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Globalisation: towards a new era

In recent decades, globalisation has transformed the world, boosting economic growth and connecting developed and developing countries. Now, in the aftermath of the financial crisis, the nature of globalisation is changing as emerging markets take a larger role in the global economy

Globalisation created today’s world. Cultures, economies, government policies and markets around the globe have always interacted and influenced each other. However, in recent decades - and especially since the 1990s - globalisation has expanded in scope enormously. The increase in the breadth and depth of connections between individuals, companies, nations and regions has changed the lives of billions of people.

The end of the Cold War, leading to the inclusion of Russia and Eastern Europe in the world of free trade, the economic liberalisation in China, and increasing political stability in many countries in Latin America accelerated globalisation. These socio-political changes, combined with a prevailing economic mindset that prioritised free markets and trade, ushered in a new era. Countries that were previously isolated from the global economy became integrated into production chains that spanned continents.

However, there are signs that globalisation is changing. Global trade is slowing, especially in relation to GDP growth, and trade patterns and practices are changing. Meanwhile, the economic orthodoxy that underpinned globalisation has come under fire as a result of the financial crisis. At the same time, the balance of economic and political power in the world is evolving, reflecting and reinforcing the changes to trade and economic policy that are underway.

Trade growth is slowing
One hallmark of globalisation has been a huge increase in trade: since the 1970s the volume of world trade has grown by around 7% a year - significantly above global GDP growth (1). Indeed, the ability of trade to grow faster than GDP - a 1% increase in latter was associated with a 2.2% increase in the former (2) - exemplified globalisation’s momentum. From a macro-economic perspective, trade benefited everyone: prices for goods in developed markets fell and living standards for workers in many developing countries rose.

Now the link between GDP growth and trade growth is weakening. After a post-recession rebound in 2010, when global trade rose 13%, it has grown just 3.4% a year between 2012 and 2014 (3).

Globalisation - as defined in recent decades - is slowing down. The World Bank, which expects trade to grow just 5% over the medium-term, believes the slowdown is not only because world income is lower, but also because “trade has become less responsive to income growth” - a 1% increase in GDP will no longer result in a 2.2% increase in trade.

Why might that have happened? There are two important reasons. Firstly, the one-off gains enjoyed in the 1990s were prompted by historical change, such as the opening up of China’s economy, which were one-off events. Secondly, many global value chains are already fragmented: most of the goods sold in the shops in the US or Europe are manufactured, at least in part, in one of more emerging market country. While value chains could spread further, future gains could be more limited.

Trading patterns are changing
There is a widespread assumption that globalisation has primarily increased trade between developed countries and developing countries. Certainly, such trade is a core element of globalisation. However, it has also hugely increased emerging market connectivity. The share of intra-emerging market trade in emerging market’s total trade grew from less than 9% in 1960 to over 42% in 2008 - an almost five-fold increase (4).

The stalling of developed markets in 2008 highlighted how important trade between emerging markets, especially involving China, had become. In 2009, China became Brazil’s and Africa’s largest trading partner. The huge economic weight of China, which overtook the US to become the world’s largest economy in December 2014, means that global trade - and globalisation more generally - no longer has to involve a developed country.

As a result, the West’s ability to define globalisation is diminishing. One recent example of this trend is the $400 billion, 30-year gas deal between China and Russian state-owned energy company Gazprom in May 2014. In its main European export markets, Gazprom has come under pressure from its customers to adopt market-based pricing. China’s appetite for energy has given Gazprom an alternative market, where pricing models, for example, are different.

Gazprom’s deal does not conform to traditional ideas associated with globalisation, not least because none of the significant details have been revealed. Nevertheless, it is globalisation. Economic ties between Russia and China will undoubtedly strengthen in the coming decades, with increased financing flowing to Russia (China is understood to have committed to lend to Russia as part of the Gazprom deal) and growing trade flows between the two countries.

