Global: The Asymmetries of Globalization

Morgan Stanley - Global Economic Forum ^ | January 29, 2003 | Stephen Roach

[Cicero]

Jan 28, 2003

Global: The Asymmetries of Globalization

Stephen Roach (from Davos)

Most of us tend to analyze globalization from rather comfortable perches -- and in relative isolation. During the five days of the annual World Economic Forum, Davos, Switzerland becomes a real-time laboratory of globalization. I know of no other gathering in the world -- and I’ve been to all of them -- that brings the major constituencies of globalization to the same table. Politicians, policy makers, academics, corporate leaders, artists, religious leaders, and senior representatives of most of the world’s leading NGOs (non-governmental organizations) come to Davos with a seriousness of purpose and an urge to engage. Contrary to widespread impression, Davos is not about glitz -- it’s about probing some of the toughest issues of our time.

The official theme of Davos 2003 was "Building Trust." The agenda was carefully set to focus on how trust can be restored after a year of corporate malfeasance, post-bubble havoc in markets and economies, and ever-mounting geopolitical and religious tensions. For me, that was the starting point. The debate took off in an unexpected direction, essentially forcing me to rethink many of my preconceived notions about globalization. In theory, globalization is often depicted as the rising tide that lifts all boats. Through trade liberalization and increasingly integrated capital and information flows, a new global connectivity is supposed to raise the world’s standards of living and help facilitate a narrowing of global income gaps between the rich and the poor. The reality has deviated sharply from this theory in recent years. At work may well be the inherent asymmetries of globalization. Three such possibilities came to mind in Davos:

At the top of the list is America’s response to the asymmetrical threats of global terrorism. As widely reported in the press, the looming battle in Iraq permeated most of the discussions in Davos. The bottom line is that the world at large simply doesn’t buy America’s case. The Bush Administration sent the first team to make that case to the global community gathered in Davos. Colin Powell’s speech left me soaring with a pride and resolve I haven’t felt in a long time. Picking up on this year’s official theme of the World Economic Forum, the US Secretary of State appealed to the world to trust America’s motives. He made the case for trust on the basis of experience, starting with America’s pivotal role in liberating occupied Europe in World War II and ending with an equally principled intent to do the same in Afghanistan. In his words, "I don't think I have anything to be ashamed of or apologize for with respect to what America has done for the world." At the same time, he was tough and to the point. While he, alone, probably deserves the greatest credit in the administration for shifting the Iraq response from unilateral to multilateral, he stressed that "Multilateralism cannot become an excuse for inaction." Powell left little doubt, in my view, as to the endgame. During the Q&A that followed, he concluded, "We’re probably approaching [a] moment where we will have to take that next step. And history will judge us as to whether or not we have the strength and fortitude and the willingness to take that next step."

While many an American’s eyes brimmed over with tears -- including mine -- the rest of the audience reacted quite differently. There was a stoic sense of resignation on the faces of most Europeans I encountered in the halls after the speech. Still smarting from US Defense Secretary Donald Rumsfeld’s recent gaffe about "Old Europe," they were not in a mood to accept America’s promises on blind faith -- i.e., without evidence. Those from the Middle East expressed more of a mood of resignation. War is thought to be a very different commodity for those who have experienced it in their own backyards. Asians were equally disturbed by the inevitability of looming conflict. Malaysia’s outspoken and controversial Prime Minister, Mahathir bin Mohamad, was explicit in warning that global terrorism could well gather greater strength from a US invasion of Iraq. My point is not to take sides on this contrast between American perceptions and those of the rest of the world. The observable reality of Davos is that a very real schism exists: Unilateral American action is perceived to strike at the heart of the collectivism of globalization. The asymmetry of global power is a bitter pill for many to swallow as the world moves to the brink of war.

A second asymmetry -- the perils of a lopsided, US-centric world -- was viewed very differently by the assembled crowd in Davos. Few took issue with my view that the non-US portion of the world economy was in trouble. Europe was singled out for special attention by this heavily European group. Lacking in domestic demand, an ever-strengthening euro was feared to be choking of external demand, Euroland’s sole surviving source of growth. With structural reforms lagging and pro-cyclical fiscal and monetary policies reinforcing the downside, Europe was increasingly viewed as caught in a vise. The role for Japan was to make Europe look good by comparison. Japan’s new economic czar -- Heizo Takenaka -- made an impassioned plea that the Japanese economy was now only two years away from revival. Unfortunately, that’s just the point -- another two years.

