first tier firms to second and third tier firms leaves the underlying manufacturing base hollowed out. Like companies indifference to their workers, indifference to suppliers makes the global economy unstable and dangerous prone to collapses and political uncertainty as governments try to overcome structure imbalances caused by opening markets too fragile to survive the competition.
Changing corporate culture may be the most useful approach to insuring long-term economic prosperity for rich and poor alike. Populist backlash against globalization is a natural outcome of the uneven pattern of benefits and costs that the last three decades have offered both to rich and poor countries alike. If we are to insure stable, beneficial economic growth then companies will have to do their part. Keynesian stimulus without support from the private sector has often led to growing and unsustainable imbalances on current accounts and government balance sheets. With world population size reaching towards 9 billion, mass migrations occurring as climate change affects regions already in food deficits destabilize social and political balance in countries still better off leading to backlash against immigrants.
In this paper we have examined how globalization has impacted long-term growth for three groups of countries – wealthy advanced countries, emerging markets, and developing countries. Gaps between these three groups remain wide and are unlikely to narrow without changes in the way the private sector and national governments interact. No single nation, including the United States, can change its destiny by closing off the world, and yet this is the message of populist candidates everywhere. Turning the clock back on the past is impossible, but allowing the current system of disjointed growth to continue will also fail to solve the most pressing of the world’s problems:
Income inequality and depressed real wages from global completion leading to uneven growth in demand and forcing governments to support growth through tax breaks and direct aid. One study suggested that the top 1% took in 85% of the income growth occurring since the recession began in 2008 reducing significantly the circular flow needed to lubricate and support short and long-term growth. Concentration of early stage manufacturing in single countries or regions opens the world economy to supply chain failures and economic blackmail leading to populist outrage against globalization as jobs shift from higher valued manufacturing jobs to lower value service employment for less skilled workers. Managerial capitalism with its short-term goals of the next quarter’s numbers reduces the ability of governments to influence company behavior using the “bully pulpit” making recovery from economic recessions difficult. Failure of companies to hire and invest using excess profits to maintain depressed share prices often with borrowed money opens the door to a 1930’s style depression. Corporate internationalism helped by trade agreements that reduce barriers to entry for foreign-made products opens the door for anti-globalization nationalism leading to the potential for backlash against existing and future agreements to integrate the world economy. Climate change and drought may be the final straw forcing a reassessment of internationalism as nations start to look inward for solutions to problems despite decades of integration making slogans like “America first” or Brexit obsolete and dangerous simplifications and solutions. In a way we are inching closer to the 1930’s world with just the major actors changing. Russian nationalism and feelings of loss of global position replaces German nationalism with military expansion taking precedence over economic opportunities. The recovery from the financial crisis of 2008 has been in spurts of optimistic growth followed by sudden collapses in confidence and rising wage inequality in ways similar to the late 1930’s. In the Pacific Chinese expansionism replaces Japanese and is in the process of developing an economic sphere of influence as the US retrenches leaving a vacuum for China to fill. In short the idea of a cooperative global strategy to solve the pressing issues and motivate world spanning corporations to work in concert with governments may be just a pipe dream.
To read the complete paper please download the file attached.
| globalization_has_run_its_course.docx |
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