Commentary Type

Globalization Is Evolving, Not Receding


The loudest voices in the West come from "globalization pessimists" these days. One group denies that cross-border trade and international engagement and cooperation are beneficial. Another believes countries should work together, and trade makes sense for developed and developing countries alike—but gloom permeates this camp as well. 

The timidity of the proponents of globalization has several explanations. Even in countries where unemployment is moderate, large numbers of workers have not seen improvements in their living standards. Many workers feel that what was once an income and social ladder they could climb—through higher wages, promotions or better working conditions—today feels more like a slippery velvet rope. Some workers, generally those with a higher education, are able to make the ascent—many fall off and feel excluded.

The dissatisfaction of some workers in the United States, especially those facing competition from China (because they work in the manufacturing sector) is turning to a raucous opposition to any form of trade agreements. The lack of successful recent trade initiatives partly explains why global trade is slowing down, although the amount of goods and services exchanged between countries is still growing moderately.

Instead of explaining that trade is a major ingredient for economic prosperity, various US presidential candidates have sought to blame foreign countries for domestic problems. The uncomfortable truth is that poverty and job insecurity exist in all developed economies, and restricting trade will not resolve any urgent social issues.

There are other reasons for unease about globalization in the months ahead. The unification project that began in Western Europe almost six decades ago no longer inspires its citizens. The United Kingdom is seriously considering leaving the European Union, and nearly half its population seems to believe Britain would be better off on its own. With the crisis in Greece and migration pressures not yet resolved, the referendum that will take place in the United Kingdom in June is the latest reminder that the European Union's architecture is vulnerable. Few EU members have the courage to pursue necessary reforms and improvements that would allow the union of 28 European countries to function more efficiently.

In spite of the profound challenges outlined above, there are at least three reasons to hope that globalization can continue and even thrive. First, connections between countries are increasing. If one defines globalization narrowly as the exchange of tradeable goods, then it is easy to reach the incorrect conclusion that globalization is slowing down. A more complete analysis should also consider activities like international travel and cultural exchanges, including tourism and students studying outside of their home country, communication flows (transmission of data), scientific collaboration, ecommerce and other types of "digital markets," as well as the steady expansion of companies from developing countries to other markets.

The best way to see the rising interconnectedness is tallying the value of factories and businesses that were built or bought by foreign investors. Total global foreign direct investment today is 50 percent higher than it was just ten years ago. When Chinese companies set up branches abroad (or when investors from the United States, Europe, or other places build factories in China), the benefits include new jobs, learning new production methods, and higher incomes for the cities or areas where new investments take place. Moreover, foreign direct investment is favorable for financial stability because, unlike short-term bank loans, factories stay on the same ground for years. Long-term investments make communities more resilient.

Second, consider the recent progress on environmental issues. Just a few years ago, hardly anyone believed a global agreement on fighting climate change would be achievable (the previous major effort in this area was the 1997 Kyoto protocol, which was not ratified by the United States). Today, most countries agree that a common approach to environmental deterioration is warranted (dirty air knows no borders), and the 2015 Paris climate accord has been signed by all relevant countries. China and the United States have pledged to ratify the agreement this year, and some smaller countries have already ratified the deal. More countries are likely to follow.

The third piece of good news is China's constructive involvement in international economic policy. Two recent initiatives—the establishment of the Asian Infrastructure Investment Bank (AIIB), and the Belt and Road Initiative—can contribute to faster economic development and reduction of poverty across Asia. The mission of the AIIB in particular has impressed western counterparts, suggesting that this institution will soon be an excellent venue of international cooperation. The AIIB certainly looks like a foreign policy success so far, and the Chinese-led G-20 meetings have also displayed China's emerging skills for international policymaking.

China is becoming a major player in business as well. In 2005, China's investments abroad in the form of erecting new factories or purchase of existing enterprises stood at $10 billion, meaning that total investment from China was lower than what Ireland spent on similar ventures in that year. Today, China's investments are ten times greater compared to 2005. China's significance for the global economy also became apparent a few months ago, when investors watched with fear the prospect that Chinese consumers' income might grow more slowly in this year. Markets and governments sighed with relief last month, but this experience illustrates that the state of the Chinese economy has taken center stage around the world. Going ahead, higher living standards and international interconnectedness will be mutually reinforcing, unless misguided economic policy hinders their progress.

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