A single crisis like the current pandemic is rarely the only cause of rapid and dramatic change. But it often lays bare what has been hidden in plain sight. Globalisation has been stagnating, in trouble and declared dead long before the current crisis. Now is the time to face the inevitable and ponder the consequences.
While governments severely restrict the physical movement of people, goods and services to fight the disease, the digital flows are flourishing. Is globalisation simply shifting gears, moving from the physical to the digital sphere? Maybe, but this process is still in its infancy. For example, Amazon, Apple, Facebook and Microsoft are contributing just 1.3 per cent of world exports, despite their ginormous market caps.
If we take a closer look, it seems that a certain model or epoch of globalisation is now coming to an end. One of the clearest explanations comes from economist Michael O’Sullivan, who said in June 2019:
First, global economic growth has slowed, and as a result, the growth has become more “financialised”: debt has increased and there has been more “monetary activism”—that is, central banks pumping money into the economy by buying assets, such as bonds and in some cases even equities—to sustain the international expansion. Second, the side effects, or rather the perceived side-effects, of globalisation are more apparent: wealth inequality, the dominance of multinationals and the dispersion of global supply chains, which have all become hot political issues.
Trying to keep the old model afloat
Slowing economic growth is, among other factors, the result of slow productivity growth. Capital has become abundant and thus cheap, leading to higher levels of debt. Since the financial crisis of 2008/2009, central banks are desperately trying to keep the old model afloat. But the result could well be an asset bubble. In this case, all the money goes into higher asset prices (and thus diminishing returns). O’Sullivan’s verdict is harsh:
In many ways, the end of globalisation is marked by the poor and inconclusive response to the global financial crisis. In general, the response has been to cut the cost of capital and not to tackle the root causes of the crisis. As such, the world economy will limp on, burdened by debt and in hock to easy money from central banks.
Interestingly enough, we now see the same response to the current global crisis. Again, central banks and governments are bailing out the economy like there’s no tomorrow. Whatever it takes, the maxim of Mario Draghi, is once again employed to ease the collapse of the world economy and its inherited order. Increasingly, this approach looks like a giant Ponzi scheme.
Large amounts of money handed out by central banks and governments can sustain what has become unsustainable only for a time. The question is how long this will be. Will global supply chains get fully reinstated after the crisis? Will they be replaced by supply networks? Or, more broadly, will we ever return to the old normal? This seems to be the assumption many actors in business and politics continue to employ.
A driving force of globalisation
The aviation industry, a pillar of the old globalisation model, has been hit particularly hard. How long will it take to get back to pre-crisis levels? Do we need a full recovery, and even future growth? Or can we do with less air travel? At the moment, it looks like there is no way back to the old model.
What can still flow freely around the world are capital, information and ideas — at least, in theory. In practice, the flow of capital is also suffering. But digital technology has been a driving force of globalisation for years. This part of the picture looks way more rosy.
While trade predicated on global supply chains that take advantage of cheap labor is slowing, new digital technologies mean that more actors can participate in cross-border transactions than ever before, from small businesses to multinational corporations.
Cheap labour becomes less important as companies increasingly automate manufacturing.
As a result, some types of production are shifting from emerging markets back to advanced economies, where labor costs are considerably higher.
These kinds of structural shifts are going on while we enter a new phase of globalisation. Klaus Schwab dubbed this phase Globalization 4.0, after the Fourth Industrial Revolution. He draws a distinction between globalisation and globalism:
an ideology that prioritizes the neoliberal global order over national interests.
Digital globalisation is ready to thrive
The WEF pronounced globalism dead back in 2019, and the current crisis has others led to doing the same. Globalism, like every -ism, overamplifies something that is not inherently bad. In this case, the ideology elevates globalisation from the means to the end itself. But globalisation is not something worth pursuing for its own sake.
Global movement of people, goods, services, capital, information and ideas can do tremendous good. This is clearly true when it comes to global challenges like the current health crisis or climate change. It can also do tremendous damage, and that’s why we need to be careful. Complexity scientist Yaneer Bar-Yam has been warning for years:
Increasing global connectivity is making the world vulnerable to catastrophic failures. Local failures can cascade into a world wide collapse.
The financial crisis of 2008/2009 and the pandemic are both examples of such global vulnerability. On the other hand, his analysis also gives us hope. In a 2002 paper, he stated:
On a global scale, human civilization is a single organism capable of remarkable complex collective actions in response to environmental challenges.
It seems inevitable that we end up talking about complexity, a recurring theme on this blog. Globalisation is clearly adding complexity. The stagnation and now the shutdown implies that the old model of globalisation was hitting saturation before this crisis. However, digital globalisation is poised to thrive. The current global crisis will impact it, and might even accelerate it.