Globalization

How the mighty have fallen. The deal may indeed be bad from a business point of view. (Kraft shareholder Warren Buffett certainly doesn't like it.) But claims on British honor and chocolate superiority ring hollow. Maybe the British shouldn't have gone so crazy with all that empire-building and Adam Smith proselytizing. Globalization giveth, and globalization taketh away. As the FT noted in an accompanying editorial, Kraft is paying a pretty penny to create a combined company with "strong growth prospects in India and Brazil."

And besides, what right does a company famous for employing a man in a gorilla suit banging the drums to the tune of Phil Collins to sell its wares have complaining about barbarous Yanks? (Thanks to IPEZone for the link.)

Call it the price of success? Ten years ago, American triumphalism was at its peak. We were the lone superpower, dictating the Washington Consensus as the answer to all the world's economic development problems, preening ourselves as we regarded our mighty technological prowess and the downfall of communism. But now comes the midlife crisis, popping up in end-of-the-year think pieces everywhere. What's the theme? It hasn't been just a bad year but also a "big zero" decade, and even worse, the end of optimism.

To wit: In a remarkable piece of handwringing published today in the Financial Times, "Self-Doubt Tarnishes Brand America," Edward Luce observes the decay of "American intellectual hegemony" and declares that "the metallic rust of decline has crept into the American soul."

Meanwhile, over at the Wall Street Journal, we are offered a glimpse at the annual Christmas letter sent out by Guy Hands, the founder of private equity firm Terra Firma Capital Partners.

We need to question the accepted wisdom that a truly global market benefits all citizens in western developed nations. Indeed, I suspect we will, in time, see globalization as the driver that delivered a massive transfer of economic power from the west to the east.

Over the long term it will result in an ever growing class of permanent poor being created in the west. I also suspect new graduates will find it increasingly difficult to get the jobs for which they are qualified. It is the young and the poor in the west who will pay the cost of global human resources competition.

No doubt: Globalization makes it tougher to compete — though we can argue whether it is ultimately more economically devastating to workers in the formerly flush West than relentless technological innovation. (For example, my own industry, journalism, is being remade by the Internet, not China or India.) But that's quibbling: Globalization plus technological progress together are squeezing Western workers in a giant vice grip.

It didn't use to be that way. Once upon a time, all you had to do was be born in the U.S., or West Germany, or Japan, and, barring certain disadvantages such as race or gender, a headstart on grabbing for the good life was all but assured: widespread levels of affluence and a steadily rising standard of living unmatched throughout all of human history. Now it's not so easy — in part because of this "massive transfer of economic power from the west to the east."

Of course, from the East's perspective, it's maybe not so bad. As FreeExchange notes, "the economies of India and China basically doubled in size over the [last decade], dealing a major blow to poverty in countries that are home to over 2 billion people, one third of earth's population." I'm betting that that there are few citizens in those countries who would be excited about a return to the halcyon days of the 20th century, or who would be so prone to decry the fact that global markets don't benefit all the citizens in Western developed nations.

One person's massive transfer is another's rebalancing. For centuries, Western Europe, the U.S. and a handful of other countries dominated the global economy by force of gunboats and market capitalism. That's over, or at least in serious jeopardy. But should this change of fortune be read as a marker of Western decline or as the natural, inevitable rise of the rest of the world? We've all seen how the West can no longer enforce its will at World Trade Organization or climate change negotiations. Should we lament the loss of hegemony — which makes it easy to get things done — or celebrate the rise of multipolarity — which makes it much, much harder to cut a deal?

There's also, as Andrew Sprung points out at Xpostfactoid, the encouraging news that globally, life expectancy is up, child mortality down, and the poverty rate is shrinking at an accelerating pace.

Maybe, as 2010 approaches, it's time to suck it up a little bit, and instead of bemoaning how screwed up everything is, take some time to think about the vast global trends that may make the 21st century a better time to be born in China or India or Brazil than has been true for centuries — or ever. Or if that kind of one-world thinking is too hard to reach, we can perhaps settle for smaller victories. I, for one, am very glad the Christmas bomber didn't kill anyone, that the prospects for the U.S. economy are nowhere near as frightening today as they were a year ago, and that we at least seem to have our attention focused on the important problems — energy, climate, healthcare, financial regulatory reform — instead of just blithely ignoring them.

Rust in the soul? There's nothing here that a little WD-40 and some elbow grease can't fix. Or at least, that's HTWW's New Year's resolution.

