The Guest Blog

Steinbock: Globalization at Risk

“Time is probably our greatest threat. The longer it takes for the recovery to begin, the greater the likelihood of serious damage to U.S. strategic interests,” said Dennis C. Blair, the then-director of U.S. national intelligence, in the annual threat assessment for the Senate in February 2009. He reminded the Congress of the dramatic political consequences wrought by the economic turmoil of the 1920s and 1930s in Europe, the instability, and high levels of violent extremism.

Since 1980, global economic integration accelerated dramatically – until the onset of the financial crisis in fall 2008. Even today, growth, trade and investment remain behind the pre-crisis level. The Baltic Dry Index, which tracks global shipping rates, is currently barely above US$1,900 – far below US$11,800, the 2008 peak.

In the leading advanced economies, growth accelerations are unlikely in the short- to medium-term future. While the status quo is comparable to the early 1930s, the stakes are now more global.

End of “Business as Usual”

Economic integration occurs through trade, migration, and capital flows. Starting around 1870, all these flows rapidly became substantial, driven by falling transport costs. This first wave was reversed by a retreat into nationalism and protectionism between 1914 and 1945.

After World War II, trade barriers came down, and transport costs continued to fall. This second wave of globalization benefited primarily the advanced economies. It was their “golden era.”

Since 1980 many developing countries broke into world markets for manufactured goods and services, while they were also able to attract foreign direct investment. This era peaked between China’s membership in the World Trade Organization in 2001 and the onset of the global recession in fall 2008.

In the past, world trade picked up as recessions ended. But that was then. As the dust will settle after the ongoing global crisis, there will be no “business as usual.”

This Time Is Different

In the 1970s, the quadrupling of the oil prices resulted in the eclipse of globalization and the rise of regionalization. As the energy prices plunged in the early 1980s, this trend was reversed. But now rising energy prices have come to stay.

In spring, turmoil in North Africa and the Middle East (MENA) spread to Algeria, Bahrain, Djibouti, Iran, Iraq, Jordan, Oman and Yemen, while minor incidents have occurred in Kuwait, Mauritania, Morocco, Somalia, Sudan, Syria, and even Saudi Arabia.

By April, the oil prices were hovering around $110-$120; the highest since September 2008. Meanwhile, social unrest in several regions risks driving up global food prices. Since the discovery of oil in Iran before World War I, Western powers have interfered in the Middle East to secure the political survival of the regimes in the oil-exporting countries. Today, the era of cheap oil is over.

Certainly, current oil prices are “only” $80+, although Brent topped $106 on euro zone hopes. In the coming months, however, deepening unrest in the MENA economies has potential to reverse much of the gains of globalization.

Threat to Globalization

Currently, emerging economies account for more than 90% of the projected increase in world primary energy demand, reflecting faster rates of growth and economic activity, industrial production, population, and urbanization.

Since 2007, China and India have contributed more to worldwide growth than the U.S., Western Europe, or Japan, respectively. Their sustained growth, however, is predicated on continued industrialization and urbanization – read: cheap energy prices.

In contrast to ascendant Britain, the U. S. and Western Europe a century or two ago, China and India, with their large populations, cannot rely on high energy consumption. Over time, abrupt and broad increases of energy prices have a potential to hamper growth prospects in emerging Asia, and sluggish recovery in the advanced West.

In the coming years, the only thing that could conceivably prove worse than the ongoing global crisis is, well, recovery.

Dan Steinbock is research director of international business at India China and America Institute (USA), visiting fellow at Shanghai Institutes for International Studies (China) and in the EU-Center (Singapore).