The ongoing coronavirus pandemic is changing the way we make our basic economic decisions. With little or no wages, social distancing measures, erosion of savings and wealth has made people, including the rich, to revisit past financial planning and economic decisions. A global economic downturn is imminent (International Monetary Fund predicts a 3% contraction due to the ‘Great Lockdown’) and economies cannot be rushed to reopen as it jeopardizes public health. Nobody can predict what a post-COVID-19 world would look like, but the consequences are going to outlast the pandemic. Global integration in terms of trade, finance, and labour mobility is going to suffer. When global GDP (Gross Domestic Product) declines, trade declines much more. The World Trade Organization has predicted an unprecedented 13-32% decline in global trade. The global supply chains will undergo a major to address over-dependence over a certain region or country, particularly China. This economic crisis and future revival will decide the pace of globalisation and its extent, in terms of economic and political influence.
Globalisation: The idea
The concepts of globalisation, trade, and labour mobility predate the nation-state model. Great civilizations like the Indus Valley and Mesopotamia heavily relied on the reciprocal traffic of goods and movement of merchants. The current model of globalization emerged from the resurgence in trade with new international finance, commerce, and monetary framework, through the Bretton Woods Agreement, and the American initiative of the European Recovery Program or the Marshall Plan and the reduction of tariffs through the General Agreement on Tariffs and Trade, 1947. The establishment of the United Nations and other international organizations ushered a new era of global interdependence.
By the late 1990s, China had begun the process of integrating its national economy into the global economy, the fall of the Soviet Union had pushed liberalization and globalization to its peak and India began abandoning autarky (self-reliance in terms of economy). Above all, the World Trade Organization came into existence in 1995 to regulate and promote international trade and investment, by further bringing down the barriers to trade.
Regional trade agreements like the North American Free Trade Agreement and the Association of Southeast Asian Nations Common Effective Preferential Tariff Agreement promoted the idea of free trade and movement within their blocs. The European Economic Community (later became the first Pillar of the European Union according to the Maastricht Treaty, 1992) was formed to bring regional economic integration among its members. The European Union went on to become a political union. The membership of these blocs gradually increased and there was a freer flow of investments, capital, and trade.
The trend of globalisation continued at an accelerating pace. Foreign investments flowed into emerging economies, especially China and later India. The neoliberal model of economic development recommended liberalization of the market forces, deregulation, privatisation and corporatisation of public enterprises, light regulation of the financial sectors, and promote foreign direct investment (loosely called the Washington Consensus). These policy recommendations were promoted by the International Monetary Fund and the World Bank as conditionalities on loans. Many developing countries abandoned their old inward-looking development models for the neoliberal approach. New regional trade areas came into picture and many more bilateral treaties to facilitate trade and investment.
Unfortunately, the introduction of the 2000s came with a mild economic slowdown although it did not turn into a recession in most parts of the world. Changes in basic monetary policies and fiscal measures revived the economy. Global trade and investments continued to expand, most in the form of securities and some in the form of greenfield investments (construction of new facilities). There was consensus that the then model of globalisation had benefits that outnumbered its cost. Most countries continued to open trade barriers and facilitate foreign investment. Globalism was at its peak.
The Global Financial Crisis (2007-2009)
This was a period of extreme stress on the global financial market, its banking system, and a contraction of the global economy by 5.3%. The global recession resulted in large-scale destruction of wealth (a direct loss of $1.9 trillion just in the United States) and rendered around millions unemployed. Real wages fell and investments declined. The crisis, to a large extent, was confined to the developed world of North America and Europe in terms of its direct impact. While the African economy was not fully integrated, Asia was better prepared and had higher growth rates, and Latin America had stricter regulations for the financial sector. However, the developing world, which had seen a surge of investments, faced lower investments, especially whose which were long term in nature. Several developing economies incurred high debt as a part of recovery packages by the national governments, most notable being the Chinese recovery package and the Indian twin balance sheet problem due to government inaction.
However, this article analyses the impact of the Global Financial Crisis on the subject of globalisation. Household consumption had such massively declined that even by 2017-18, they had barely risen to pre-2008 levels. Soon after the crisis, the Eurozone entered into a debt crisis, where several of its members were unable to repay the government debt and needed the assistance of the European Central Bank and the International Monetary Fund. Corporate profits began faltering in 2016 and continued till the coronavirus pandemic. Foreign Direct Investment ceased to be the driver of growth in emerging economies and domestic markets became more relevant. The economies, both in terms of policies and operation, became less globalised than they were before the financial crisis. The primary reason for such an ‘inward-looking’ nature of policies was that policymakers brought out national recovery measures to mitigate the effects of a crisis, that was global and interconnected. Other than an increase in lending capacity by the World Bank and the International Monetary Fund, and Basel III norms (an international regulatory accord to improve risk management in the banking industry), little was done to regulate global business transactions and strengthen the dispute resolution processes. Since there were calls for better regulation and supervision of the financial markets, the national policies had to be formulated to address the issues on a national capacity (not a global one) because there was a clear absence of an efficient regulatory regime on the international level and a lack of transparency (on both national and international levels). That is why these policies were only partially successful in economic revival.
