Deven Sharma, Founder of Inflexon (www.inflexon.com) , Fellow at Connection Science @ Media Lab, and former President of Standard & Poor
Globalization is under assault.
Beyond the political and pundit slogans, there are ample signs that point to the peril of globalization: protectionism, immigration backlash, nationally centered regulations, and constraints on capital mobility and data flow. The debate on protecting the primacy of the national language, culture, values, and local way of life is intensifying, even as the receptivity and march towards global sharing of innovative ideas and research, a fusion in fashion and food tastes continues enabled by the exploding adoption of technology community networks, like Facebook. Economic, socio- and geopolitical factors combined with increased competitiveness of emerging multinationals, and new technologies are reordering the dynamics of globalization.Currently, global trade is growing slower than Gross Domestic Product (GDP), whereas for three decades, global trade expanded at about twice the pace of the global economy. The ‘KOF Index of Globalization’—a measure of economic flows, economic restrictions, information flows, cultural proximity, and cross-border people flows—shows a clear break starting in 2009.
There is a growing citizen unease regarding globalization, even with the standard of living rising across the world. Worldwide unease towards globalization sparked from slow global economic growth, rising income inequality, income stagnation, slow job growth, and fear of social changes brought on by migrant flow into far corners in many countries.
To top all of these headwinds, business leaders have to cope with currency volatility, which adds another layer of risk and uncertainty to delivering shareholder earning and growth expectations. At the same time, multinationals in rising economies are competing in the global arena: the Brazilian Embraer in aircraft manufacturing, the Indian Dr. Reddy’s in generic drugs, the Chinese Alibaba in e-market place, and the Kenyan M-Pesa in alternate payments.
Coming along are new technologies that are upending the economics of global supply chains, and the benefits of large wage differentials can no longer be enough of a reason to locate to developing economies.
Policy uncertainty and financial volatility have led to an investment slump, and slow growth has dampened consumption confidence adding to the savings glut.
- Globalization is at a crossroads. Structural pullback is here. However, the promise of global markets also remains very much intact, given:
Emerging economies make up more than half the GDP and world population, and are driving the majority of global growth. Even in developed economy of US, $2.3 Tr of exports creates more 11 million jobs and contributed to large part of the growth over last few years.
- Technology connectivity continues to expand sharing of ideas and influencing cultures across borders.
- Trade flows among emerging economies (South to South) continues to expand.
- Capital flows to locations where talent, innovation, and opportunity offer prospect for attractive returns, despite rising barriers.
- Innovation and new start up scenes are taking root in many parts of the world, including in emerging economies.
- Western multinationals, more than ever, rely on growth from rising economies. Emerging multinationals need access to the sizable advanced markets to attain scale and growth.
- Small and micro businesses, with the benefit of digital network platforms, are well positioned to economically pursue global markets.
- Global trade remains intertwined with international relations and security, and will continue to provide an impetus to keep the markets open.
At the same time, we can expect to see weak global growth driven by pressures from overcapacity, persistent high unemployment and volatility in the financial markets, larger burden of regulation and taxation, increased protectionism, and muted consumption and investment. Consequently, the pace of globalization will likely slow and the nature will change, but the path is highly unlikely to reverse.
Globalization is attitudinal in exchange of ideas, knowledge, norms, behaviors, and people, as much as it is about politics and policy. Large numbers of big and small businesses are participating in capturing the growth and benefits of global markets. A recent McKinsey study highlights that Amazon hosts some two million global third party sellers, and the share of US SMEs that export is over seven times higher on eBay than offline. Global forces unleashed over the last few decades have transformed the way companies, societies, and people work, engage, live, and showcase themselves. Globalization cannot be stopped or reversed; however, it will be reordered, and future path altered.
Global trade is as much about national politics as it is about economic growth. The challenges to solve for job growth to address the unease, particularly among disaffected citizens, are real and substantial and only likely to rise with the impact of new technology, such as AI and robotics, on white-collar educated workforces. Policy makers globally have similar goals: job and economy growth, equitable growth benefits for their citizens, and promotion of national competitiveness. The levers to drive job and economy growth are also similar: preparing workforce skills for the future; safety net promise for unprepared and dislocated citizens; greater inclusion and participation of citizens in the economy; government spend on infrastructure to stimulate aggregate demand; reducing friction to foster innovation and be an attractive destination for investment flow.
Though the political goals and levers advocated across most countries sound the same, the execution will differ, partly driven by differences in the economic structure; citizen expectations for equity and growth; environmental and safety standards; and levels of transparency, freedoms, and social norms. The legal and judicial system variances add another layer of differences in the approach each nation may take. For example, even in the single EU market, the social expectations and judicial system between Germany and Italy are different, driving differences in ways policy makers respond and ways companies approach the markets. In the spirit of cooperation on global climate control, the tensions on environmental standards are another trade off with economic growth that domestic policy makers are facing.
Political discourse in many countries is calling for greater primacy of domestic policy and self-interest over globalization. Job growth is the central agenda for domestic politics, which will require global trade, investments, and global engagement —perhaps structured, framed and sold to citizens differently to rebuild the trust and confidence. The responsibility to rebuild the trust and confidence in globalization rests on the shoulders of both political and business leaders. And then there are the elections in the U.S. and elsewhere. Politics and economics are interrelated in complex ways with in and across nations that makes the future evolution of globalization unpredictable. Prepare for the unexpected!