Twenty years ago, I was strongly in favor of globalization. I recognized the theoretical benefits it could bring and believed that poor countries could get richer while rich countries and their inhabitants did not get poorer. Alas, I favored a globalization that we did not get, and that maybe does not exist. Politics, as always, messes up the process; once you take account of politics, it becomes clear that extreme globalization must be fought tooth and nail.
According to David Ricardo’s Doctrine of Comparative Advantage, propounded in 1817, if two nations each produce the goods and services for which they have the greatest advantage, world wealth will be maximized. In the world of 1817, that Doctrine held very largely true, and the move to free trade that it inspired, to the extent that movement was shared among the world’s leading economies (which it increasingly wasn’t) was responsible for a massive improvement in human welfare.
When the Soviet Union imploded and, almost simultaneously, the Internet and cellphones appeared, it seemed that Ricardo’s Doctrine was once again going to lead to an almost unimaginable improvement in human welfare, this time with the world’s poorest countries sharing in the increased wealth that in the 19th Century was almost entirely confined to western Europe and the United States. World War I had clearly derailed the steady improvement in life standards of the 19th century. The imprisonment of a large part of the human population in the economic dead-end of Communism after that war and the second war that followed had greatly reduced the Ricardian potential that might have been available from a truly free world. Now it appeared that the old barriers had finally broken down, even in India and China, home to nearly 40% of the world’s population, so the economic lift-off ought to be spectacular.
The advent of modern telecommunications should have done even more for global growth. Suddenly, it became relatively easy to outsource globally, controlling a supply chain from the rich countries where the markets were, while carrying out the actual manufacturing in poor countries with wage levels one tenth those of the rich ones. Combined with the extension of the market to an additional 40% of the world’s population, this should have produced global growth rates at an unprecedented level, with the relatively high research expenditures and rapid diffusion of knowledge characteristic of modern economies also serving to turbo-charge global growth and increases in wealth.
Admittedly, you would also expect an equalization of living standards between rich countries and poor countries by the new globalization, as poor countries were fully integrated into the world economy. However, in a truly free market, Say’s Law should have ensured that nobody got poorer. The additional supply potential of the poor countries, and their higher purchasing power, should produce its own demand. In a truly free market, the opening of the Chinese and Indian economies should have led to a bonanza for Western producers, who should have been able to double their output while reducing costs, in a free market a guaranteed recipe for success. That doubled output should have provided additional job opportunities in Wisconsin as well as in Wuhan.
In practice, a Ricardian episode of faster growth through globalization is not what we got. Global GDP per capita, the growth of which should have accelerated after 1990, as full globalization and the Internet/telecom revolution took hold, has in fact slowed. Whereas in the 30-year period 1960-90, growth averaged 1.25% per annum, on World Bank figures, in the 28-year period 1990 to 2018 it has averaged only 1.15% per annum. Given the changes of the 1990s, you would have expected global growth to accelerate to an annual 1.75%-2%, reflecting the exceptionally attractive new growth environment. Thus, the growth shortfall is much more serious than it at first appears – the world is at least 20-25% poorer today than it should be.
Some of the explanations for this are relatively benign. Ricardo’s doctrine does not work well in knowledge-intensive service sectors, because relative advantages can be shifted. A good example of this was given to me by a software CEO, who in 2002 explained that his outsourcing was benign, because the Indian-domiciled graduates of the Indian Institute of Technology had the ability to be coders, but did not have the higher-level abilities and experience to be software managers. That has proved to be rubbish in the intervening years; the Indians to whom he had outsourced, being intelligent people, learned the higher-level skills that he intended to keep in the United States and have now taken over the projects entirely, greatly restricting his business. That did not happen in the textile industry of 1817; life has moved on, and Ricardo is no longer so applicable.
