"While the world’s eyes were on the pandemic, the events in
Ukraine and China, the paths to prosperity and shared interests have grown
murkier.
When the world’s business and political leaders gathered in
2018 at the annual economic forum in Davos, the mood was jubilant. Growth in
every major country was on an upswing. The global economy, declared Christine
Lagarde, then the managing director of the International Monetary Fund, “is in a
very sweet spot.”
Five years later, the outlook has decidedly soured.
“Nearly all the economic forces that powered progress and
prosperity over the last three decades are fading,” the World Bank warned in a
recent analysis. “The result could be a lost decade in the making — not just
for some countries or regions as has occurred in the past — but for the whole
world.”
A lot has happened between then and now: A global pandemic
hit; conflict erupted in Europe; tensions between the United States and China
boiled. And inflation, thought to be safely stored away with disco album
collections, returned with a vengeance.
But as the dust has settled, it has suddenly seemed as if
almost everything we thought we knew about the world economy was wrong.
The economic conventions that policymakers had relied on
since the Berlin Wall fell more than 30 years ago — the unfailing superiority
of open markets, liberalized trade and maximum efficiency — look to be running
off the rails.
During the Covid-19 pandemic, the ceaseless drive to
integrate the global economy and reduce costs left health care workers without
face masks and medical gloves, carmakers without semiconductors, sawmills
without lumber and sneaker buyers without Nikes.
The idea that trade and shared economic interests would
prevent military conflicts was trampled last year under in Ukraine.
And increasing bouts of extreme weather that destroyed
crops, forced migrations and halted power plants has illustrated that the
market’s invisible hand was not protecting the planet.
Now, as the second year of events in Ukraine grinds on and
countries struggle with limp growth and persistent inflation, questions about
the emerging economic playing field have taken center stage.
Globalization, seen in recent decades as unstoppable a force
as gravity, is clearly evolving in unpredictable ways. The move away from an
integrated world economy is accelerating. And the best way to respond is a
subject of fierce debate.
Of course, challenges to the reigning economic consensus had
been growing for a while.
“We saw before the pandemic began that the wealthiest countries
were getting frustrated by international trade, believing — whether correctly
or not — that somehow this was hurting them, their jobs and standards of
living,” said Betsey Stevenson, a member of the Council of Economic Advisers
during the Obama administration.
The financial meltdown in 2008 came close to tanking the
global financial system. Britain pulled out of the European Union in 2016.
President Donald Trump slapped tariffs on China in 2017, spurring a mini trade
war.
But starting with Covid-19, the rat-a-tat series of crises
exposed with startling clarity vulnerabilities that demanded attention.
As the consulting firm EY concluded in its 2023 Geostrategic
Outlook, the trends behind the shift away from ever-increasing globalization
“were accelerated by the Covid-19 pandemic — and then they have been supercharged
by the events in Ukraine.”
It was the ‘end of history.’
Today’s sense of unease is a stark contrast with the heady
triumphalism that followed the collapse of the Soviet Union in December 1991.
It was a period when a theorist could declare that the fall of communism marked
“the end of history” — that liberal democratic ideas not only vanquished
rivals, but represented “the end point of mankind’s ideological evolution.”
Associated economic theories about the ineluctable rise of
worldwide free market capitalism took on a similar sheen of invincibility and
inevitability. Open markets, hands-off government and the relentless pursuit of
efficiency would offer the best route to prosperity.
It was believed that a new world where goods, money and
information crisscrossed the globe would essentially sweep away the old order
of Cold War conflicts and undemocratic regimes.
There was reason for optimism. During the 1990s, inflation
was low while employment, wages and productivity were up. Global trade nearly
doubled. Investments in developing countries surged. The stock market rose.
The World Trade Organization was established in 1995 to
enforce the rules. China’s entry six years later was seen as transformative.
And linking a huge market with 142 countries would irresistibly draw the Asian
giant toward democracy.
China, along with South Korea, Malaysia and others, turned struggling
farmers into productive urban factory workers. The furniture, toys and
electronics they sold around the world generated tremendous growth.
