Information and development: Globalisation interrupted and deglobalisation risks
Phuah Eng Chye (17 August 2019)
Globalisation is the main pathway to economic advancement and prosperity. Yet, for all its contributions to growth, globalisation is often cast as the villain in political discourse. In matured economies, politicians tap on public insecurities arising from the loss of factories, jobs and companies and the encroachment of foreign goods, workers, ownership and cultures. This led to the outbreak of trade hostilities which has interrupted globalisation. In the process, several surprising aspects of globalisation have surfaced.
First, trade imbalances are the headline that grabs all the attention but they are not the real issue underlying the disputes. Despite the rhetoric, policy-makers generally understand the realities of globalisation. Matured economies may run trade imbalances but benefit from importing cheaper goods from developing economies. It is unrealistic for matured economies to attempt to bring manufacturing back. Matured economies will find it is too expensive to manufacture in the crowded cities while there are labour shortages outside these cities due to depopulation. Even if plants are relocated at home, the output will mainly be to satisfy domestic needs as it will likely be too costly to export.
More importantly, relocating plants from developing economies to matured economies would interrupt global economic growth. From a global perspective, only matured economies have sufficient financial resilience to be persistent importers. If matured economies reduce their imports, this will have negative repercussions on global growth. Developing countries will not be able to shoulder the burden of global consumption due to their financial vulnerabilities. In this context, reducing developing country exports will reduce the amounts of goods and services that nations can purchase from each other; i.e. they magnify the contractionary influence of the balance of payments constraint. Trade imbalances are not insurmountable and seem relatively easier to fix through agreements to re-calibrate tariffs and for surplus countries to commit to purchases and investments. The optimal trade arrangements would seek to expand trade while minimising the occurrence of persistent deficits.
Second, populist backlashes also occurred in countries with trade surpluses which suggests trade deficits are not the cause. Punitive tariffs will not address social dissatisfaction and may even worsen it. My view is that social dissatisfaction mainly stems from information disruption and the dislocation caused by large foreign inflows of people and capital crowding out locals. These requires a different set of policies such greater focus on the creation of good jobs[1] and on managing the problems of crowding.
Third, the trade imbalance arises from multinational configuration of production chains. In this regard, the globalisation of markets and shareholders have caused the interests of corporations to diverge from the interests of workers and the economy. In particular, workers seem to have largely borne the costs of corporate decisions to optimise profits. The mantra of “what was good for our country was good for General Motors, and vice versa”[2] thus no longer applies. This “implies the benefits of protecting or rescuing distressed national corporations has diminished considerably. Policies need to be geared to a globalised landscape rather than to a national economy or local community…need to steer companies and economies in the right direction; namely to be re-positioned for recovery through nurturing new sources of job creation”[3]. This suggests trade imbalances are a distraction and that part of the solution lies in refocusing government policies on aligning the private sector role with domestic social needs.
Fourth, globalisation can be analysed as an information driven process. In this regard, the benefits of globalisation derive not from comparative advantage[4] but from its role in enabling global cooperation, communication and exchange to create opportunities and function as an engine of growth. Globalisation helps economies to augment their resources by overcoming scarcity (limitations) in resources and knowledge. Globalisation expands market size and facilitate scaling. Global economic growth flourishes when the forces of globalisation are able to overcome national barriers.
Globalisation is also a stepping stone to facilitate matured economies to make a transition from a physical economy. The low costs of imported goods and a strong currency enables matured economies to offset rising domestic costs. Matured economies also have the ability to generate foreign exchange inflows to finance imports of goods. One route is to earn foreign exchange from exporting services – education, health, tourism, patent and brand income and management fees. Another is to encourage home companies to repatriate overseas income. Lastly, matured economies can sell assets to foreigners – properties, financial assets, brands and technology. This makes sense because monetised assets fetch higher values in matured economies than in developing economies.
Once globalisation is interrupted, it will trigger deglobalisation which will unwind the benefits of globalisation. First, scalability would be reduced by the imposition of barriers fragmenting markets and economies into separate zones. Second, the benefits of cooperation and sharing to overcome scarcity (limitations) in resources and knowledge will be reduced. Third, policy uncertainties will dampen business investment. Companies would be fearful of making a costly misstep.
Deglobalisation brings to fore the threat of a global economic depression. In this regard, an economic depression can be decomposed into the three inter-related effects of deleveraging, deflation and deglobalisation[5]. The effects of deleveraging arise from a reduction in the size of financial balance sheets. At the moment, this risk emanates from the central bank balance sheets (bloated after years of quantitative easing) rather than from the private sector. The deflation effects from falling prices are related to consumption or wealth (debt). In a financialised economy, the falling price of consumption goods may be benign while the wealth effects (capital loss) would likely be more consequential[6].