The rhetoric of nationalism and a lack of trust
All opposition to the idea of globalisation can be summed up into 2 categories: firstly, the lack of trust in the international community and lack of a global framework to streamline international financial transactions; secondly, the popular opposition to the idea of globalisation by favouring protectionism.
Lack of trust among nations is one of the main reasons for policymakers to formulate ‘inward-looking’ policies. Creation a global framework is a legal issue because, despite developments in the field of international law, nation-states continue to remain at the apex of the financial regulatory system. The nations must come together to deliberate and establish a framework providing more authority to international organizations to recommend and, in certain cases, implement the regulations in the interest of the global economy most transparently and democratically. However tremendous political will is necessary for such a development. The fate of globalism cannot be solely left to nation-states, on one extreme, or to the unregulated markets, on the other. This retreat of globalization has often been in terms of rise in tariffs and retaliations (the extreme of which was the US-China Trade War), withdrawal from free trade agreements (like the US’ withdrawal from the NAFTA, more recently, India’s withdrawal from the Regional Comprehensive Economic Partnership), and most importantly, British exit from the European Union (or more commonly Brexit), which has undermined the prestige of the transnational political union. Although such political moves are nearly impossible without public support or acquiescence.
The more important development against globalism was the public support political backlash. From Brexit to the rhetoric of ‘Make America Great Again’, the popular demand, after the Global Financial Crisis, has been in favour of nationalism. The general idea of the whole debate is ‘us versus them’, that is, natives versus foreigners. The lack of public support for globalisation has damaged the idea more than the global financial crisis. The people have been sceptical of open borders, immigration, and global interdependence, and is rightfully so. Since economies have integrated, most have seen a greater income and wealth inequality, and job losses in labour abundant sectors. While financial markets have grown tremendously, similar gain is not seen in the real economy. For years, the intellectuals and economists have done little to allay the fears of the general working-class public in terms of globalisation. The only response to the fear of loss of jobs and rising inequality (to which globalisation is an important factor) has been an assurance that the benefits of globalisation outweigh its cost, but that assurance is simply not enough. To reap the “benefits” of globalisation, labour must be treated as a commodity (like capital), moving from regions of surpluses to regions where there are needed, but that is impractical and inhuman.
Unfortunately, while formulating the strategy of globalisation, the human element has been overlooked. In several countries, GDP and trade have increased, but wages and employment have been low and stagnant. Such neglect of the real economy by the policy advisors has made the world an ideological breeding ground to oppose the globalism efforts. The feeling and public support is not limited to the developed world but rather is being led by several leaders even in developing countries. These feelings will only continue until these issues are addressed, and trust is regained, and globalisation strategies are changed to support the people who work in the real economy. If they are not addressed, people are bound to trust a national government to safeguard their livelihoods, which is elected by them (in most places, some kind of election is conducted) and is closer to them than international institutions.
COVID-19 and Globalisation
Globalisation is going through a severe crisis is, to say the least. Growing tensions between the United States and China are back due to rivalry and a lack of trust, there are calls for geographic localization of supply chains, the crisis within the World Trade Organization to protect the national economic interest, and autarkic policies tell us that globalism is going to further slow down and its pace will now be determined by the will of the nation-states, who are not very positive about it. Yet, the pandemic should be considered an opportunity for the world to restructure the globalisation strategy in a more planned and rational manner so that it provides sustainable growth to all its stakeholders. An international mechanism can be created for effective financial regulation and reconsider the human element to regain trust in favour of globalisation in the real economy. The international organizations must become more transparent and democratic and respect the wisdom of a common citizen. The pandemic has exposed how fragile globalism is, and to bring globalism back to the forefront of policymaking, the new model must be fairer and put greater importance to human cooperation.
Coronavirus cannot kill globalism in the foreseeable future and to assert “death of globalisation” is premature, because it is inevitable for economies to trade and integrate in a long run, but it can give way to ‘slowbalisation’, that is, global economic integration at a significantly slower pace. The relief measures for COVID-19 also require global cooperation because national(ist) revival measures cannot fully mitigate the disaster caused by a global economic crisis. Cooperation is a necessity not a choice, and politicians need to stop treating it as one. Development cannot be reduced to just numbers.
- By Anubhav Mishra
References
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