At the verge of a change from globalisation to a multipolar world ?
Based upon a recent publication by CS Credit Suisse Equity Research, TextileFuture would like to submit to our readers these scenarios if globalisation is touching the limit and gives way to a multipolar world. This under the aspect that we always put discussion items concerning future developments at your disposal. We consider the findings and conclusions of the authors authentic, and these will be directing our thoughts into the immediate future. The different authors give you an overview of what was leading to globalisation, how it was enhanced and where we are heading now. The paper offers also an enormous wealth of data, enabling TextileFuture readers to compile such information in their own planning.
Introduction
Globalisation, which CS defines as the increasing interdependence and integration of economies, markets, nations and cultures, is the most powerful economic force the world has witnessed in the past twenty years. It is now so pervasive in its effects and has produced so many startling outcomes—the rise of global cities, the successes of small states, growing wealth in emerging economies, the emerging consumer and fast-changing consumer tastes, for example—that we risk taking it for granted.
The current wave of globalisation is the second the world has seen, the first one occurring between the years 1870 to 1913, built on the fruits of the industrial revolution and the rise of the American economy. ‘The current period effectively dates from the early 1990s, where events like the fall of communism, rounds of trade liberalism and the growing momentum of the Chinese economy accelerated globalisation. This was then driven by US multi-nationals, the advent of the Euro, and the growth of financial markets and the development of many emerging economies.
However, in recent years the path that globalisation is taking has become obstacle strewn and much less clear. The global financial crisis has slowed economic growth, left large amounts of indebtedness in its path and checked the rise of the financial services industry. The Eurozone appears too many to be in a state of perpetual crisis, while the structural rise of China’s economy has caused some to fear the role it will play geopolitically. Its cyclical slowdown is also promoting concern. Elsewhere the side effects of globalisation—such as inequality and climate change—are now widely debated.
This report adds to the CS Globalisation Index by developing a ‘Multipolarity Index’ and a ‘Globalisation Clock’ and by examining specific trends in financial markets, trade, governance and corporate activity. The authors’ sense is that the world is currently in a benign transition from full globalisation to a multipolar state, though this is not complete. Specifically, the world is most multipolar in terms of trade patterns and economic activity; but financially, the world, although highly globalised, is much less multipolar, with the USA still dominating markets. Companies continue to try to sell their goods across borders but are less willing to invest internationally.
Towards a multipolar world?
CS Author Michael O’Sullivan considers that globalisation is the predominant economic, strategic and political force of our age. Its implications and side-effects—from wealth creation to climate change—are pervasive. As such the direction that globalisation takes has far-reaching implications. The rise of emerging markets, financial and economic crises in the USA and Europe, the creation of new institutions and the demise of 20th century ones, amongst other trends, point towards a more multipolar world. However, there is a narrative that points to the geopolitical risks of such a development—from regional conflicts, cyberwars and ‘great power’ rivalry. In the report three scenarios form the basis: Globalisation thrives – A multipolar world emerges at economic, political and social levels and, more dramatically, – Globalisation comes to an end.
The author builds on the CS Credit Suisse Globalisation Index that was introduced in the CSRI ‘Success of Small Countries Report’ by creating a Multipolarity Index and incorporate these into a Globalisation Clock, which captures the world in terms of globalisation as a phenomenon and multipolarity as a state of the world. This and our analysis of trends in the financial, governance, economic and corporate spheres, help to quantify the extent to which the world is more globalized or multipolar. The author’s sense is that the world is currently in a benign transition from full globalisation to multipolar state, though this is not complete. Specifically: The world is most multipolar in terms of trade patterns and economic activity. Trade is becoming more regional though there are signs of the erection of barriers to trade.
Financially, the world is highly globalized but less multipolar, with the USA remaining at the centre of the financial world in terms of the sway that US markets have over others internationally and the central role of the dollar compared to the Euro and Renminbi.
The analysis of corporate investment and revenue growth shows that globalisation remains intact in terms of consumption and marketing patterns, there appears to have been a retrenchment in cross-border investment by corporates. Together with the rise of emerging market (EM) companies in terms of both sales and investment, we read these results as pointing towards a more multipolar world where companies continue to sell across borders but are more cautious in investing across them.
