The debate over the future of globalization has heated up, with political populism framing dystopian alternatives. Anik Bose takes a look back, and a look forward, sharing his outlook on this critical topic.
Evolutionary Perspective
The World Economic Forum famously defined three historical phases of global economic integration. The first was the period leading up to 1914, when immigration, trade and cross-border capital flowed freely, even by contemporary standards. Limited global institutional architecture permitted travelers to cross borders without passports and immigration policy enjoyed freedom from governmental limitation; but only a small handful of international economic agreements and cooperative institutions had yet emerged on the world stage.
The second phase extended from the Second World War to the late 1990s, in which much of the modern international enabling architecture was established to facilitate economic cooperation. During this period, multinational corporations greatly expanded their operations across the globe, aided not only by policy liberalization, but also by improved communications.
The third phase ran from the late 1990s to the present, characterized by the advent of the Internet, the establishment of the World Trade Organization (WTO) and the formal entry of China into the global trading arena. This phase ushered in critical improvements in information technology and financial risk management along with continued liberalization through regional free trade agreements and bilateral investment treaties. All of these developments, buoyed by the integration of markets and cross-border expansion of value chains, brought globalization to new heights, as the world economy continued to expand, and integrate, in breadth and depth.
We are now entering a distinctively new era that challenges the assumptions of prior periods. Key policies in Washington around immigration, data privacy and security, coupled with critical developments abroad, like Brexit, China’s Belt and Road Initiative, and multi-speed European integration signal a demonstrable shift in posture from the chief advocates of global integration. Against this backdrop, the COVID-19 pandemic, and the accelerated impact of automation on the future of work has upended many of our beliefs: from capitalism to neo-liberalism, from the over-significance of work to realizing work-life balance, and from globalization to nationalization.
The Future of Globalization
While these are still early days of an uncertain new phase, a few clear directions are beginning to emerge:
- In the near term, the social effect of COVID 19 is likely to drive anti-globalization policies like immigration restrictions and trade protections to support domestic economies. While the pandemic has disrupted the international order — legally, socially, politically, and economically — we believe that the adverse effects on globalization are temporary, and that they will provoke more “focused” international cooperation among nations in the long run. One such example is the emergence of sector-specific global agreements in new areas of the economy (instead of a one size fits all approach negotiated amongst all WTO members) with e-commerce, digital trade, and customer privacy presenting initial staging grounds.
- We anticipate a broad restructuring of existing supply chains. Businesses used to allocate production purely on the basis of cost advantages; yet, today’s crises underline the need for companies to design supply chains around risk competitiveness as well. The natural outcome points to a diversification of supply chains, which is actually the exact opposite of localizing production. Accompanying this shift, the redesign is apt to integrate productivity gains offered by AI-enabled automation, which is poised to play an increasing role in supply chains.
- We also forecast increasing numbers of high-quality cross border enterprise startups conceived outside Silicon Valley, in Israel, Europe and India. With tighter immigration restrictions, global innovation will be shaped locally, by abundant high-quality talent abroad, backed by a demonstrable rise of AI curriculums in universities and innovation centers around the world. Critical to the success of these startups will be VC firms that can help those entrepreneurs penetrate the US market and gain access to later stage capital. As the VC eco-systems shrink with the unfolding recession the role of quality cross-border VC firms will grow in relative importance. Firms with a strong cross-border DNA, expertise in global company building along with experience across recessionary cycles will thrive.
Conclusion
Waves of globalization have been associated with high growth rates, declining poverty, increasing efficiency and greater living standards. Periods of protectionism, by contrast, have been accompanied by slow growth, lower living standards, and, ironically, higher inequality. This is best exemplified by the aftermath of the Great Depression and the ensuing protectionist policies that distinguished this era. As a consequence, we advocate a reshaping, rather than a replacing, of the existing order. While the third phase of globalization had its shortcomings — especially in terms of equality, a one size fits all WTO approach, environmental protection, human rights protection, and supply chain risks — it still presents a workable basis from which to reform the system and increase global innovation rather than collapsing it altogether.