An old agenda challenged
It is not just the economic strength of China and other leading emerging market countries that is changing the definition of globalisation. The legacy of the intellectual theories previously associated with globalisation is also prompting change.

In the decades after globalisation first took hold, it was defined almost exclusively by developed countries. Indeed, much of what is known as globalisation, including increased trade, lower tariff barriers and reduced state intervention in the economy, emerged in the 1980s as an ideology in the US and the UK, before being exported around the world in the form of privatisation, lifting of currency controls and other policy innovations in the 1990s.

Some of these ideas have now been rejected following the financial crisis and ensuing global recession, which demonstrated the shortcomings of economic orthodoxy. The stalled Doha round of World Trade Organisation talks stand testament to global indifference to the original globalisation trade agenda, for example. Meanwhile, the power of the developed countries that pushed this agenda has declined relative to emerging markets.

A new power balance
The increasing economic independence of emerging markets is having political consequences. As early as 2009, Martin Jacques, academic and author of ‘When China Rules the World: the Rise of the Middle Kingdom and the End of the Western World’, wrote that the financial crisis marked a shift in power from the US to China. More recently, he noted that “the West is in decline, Europe rampantly so” (5).

Certainly, the G20 meeting in London in April 2009, at the nadir of the crisis, was widely interpreted as heralding an era in which the economic agenda could no longer be set by the G7/G8. More recently in July 2014, the announcement by Brazil, Russia, India, China and South Africa that they will create a BRICS development bank to finance infrastructure projects (as an alternative to multilateral institutions such as the World Bank) is a clear statement of political independence.

The West is belatedly realising that it can no longer call the shots on globalisation. One report notes that “the International Monetary Fund and the Organisation for Economic Cooperation and Development have begun to rethink their approach to capital controls” (6) - one of the central tenets of the economic orthodoxy which underpinned globalisation. However, such actions may be too little, too late: the redefinition of globalisation is already in progress.

A natural evolution
Many of the ‘big-wins’ from globalisation, which caused global trade to grow faster than economic growth for decades, are unrepeatable: the integration of China into the global economy can only occur once. Equally, some of the themes that defined globalisation during earlier periods, such as economic liberalisation and transparency, have been dealt a blow in recent years. But that does not mean that globalisation is in retreat.

Instead, globalisation is changing as the geographical centre of trade shifts towards emerging economies. The share of global trade within the OECD will decline from 50% in 2012 to 25% by 2060, while trade among Asian economies will increase from 6% to 16% (7). New trade routes - between China and African countries, for example - that were unimaginable 30 years ago are now commonplace. And while multilateral trade talks have floundered, bi-lateral agreements (and even regional agreements such as ASEAN in Asia) have flourished.

Technologically and culturally, globalisation is one of the most potent forces in the world: there will be 2.5 billion global smartphone users by the end of 2015 (8); and incredibly one of the most popular songs ever- ‘Gangnam Style’ - hails from South Korea. As the world’s economic and political balance changes, the ideas that define globalisation will evolve. However, it seems certain that globalisation will be with us for decades to come. 

1. Global Economic Prospects, World Bank, January 2015

2. For the period 1986-2000, Global Economic Prospects, World Bank, January 2015

3. Global Economic Prospects, World Bank, January 2015

4. Kose and Prasad, quoted in Francesca Beausang, Globalization and the BRICs: Why the BRICs Will Not Rule the World For Long, Palgrave Macmillan, August 31, 2012

5. Martin Jacques, The myopic western view of China’s economic rise, Financial Times, October 23, 2014

6. Will Straw, Alex Glennie, The third wave of globalisation, Institute for Public Policy Research, January 2012

7. Åsa Johansson, Eduardo Olaberría, Global Trade and specialisation patterns over the next 50 years, OECD, July 2014

8. Woody Oh, Global Smartphone User Penetration Forecast by 88 Countries: 2007 to 2020, Strategy Analytics, July 23, 2014

 

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