The focus of public debate on globalization has shifted. Before the financial crisis the inevitable need for labor market adjustments was a hot topic. Attention has now turned to the risks to the globalization process lurking in unresolved global imbalances.
Dynamic globalization process over the past 20 years
At the economic level, the term “globalization” can be used to describe a process that leads to an intensification of international economic relations as natural and man-made barriers fall. The globalization process developed particular momentum in the early 1990s. It is not only characterized by declining transportation costs and tariffs, but was also given a substantial boost by the integration of China, India and the economies of Central and Eastern Europe into the world economy. This has resulted in a much greater abundance of labor for companies that are active on the global stage.
New opportunities, in terms of more efficient resource allocation and therefore higher per capita incomes, started to emerge. Faster integration was also promoted by new methods of production driven by technological change. It had become easier to split production into various sub-processes, so labor-intensive parts of the production chain could be outsourced abroad. This “fragmentation” made cross-border trading in intermediate goods an increasingly significant feature of international trade.
The marked change in global supply and demand conditions has not only brought economies closer together, it has also made relations more complex:
- Over the past 20 years, world trade has expanded by an average of 6.5 percent a year, significantly outstripping growth in global economic output, just as international capital flows did. So the degree of openness has increased in many countries.
- The weight of the emerging markets in the global economy has become significantly more prominent.
- Globally active financial institutions and a whole range of derivatives have moved the financial markets closer together, resulting in the emergence of more complex relationships, in addition to those caused by global production chains.
Overall, this is why shocks in major economies now have a greater and longer-lasting impact on the system as a whole.
Financial crisis highlights potential for tension
Globalization not only creates opportunities, it also carries risks. The varying pace of change in the three key areas of international economic relations (economic, financial, and exchange rate policy) has proved problematic. Although autonomous centers of growth have emerged in the global economy, there are still marked differences in the development stage of the individual financial systems. This helps to explain why the USD is still the dominant reserve currency. There can be no talk of a multi-polar system yet. Rather, the system is more of a hybrid one in which many countries more or less peg their currencies to a few freely floating currencies.
These asymmetries have contributed to the uneven growth in the global economy for some time: on the one hand, an export-oriented growth strategy pursued by many emerging markets which involved keeping their own currencies low and accumulating vast currency reserves; on the other, growth in domestic demand in industrialized nations fueled by increasing debt. There is now a broad consensus that these global imbalances, which were reflected in yawning gaps in the current account positions, contributed to the financial crisis of 2007/2008.
Outlook and risk assessment
To date, the economic rebound from the financial crisis has been uneven across countries, with the recovery in some countries proving fragile. Meaningful adjustments will be needed in both the advanced economies and in the emerging markets in order to return to the strong, sustainable and balanced global economic growth envisaged by the G20 in its framework of the same name. In the industrialized countries, the main task in hand will be to forge ahead with budgetary consolidation and reduce monetary stimuli. It would be easier to implement this turnaround if stronger external trade impetus were able to compensate for the loss of domestic demand.
In contrast, the emerging markets, particularly in Asia, will have to gradually move away from export-oriented growth models by overcoming structural deficits in their domestic economies. This will, first and foremost, involve fostering domestic demand, developing financial systems, strengthening financial supervision processes at the same time, and making exchange rates much more flexible. One positive aspect, in this context, is that China has announced reforms aimed at achieving growth that is driven more by domestic demand. Yet it is still unclear how quickly the individual economies will manage to put these adjustments into practice. Incompatible adjustment strategies could lead to undesirably low global growth. This, coupled with the resultant possibility of waning commitment to open markets, could undermine the globalization process.
Bearing this in mind, some developments in recent years give rise to the concern that, in the future, sufficient and sustainable global market access to commodities under fair conditions for all consumers might prove more difficult or impossible. The problems include:
- Strategies employed by emerging markets to protect their own resource bases
- Attempts by some emerging markets to gain preferential access to commodities
- Concentration of production on a small handful of countries, together with a lack of political and economic stability in some commodity supply countries
Irrespective of whether the first two trends mentioned are economically motivated or driven by political motives in anticipation of conflict, these potential barriers to unrestricted access to commodities also pose a significant risk to the global economy.
The problem areas outlined above underscore the need for intensified international economic policy cooperation. It is to be hoped that the G20, with the “Mutual Assessment Process” it has agreed, will come up with constructive decisions on all relevant policy aspects, including commodity policy.