The oughts can't end a moment too soon.

What does the decade of 2010-20 hold in store? There is already a consensus among America's commentariat. We are told that the near future will see the decline of the United States and the rise of China in global power politics and, as an added attraction, the decline of the nation-state.

Yeah, sure. I'll believe it when I see it.

I've heard it before. Born in 1962, I have followed the public discussion in this country for nearly half a century. And as I think back on the five decades of my life to date, what impresses me is the repetition of two themes in public discourse: the dramatic rise and fall of the U.S. and other great powers, and claims of radical changes in the very nature of world politics. When I hear these same sensational themes recycled, my response is a yawn.

Take the rise and fall of the great powers, a subject that has engaged me since I took Paul Kennedy's course on the subject at Yale in the 1980s. I have lived through enough cycles of exaggeration to be skeptical about claims that radical changes in the global distribution of power and wealth will end American primacy in the near future. In the 1970s, the Soviets were supposed in some quarters to be on the verge of surpassing the U.S. not only in military strength but also in economic power. Then the Soviet empire fell apart, and it turned out that CIA analysts and other alleged experts had grossly exaggerated the size of the Soviet economy and the efficiency of the Soviet armed forces.

But the theme of the imminent downfall of the U.S. was too good to be abandoned. So a substitute was found for the Soviet leviathan in the Japanese juggernaut. In the 1980s, there were predictions that Japan might actually surpass the U.S. in gross domestic product by 2000. Tom Clancy wrote a novel in which Japanese militarists blow up the U.S. Capitol and slaughter America's top leaders. Business school gurus recommended Japanese management techniques like singing company songs. And then the bottom fell out of the Japanese real estate and stock markets and Japan went into a prolonged slump from which it has yet to recover.

In the 1990s, American pundits lurched to the other extreme. Following the implosions of the Soviet Union and Japan, America's best and brightest declared almost unanimously that the U.S. was not a declining empire after all. No, America was an unstoppable super-duper-hyper-megapower! U.S. victories in a couple of wars in which a military designed to defeat the Warsaw Pact was deployed to crush bankrupt, backward countries like Iraq, Serbia and Afghanistan were interpreted as proof that the world -- and not just bankrupt, backward countries -- trembled before the might of Washington's legions. Otherwise sensible people, swept up in the conventional wisdom, wrote things like, "Not since Rome has a single state been as powerful as the United States of America."

This neo-imperial triumphalism shaped U.S. policy during the Bush years, when Donald Rumsfeld's Defense Department, in the silliest government seminars of all time, invited historians to speculate on lessons for the Pax Americana from ancient empires. Let's combine Byzantine diplomacy with Hittite battlefield tactics ...

Then it turned out that a handful of terrorists hijacking airplanes could temporarily crater the U.S. economy and make Americans afraid of their own shadows, while small numbers of insurgents with improvised explosive devices (IEDs) could make American occupations of other countries too costly for the American people to stomach. So much for the greatest empire since Rome. The imaginary Pax Americana was as short-lived as the imaginary Pax Nipponica and the imaginary Pax Sovietica that preceded it.

The lesson I take from all of this is that the distribution of power and wealth in the world is far more stable than you would think if you listened to our manic-depressive public discourse, where America is always either on the brink of catastrophic decline or unchallengeable global supremacy. The U.S. share of global GDP -- a good proxy for power -- has fluctuated around a quarter or a fifth since the early 1900s, with the exception of a temporary spike after World War II before the other industrial great powers recovered from it. The Soviet Union never came anywhere near challenging American primacy, and neither did Japan.

But now we are told that China will catch up with the U.S. in a couple of decades and dominate the world in the "Asian century." Maybe, and then again, maybe not. Those projections depend on straight-line extrapolations of the incredibly high Chinese growth rates of the last decade. But there are a lot of problems with those projections that you seldom hear in awed discussions of the rise of China.

For one thing, as developing countries become developed countries, their initial high rates of growth slow down. Taking this into account pushes China's parity with the U.S. further into the future. And this assumes that China's high growth rates have been real. More and more experts are wondering whether those official growth rates can be trusted. It would not be the first time that a corrupt, authoritarian regime cooked the books. If China's growth figures have been inflated for a decade or two, then the Chinese economy may be smaller than many believe and the distance it has to travel to catch up with the U.S. is much greater.

