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Business News/ Politics / Policy/  Why obituaries to globalization are premature
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Why obituaries to globalization are premature

Headline numbers on cross-border flows and trade give a misleading picture of globalization's future prospects

Between 2014 and 2015, value of trade in oil declined by $ 891 billion, which accounts for a fifth of shortfall in trade relative to GDP. Photo: ReutersPremium
Between 2014 and 2015, value of trade in oil declined by $ 891 billion, which accounts for a fifth of shortfall in trade relative to GDP. Photo: Reuters

The elections of Donald Trump in the US and the vote for Brexit in the UK have been interpreted by many economic commentators as the beginning of the end of globalization. Coming as they did at a time of ebbing capital and trade flows, these political shocks seemed to have shaken up the global consensus on the stability of the global capitalist order. While the discontent fuelling the rise of nativist populism is indeed real, the reports about the death of globalization may be grossly exaggerated, a careful reading of the numbers shows.

A look beyond the headlines suggests that globalization is changing rather than stagnating or reversing, wrote Sebastian Mallaby, a senior fellow of economics at Council of Foreign Relations, in the latest issue of IMF’s Finance and Development magazine. Mallaby suggests that a large part of the decline in capital flows is a healthy correction from the excessive levels of bank lending in the run-up to the 2008 global financial crash, and the apparent decline in trade flows is driven by falling oil prices leading to lower value of commodity trade.

Cross-border flows as percentage share of global GDP fell to 4% in 2008—a fifth of their 2007 level. The share has plummeted to 2.6% in 2015. Does it mean capital is not traversing across the globe anymore? Not necessarily, says Mallaby.

He gives two reasons. One, the pre-crisis phase of effervescent lending cannot be treated as a normal benchmark for judging whether current levels are healthy or not. Mallaby also points towards the break-up of cross-border capital flows which shows that bulk of the decline is due to a collapse of international loans. Consider this statistic: in 2015, total cross-border flows were just 31% of their 2007 level. However, if one were to leave loans aside, the fall becomes much less. Cross-border flows on account of equity, bonds and FDI in 2015 were 68% of their 2007 levels. In fact, portfolio equity investments have increased marginally during this period.

Mallaby also calls for caution in reading too much in the erratic trends in global trade. He points out that the recent fall in ratio of global trade to world GDP partly reflects the sharp fall in oil prices. Between 2014 and 2015, value of trade in oil declined by $ 891 billion, which accounts for a fifth of shortfall in trade relative to GDP. The argument seems to hold merit if one looks at the trend in volume and value indices of trade. While value indices have come down in the recent years, volume indices have been much more resilient.

What about the uncertainty vis-à-vis future policies in countries such as the US? Much of the Brexit-related or Trump rhetoric is focused on bringing back blue collar jobs which were purportedly destroyed due to cheaper imports from the global South. While such claims have been able to fetch votes, the economics behind such claims is weak.

A growing body of research seems to suggest that technological changes rather than trade per se may have been driving job losses and inequality in the advanced economies of the West. As several economists have noted, real manufacturing output in the US is actually higher today than ever before but employment is much lower. Even though real manufacturing output in the US has been increasing steadily since the 1980s, employment has come down due to a massive increase in productivity, a recent blog post by Alison Burke of Brookings pointed out. As a new wave of automation engulfs the world of manufacturing, such trends are likely to persist.

It is therefore likely that any attempts to restrict imports would generate more jobs for robots than for unskilled labourers of the developed world. A 2013 paper by Carl Benedikt Frey and Michael A. Osborne, economist and engineering science professor duo at Oxford University, predicted that 47% of jobs in the US were faced with extinction due to automation.

Low-skilled workers such as telemarketers and accountants faced the highest risk of job loss, whereas those in professions requiring greater skill and cognitive ability such as editors and recreational therapists were the most secure. Interestingly, economists were in the middle of the pack, much below chemical engineers, probably a reflection of the quantitative takeover of the discipline in the US.

To be sure, doomsday predictions of robots taking over the entire job market have also been questioned by a number of economists. As a Mint column had pointed out, an endless desire to cut down on wage costs can end up undermining purchasing power and demand for the goods which the robots are producing. Nonetheless, the fact remains that automation rather than globalization seems to be hurting workers of the advanced world the most.

None of these arguments are meant to undermine the seriousness of growing economic inequality and challenge of job creation in both advanced and developing countries. However, the first step to reviving the health of the global economy is an accurate diagnosis of the ills that plague it. The evidence so far suggests that globalisation is far from dead, and far from being the villain it has been made out to be.

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Published: 04 Jan 2017, 08:33 AM IST
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