In terms of governance, the impetus provided to the spread of democracy by globalisation looks to have reached a limit, with less democratic forms of government being perceived to produce economic success and new regional institutions replacing the activities of world ones. New institutions—such as sovereign wealth funds and fiscal councils—are amongst the more prominent new actors on the institutional stage. Geopolitically, conflict now takes place more within countries and regions, than between countries.
The world is increasingly undercut by faultlines in terms of religion, climate change, language, military development and indebtedness to name a few. Our ‘end of globalisation’ risk scorecard flags indebtedness and migration as risks to focus on.
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Globalisation – where are we headed?
In the course of the last year alone some events, such as the establishment of the Asia Infrastructure Investment Bank, international political engagements surrounding the Ukraine crisis, Abenomics in Japan, the rise of Asian companies like Alibaba and the active role that the ECB is playing in the European economy, point towards the emergence of a more complex, multipolar world and away from globalisation as we have come to know it. In big picture terms, Figure 1 (using IMF forecasts) underlines this trend by showing how China and India are on their way to building dominant economic powerhouses.
A slightly different view confirms this. Combining IMF and UN forecasts and following a simplified version of the methodology established by Danny Quah (2011) we show how geographically the location of world GDP (filtered on cities with population greater than 100000 in 1950) has moved eastward (Figure 2). In the future, the top 50 urban agglomerations will be dominated by cities such as Delhi, Shanghai, Mumbai and Beijing that all located in the east. By contrast, in 1950, 22 % of the world’s top 50 urban agglomerations were located in the USA alone but by 2030 only 6 % of the world’s urban commercial centres would be in the USA.
If such a change is materialising, it will have enormous implications for companies, markets, economies and governments—not least because so many of them have come to rely upon globalisation. In this respect, the aim of this report is to establish and track the direction that globalisation is taking, with three different scenarios in mind (Figure 4).
Scenario 1: Globalisation continues: The first of these is that globalisation continues in the form we have come to know and understand over the past thirty years. In substance, this means the dollar continues its role as first amongst equals in the forex world, generally western multinationals dominate the global business landscape and the fabric of international law and institutions is still western in nature.
In economics, macroeconomic volatility is low, trade grows with few interruptions from protectionism and the internet economy grows, across borders. Socio-politically, the significant development is that human development improves, characterised by more ‘open societies.’
Scenario 2: A multipolar world: This second scenario is based on the rise of Asia and a stabilisation of the Eurozone so that the world economy rests, broadly speaking, on three pillars—the Americas, Europe and Asia (led by China). In detail CS would expect to see the development of new world institutions that outgrow the likes of the World Bank, the rise of ‘managed democracy’ and a more regionalized version of the rule of law, migration becomes more regional and rural to urban-led rather than cross-border, regional financial centres rise and banking and finance develop in new ways. At the corporate level, the significant change would be the rise of regional corporate champions, which in many cases would supplant global multinationals.
The author and CS are also expecting to see uneven improvements in human development leading to more stable, wealthier local economies on the back of a continuation of the EM consumer trend. In Europe, the EU halts its outward expansion and thrives as the restructuring of banks and companies makes for a leaner economy.
Scenario 3: The end of globalisation: Our third scenario is a darker, negative one that recalls the collapse of globalisation in 1913 and the subsequent onset of the First World War. Though the world has been stressed by the global financial crisis and terrorist attacks in recent years, these developments have arguably led to more rather than less cooperation between nations. Still, there are risks to globalisation and in this section we outline them in the form of a risk scorecard.
The kinds of things we watch for are—a trend slowing in economic growth and trade with the added possibility of a macro shock (from indebtedness, inequality, immigration), a rise in protectionism, a geopolitical/military clash between the great powers, currency wars, a climate event(s), the rise of broad-based anti-globalisation political movements and a backlash against global corporations, or a reversal in transitions to democracy.
Globalisation Clock
In the sections that follow we measure the extent to which the twin trends of globalisation and multipolarity have developed. Here, we have taken many of the indicators and data used throughout the report and constructed a Globalisation Clock.
To give context, the start is with the rise of globalisation in the 19th century and its collapse into the First World War. This is illustrated with a crude but meaningful measure of globalisation—exports/GDP in Figure 5.
Globalisation then revived in 1990 and as we move through the 21st century, we find greater evidence of multipolarity. We bring the two indicators together in the form of the Globalisation Clock. This plots globalisation and multipolarity scaled against their long-term averages.