And even optimistic projections only have China catching up with the U.S. in overall GDP, mainly because it will have a larger, but much poorer, population. Nobody expects China, even under the most favorable circumstances, to catch up with the U.S. and other developed countries in per capita income until the 22nd century, if then. And each of the rest of the "BRICs" (Brazil, Russia, India, China) is dwarfed by the U.S. in GDP.

But don't expect to read any of this in the newsmagazines or the Op-Ed columns. "Sleeping Dragon Wakes, World Trembles" or "South Asian Elephant Shakes World Order" make better headlines than "Even With High Growth, China and India Will Be Poor for Generations."

Hyperbolic assertions about America's meteoric rise or meteoric decline are not the only kind of hype that pollutes public discourse. Academics and journalistic pundits alike are fond of drawing attention to themselves by declaring that we are on the verge of a radical transformation of the system of sovereign states that has existed in Europe since the Thirty Years' War and in the world since post-World War II decolonization. Once again, we see the fallacy of the straight-line extrapolation from a temporary trend to a cosmic transformation.

In the 1990s, some misinterpreted the disintegration along ethnonational lines of the Soviet Union, Yugoslavia and Czechoslovakia. Instead of understanding these phenomena as what they were -- the long-delayed dissolution of remnants of the Romanov and Hapsburg empires -- these local breakups were said by some to augur the crackup of states everywhere.

During the Balkan wars in the mid-1990s, on a trip to war-ravaged Croatia, I sat on a plane next to an American businessmen who was reading a pop futurist book. "This book says that by the year 2000, there will be 3,000 nations in the U.N.," the businessman told me. When I expressed my skepticism, he evidently concluded that I didn't know what I was talking about and said little for the rest of the flight. As of 2009, mostly as a result of the Soviet and Yugoslav crackups, a couple of dozen new states have joined the international community since the end of the Cold War, but not a couple of thousand.

Others in the 1990s predicted not the exponential multiplication of states but the end of the state as such as the dominant actor in world politics. Robert Kaplan predicted "the coming anarchy" and many prophesied a neo-feudal world order in which stateless entities were more powerful than conventional states.

9/11 gave a brief boost to those who claimed that international terrorist organizations now rivaled states in their power, but in retrospect it was a fluke, not a trend. Since 9/11 the U.S. and other states, having heightened their security, have thwarted mass-casualty attacks, and jihadists have been limited to crude, smaller-scale violence like machine-gunning crowds and blowing up buses and trains. Contrary to popular belief, with the exception of jihadism and a few local wars of partition, political violence worldwide dramatically diminished after the Cold War and remains low compared to the Cold War years (in part because the U.S. and the Soviets stirred the pot of many local conflicts that mercifully fizzled out without external intervention).

And the international corporations that were supposed to be more powerful than countries? The poorest countries have to bargain with transnational enterprises and banks -- but that is nothing new. Not only giant but also medium-size countries still overmatch even the largest corporations and banks. And "global" firms turned out to be not so global. When the present economic crisis struck in 2008, allegedly transnational enterprises like banks and car companies went running for aid to their respective national governments. These global firms, from Deutsche Bank to General Motors, have always been deeply rooted in particular nation-states, notwithstanding their overseas subsidiaries and partners. True global capitalism is a myth spread by the likes of Thomas Friedman. In reality, we live in the era of multinational capitalism, not global capitalism.

While we are strolling down memory lane, remember all the chatter a few years back about how irresistible immigration flows were leading to a world with open borders for labor as well as goods and capital? One of the fads in universities in the 1990s was the claim that "diasporic consciousness" was leading to the replacement of national identity by post-national global multiculturalism.

Not hardly. The backlash against the economic and cultural problems associated with mass immigration has forced parties of the left as well as the right in Europe to crack down on illegal immigration and asylum seeking. In the last decade in the U.S., many Democratic politicians who face reelection, including President Obama, have switched from denouncing critics of illegal immigration as racists to boasting of the success of their efforts to control the borders and promising to exclude illegal immigrants from public healthcare plans. And from India and Saudi Arabia to America's Southwestern border, fences are going up, to keep out both terrorist infiltrators and the unwanted foreign poor.

