Is economic globalization a failure?

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Globalization as an economic ideal was first introduced by former American president Ronald Reagan (1981-1989) and former British Prime Minister, Margaret Thatcher (1979-1990). The essence is that the entire world economy will become more developed and prosperous if trading, investment, and technological barriers between countries are eliminated. The idea of a ‘national economy’ is supplanted by one of a ‘regional economy’ and ‘international economy’, a strategy which in turn gave birth to regional and international trade and investment agreements such as NAFTA, AFTA, the European Union, APEC, etc., as well as international economic agencies that actively participate in them, such as the World Bank, IMF, and WTO.

DR. Fuad Bawazier, MA
Economist and Former Finance Minister in Cabinet Development VII

IO – With a global economy, mobilization of economic resources between nations becomes easier and cheaper, because of reduced trade barrier and investment limitations. The logic is that this will cause goods and services to be produced in the most efficient and cost-effective countries, so they will become more affordable for consumers in all countries. In order to achieve perfect globalization, all policies considered as impeding the efficiency of production and distribution, or in markets in general such as subsidies, import duties, and government intervention, will be eliminated – or at least minimized.

Globalization is led by the ‘rule of efficiency’, while conventional national economies consider both efficiency and the interests of its citizens in allocating resources. Such domestic protection may take the form of tariff barriers, export taxes, import-export quotas, or even the prohibition of certain imports for reasons of health, safety, environmental hazards, utilization of underage workers, or others. Through globalization, the theory goes, maximum efficiency generally benefits from large economies of scale, which mostly benefit giant businesses.

‘Globalization’ is actually a follow-up to the results of the ‘trickle-down effect’ policy, which failed in fact to sustain the welfare of ordinary citizens. That means that the Gini ratio (the ratio of equality of income or wealth) in countries with trickle-down policies generally worsens as time goes by.

Aftermore than 3 decades, the grand winner of economic globalization is China, which succeeded in becoming the cheapest, yet most reliable producer of goods and services, one that freely uses the world as its free market. China succeeded in gathering foreign currencies and securities from its exports, part of which are invested abroad. It has become the new economic superpower with a normal annual GDP of USD 12 trillion, the biggest worldwide exporter with an annual value of USD 2 trillion (2016), the biggest worldwide importer at USD 1.4 trillion (2016) and USD 4 trillion in foreign investments.

Globalization has also succeeded in increasing per capita income in China, with its GDP per capita in 2016 at USD 8,123.00 (normal). However, its per capita GDP according to purchasing power parity (PPP) for the same year was USD 17,000.00. China’s GDP based on PPP for 2016 was USD 21.3 trillion, while EU’s GDP for the same year was USD 19.1 trillion and the USA’s was USD 18.5 trillion. Its average economic growth rate for 30 years is > 10% per annum, even though economic growth rate in 2016 and 2017 slowed to 6.7% and 6.9%, respectively. China’s achievement derived from globalization is naturally a surprise for the world, especially to the United States and Britain, as the ‘pioneers of globalization’.

Belatedly realizing the dangers threatening their national economies, USA and Britain, the original champions of globalization in the name of ‘efficiency’, are in retreat, seeking a return to legacy economic regulation or ‘de-globalization’. This means that they have decided they no longer desire free global investment and free global trade, because they have woken up to how disadvantageous it can be to their domestic economies. The view spread wide in Western countries (read: US and Britain) is that through globalization they have surrendered their national market and economic sovereignty, because they are forced to comply with the terms of global and/ or regional agreements.

Britain was known to have been half-hearted in becoming a member of the European Union in the fi r s t place, smarting from having to give up the Pound Sterling and replace it with the Euro. Britain ended up voting to leave the European Union (Brexit) and the USA simultaneously started to cut its global ties.

Under President Donald Trump, the USA champions the notion of ‘America First’: basically, even though foreign production is more efficient and/or cheaper, if it weakens or disadvantages its national economy, as a producing country it will abandon the principle of ‘economic efficiency’. In other words, goods produced by American companies abroad will be saddled with a high entry fee (‘free trade’ no longer). This is the reason the US is backing out of NAFTA and the Paris Climate Agreement, and seems to be getting ready to wage a trade war against Europe. Under Trump’s leadership, the US has also declined to participate in the Trans Pacific Partnership (TPP), originally established by President Obama as an attempt to balance the dominance of China in the Pacific.

In view of the developments after Brexit and the election of President Trump, the spirit of globalization seems to be fading fast. The world seems to be getting ready to revert to a principle of ‘national economies’, i.e. all trading and investment agreements will be made bilaterally. However, de-globalization will not be that easy: it will take a very long time, as China is not the only party involved. There are in fact numerous other parties with deep and strong global ties that have been nurtured for decades.