Some clusters are clearly visible and match historical events. For instance, the early 1990s were dominated by the USA and European countries, followed by a phase of low globalisation and low multipolarity during the period of 2000-2005, driven by the growth of information technology and the consolidation of military power by major advanced countries during the Iraq and Afghanistan wars. Since then, the world has moved into the first quadrant of the Clock—a sweet spot—to become more globalized and more multipolar at the same time, accentuated by the economic weakness of developed economies and stronger emerging market economies.
Globalisation – What is it?
This question is answered by the CS authors Michael O’Sullivan and Krithika Subramanian: In broad terms, globalisation refers to the increasing interdependence and integration of economies, markets, nations and cultures. It is difficult to measure, a fact that probably contributes to the wide range of interpretations that are given to it.
In order to understand and measure globalisation, it is first of all necessary to define what it is. There is a broad range of definitions of globalisation, though most tend to focus on the integration or interlinking of economies, perhaps because this is the most tangible form of globalisation.
One of the more extensive efforts to define and understand globalisation has been undertaken by the House of Lords Select Committee on Economic Affairs (House of Lords Economic Affairs Committee, First Report on Globalisation, (London: House of Lords, 16 January 2003) (www.parliament.the-stationery-office.co.uk/pa/ld200203/ldselect/ldeconaf/5/501.htm). The Committee, whose report was published in 2002, gathered together a varied and experienced cast of experts, policy makers and opinion formers. They highlight a number of definitions, such as that adopted by the World Bank, namely that globalisation is ‘the rapid increase in the share of economic activity traded across national boundaries, measured by international trade as a share of national income, foreign direct investment flows and capital market flows.’
UNCTAD, the United Nations Conference on Trade and Development (www.unctad.org) offered a definition in a similar vein to the above: In general terms, globalisation describes the process of increasing economic integration among nations through cross-border flows of goods and resources together with the development of a complementary set of organizational structures to manage the associated network of economic activities.
Other economic academics display a crisp understanding of globalisation. O’Rourke and Williamson (Kevin O’Rourke & Jeremy Williamson, ‘When Did Globalisation Begin?’, European Review of Economic History, vol. 6, 2002, p. 24) whose research focuses on international trade, take globalisation to be represented by ‘the integration of international commodity markets… the only irrefutable evidence that globalisation is taking place, on our definition, is a decline in the international dispersion of commodity prices or what we call commodity price convergence.’
The political scientist Joseph Nye defines globalisation as referring to networks of interdependence at worldwide (multi-continental) distances (Joseph Nye, ‘Globalisation’s Democratic Deficit: How to make International Institutions More Accountable,’ Foreign Affairs, vol. 80, 4, July/August 2001). He expands on this definition in his book ‘Governance in a Globalizing World’, by stating that ‘these networks can be linked through flows and influences of capital goods, information and ideas, people and force, as well as environmentally and biologically relevant substances.’ (J. Donahue & J. Nye, Governance in a Globalizing World, (Washington: Brookings Institution Press, 2000), p1)
Measuring globalisation
In general, definitions of, objections to and perspectives on globalisation span many fields. In many cases, it is not easy to identify whether specific problems arise as a result of globalisation, or indeed if globalisation simply exacerbates them. Measuring globalisation and in particular the causality of its effects is difficult, though perhaps the least problematic aspect of analysing globalisation is to measure its economic effects.
Measures that economists often examine are the relation between a country’s savings and its investment activities, its current account relative to its output, and levels of foreign direct investment (FDI). A number of other more idiosyncratic measures can be examined as well, such as the change in the number of foreign firms located in a country, differences between domestic and national products and between the research and development activities of foreign and indigenous corporations. Measures of migration are useful too, though the flow of labour was more widespread during the first wave of globalisation than it is now.
CS Globalisation Index
There have been some notable attempts to measure globalisation (Such as the Foreign Policy/AT Kearney Globalisation Indexand in a recent publication we constructed a CS Globalisation Index) (in the July 2014 CSRI publication on the ‘Success of Small Countries’ followed by an update in April 2015). The CS Globalisation Index is based on economic, social and technological factors
This index shows that European countries dominate the list, while African nations tend to be the least globalized. However, we should flag that some small countries that act as trade or financial entrepots (i.e. Luxembourg) have very heavy finance and trade flows relative to their GDP size and as such appear intensely globalized in the economic sense (Economic globalisation: Trade openness (% of GDP), FDI (% of GDP), FPI (% of GDP).