Deglobalisation is likely to have the most severe effect as compared to deleveraging and deflation. This is because financial globalisation played a central role in promoting global economic growth. In tandem with the US trade (savings) deficits, central bank holdings of US dollar reserves (for sterilisation or quantitative easing purposes) have ballooned. The expansion of central bank balance sheets has increased the connectivity between different asset markets. The availability and low costs of US dollars coaxed a build-up in US-denominated private sector debt to finance infrastructure development and investments. Shrinking the central bank balance sheet will withdraw liquidity, reduce asset price connectivity and induce deleveraging worldwide. Deglobalisation will also aggravated by shrinking global trade[7] which lessens the need for other countries to maintain USD balances for working capital and investment purposes. Together, these developments could lead to an unwinding of round-trip trades[8] which would disrupt interest rates, currencies and asset prices around the world and trigger financial contagion.
To pre-empt a crisis, the developed countries are undertaking quantitative easing to mutually support market liquidity and to put a lid on a potential sudden surge in interest rates. In contrast, emerging markets are vulnerable to capital outflows that can trigger a rise in their interest rates and a fall in currency value. The capital outflows not only increase financial instability and impair domestic intermediation, it also reduces the ability of these countries to sustain trade deficits and to service their foreign-currency debt. Overall, deglobalisation will reduce market connectivity and will leave many emerging markets largely dependent on local liquidity.
In my view, several aspects of an economic depression are misunderstood. The first is to view currency movements through the lens of “beggar-thy-neighbour” or competitive effects. The effects of currency fluctuations on export competitiveness is over-estimated. Swarnali Ahmed, Maximiliano Appendino and Michele Ruta suggest “cross-border production linkages may contribute to reducing the effectiveness of depreciations to boost exports”. They note other explanations such as “the global trade slowdown, low pass-through and trade policy retaliation…temper the international demand-switching mechanism that underlies the competitive impact of a depreciation.”
I would add that multinational firms are now able to separate production and financial risks through hedging and portfolio strategies. In a modern economy, the benefit of a weak currency in maintaining export competitiveness is outweighed by its adverse impact on living costs, asset prices and international debt servicing. In addition, it is becoming more difficult to insulate domestic prices from international prices.
The effects of currency fluctuations will be mainly routed through their impact on corporate profits and valuations and through asset prices, financial balance sheets and the capital account. At the extreme, a sudden discontinuous shift in relative currency values could affect asset prices and impair financial balance sheets.
The second misunderstanding is to analyse deflation through the lens of the 1930s depression. The 1930s deflationary experience was severe because economies were low-information with a small service sector. Hence, the adjustments to falling prices in a physical environment were rigid and harsh. In contrast, the 1990 Japanese deflationary experience was benign. Despite decades of low growth, low inflation and low interest rates, the standards of living and employment levels were maintained. In a service economy, rising costs is a major problem and deflation in tandem with a strong currency can increase purchasing power and reducing living costs. The main risks come from the deflation of asset prices and the pressure on corporate profits which can lead to closures and unemployment. Overall, the modern economy is better positioned to weather the effects of deflation due to the expanded options for managing liquidity, costs, asset prices, capital (e.g. share buybacks) and the ability to diversify internationally.
Third, the theoretical perspective on managing a depression has been dominated by the debate on monetary theory. But central bank interventions, no matter how coordinated and aggressive, has only limited reach. It can offset a severe contraction in the availability of credit and market liquidity (thus neutralising balance sheet deleveraging and asset price deflation). But quantitative easing seems unable to overcome consumer price deflation.
Fourth, among the three Ds, it is deglobalisation that makes an economic depression formidable and enduring. Japan’s[9] deflationary experience in the 1990s was relatively benign because it was an isolated event. When depression takes place on a global scale, the implications are vastly different. It is difficult to envisage any economy maintaining positive economic growth if global trade and capital flows are continuously contracting.
Fifth, the preoccupation with monetary policy may have distracted from other events associated with the great depression of the 1930s. One is secular stagnation[10] which links demographic aging and demand deficiencies to the depression. Two other themes, present now and in the 1930s, are the “forgotten man” and trade disputes.
The” forgotten man”[11] was an expression used in the 1930s. It is particularly relevant today and would describe the large swathes of population who feel disenfranchised; as reflected by the election of populist governments, the Brexit movement, the yellow vests[12] and the Hong Kong protestors[13]. It is a common sentiment among these groups that they are being left behind to cope on their own and that they seem to have no role in shaping their own future.
Trade disputes is the other commonality. The great depression is associated with the imposition of the Hawley–Smoot Tariff[14] and the “retaliatory tariffs by America’s trading partners were major factors of the reduction of American exports and imports by more than half”. The recent trade wars appear reminiscent of conditions in the 1930s but there are important differences.
The recent disputes centers around information rather than physical trade. This is not surprising as the physical share of total trade[15] has fallen as compared to the 1930s. Specifically, the US is concerned by the long-term implications of the concentration of production facilities and technological prowess in China. Hence, actions have been taken to restrict information flows (i.e. research, access to technology and intellectual property). This will trigger a series of consequences; namely “the failure to stem deglobalisation will shift the struggle from the economic to the political and military arena. Countries will scramble fiercely to retain miniscule advantages as liquidity and trade shrinks. Elites will attempt to re-impose control on the ownership of ideas and brands, access to information and information flows”[16].
