Aurora College Economics HSC Study Day, Sydney
Every year there’s some event in the news that’s relevant to your study of the global economy, and this year it’s Russia’s invasion of Ukraine. This has combined with the continuing disruptions to supply caused by the pandemic to greatly increase imported inflation in all the advanced economies. These supply-side price rises have interacted with the huge fiscal stimulus the rich countries used to support their economies during the lockdowns to give them worries about continuing high rates of inflation. Most of the advanced economies have been increasing interest rates to slow their economy’s growth and ensure inflation does not become entrenched.
There’s nothing new or special about one country attacking another, but the invasion of Ukraine has major implications for the global economy for two reasons. First, because Russia is a major supplier of oil and gas to Europe, and the reduction of this trade has caused big increases in the world prices of all fossil fuels. Russia and Ukraine are also major exporters of wheat and other food, and the reduction in this trade is raising world prices and causing many countries to worry about having enough food. Second, world trade has been further disrupted by many countries siding with Ukraine and imposing economic sanctions on Russia, including restraints on its financial transactions. The point is that our more globalised world economy – where countries are more closely integrated by trade and financial flows – has caused a war between two countries to significantly affect far more economies than would have happened in earlier times.
The pandemic
It’s the same story with the pandemic. There’s nothing new about epidemics starting in one country then spreading to many other countries. It’s been happening for millennia. Even so, it’s the world’s worst pandemic since the “Spanish” flu epidemic immediately after World War I, and the first where the greater economic integration of the world’s countries – and particularly, the huge number of people at any time flying around the world on jumbo jets – caused the virus to reach all corners of the world in a few weeks rather than years. But globalisation and co-operation between pharmaceutical companies in different advanced economies – plus billions in government subsidies – have also helped us produce effective vaccines in record time, thus greatly reducing the pandemic’s economic and social disruption.
With the pandemic now in its third year, it’s easier to see its effect on world trade. International trade fell after the start of the pandemic in 2020, but recovered sharply in 2021, to be back to pre-pandemic levels in 2022. However, not all countries and not all products are back to where they were. In many countries, the lockdowns saw a surge in demand for goods (which could be bought without leaving home) and a corresponding decline in demand for services (many of which couldn’t be, including tourism, overseas education, and live entertainment). The sudden surge in demand for imported goods (including cars) led to shortages of shipping containers and ships, and hence delays and higher prices. There was a worldwide shortage of semiconductors (chips). Many other shortages and bottlenecks occurred, but these are being resolved. However, China’s continuing difficulties in controlling the virus via lockdowns, is likely to lead to continuing supply shortages in the rest of the world and possibly a recession in the Chinese economy.
Definition
The OECD defines globalisation as “the economic integration of different countries through growing freedom of movement across national borders of goods, services, capital, ideas and people”.
That’s a good definition, but I like my own: globalisation is the process by which the natural and government-created barriers between national economies are being broken down.
Globalisation’s two driving forces
With this definition I’m trying to make a few points. One is that globalisation has had two quite different driving forces. The one we hear most about is the decisions of governments around the world to break down the barriers they have created to limit flows of goods and money between countries by reducing their protection of domestic industries and by deregulating their financial markets and floating their currencies.
But the second factor promoting globalisation is just as important, if not more so: advances in technology – including advances in telecommunications, digitisation and the internet, which have hugely reduced the cost of moving information and news around the world, as well as increasing the speed of its movement. This has allowed a huge increase in trade in digitised services. As well, advances in shipping – containerisation, bigger and more fuel-efficient ships – and in air transport have led to increased movement of goods and people between countries.
Globalisation is a process
Another point my definition makes is that globalisation is a process, not a set state of being. Because it’s a process, it can go forward – the world can become more globalised – or it can go backwards, as national governments, under pressure from their electorates, seek to stop or even reverse the process of economic integration. Among the advocates of globalisation there has tended to be an assumption that the process of ever greater integration is inevitable and inexorable. That was always a mistaken notion.
Earlier globalisation
The process of globalisation is and always was reversible. People should know this because this isn’t the first time the process of globalisation has occurred and then been rolled back. The decades leading up to World War I saw reduced barriers and greatly increased flows of goods, funds and people between the old world of Europe and the new world of America, Australia and other countries. But this integration was brought to a halt in 1914 by the onset of a world war. And the period of beggar-thy-neighbour increases in trade protection, to which countries resorted in response to the Great Depression of the early 1930s, greatly increased the barriers between national economies. Indeed, in the years after World War II, the many rounds of multilateral tariff reductions brought about under the GATT – the General Agreement on Tariffs and Trade, which has since become the World Trade Organisation – were intended to dismantle all the barriers to trade built up in the period between the wars.