The favored economic road map helped produce fabulous
wealth, lift hundreds of millions of people out of poverty and spur wondrous
technological advances.
But there were stunning failures as well. Globalization
hastened climate change and deepened inequalities.
In the United States and other advanced economies, many
industrial jobs were exported to lower-wage countries, removing a springboard
to the middle class.
Policymakers always knew there would be winners and losers.
Still, the market was left to decide how to deploy labor, technology and
capital in the belief that efficiency and growth would automatically follow.
Only afterward, the thinking went, should politicians step in to redistribute
gains or help those left without jobs or prospects.
Companies embarked on a worldwide scavenger hunt for
low-wage workers, regardless of worker protections, environmental impact or
democratic rights. They found many of them in places like Mexico, Vietnam and
China.
Television, T-shirts and tacos were cheaper than ever, but many
essentials like health care, housing and higher education were increasingly out
of reach.
The job exodus pushed down wages at home and undercut
workers’ bargaining power, spurring anti-immigrant sentiments and strengthening
hard-right populist leaders like Donald Trump in the United States, Viktor
Orban in Hungary and Marine Le Pen in France.
In advanced industrial giants like the United States,
Britain and several European countries, political leaders turned out to be
unable or unwilling to more broadly reapportion rewards and burdens.
Nor were they able to prevent damaging environmental
fallout. Transporting goods around the globe increased greenhouse gas
emissions. Producing for a world of consumers strained natural resources,
encouraging overfishing in Southeast Asia and illegal deforestation in Brazil.
And cheap production facilities polluted countries without adequate
environmental standards.
It turned out that markets on their own weren’t able to
automatically distribute gains fairly or spur developing countries to grow or
establish democratic institutions.
Jake Sullivan, the U.S. national security adviser, said in a
recent speech that a central fallacy in American economic policy had been to
assume “that markets always allocate capital productively and efficiently — no
matter what our competitors did, no matter how big our shared challenges grew,
and no matter how many guardrails we took down.”
The proliferation of economic exchanges between nations also
failed to usher in a promised democratic renaissance.
Communist-led China turned out to be the global economic
system’s biggest beneficiary — and perhaps master gamesman — without embracing
democratic values.
“Capitalist tools in socialist hands,” the Chinese leader
Deng Xiaoping said in 1992, when his country was developing into the world’s
factory floor. China’s astonishing growth transformed it into the world’s
second largest economy and a major engine of global growth. All along, though,
Beijing maintained a tight grip on its raw materials, land, capital, energy,
credit and labor, as well as the movements and speech of its people.
Money flowed in, and poor countries paid the price.
In developing countries, the results could be dire.
The economic havoc wreaked by the pandemic combined with
soaring food and fuel prices caused by the events in Ukraine have created a
spate of debt crises. Rising interest rates have made those crises worse.
Debts, like energy and food, are often priced in dollars on the world market,
so when U.S. rates go up, debt payments get more expensive.
The cycle of loans and bailouts, though, has deeper roots.
Poorer nations were pressured to lift all restrictions on
capital moving in and out of the country. The argument was that money, like
goods, should flow freely among nations. Allowing governments, businesses and
individuals to borrow from foreign lenders would finance industrial development
and key infrastructure.
“Financial globalization was supposed to usher in an era of
robust growth and fiscal stability in the developing world,” said Jayati Ghosh,
an economist at the University of Massachusetts Amherst. But “it ended up doing
the opposite.”
Some loans — whether from private lenders or institutions
like the World Bank — didn’t produce enough returns to pay off the debt. Others
were poured into speculative schemes, half-baked proposals, vanity projects or
corrupt officials’ bank accounts. And debtors remained at the mercy of rising
interest rates that swelled the size of debt payments in a heartbeat.
Over the years, reckless lending, asset bubbles, currency
fluctuations and official mismanagement led to boom-and-bust cycles in Asia,
Russia, Latin America and elsewhere. In Sri Lanka, extravagant projects
undertaken by the government, from ports to cricket stadiums, helped drive the
country into bankruptcy last year as citizens scavenged for food and the
central bank, in a barter arrangement, paid for Iranian oil with tea leaves.
