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posted on 24 January 2017

Real Leadership Requires True Globalization

Written by , Difference Group

After 2008, world trade, investment and migration have come to a standstill. What the world requires is responsible leadership, which rests on inclusive globalization.

leadership.2

During his first state visit to Switzerland and the World Economic Forum (WEF), President Xi Jinping hoped to inject a positive impetus for the recovery of the world economy.

Amidst rising economic uncertainty and market volatility, Xi offered China's vision on economic growth and free trade in a global economy overshadowed by protectionism.

The old path of globalization led by advanced economies, which are now turning inward, no longer works - as evidenced by the dire state of current global economic integration.

From slowdowns to elevated negative risks

Globalization can be measured by world trade, investment and migration. By the 1870s, capital and trade flows rapidly became substantial, driven by falling transport costs. However, this first wave of globalization was reversed by the retreat of the US and Europe into nationalism and protectionism between 1914 and 1945.

After World War II, trade barriers came down, and transport costs continued to fall. As foreign direct investment (FDI) and international trade returned to the pre-1914 levels, globalization was fueled by Western Europe followed by the rise of Japan. This second wave of globalization benefited mainly the advanced economies.

After 1980 many developing countries broke into world markets for manufactured goods and services, while they were also able to attract foreign capital. This era of globalization peaked around China’s membership in the World Trade Organization (WTO) in 2001 and the global recession in 2008. During the global financial crisis, China and large emerging economies fueled the international economy, which was thus spared from a global depression.

But as the G20 cooperation has dimmed, so have global growth prospects, too. With the incoming Trump administration in the US, the downside risks have grown elevated, as even the International Monetary Fund (IMF) has recently warned.

Stagnating world investment

Before the global crisis, world investment soared to almost $2 trillion. But those days have been gone, for almost a decade. In 2016, global FDI flows are expected to decline by 10 - 15%, reflecting the fragility of global economy, continued weakness of demand, sluggish growth in commodity exporting countries, and a slump in multinational companies’ profits.

According to the UN, global FDI flows are projected to resume growth in 2017 and to surpass $1.8 trillion in 2018 over the medium-term. Yet, such projections remain almost 10% below the pre-crisis peak.

In advanced economies, FDI activity seemed to recover in 2015. But as the upturn is unlikely to be sustained, the sentiment is turning less optimistic. In the West, large emerging economies have recently portrayed as yesterday’s promises, yet FDI flows to BRICs economies could return to growth, increasing by some 10%.

In the current landscape, the only bright spots are large emerging economies and developing nations that are the last to industrialize.

Plunging world trade

If the state of world investment is bad, that of world trade is worse. World export volumes reached a plateau already in early 2015, in both advanced and emerging economies.

In 2008, when the advanced economies led by the US could no longer contain the global financial crisis, large emerging economies joined the G20 to contain the crisis. At the time, the leaders of major advanced economies (G7) pledged to accelerate governance reforms in multilateral international organizations.

However, as advanced economies enjoyed a brief recovery, thanks to huge stimulus packages and more debt, those pledges were largely ignored. Instead, advanced countries have sought to overcome stagnation through ultra-low interest rates and rounds of quantitative easing.

At the same time, protectionism has returned to world trade. In 2015, protectionism was 50% up from the previous year, while policy initiatives harming foreign commercial interests outnumbered trade liberalization by three-to-one.

Since the collapse of the Soviet Union, the world economy has not seen such a long trade slump, except during global recessions.

global.exports1960.2015

Source: The World Bank.

From geopolitical friction to migration crises

After advanced West took greater control of migration in early 20th century, global migration - the third leg of globalization - has shrunk dramatically. Yet, the number of globally displaced has exploded.

After the terrorist attacks of 9/11 in 2001, the subsequent US-led wars in Afghanistan and Iraq, the West’s interventions in North Africa and the Middle East and elsewhere, wars and persecution have driven more than 65 million people from their homes. It is the greatest global forced displacement since 1945.

Despite international media focus on migration burden in Europe and the United States, the simple reality is that in 2015 developing regions - not advanced regions - hosted 86% of the world’s refugees under UN mandate. Moreover, the top-hosts of the globally displaced do not feature the US, Germany or the UK, but Turkey (2.5 million), Pakistan (1.6m), Lebanon (1.1m), Iran (0.8m), Ethiopia (0.7m) and Jordan (0.7m).

The wealthy nations do not host the “wretched of the earth." Rather, it is the wretched who struggle to host even more wretched.

Ominous footprints

In the past, world investment, trade and migration habitually picked up as recessions ended. Today, that is no longer the case.

In 2017, the Trump tariffs will pave way to greater protectionism, which could be supported by several elections in Europe. Moreover, the supportive effect of world trade and investment could deteriorate further as tit-for-tat retaliation scenarios are likely to ensue.

The footprints are dark. In the 1930s, the Smoot-Hawley Tariff Act in the US undermined a fragile recovery and paved the way for international disorder. At Davos, President Xi likened protectionism to "locking oneself in a dark room" in the hopes of protecting oneself from danger; yet in so doing, cutting off all "light and air." The result is a trade war in which “no one will emerge as a winner."

What the world needs today is responsible leadership, say WEF leaders at Davos. That is not possible without truly inclusive global economic integration, which, in turn, is not viable without broader, deeper and faster global governance reforms and purposeful cooperation by the G20 and other international multilateral organizations.

Globalization must not serve just a few wealthy advanced economies, which no longer fuel global economy. It must also serve poorer and faster-growing emerging and developing economies, which today account for global growth.

A version of this article appeared on China Daily 19 January 2017.

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