Ideas about economic crisis
A multi-year depression will see the frontiers of globalisation rolled back. The market failures exposed by the financial crisis will call into question some of the tenets of the free-market capitalism underlying globalisation.
Globalisation will be blamed for job losses and falling living standards, just as it was blamed for the income and wealth disparities that opened up in the past two decades, even though the ultimate cause for these may lie more in technological advances and failures of corporate governance and regulation.
Governments will respond with protectionist measures in a number of forms. The destruction of excess capacity globally will encourage dumping, which will be used to justify increases in trade tariffs and quotas. In some cases, governments may find it expedient to renegotiate the terms of regional or bilateral free-trade agreements.
In a world of excess capacity where competition for new investment is intense, governments will be tempted to impose restrictions on companies planning overseas investments. High unemployment and social unrest will make labour immigration an even more contentious political issue.
The shrinkage of the financial services industry will curtail crossborder capital flows. Banks that have received public funding will be under pressure to prioritise domestic lending. More generally, the availability of crossborder capital will be constrained in a climate of risk aversion and more onerous capital adequacy requirements.
The days of the freewheeling corporation at the cutting edge of globalisation will be over. When not barred from doing so by protectionism, companies will continue to seek new markets and to achieve cost reductions from offshoring production. But a deep cyclical downturn in emerging markets will lead to a more sober reassessment of their medium- and long-term growth potential. Large emerging-market corporations will face particular challenges given the preponderance of companies in cyclical industries. Emerging-market corporate default rates are likely to exceed those
of their developed counterparts. Aggressive overseas expansion plans hatched by emerging-market companies during the boom years will be scaled back.
–> Kei-Mu Yi, an economist at the Federal Reserve Bank of Philadelphia, argues that trade has fallen so fast and so uniformly around the world largely because of the rise of “vertical specialisation”, or global supply chains. This contributed to trade’s rapid expansion in recent decades. Now it is adding to the rate of shrinkage. When David Ricardo argued in the early 19th century that comparative advantage was the basis of trade, he conceived of countries specialising in products, like wine or cloth. But Mr Yi points out that countries now specialise not so much in
final products as in steps in the process of production.
Trade grows much faster in a world with global sourcing than in a world of trade in finished goods because components and part-finished items have to cross borders several times. The trade figures are also boosted by the practice of measuring the gross value of imports and exports rather than their net value. For example, a tractor made in America
would once have been made from American steel and parts; it would have touched the trade data only if it was exported. Now, it may contain steel from India, and be stamped and pressed in Mexico, before being sold abroad. As a result, changes in demand in one country now affect not just the domestic economy but also the trade flows and economies of several countries.