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Monday, March 17, 2003

Globalisation At Risk?

Stephen Roach argues that globalisation may be at risk. I beg to demur. At least not at present. His argument, slowing global trade, global imbalances (of the US, EU, China, India variety), and increased global tension. On all three of these he is surely correct. The world is in more trouble today than it was five years ago. But that doesn't mean globalisation is on the way out. If we look at the rush to get into China things in fact seem to be going the otherway. Globalisation experiencing diminishing returns then? Possibly. What is clear that anyone who goes out gets stuck in total lockout. Those in doubt please look at Argentina. So I think throwing globalisation into reverse gear is just not plausible. At least for now. My department of heretical thoughts would also add this: there has long been a debate among globalisation theorists about when a world economy actually got off the ground. Some would trace the origins of the modern world economy back to the 13th and 14th centuries (Braudel, Wallerstein). Others have argued that there is something qualitatively new in the 19th century (Williamson, O'Rourke). To date I have been more on the side of the latter group, but jsut recently a strange thought has been going through my head. What if globalisation went in waves, and with emergent properties (ie each wave got stronger)?. On this view this wave is so strong there is no way back. Given the steady demise of the nation state and the national identity: just what is there to go back to? (Expect more blogs on this!!!).

For the rest Stephen almost makes me look an optimist. I concur.

As I look ahead over the next several years, I see little relief on the economic horizon. In fact, I fear an intensification of pressures on globalization coming from three major forces: First and foremost are the likely impacts of a weaker US dollar brought about by America’s long overdue current account adjustment. America’s current account deficit hit a record -$548 billion (annualized) in 4Q02, or 5.2% of GDP. This is an unavoidable by-product of a near evaporation of national saving -- a net national saving rate (net of depreciation for consumers, businesses, and government units) that plunged to a record low of 1.6% in 3Q02. Lacking in domestically generated saving, the United States must import surplus saving from abroad, and run massive current account deficits to attract that capital. Yet ever-widening US budget deficits will only exacerbate these pressures -- having the potential to push the national saving rate toward zero and the current account deficit toward 7% of America’s GDP over the next few years.

There are two other economic forces that are likely to put intensified pressure on globalization in the years ahead -- both emanating from the powerful trends emerging in the developing world. The first is the so-called “China factor” -- the emergence of a low-cost, high-quality manufacturing platform with extraordinary scale and scope. Always in search of a scapegoat, the world has been quick to blame China for many of its problems. China-bashing is at its worst in Japan, where fears of “hollowing out” -- a rather ironic accusation coming from Japan -- have reached near epidemic proportions. But hand-wringing over China -- also evident in Washington and Europe -- can be expected to worsen, as rising unemployment becomes more of a problem. Lost in the fear-mongering is that China’s emergence is very much made in the industrial world, itself -- a by-product of conscious outsourcing strategies that improve business efficiencies and offer consumers price breaks on high-quality goods. China topped the world as a recipient of $52.7 billion in foreign-direct investment in 2002; in the first two months of 2003, FDI into China has surged further to $11.1 billion, running well ahead of last year’s record pace. While industrial world businesses are shifting to China for economic reasons, xenophobic politicians are blaming China for their problems. That’s yet another strain on the fabric of globalization.

A third force putting pressure on globalization is evident where few suspect it -- in the so-called non-tradable, or services, sector. For lack of a better term, I call it the “India factor” -- emblematic of a surge in IT-enabled services (ITES) exports that are a key by-product o the globalization of services. Now, with the click of a mouse, multi-national service enterprises can extract increasingly high-valued and low cost services from foreign destinations such as Bangalore, Shanghai, Dublin, and Australia. Nor are these just call-center outsourcing strategies. The ITES phenomenon is migrating increasingly up the value chain, involving a wide array of activities such as software programming, consulting, logistics management, engineering and design, transcription and translation services, and knowledge-creating research centers. Expected to grow by roughly 50% per year, India’s ITES sector is estimated to be a $17 billion industry by 2008.

The globalization of services challenges the orthodox model of income generation and wealth creation in the advanced world. Intensified competition in tradable goods is to be encouraged, not feared. That’s because the core competency of wealthy, knowledge-based service economies was in information-based activities, long thought to be sheltered from global competition. That model is now being challenged before our very eyes -- not just by surging ITES activity but also because of global deregulation of services and surging cross-border M&A activity, which has led to the creation of huge multinational service behemoths. Unlike the past, services are no longer operating under local supply curves -- the global supply curve is now shaping pricing in this vast segment of the world economy as well.
Source: Morgan Stanley Global Economic Forum

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