The era of hyperglobalisation
The period between the end of World War II in 1945 and the late 1980s saw huge growth in trade between the advanced economies, as a consequence of those successive rounds of tariff reductions. But from the late ’80s until the global financial crisis and Great Recession of 2008 there was a period of “hyperglobalisation” in which trade between the developed and developing countries grew hugely. This was partly because of the way the digital revolution and other technological change broke down the natural barriers between countries. But also the result of the eighth and final “Uruguay round” of the GATT in 1994 reducing tariff and other trade barriers between the developed and developing countries. Many poor countries joined the new WTO at this time, with China joining in 2001.
One measure of the extent of globalisation is the growth in two-way trade between countries (exports plus imports) as a proportion of gross world product (world GDP). Between 1990 and 2008, global trade rose from 39 pc to 61 pc of GWP – the period of rapid globalisation.
Note that the poor countries did well out of the quarter-century of rapid globalisation. Between 1995 and 2019, real GDP per person in the emerging economies more than doubled, whereas in the advanced economies it grew by only 44 pc (after allowing for differences in purchasing power).
The era of deglobalisation
But the end of hyperglobalisation can be dated to the global financial crisis in 2008, and the new era of “deglobalisation” has continued during the pandemic. Two-way trade as a proportion GWP fell after the global financial crisis, and even by 2019 had not regained its peak in 2008.
Among the signs of deglobalisation are Britain’s vote in 2016 to leave the European Union – Brexit – and thus to reduce its degree of economic integration with the rest of Europe – a decision most outsiders see as involving a significant economic cost to the Brits’ economy. Second, the Trump administration withdrew from the Trans Pacific Partnership, an agreement between the US and 11 other selected countries (including Australia) to reduce barriers to trade between them – although the remaining 11 finalised an agreement without the US. Third, the Trump administration withdrew from the Paris global agreement on reducing greenhouse gas emissions. Fourth, Trump launched a trade war with China. President Biden has re-joined the Paris agreement and repaired America’s relations with its allies, but continues the contest with China.
The temptation of returning to protectionism
The period of hyperglobalisation saw the shift of much manufacturing from the rich countries (including Australia) to China and other developing countries with cheaper labour. But it’s likely that, in the period of slower growth that followed the global financial crisis, some countries yielded to the temptation to return to protecting their domestic industries against foreign competition, returning to the (failed) strategy of growth through “import replacement” rather than “export-led” growth. Regrettably, this trend is being led by the two biggest developing economies, China and India. China has raised its import barriers against many Australian exports.
This trend has continued during the pandemic, with The Economist magazine reporting that countries have passed more than 140 special trade restrictions during the pandemic. Some of these may arise from concerns in the rich countries over the lack of availability of personal protective equipment, or vaccines. Worries about the pandemic’s disruption of global supply chains may be another reason for the return of protectionist attitudes in the advanced economies.
The channels of globalisation
The four main economic channels through which the world’s economies have become more integrated are:
1) Trade in goods and services
2) Finance and investment
3) Labour
4) Information, news and ideas.
Trade is probably the channel that gets most attention from the public. Donald Trump’s populist campaigning against globalisation focused on the belief that America’s greater openness to trade – particularly with developing countries – has caused it to lose many jobs, particularly in manufacturing, as cheaper imports caused many domestic producers to lose sales, or as factories have been moved offshore to countries where wages are lower, without America receiving anything much in return.
Surprisingly, financial globalisation didn’t get as much blame as it could have for the global financial crisis and the Great Recession it precipitated. Most countries have not liberalised the flow of labour into their economy in the way they have the other factors of production.
Income distribution and the gains from trade
One of economists’ core beliefs is that there are mutual gains from trade. Provided the exchange of goods is voluntary, each side participates only because it sees some advantage for itself. This is undoubtedly true, but in the era of renewed globalisation we’ve been reminded that, though the gains may be mutual, they are not necessarily equal. Some countries do better than others.
Similarly, the benefits to a particular country from its trade aren’t necessarily equally distributed between the people within that country. When, for example, a country imports more of its manufactured goods because they are cheaper than its locally made goods, all the consumers who buy those goods are better off (including all the working people), but many workers in the domestic manufacturing industry may lose their jobs.
Another factor that has been working in the same direction is digitisation and other technological change which, in its effect on employers’ demand for labour, seems to be “skill-biased” – that is, it tends to increase the value of highly skilled labour, while reducing the value of less-skilled labour. It seems likely that, between them, trade and technological advance have worked to shift the distribution of income in America, Britain and, to a lesser extent, Australia, in favour of high-income families and against many middle and lower-income families.
The unwelcome surprise many politicians and economists have received from the high protest votes for Brexit, Trump and One Nation is causing them to wonder if too little has been done to assist the workers and regions adversely affected to retrain and relocate, and too little to ensure the winners from structural change bear most of the cost of this assistance.
Shares of the World Economy, 2021
GWP Exports Population
China 19 13 18
United States 16 9 4
Euro area (19 countries) 12 26 4
India 7 2 18
Japan 4 3 2
Advanced economies (40) 42 61 14
Developing economies (156) 58 39 86
100 100 100
Source: IMF WEO statistical appendix; GWP based on purchasing power parity
