Why the world should embrace globalization

Ken Moak March 12, 2017 1:34 PM (UTC+8)
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Globalization means different things to different people. For this article it is defined in economic, geopolitical, cultural and social terms. The economics part refers to international trade and investment. The geopolitical segment focuses on non-economic international relations such as military alliances and supranational institutions such as the United Nations. Culture emphasizes the arts and people. The social aspect centers on immigration and its impact on both the source and receiving nations’ economic, political and social institutions.

Promoting free or freer international trade and investment is based on the 18th century English economist David Ricardo’s theory of comparative advantage. Ricardo argued that a country should export the goods and services with relatively lower production costs, and import those that incur a relatively higher cost. In this way, resources would bring economies of scale, increase productivity and spur economic growth.

Free or freer trade has benefited the world immensely, albeit not for everyone. Domestic industries incurring a comparative disadvantage have been out-competed by more efficient foreign industries. Failing to address the consequences by using proactive remedial policies (i.e. job-retraining programs, tax incentives to encourage struggling firms to move resources to alternative investment ventures) worsened the economic plight of investors and workers displaced by liberalized trade.

Free-trade losers began to look for someone to blame, giving rise to protectionism and populism. Adolf Hitler blamed the Jewish community for Germany’s economic problems. Governments on both sides of the Atlantic erected import barriers.

Global protectionism led to the Depression

Instead of solving the protectionist and xenophobic countries’ economic, political and social problems, the problems worsened. Racism brought political and social instability. Protectionism crippled export opportunities and further weakened already fragile economies. The result was the Great Depression which ended with the Second World War when governments poured capital into the production of armaments and consumer products.

When victory over the Axis powers (Germany, Japan and Italy) was imminent, the Allied powers concluded that liberalized international trade and investment were essential to rebuild the world economy. In 1944, the Allied leaders met in the small American town of Bretton Woods, New Hampshire to chart a course for the post-war global economic order. The US and UK were the key architects of that new order, establishing the International Monetary Fund, World Bank, the General Agreement on Tariff and Trade, and making the US dollar the world’s reserve currency. The US dominated global trade and finance from 1945 to 2008.

The 2008 financial crisis exposed vulnerabilities among the developed economies, including huge private and public debt. The G7, made up of the world’s seven richest economies — US, Japan, Germany, UK, France, Italy, Canada and the EU — has amassed average public debt/GDP ratios of 100% and consumer debt/personal income ratios of 105% respectively. High debt levels prevent the G7 economies from boosting domestic demand to help recover from the financial crisis because private and public consumption account for more than 85% of GDP. Adding to the problem are marginal wage increases, rising at less than 2% a year because most of the jobs are in low-wage service sectors.

Attempts to reverse the slow-growth trend did not work as well as expected. Quantitative easing — printing money in order to buy sovereign debts (i.e. treasury bills) — was used to inject liquidity into the economy by bailing out banks and giving governments funds to maintain fiscal programs. Setting the short-term lending rate near zero was supposed to encourage borrowing. A third attempt was a negative interest-rate policy, penalizing savers. None worked the way policy makers intended or revived economies primarily, if not entirely, because of low domestic private and public consumption.

World economies need external markets to thrive

Other economies — developed and developing countries — need external markets to sell their resources and manufactured goods. Russia, Brazil, Canada, Australia, would not be what they are today had there been no markets for their natural resources. Access to external markets is also important for China in spite of its rapid economic growth and huge domestic market. The country needs external markets to reduce industrial overcapacity, acquire natural resources, and open opportunities for overseas investment.

China is vigorously pursuing the “One Belt, One Road” initiative — land trade routes linking the country to Europe through Eastern Europe in the north and Southeast Asia, South Asia, Africa, the Middle East in the south. More than 100 countries are showing interest in the initiative and 40 have signed investment and trade agreements with the Chinese.

Geopolitically, the world is becoming increasingly dangerous with tensions rising between the West, including Japan, and China and Russia. North Korea is developing nuclear-capable missiles that could hit US military bases in Asia and perhaps the American mainland. President Donald Trump wants to increase defence spending by US$54 billion and expand the nuclear arsenal to ensure US military supremacy. Trump also wants European and Asian allies to “pay their fair share” of the cost of protection against potential adversaries. An arms race between the U.S. and its allies and China and Russia cannot be ruled out.

Unless the superpowers are willing to risk world destruction, international cooperation is needed to avoid the so-called “Thucydides Trap” — the theory that a rising power instills fear in an established power which then escalates to war. While history has proven the theory, past wars for dominance did not involve nuclear or other weapons of mass destruction. Moreover, thanks to missile technology, there is no guarantee the US will be spared from attack as was the case in past military conflicts. Last but not least, the US and Chinese economies are already joined at the hip, prompting the US scholar, Niall Ferguson to coin the term “Chiamerica”.

On immigration, America has become what it is today is in part because it promoted and welcomed newcomers, attracting the world’s best and brightest. No country has more foreign-born scientists and engineers studying, teaching and working in its universities, research facilities and industries, making the US the world’s dominant innovator.

Immigration will stave off a demographic crisis

The developed countries need immigration because the birth rate of 1.6 child per family is lower than the death rate of 2.2, resulting in an aging and declining population. If the trend is not reversed, the developed countries could face a demographic crisis in which fewer people will be working and paying taxes, but more people will demand pensions and health care. Japan is already feeling the impact; its deputy prime minister is telling the country’s elderly to die early. Even China is facing an aging population because the one-child policy reduced the fertility rate to less than 1.6 child per family from 2.8. To deal with the issue and prevent the economy from falling into the “middle-income trap” (it cannot become a high-income country), the Chinese government has instituted a two-child policy.

The main sources of immigrants will likely be Africa, the Middle East, Latin America and South Asia whose fertility rate at more than 2.5 is above the replacement rate. Some may oppose immigration from these regions, but it may be a “win-win” — solving the demographic problem in the West and reducing misery in the poorest continents. To prevent racial tensions, however, there must be strong political will and adequate resources to integrate newcomers into mainstream western society.

Culture and people exchanges are perhaps the most effective ways to forge harmonious international relations because they improve mutual understanding. US-based Pew and Gallup polls show that Americans and Chinese who have exchanged visits and worked and studied in each other’s country have a more positive view of the other. Indeed, today’s foreign students would become tomorrow’s leaders.

Another benefit of cultural and people-to-people exchanges is economics. Thousands of foreign students studying in the West subsidize its universities and spur economic activities. The more than 120 million Chinese tourists play an important role in sustaining economic growth in countries like Japan, South Korea, Australia, Europe, the Americas, Africa and other regions worldwide.

 

 

Ken Moak
Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact (Palgrave McMillan, 2015). His latest book is titled, Developed Nations and the Impact of Globalization and it will be published by Palgrave McMillan Springer in 2017.
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