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January 25, 2017

Global Economy|International Relations

Globalization Trumped

By Nitin Desai


On 20th of January 2017 a speech delivered from the steps of the Capitol in Washington DC signalled the end of the post war world order.  The country that led the development of this order elected a President whose inaugural speech rejected practically every foundational principle on which it is based. The pursuit  of these principles led to the establishment of many institutions for global cooperation and a loosening of border barriers. Their impending abrogation will surely lead to rising barriers and discord between nations.


The establishment of this order began in 1945 when, in a far-sighted decision, the United States, decided to share its monopoly global power with others through the United Nations and three economic organisations - the World Bank, the IMF and  GATT, that later became the World Trade Organisation. It was an attempt to prevent the recurrence of anything like the two great traumas experienced by the West in the thirties and early forties  - the Great Depression and the Second World War.  It is ironic that the dismantling of this order should be led by the very country that established it  Perhaps the ability to shape opinion has shifted from members of its elite, like the six wise men who shaped the far-sighted grand strategy of the USA in the immediate post-war years, to the mass media and the streets.


The design contemplated in the negotiations in San Francisco and Bretton Woods  changed soon, with the strategic and ideological confrontation between the USA and USSR. With decolonisation,  the emergence of independent States in Asia and Africa, brought to the stage a new set of players. Global cooperation gave way to alliance building.  A 'one-party' world became a 'multi-party' global order. But when the USSR collapsed and communism gave way to capitalism practically everywhere, there was talk of the end of history and the final triumph of liberal democracy and globalised capitalism.


But the contradiction between a Western dominated world order and the shift in the drivers of global growth to China and the East was never resolved.  Nor were the diverging interests of capital and labour reconciled, a fatal flaw in any democratic society. Ethnic and religious identities became more assertive and more violent.


Does this mean that the post-war agenda has failed? No. The preamble of the UN charter states four basic goals - the prevention of war, protection of human rights, respect for international law and the promotion of  "social progress and better standards of life in larger freedom". With regard to the first three, despite clear shortfalls from the ideal, one can certainly say the world is better off in the last seventy years than in the thirty that preceded. As for the fourth the achievements are evident in any comparison with the past.


Yet, despite the achievements the order has come close to collapse.Why has  economic globalisation which was the more effective part of the global agenda become the cause of this collapse?


International trade and investment drove the  global economic integration  that began after the end of the Second War and gathered pace in the eighties. It rested on two pillars - a liberal political and economic order in the West with rising wages that drove a consumption demand boom and an authoritarian order in East Asia that provided a disciplined, educated and productive labour force for producing and supplying low-cost goods to feed this boom. 


This order served the interests of capitalists in the West (and their associates elsewhere) and autocrats in the East and South. But in its recent phase, it did not serve the interests of workers in the West. The hollowing out of manufacturing led to job losses and stagnant wages. Huge petrol dollar surpluses in the seventies and technological changes that simplified trading, accelerated the globalisation of capital markets and led to a sharp shift of income to financing institutions and their managers. A third factor was the rapidity of technology diffusion that shifted rewards to owners of intellectual property. The classic example of this is Apple which owns no manufacturing capacity but captures 60-70% of the sale value of its products as a reward for innovation, marketing skills and a capacity to attract low cost risk capital.


Immigration flows of low skilled workers rose, not just because of refugees from violence but also because of the shortage of local workers for lower grade jobs. Outsourcing was a direct consequence of the capital's pursuit of profit and the globalisation of value chains. The attacks on outsourcing and immigration are of a piece. The emerging political dispensation in the West does not want jobs to go out  or job seekers to come in, an attitude that is incompatible with the goals of global or regional  economic integration.


The Western pillar of the globalisation edifice is about to collapse. An isolationist USA, a Brexited UK, the probable strengthening of far right parties in the elections due this  year in France and Germany and a disintegrating European Union, will mean that the West will no longer pursue its seventy year old agenda of promoting democracy and liberalising international trade and investment. An isolationist US and a disintegrating European Union will create a power vacuum that only China is in a position to fill - a conclusion that is uncomfortable but unavoidable.   Xi Jiping fired the first salvo in this claim for global leadership at this year Davos gathering becoming the champion of globalisation and multilateralism while Donald Trump blew a trumpet for protectionism and unilateralism.



“The end is in the beginning and yet you go on.”  laments Samuel Becket in Endgame. The same lament seems appropriate now for the processes that drove  the post-war order were such that this end could have been foretold. The challenge now is to design a grand strategy that does not just go on as before but adjusts to changing power equations and the confused retreat from globalisation. That will be the theme of this column next month.


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