Social globalisation should be understood as Cell phone subscription (per 100 people), telecom lines (per 100 people), remittances (inward + outward) (% of GDP), and Technological globalisation as Internet users (per 100 people), secure servers (per million people).
Déjà vu all over again
Though many of the artefacts of globalisation such as technological advances make it look and sound new, it does have a precedent (Ireland and the Global Question, Cork University Press 2006). There are two generally recognized waves of globalisation, the first taking place from 1870 to 1913, and the current one which effectively began in the late 1980s. The first wave of globalisation was spearheaded by British merchants and the second one by American corporations.
The nineteenth century period of globalisation was one of extensive commodity market integration. Against this backdrop the level of trade surged so that by 1913 merchandise exports as a share of GDP in western European economies reached a level of 17%, from 14% in 1870 (subsequently falling to around 6% by 1938 and climbed above 17% again in the 1990s) (Rodrik (1997), op. cit., p.7).
The fantastic power that capital markets seem to wield make it difficult to appreciate that the world could have been anything as developed as it is now. Yet, research shows that a number of countries (especially those outside the USA) were more financially developed in 1913 than they were by 1980 (R. Rajan and L. Zingales, “The great reversals: The politics of financial development in the twentieth century,” Journal of Financial Economics, vol. 69, 1, 2003, pp. 5-50). For instance, in proportion to GDP (gross domestic product), the market capitalization of the French stock market was nearly twice that of the USA in 1913, but fell to a quarter of it by 1980. Generally speaking, financial market development over the course of the last hundred years reached its nadir in 1980, from which point it has increased towards and beyond the levels of development seen at the turn of the last century.
The 1870-1913 period of globalisation was also remarkable for the levels of emigration that were witnessed. Over sixty million people migrated to the New World between 1820 and 1913. It is estimated that from the 1880s to the early 1900s, 6 % of the population of several European countries migrated overseas.
However vibrant globalisation was at the turn of the century, burgeoning levels of trade, finance and technological advances (in transport and communications) soon led to imbalances in the European, Latin American and American economies, which in many cases, were dealt fatal blows by poor policy making. Openness quickly gave way to protectionism and the application of tariffs. The rise in poverty and unemployment that was brought about by inflation in the price of goods and deflation in asset prices forced an eventual response from governments who had come to fear the greater say that the poor had in politics because of the expanding franchise. Where small governments had previously been in vogue (in 1912 government expenditure in developed countries was about 13% of GDP) governments were now expected to spend and protect their way back to prosperity. Thus, protectionism, economic decline, nationalism and finally war brought down the curtain on the first period of globalisation.
A multipolar world
The first period of globalisation (1870 to 1913) serves to show the benefits of globalisation and also how it can be negatively transformed by geopolitics and changes in international economic health. It highlights the severe and enduring costs associated with the end of globalisation. In this respect, we pay very close attention to changes in globalisation and the direction that these might take. In the following chapter we consider how an end of globalisation scenario might unravel, though in this section we examine the more likely evolution of globalisation towards a multipolar form. We identify a multipolar world as one that evolves from a globalized world, where trade, economic, socio-cultural and corporate activities take place around several geopolitically significant poles.
In recent years it seems that globalisation has been checked by the global financial crisis and become more balanced in that wealth and economic power have risen in a number of emerging markets, notably China. Notwithstanding Europe’s struggles with the euro, it remains a considerable though yet diverse economic bloc.
Other CSRI research strands, such as the Emerging Consumer Survey and the Global Wealth Report detail the rise of emerging economies and we increasingly see diverse signs of this – the opening up of capital markets in Asia and Arabia, the growth of new institutions in Asia and the pick-up in commerce in Africa. The amalgam of many of these trends points to a more multipolar world, though this is still difficult to quantify.
In this context, we are increasingly mindful of George Orwell’s 1984, where he divided the world into three regions – Oceania, East Asia and Eurasia on the basis of economic power and form of government. Although it requires some conceptual shoehorning we could well fit the major countries of the world into the following categories: Oceania (USA, Canada and Latin America), Eurasia (Europe, the Middle East and Russia), East Asia (Africa, Asia and the Pacific economies). Some countries like the UK, Japan and Australia could just as easily fit in two categories. In today’s world, Orwell’s classification is not a ‘clean’ one but the three broad regions he has set out give a sense as to how a multipolar world might evolve at a high level.