Under these circumstances, trade agreements are unlikely to be enough to halt deglobalisation. In the event of decoupling, no one is quite sure how countries are going to enclose and enforce their rights around intangibles and information and on the consequences for technological exchange, research and innovation. From an information perspective, deglobalisation marks the return to a more physical environment with the loss of benefits such as scaling, exchange, sharing and cooperation. This will hamper the ability of countries to monetise value, reduce or result in negative returns on capital. These information consequences will entrench economic stagnation.
These conflicts mark a breakdown in cooperation. Over the past two decades, there has been significant cooperation to converge fiscal and monetary policies towards being supportive and expansionary. Rising conflicts will lead to policy divergence as nations focus on domestic needs at the expense of international requirements. This could have destabilising consequences. In addition, there will be substantial effects as firms react by reconfiguring their operations and investors by reshuffling their portfolios.
Deglobalisation can only be reversed if nations are able to re-establish a framework for global cooperation. This would require new international arrangements to accommodate the changing balance of economic power and the co-existence of diverse economic systems. It would involve clarifying the roles of states and firms given that companies, products and technology are no longer distinctively national with obligations to a range of stakeholders in different countries. Most importantly, there is a need to establish a global framework for the flow and use of information (covering technology, data and intellectual property) and to give due consideration to managing information assets in a manner that would bridge the global digital wealth divide.
References
Lawrence H. Summers (15 August 2014) “Reflections on the new secular stagnation hypothesis”. Secular stagnation: Facts, causes, and cures edited by Coen Teulings, Richard Baldwin. Voxeu. http://www.voxeu.org/article/secular-stagnation-facts-causes-and-cures-new-vox-ebook
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
Phuah Eng Chye (3 August 2019) “Information and development: Globalisation in transition”. http://economicsofinformationsociety.com/information-and-development-globalisation-in-transition/
Phuah Eng Chye (24 November 2018) “Future of work: Redefining work (Part 3: Bad jobs, good jobs and what governments could do about it)”.
Phuah Eng Chye (16 February 2019) “Future of work: Job destruction, income constraints and information”. http://economicsofinformationsociety.com/future-of-work-job-destruction-income-constraints-and-information/
Stathis Kouvelakis (June 2019) “The French insurgency. Political economy of the Gilets Jaunes”. New Left Review. https://newleftreview.org/issues/II116/articles/stathis-kouvelakis-the-french-insurgency
Swarnali Ahmed, Maximiliano Appendino, Michele Ruta (27 August 2015) “Depreciations without exports”. Voxeu. http://www.voxeu.org/article/depreciations-without-exports
Thomas Peter (22 Jul, 2019) “Why Hong Kong’s angry and disillusioned youth are making their voices heard”. South China Morning Post. https://www.scmp.com/magazines/post-magazine/long-reads/article/3019591/why-hong-kongs-angry-and-disillusioned-youth-are
Tuomas Malinen, Peter Nyberg (5 August 2019) “A tale of two deflations”. GnS Economics. https://gnseconomics.com/en_US/2019/08/05/a-tale-of-two-deflations/
[1] “Future of work: Redefining work (Part 3: Bad jobs, good jobs and what governments could do about it)”.
[2] “For years I thought that what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country. Our contribution to the nation is considerable”. Charles E. Wilson (1952). https://en.wikiquote.org/wiki/Charles_Erwin_Wilson.
[3] “Future of work: Job destruction, income constraints and information”.
[4] https://en.wikipedia.org/wiki/Comparative_advantage.
[5] See Policy paradigms for the anorexic and financialized economy.
[6] Particularly if there are contagion effects.
[7] A fall in global trade likely signifies the US trade deficits are shrinking and that US savings is rising. At this moment, there are tensions between falling US imports and rising US fiscal deficits and it is unclear how events will pan out.
[8] Particularly those involving negative rate assets.
[9] See Tuomas Malinen and Peter Nyberg for an interesting comparison of Japan and Finland’s deflationary experience.
[10] See Lawrence H Summers.
[11] In 1932, President Franklin Roosevelt used the term in a speech to promote his new deal: “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid”. https://en.wikipedia.org/wiki/Forgotten_man. In a book The Forgotten Man: A New History of the Great Depression (2007), Amity Shlaes provides a re-analysis of the events of the Great Depression, generally criticising government interventions for exacerbating the Depression. https://en.wikipedia.org/wiki/The_Forgotten_Man:_A_New_History_of_the_Great_Depression
[12] See Stathis Kouvelakis.
[13] See Thomas Peter.
[14] https://en.wikipedia.org/wiki/Smoot%e2%80%93Hawley_Tariff_Act.
[15] “Information and development: Globalisation in transition”.
[16] Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.