Fragility of Globalization

I am generally an optimist when it comes to business.  I see opportunities where others see challenges. In particular, I see enormous opportunity from the processes of globalization and I believe that we will all be better off as a result of these processes.  For this reason, I have been particularly distressed over the past couple of days to come across two respected analysts who are sounding the alarm bell, warning us not to take these processes for granted and, in fact, suggesting there is considerable risk that these processes may not only be stopped, but reversed.

One of these analysts is Peter Drucker, a deeply insightful man with considerable historical perspective.  He has a new article in the Spring 2005 issue of The National Interest entitled "Trading Places" (for some reason, on the cover of the print version of the quarterly, Drucker’s article has the more ominous title of "Our Mercantilist Future").

In classic Drucker style, he paints on a broad canvas, discussing the evolution of the global economy, suggesting that

what is emerging is not one but four world economies: a world economy of information; of money; of multinationals (one no longer dominated by American enterprises); and a mercantilist world economy of goods, services and trade. These world economies overlap and interact with one another. But each is distinct with different members, a different scope, different values and different institutions.

(As an aside, I find it interesting that Drucker doesn’t focus on a fifth global market – the talent market – that is having a profound impact on reshaping both the economic and political landscape of the world.) From my perspective, it’s that fourth world economy that is most worrisome. In this context, he suggests that we are seeing the emergence of a new form of mercantilism, this time focused on regional blocs of nations rather than individual nation-states:

The world economy is thus fast coming to look far more like the mercantilism of Alexander Hamilton than like Adam Smith’s free trade. It is fast becoming an "interzonal" rather than an "international" world economy.

Drucker argues that much of this new mercantilist rivalry is focused on containing the economic power of the United States:

But a new kind of mercantilist rivalry is emerging in this new economy–one in which the United States suffers from little-noticed disadvantages. For instance, the EU is seeking to export its regulations (and to impose its high regulatory costs on the United States) through international agreements, the reinterpretation of WTO rules, and the growing acceptance of EU standards in third markets. It is also promoting its new currency, the euro, as a rival and alternative to the dollar as the world’s reserve currency–a step that, if it succeeded, would greatly reduce the U.S.government’s ability to attract foreign funds to finance its deficit and thus maintain the Bush Doctrine. . . . The United States could therefore find itself with a smaller "home market" than rival blocs, but with the same high-cost regulations, in a world of intense mercantilist competition.

The other analyst weighing in on globalization is Niall Ferguson, the historian and prolific writer of such books as  The Cash Nexus, The House of Rothschild and Empire. He has a new article entitled "Sinking Globalization" (available only by purchase online) in the March/April 2005 issue of Foreign Affairs. 

Ferguson warns that we take globalization for granted but that history shows it can reverse very quickly. He focuses on the historical parallel with the era leading up to World War I:

The last age of globalization resembled the current one in numerous ways. It was characterized by relatively free trade, limited restrictions on migration, and hardly any regulation of capital flows. Inflation was low. A wave of technological innovation was revolutionizing the communications and energy sectors; the world first discovered the joys of the telephone, the radio, the internal combustion engine, and paved roads. The U.S. economy was the biggest in the world, and the development of its massive internal market had become the principal source of business innovation.

World War I wrecked all of this. Global markets were disrupted and disconnected, first by economic warfare, then by postwar protectionism.

China was opening up, raising all kinds of expectations in the West, and Russia was growing rapidly.

These two articles are timely warnings for those of us who take globalization for granted.  Make no mistake about it: globalization is a fragile process – there is nothing inevitable about it.  As it unfolds, it deeply threatens entrenched economic and political interests.  Those interests may spark a backlash and we may well find ourselves thrust back into a much more protectionist era.  I do worry that, here in the United States, we do not have enough corporate executives willing to publicly champion the more controversial aspects of globalization, including offshoring and immigration reform.  In the absence of this corporate voice, we are unlikely to find many political leaders willing to resist pressures to build more barriers.