Commentary on Political Economy

Monday 11 April 2022


When the CEO of the world’s largest asset management firm proclaims the end of globalisation, it is time to take note. Larry Fink, the BlackRock founder, recently wrote in his shareholder letter that the war in Ukraine, coming on top of pandemic-related supply chain shifts, had put an end to the last three decades of globalisation. He expected more companies and governments to manufacture and source domestically and regionally rather than globally. The war, he wrote, marks “a turning point in the world order of geopolitics, macroeconomic trends and capital markets”. This is a shift that has in fact been coming for a decade or more. In some senses, decoupling between the world’s largest economies, the US and China, really started the day after Lehman Brothers fell, when China rolled out its massive fiscal stimulus program and started rethinking Anglo-American-style financial market liberalisation. Beijing is not alone in this; many countries have decided that global capital has, for the past 40 years or so, flown too far ahead of national economies, creating stresses and inequalities within many nations. Those stresses have sometimes resulted in populist backlashes against globalisation, commonly defined as the ability of goods, people and capital to move wherever it is most productive for them to do so. The last several decades of globalisation created unprecedented prosperity at a global level. But within most countries, inequality grew. Some of the discontent is about stagnating wages and lost jobs, particularly for manual workers and the lower middle classes in rich countries. Most of that is down to technological disruption of labour markets, but some of it is down to what academics such as David Autor have called “the China shock”, meaning the ascent of China into the World Trade Organization. The solution is not beggar-thy-neighbour trade wars but shifts in both domestic policy and international institutions to help save what is best about globalisation From 2000 onwards, the flow of western capital into a nation with a cheap labour market of unprecedented size held back industrial wages and jobs in the US. It contributed to winner-takes-all dynamics in which the majority of income growth was claimed by the largest multinational companies, China and other Asian high-growth countries. This was helped by a lack of a proper US antitrust policy and too much financial and corporate deregulation across the west. In fact, globalisation was never complete, as Beijing also ringfenced its capital markets and protected strategic industries in ways that did not mesh with WTO rules. Smaller developing countries have long complained that unfettered free trade would hurt them. Now, many rich countries complain about it too. The solution is not beggar-thy-neighbour trade wars but shifts in both domestic policy and international institutions to help save what is best about globalisation, while also helping to reconnect the global economy to domestic prosperity in ways that make the voting public feel their leaders are looking out for their interests. Financial crisis, pandemic and war have indeed focused corporate minds on how global supply chains could be vulnerable in periods of stress. China’s plans for a circular economy may make a more bipolar world a fait accompli. Greater regionalisation will be the future. Rising wages in Asia, higher energy prices and environmental and social standards make long supply chains costlier. Regions differ over how to regulate data and digital economies. More fractious politics will also play a role. Economic pendulums swing. This particular cycle of globalisation has lasted 40 years. The hope is that things do not swing too far in the opposite direction as we move into a new world order.

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