Remember how national identity was supposed to wither away? Obama campaigned and now governs against a backdrop of multiple American flags, as though he were the head of the John Birch Society. In Britain, the Labour Party that touted the wonders of globalization and financial deregulation in the 1990s is now proposing citizenship tests for immigrants, assimilation and American-style civic patriotism or liberal nationalism. The nation-state is not withering away. Post-national globalism is withering away. To be more accurate, post-national globalism never really existed, except in the imaginations of pundits and professors and plutocrats who concluded that the nation-state was dead because they invested in China, bought their suits in London and watched French art films.

In the decade about to begin, it would be naive to expect an end to breathless hype about world politics. That sort of thing wins readers for journals and newspapers and makes the careers of pundits who aspire to bloviate at Davos before an audience of the trendy rich. Nevertheless, the appropriate response to claims that America is about to collapse or conquer the world, and to assertions that the nation-state system is about to give way to something entirely different -- global mafias, city-states, a new Caliphate, tribal empires, a cybernetic Singularity, whatever -- is a bored yawn.

Other less expensive ideas include a new jobs tax credit for any firm creating net new jobs. Lending directed at small businesses, which are having a hard time getting credit but are responsible for most new jobs. A one-year payroll tax holiday on the first, say, $20,000 of income -- which would quickly put money into people's pockets and simultaneously make it cheaper for businesses to hire because they pay half the payroll tax. And a WPA style program that hires jobless workers directly to, say, insulate homes.

Most of this would be helpful. Together, they might take the official unemployment rate down a notch or two.

But here's the real worry. The basic assumption that jobs will eventually return when the economy recovers is probably wrong. Some jobs will come back, of course. But the reality that no one wants to talk about is a structural change in the economy that's been going on for years but which the Great Recession has dramatically accelerated.

Under the pressure of this awful recession, many companies have found ways to cut their payrolls for good. They’ve discovered that new software and computer technologies have made workers in Asia and Latin America just about as productive as Americans, and that the Internet allows far more work to be efficiently outsourced abroad.

This means many Americans won’t be rehired unless they’re willing to settle for much lower wages and benefits. Today's official unemployment numbers hide the extent to which Americans are already on this path. Among those with jobs, a large and growing number have had to accept lower pay as a condition for keeping them. Or they've lost higher-paying jobs and are now in new ones that pays less.

Yet reducing unemployment by cutting wages merely exchanges one problem for another. We'll get jobs back but have more people working for pay they consider inadequate, more working families at or near poverty, and widening inequality. The nation will also have a harder time restarting the economy because so many more Americans lack the money they need to buy all the goods and services the economy can produce.

So let's be clear: The goal isn’t just more jobs. It's more jobs with good wages. Which means the fix isn’t just temporary measures to accelerate a jobs recovery, but permanent new investments in the productivity of Americans.

What sort of investments? Big ones that span many years: early childhood education for every young child, excellent K-12, fully funded public higher education, more generous aid for kids from middle-class and poor families to attend college, good healthcare, more basic research and development that's done here in the U.S., better and more efficient public transit like light rail, a power grid that's up to the task and so on.

Without these sorts of productivity-enhancing investments, a steadily increasing number of Americans will be priced out of competition in the world economy. More and more Americans will face a Hobson's choice of no job or a job with lousy wages. It's already happening.

But so far this Monday morning, investor reactions appear more muted than the worst-case scenarios would justify.

How seriously we should take this momentary calm is unknowable at this juncture. Sometimes economic disasters occur in slow-motion, and at this point, nobody would be surprised if Dubai's woes incited a chain of events -- sovereign debt defaults across the planet -- that short-circuited the fledgling global economic recovery. But Paul Krugman and Willem Buiter, neither of whom are ever shy at warning about impending chaos, are both complacent about Dubai World's "intrinsic" significance. Buiter's two posts, here, and here, are particularly worth reading.

Buiter's fundamental observation -- that Dubai World is essentially a commercial real estate developer that overextended itself, and commercial real estate developers are notoriously prone to bankruptcy during recessions -- is compelling. As Buiter writes, Dubai engaged in "the craziest construction boom seen in the Middle East since the construction of the Great Pyramids." One of Dubai World's key subsidiaries, the property developer Nakheel "was at the acme of property development pushed to excess, competing with God, nature and the Netherlands by constructing islands, which it hoped to sell to gormless rock stars and European football geniuses."

For years the financial press doted on stories of Dubai's extravagant excess as symbolic proof that the center of the world economy was migrating to the Gulf. But the real symbolism should have been much more obvious. Excess is a bubble waiting to pop. And stubborn hubris is not a sound investment strategy.