With the world economy flying on only one engine, there was considerable hope in Davos that another US recovery would save the day. While I certainly didn’t endorse that case, most US experts did -- from Commerce Secretary Donald Evans on down. Evans’ case was based on what he called fundamentals -- the time-tested ability of the US economy to weather successfully 70 years of difficulties, ranging from war and terrorism to depression and recession. I countered that there’s a big difference between inherent resilience and fundamentals. And in that latter regard, I continued to press the points on America’s historical lows in national saving, a record current-account deficit, and record levels of private sector indebtedness. The Davos crowd sided with Washington in this aspect of the debate, essentially arguing that this is an "old rap." However, a sinking dollar, at a time of geopolitical tension, is giving some pause. Nevertheless, I was struck by the seemingly paradoxical perceptions of Pax Americana that were evident at Davos: The world may be resisting the US tilt toward geopolitical power, but it is more than willing to accept the crutch of US-centric support for the global economy.

A third asymmetry that struck me in the Davos debate was the possibility of a deflationary bias to globalization. I pushed the case for deflation hard but my concerns rang largely on deaf ears. Most believe that the US authorities had ample ammunition to stave off this threat, even if the Federal Reserve ran out of basis points with its main policy instrument. Yet two experts -- former US Treasury Secretary Larry Summers and former Fed Vice-Chairman Alan Blinder -- raised serious concerns about the efficacy of the so-called non-traditional tools that Fed Governor Bernanke and Chairman Greenspan are currently arguing will save the day. Senior German officials seemed particularly oblivious to the perils their economy was facing. "No way" was the response of Caio Koch-Weser, Secretary of State of Finance in Germany, when asked about the risks of a German deflation. Of all the major industrial countries in the world, Germany was singled out for the most criticism in Davos. The "one size fits all" credo of EMU was widely viewed as being totally out of sync with the real interest rates and fiscal stance that a weakened German economy now required.

But the case for deflation took a particularly intriguing twist when the developing world was brought into the picture. China crept into the story at nearly every twist and turn. Fortunately, it was not in the context of what I have called the blame game, holding China responsible for world deflation. Instead the China factor was viewed as emblematic of a more fundamental asymmetry of globalization: With the impact of economic development initially skewed more to the supply side (i.e., exports) than to the demand side (i.e., private domestic consumption), the global economy could suffer. Context, of course, matters a lot on assessing the impacts of this asymmetry. With a sluggish world currently closer to the brink of outright deflation than at any point in the post-World War II era, the globalization of supply chains in the low-cost developing world could well continue to push the global price level dangerously toward the deflation threshold. In my own work I have stressed a similar development with respect to services, as globalized deregulation, cross-border M&A activity, and IT-enabled outsourcing have transformed supply curves in many service industries from national to global. Many industry leaders cornered me in the halls of Davos to confirm just such a trend -- stressing, in particular, the emergence of India’s rapidly growing IT-enabled service industry. In my view, until domestic demand comes to life in the developing world, the globalization of both tradable goods and the so-called non-tradable services will continue to exert a powerful deflationary impact on a sluggish industrial world. For that reason, alone, aggregate demand growth in the industrial world needs to run a good deal faster that normal -- precisely the opposite of conditions prevailing today.

There is no widely accepted script or theory of globalization. We’re all basically making it up as we go along. But there are some obvious bumps in the road that surfaced this year in Davos. For years, the main critique of globalization from abroad has been that it is in danger of becoming the functional equivalent of the Americanization of standards, institutions, and the rules of cross-border transfer. That was certainly a critical aspect of the Asian backlash to the financial crisis of 1997-98. But now in early 2003, the concerns over globalization have taken a new twist. Paradoxically, a weak world economy welcomes a renewal of US-led global growth but it resists America’s geopolitical and military power. Moreover, there is good reason to believe that successes in the developing world may well deepen the world’s deflationary biases. In the long run, the case for globalization is hard to refute. It’s the short run -- and apparently the medium term -- which is proving so problematic. Davos seemed stunned by the asymmetries of globalization.

[Cicero]

A bit of a heavy read, but some interesting stuff. It's also interesting that patriotic doubts and paranoic visions of impending economic doom are eminating from the heart of Morgan Stanley, of all places.

[spunkets]

bump for a later read...

[LiteKeeper]

read later