More specifically we would consider a ‘pole’ to be based on the following factors – size of GDP, size of population, an imperial legacy, open economy, does the pole have open/plentiful trade with surrounding countries, military size and sophistication (absolute spending, number of fighter jets and ships), human development indicator relative to region, is it a member of a regional grouping (e.g. Sweden with Nordics). So, under this schema India and China might be poles, but Japan and Russia would not qualify as distinct poles.
In this section the aim is to measure the extent to which the world is multipolar rather than globalised. Specifically we examine the following themes:
Are trade and output concentrated or spread out across the world? We gather together data on trade, finance, people flows and output, and innovate on some recent World Bank analysis to determine whether the distribution of economic activity is becoming more or less concentrated.
Is protectionism constraining free trade? We take a look at tariff and non-tariff barriers to trade, to examine if the world is prospering with free trade or becoming more regional amidst higher protectionist measures?
Are we moving towards a multi-currency world? The dollar has in many respects been the vehicle through which globalisation has spread, though the bumpy rise of the euro and the potential for the renminbi as a more internationalized currency offer the prospect of a multi-currency world.
Does Wall Street still lead the world? There is considerable literature on the tendency for international markets to be led by the USA In a more multipolar setting we would expect this trend to have weakened. We examine the extent to which Wall Street leads international markets today or whether Chinese markets are leading others.
Are we nearing the end of the multinational? One prominent trade economist, Jagdish Bhagwati, called multinational corporations the far-ranging B-52s of globalisation. We pool together an extensive set of corporate profit and loss statement and balance sheet data for 4000 companies going back to 1970 to examine whether the composition of revenues of multinationals is becoming more global and the extent to which their investment spending also reflects this.
Are we looking at the rise of ‘managed democracies’? Following our 2011 publication on the economic implications of the Arab Spring, we examine the extent to which democracy has spread throughout the world and in contrast the number of increasingly wealthy countries which could be described as managed democracies. The authors also consider ways in which new international institutions reflect an increasingly multipolar world.
Concentration and multipolarity index
Trade, investment and to an extent people flows are the bases of globalisation. In this section we aim to establish the extent to which trade and other activities are concentrated in a small number of countries, or whether they are more dispersed across the globe (more multipolar). Specifically we calculate a concentration index (Herfindahl-Hirschman index) for a range of indicators. The index is developed such that countries having larger shares in world totals get higher weights and those with smaller shares are awarded lower weights. This magnifies the level of concentration and makes trends in concentration more perceptible. Simply put, a lower level of concentration would support the hypothesis of growing multipolarity. The authors further develop the multipolarity index as a derivative of the concentration index for select economies, in order to gauge how trends within major poles have changed with time.
To start with, the author examinea trends in concentration for GDP and trade. Figure 10 shows how concentration in world nominal GDP declined during the period 1960-2013, suggesting that world GDP is now more widely spread amongst countries. In order to account for any biases in nominal data, we also analyse GDP in PPP terms and real GDP (in constant terms) and find that the results remain largely unchanged. However, we do not represent those results here, and stick to nominal GDP, with an aim to align the treatment of all variables in our concentration index.
Similarly, concentration levels in world trade (exports and imports) have declined significantly; supporting the conjecture of the world being more multipolar today than it was in 1960.
Game changer No. 1: Automation
While a fully humanoid robot is still a distant fantasy, industrial and consumer robots are increasingly capable of taking over tasks previously done by humans. 3D printing enables on-site production of crucial inputs. Self-driving cars are not far away from a commercial breakthrough. Even warfare is executed by robots with the rise of military drones. The replacement of human labour by robots and computer algorithms has the potential to alter demographic challenges that many countries face, while at the same time changing the marginal products of capital and labour on a global scale.
How it could make the world more connected: It is unrealistic to think all countries would develop competitive robotics industries, so even if robots, once produced, reduced interdependence between countries, the production of robots would still be concentrated in a few regions of the world, keeping up global interdependence. Changes in manufacturing processes together with cheap energy could, however, drastically alter the economic landscape of the world to the advantage of countries lacking labour, but endowed in capital.
How it could make the world more fractured
Innovations such as 3D printing (additive manufacturing) could reduce the need for global trade in intermediate goods and even end products once it is commercially viable to print these instead of transporting them across the globe. Also, in the far future the use of robots in warfare could lower human interaction and risk for the combatants lowering the political price for military action. This could possibly lead to more instability in global politics.
At the aggregate level, the author constructs the concentration i