As predicted in these columns a decade ago, globalization did not work, and has now gone the way of the dinosaur. It is not however clear what will replace it. The international institutions are still there, exerting their influence like stegosauri who missed the memo about the end of the Jurassic. Western “woke” governments are planning ever more elaborate schemes to combat climate change. That suggests that, to succeed, a country needs to be both well-run and isolated from international advice.
In an ideal world, globalization would be a feasible and attractive outcome for humanity. Countries would have a basic agreement on the economic order, and a basic determination both to preserve their own domestic societies from foreign influences and to allow other countries to do the same. Immigration would be low, and wealth differentials between countries would be moderate, so there would be no massive forces overwhelming national borders. Tariffs and other trade barriers would be modest, so that the Ricardian comparative advantages of particular countries would benefit the world as a whole. Above all, there would be no meddling international institutions, attempting to impose their bureaucrats’ values on civilizations that might well be antipathetic to them.
We do not live in such a world. Not even close. We did not live in it even in the 1990s, although the euphoria surrounding the fall of Communism caused many people to ignore the difficulties facing the globalist project. Countries do not have a basic agreement on the economic order. China has never abandoned the Communism of Chairman Mao; it appeared for a couple of decades that it was in the process of doing so, but it is now very clear that under Chairman Xi Jinping it has not and will not abandon central planning, though it will allow party-connected “entrepreneurs” to become obscenely rich, provided they toe the party line.
China is also thoroughly imperialist, using its “Belt and Road” initiative to take over vital infrastructure in Third World countries and reduce them to a state of economic peonage. A major player with such ambitions makes a globalization project impossible to fulfil, just as the expansionism of Kaiser Wilhelm II’s Germany eventually doomed the naïve free-trade globalism of Britain’s Victorians (and Xi is infinitely more expansionist, more dangerous and more unpleasant than the relatively benign Kaiser Wilhelm II).
There are other problems with globalization. The EU and the U.S. under full Democrat control believe it wrong to preserve their own civilizations from mass immigration; Angela Merkel’s opening the borders in 2015 doomed globalization for Europe, and President Biden is making every effort to make it impossible for the United States. With free immigration, the wealthier societies are subjected to existential stresses, and their lower-skill inhabitants are in a permanent and entirely justified state of incipient revolt. Contrary to current myths, globalization might have survived at least partially under President Donald Trump; it will certainly not survive under President Biden.
Wealth differences between different countries remain vast, far larger than they were in 1800, before the start of serious industrialization. This is the cause of the gigantic immigration pressures on Western countries, and the discontent Western societies have exhibited. Globalization tends to narrow those differentials, as free trade allows poorer countries to acquire skills and compete more effectively in the global economy, but that compression of differentials is by its nature unpleasant for the less skilled inhabitants of rich countries, who naturally raise political resistance to it.
The solution is to keep interest rates fairly high and immigration barriers tight, thus minimizing the stress on the rich country unskilled. (High interest rates bring high differentials between rich and poor countries, allowing the interest cost differential to offset partially the wage differential; ultra-low interest rates thus accelerate the narrowing of wage differentials between rich and poor countries, worsening the stress on the unskilled rich.) Global policymakers have in their Keynesian foolishness pursued exactly the opposite policy in both areas.
The other barrier to a globalization in which Mankind could reach its full potential is the plethora of international institutions and agreements, all of which are designed to increase governments’ ability and tendency to meddle in economic life. These were mostly established by Keynesian social engineers after World War II and have proved impossible to kill – however useless the function fulfilled by the institution, it remains in existence, maybe finding a new purpose in life through which it can do even more damage to the world and its economy.
For many years, I was a supporter of the World Trade Organization, since if we are to have free trade, it would indeed be useful to have a neutral “umpire” to blow the whistle at protectionism and ensure that trade remains truly free. However, after a decade or so of mildly useful existence, it first elected a Brazilian protectionist, Roberto Azevedo as its Director-General, and has now succeeded him with the Nigerian Ngozi Okonjo-Iweala, who comes from one of the most notoriously corrupt countries in the world and doesn’t appear to have significant trade expertise — the ideal head of the WTO would be somebody from Singapore! Whatever the WTO does from now on is almost certain to be damaging, but there is not the remotest possibility of abolishing it.
Probably the most threatening of all dangers to the global economic future (apart from an outright world war, the probability of which is remote, but less remote than it was) is the series of agreements to address climate change. Every valid scientific study shows that the climate change likely before 2100 is modest, that it could best be addressed by mitigation rather than through attempts to remodel the world economy and that, far from being a “crisis” it barely ranks in the top dozen of the problems facing the world economy today.
Far more dangerous than climate change itself, however, are the steps being agreed between governments to address it. These will impose huge additional costs on the global economy and allow governments to micro-manage even more of it than they already do. The result will be a drastic decline in living standards, felt most acutely by the working-class folks who commute long distances, for example, or use a truck to perform their jobs. The only saving grace is that poor countries, including China, are likely to do nothing whatever to satisfy these leftist fantasies, and so their living standards, at least, will not be decimated.
The principal tool for lowering the living standards of the Western middle classes will be inflation. Everything points in this direction. Costs have already been increased by the pandemic, and the Taiwanese semiconductor manufacturer TSMC says that supply shortages will not alleviate till 2023. This will produce cost-push inflation, which will be vastly exacerbated and prolonged by the explosion in money supply in the last year and the continued gigantic budget deficits and sharply negative real interest rates that the authorities are imposing on us.
Productivity will decline substantially and continuingly, as the world’s distorted monetary policies continue to force investment into suboptimal areas, while starving the innovations that produce productivity growth. Then the whole wealth-destroying, productivity-destroying, inflation-increasing mess will be exacerbated by the plethora of harassing environmental costs and regulations that Western governments will impose to meet their spurious 2030 or 2035 emission targets.
By 2030, living standards in the major Western economies (with the possible exception of Japan) will have been rolled back to 1980 levels or below, while prices will be at least double their current level. The one saving grace for the global economy will be that some emerging markets may have escaped the worst policies of the West, and will continue to have enriched themselves. These will not be the major trading economies, so successful in the 1980s and 1990s as world trade opened up; those will be damaged by the overall decline in trade and by the effect of “woke” international institutions imposing regulations on them. Instead, it will be the world’s most isolated countries, safe from the depredations of the international institutions and not subject to the follies imposed by regulators on the world’s trade networks. In this model, the greatest growth rate between now and 2030 will be experienced by somewhere like North Korea, but Belarus, Mongolia, Bhutan and Paraguay will all be stars, provided that domestically they follow some reasonably capitalist economic system, and internationally they have as little to do with the international institutions and the Western-led environmental burdens as possible.
Kim-il-sung was wrong when he proposed that North Korea follow a policy of self-reliant “juche” – the country missed out on explosive global growth and prosperity. But in the next ten years, with the West exporting monetary madness, fiscal folly and environmental extremism, juche may well be the best policy.
(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.)