Which brings us to the Lehman Brothers comparison. As many have noted, when Lehman declared bankruptcy, it had liabilities of over $600 billion, which makes Dubai World's $59 billion worth of debt seem relatively insignificant. But symbolically speaking, there are interesting parallels. The millstone around Lehman Brother's neck was bad real estate investments. Not just stupid subprime mortgage security bets, but also actual massively unwarranted investments in real estate developments -- precisely the kind of stuff that gets hammered during an economic downturn.

As is documented in the various accounts of Lehman's fall that have been trickling out all year -- most notably Joseph Tibman's "The Murder of Lehman Brothers" and Andrew Ross Sorkin's "Too Big To Fail" -- Lehman's executives, in particular CEO Dick Fuld, refused to recognize the extent of their liabilities, and waited too long to seek a way out. Possibly the most important reason why Lehman was eventually forced to declare bankruptcy is that Fuld had earlier resisted selling off all or a portion of Lehman at a price he believed to be too low. In other words, Lehman's demise was its own fault.

The same seems to be true of Dubai World. The crash in Dubai's economy has been apparent for many months, but Dubai's ruler, Sheikh Mohamed bin Rashid al-Maktoum, did a pretty good Dick Fuld imitation, and refuse to ask for help or admit reality until it was too late.

As theorized in the Financial Times:

Why so long? Because the proud Sheikh Mohammed, it seems, was reluctant to be bailed out by his richer neighbor, possibly fearing it would put a damper on Dubai's image and constrain its independence. Nor was he willing to part with some of Dubai's crown jewels at distressed prices. Some people suspect that it is the same dogged resistance that has landed Dubai in this week's mess.

The lesson? The complexities involved in modern finance sometimes make what is going on seem inscrutable and hard to understand. Economists consequently argue endlessly about the real causes of the global financial crash in language that the layman has a difficult time deciphering. But when you look more closely at the flashpoints of disaster, whether in Dubai or in New York, the real problems seem to be caused by bad decisions by stubborn executives, whether blinded by greed or stupidity or the satisfaction of excess.

 

And there's nothing we can do about it.

Based on melting arctic ice and other evidence, it is clear that global warming has begun and existing concentrations of greenhouse gases in the atmosphere will lead to further temperature increases. The timing of the global peak of oil production is less certain, although there is a growing view that maximum production will occur within the next decade. Global climate change and the global peak of oil production will undermine the economic logic and profitability of long-distance, global supply chains of imports and exports. They will lead to a condition of peak globalization, after which the volume of goods traded internationally (measured by ton-miles of freight) will decline. While policies designed to reduce oil depletion and greenhouse gas emissions may work to delay the onset of peak globalization, it is the conclusion of this paper that they will be unable to prevent it.

Curtis doesn't come out and say so directly, but given the fact that his paper appeared in the journal "Ecological Economics" and ecological economists, as a rule, tend to take a dim view of globalization and its assorted capitalist depredations against the environment, one assumes that he's not all that unhappy about the prospect of relocalization. When Curtis writes that "The economic logic of the comparative advantage of global supply chains will be overcome by both increasing transportation costs and interruptions and delays in the transit of freight," he doesn't sound too broken up about it.

But there are some fairly mighty assumptions in his opening paragraph, not least being the imminence of peak oil, the certainty of catastrophic climate change, and human inability to do anything meaningful about either or both of these threats. Additionally, Curtis sees climate change and peak oil working in concert -- but they could just as easily work at cross-purposes.

For example, we've already seen rising oil prices contribute to a global recession, which, in large parts of the world, has led to drastic reductions in greenhouse gas emissions. The economic impact of peak oil, in that sense, may actually postpone, or delay global warming.

There's also an implied presupposition that technological innovation has, for all intents and purposes, stopped. As energy prices climb, not only won't we find new, renewable cost-effective sources of energy, but we also won't devise more efficient ways to use what we've got -- freighters and airplanes that consume less fuel, for example. Curtis believes that "Offsetting technologies and policies are very unlikely to be implemented in sufficient magnitude or with sufficient promptness to counter peak globalization."

He could be right. The hitherto unstoppable advance of the Industrial Revolution could be reaching its high point right now. Curtis doesn't prove this will happen in his paper so much as he lays out the "pathways" that could lead us there. But whether wrong or right, the fascinating thing is that the answer to the question could well be provided during our lifetimes.