It’s a “Ponzi scheme,” Ms. Ghosh said.
Private lenders who got spooked that they would not be
repaid abruptly cut off the flow of money, leaving countries in the lurch.
And the mandated austerity that accompanied bailouts from
the International Monetary Fund, which compelled overextended governments to
slash spending, often brought widespread misery by cutting public assistance,
pensions, education and health care.
Even I.M.F. economists acknowledged in 2016 that instead of
delivering growth, such policies “increased inequality, in turn jeopardizing durable
expansion.”
Disenchantment with the West’s style of lending gave China
the opportunity to become an aggressive creditor in countries like Argentina,
Mongolia, Egypt and Suriname.
Self-reliance replaces cheap imports.
While the collapse of the Soviet Union cleared the way for
the domination of free-market orthodoxy, the events in Ukraine have now
decisively unmoored it.
The story of the international economy today, said Henry
Farrell, a professor at the Johns Hopkins School of Advanced International
Studies, is about “how geopolitics is gobbling up hyperglobalization.”
Old-world style great power politics accomplished what the
threat of catastrophic climate collapse, seething social unrest and widening
inequality could not: It upended assumptions about the global economic order.
Josep Borrell, the European Union’s head of foreign affairs
and security policy, put it bluntly in a speech 10 months after the events in
Ukraine: “We have decoupled the sources of our prosperity from the sources of
our security.” Europe got cheap energy from Russia and cheap manufactured goods
from China. “This is a world that is no longer there,” he said.
Supply-chain chokeholds stemming from the pandemic and
subsequent recovery had already underscored the fragility of a globally sourced
economy. As political tensions over Ukraine grew, policymakers quickly added
self-reliance and strength to the goals of growth and efficiency.
“Our supply chains are not secure, and they’re not
resilient,” Treasury Secretary Janet L. Yellen said last spring. Trade
relationships should be built around “trusted partners,” she said, even if it
means “a somewhat higher level of cost, a somewhat less efficient system.”
“It was naïve to think that markets are just about
efficiency and that they’re not also about power,” said Abraham Newman, a co-author
with Mr. Farrell of “Underground Empire: How America Weaponized the World
Economy.”
Economic networks, by their very nature, create power
imbalances and pressure points because countries have varying capabilities,
resources and vulnerabilities.
Russia, which had supplied 40 percent of the European
Union’s natural gas, tried to use that dependency to pressure the bloc to
withdraw its support of Ukraine.
The United States and its allies used their domination of
the global financial system to remove major Russian banks from the
international payments system.
China has retaliated against trading partners by restricting
access to its enormous market.
The extreme concentrations of critical suppliers and
information technology networks has generated additional choke points.
China manufactures 80 percent of the world’s solar panels.
Taiwan produces 92 percent of tiny advanced semiconductors. Much of the world’s
trade and transactions are figured in U.S. dollars.
The new reality is reflected in American policy. The United
States — the central architect of the liberalized economic order and the World
Trade Organization — has turned away from more comprehensive free trade
agreements and repeatedly refused to abide by W.T.O. decisions.
Security concerns have led the Biden administration to block
Chinese investment in American businesses and limit China’s access to private
data on citizens and to new technologies.
And it has embraced Chinese-style industrial policy,
offering gargantuan subsidies for electric vehicles, batteries, wind farms,
solar plants and more to secure supply chains and speed the transition to
renewable energy.
“Ignoring the economic dependencies that had built up over
the decades of liberalization had become really perilous,” Mr. Sullivan, the
U.S. national security adviser, said. Adherence to “oversimplified market
efficiency,” he added, proved to be a mistake.
While the previous economic orthodoxy has been partly
abandoned, it is not clear what will replace it. Improvisation is the order of
the day. Perhaps the only assumption that can be confidently relied on now is
that the path to prosperity and policy trade-offs will become murkier."
https://www.nytimes.com/2023/06/18/business/economy/global-economy-us-china.html