On the other hand, the adverse relative effect we would have expected to see on the living standards of the less skilled in rich countries has been only too visible. Those living standards before 1990 had been increasing steadily, albeit with a relative transfer of wealth from the United States to Europe and Japan in in 1973-90. However, since 1990 living standards for the average and lower-skilled in rich countries have declined, in the United States, Western Europe and Japan. You would expect this; globalization’s wealth transfer to poor countries has indeed occurred, as exemplified by the huge rise in Chinese wealth, but instead of being Pareto-optimal, helping all participants in the world economy, globalization, because it has not produced faster growth, has produced a massive wealth transfer away from Western citizens, whose welfare Western politicians are paid substantial salaries to protect.
Beyond the simple failure of Ricardo in certain areas (and they still add to only a modest percentage of the total economy) there are several reasons, generally less benign, why globalization has drastically underperformed:
- Intellectual property theft. To the extent that China, in particular steals Western intellectual property, the speed of economic growth is unaffected in the short-term, because China’s wealth increases at the expense of the West. Of course, if Western companies go out of business or cut back their innovation as a result of their IP being stolen, global growth will suffer in the long-term. There is considerable evidence that this effect is occurring and has grown more significant since 2010.
- Regional Free Trade Agreements. Until 1994, free trade was primarily a global movement, with the exception of the EU’s move to a Single Market. Since that date, innumerable regional free trade agreements have sprung up. These have generally increased tariffs, because the regional blocs increase barriers against competitors who are not members. In general, they distort the flow of goods and services, reducing the benefits of globalization. At the same time, if low-wage countries are involved, they may involve just as much “outsourcing” and impoverishment of rich-country workers as full globalization. Generally, they are a thoroughly bad idea.
- Environmental policies. To the extent that governments pursue “green” policies they impoverish all their citizens except a few well-connected environmentalists. This problem is exacerbated if environmental policies are imposed by multi-lateral treaties, where ordinary voters cannot get rid of them through the ballot box. The “climate change” scam has been responsible for much of the growth shortfall of the last decade and is only going to get worse unless it is fought tooth and nail.
- Short-termist corporate management. Partly because of “funny money” (see below) but also because of excessive grants of stock options, corporate management has become obsessed by short-term gains. In a globalizing world, this has meant an excessive regard for the wage and other cost savings from relocating production to the Third World, and an insufficient attention to the long-term costs and above all risks that outsourcing produces. With Covid-19 and the increasing geopolitical hostility of China, those costs have now become all too clear. Global supply chains must be shortened, and production brought back to Western economies, benefiting Western workers.
- “Funny money” With all major advanced economies running a lunatic monetary policy that sets interest rates far below their natural levels, all kinds of economic insanities have been encouraged. In particular, the owners of assets have been excessively benefited at the expense of the earners of wages and salaries. Small business formation has also been decimated. “Funny money” also compresses the capital cost differential between Western and emerging market economies, artificially encouraging low-wage competition and outsourcing. Finally and most important, “funny money” has killed productivity growth and therefore wage growth in every country where it has been imposed. The policy needs to be reversed as soon as possible.
- Supranational governance. Globalization has brought an increasing governance by supranational public-sector bodies, who are subject to absolutely no democratic control and impose the barmiest theories of leftist academics on the struggling global economy. Even the World Trade Organization, in principle a sensible and necessary organization, has in practice been subjected to a series of leftist Third World bureaucrats who have no understanding of free-market trade dynamics. It is now obvious, if it was not before, that a unified world government would be an Orwellian nightmare, where all the worst fantasies of the leftist professoriate were given full rein, and ordinary people had no say at all. It would combine 1984 and Brave New World, being simultaneously impoverishing and socially controlling. Even more than environmentalism and “funny money” it must be resisted a l’outrance.
The “populist” uprisings in the U.S., Britain and many other Western countries are a natural reaction to globalization’s failings. Whatever the intellectual incoherence and bad manners of populism, the uprisings should be encouraged, albeit accompanied with a non-populist reversion to sound monetary policies. Only thereby will we regain control of our societies and get the growth in prosperity we all deserve.
(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)