Is This The End Of Globalization?

Globalism’s Journey And The Popular Response

Until the financial crisis, globalization seemed a one-way street. Companies in the West benefited from lower costs and higher profits as production was offshored, while consumers enjoyed falling prices that helped them to feel more prosperous and kept inflation under control. At the same time, emerging markets experienced the fastest transformation of living standards in history. In a generation, China all but wiped out urban poverty, with per capita income growing from $200 in 1990 to $5,000 in 2010.

Then in 2008, the financial crisis struck. In the West, living standards fell, jobs were lost, and, in some countries, social security was slashed as part of austerity measures. Public discontent was palpable, and politicians of all stripes sought to exploit it. In the immediate aftermath of the crisis, anger was directed primarily toward the financial sector. However, in recent years, the political backlash has pursued a bigger boogeyman.

Globalization became vulnerable because the financial crisis revealed previously concealed fault lines: Not everyone was getting richer during the 1990s. According to Branko Milanović, author of Global Inequality: A New Approach for the Age of Globalization, the world’s top 1% (who are disproportionately located in developed countries: America’s richest 12% are in the global top 1%) were winners. Middle classes in developing nations, notably China, were also beneficiaries. The working and middle classes in developed countries lost out. They became the bedrock of populist movements.

“Since the 1990s, capitalism has gone global—with a consequent impact on income distribution—while the mass electorate has remained local,” explains Karthik Sankaran, global strategy head at Eurasia Group. “The problems created by this divergence weren’t immediately apparent in the US because there was a compensatory mechanism in place—consumption held up because household leverage kept increasing. However, since the crisis that mechanism has broken down, and the outcome is anger against finance, globalization and migration.”

Is populist anger against globalization fair? Locally, many recent trade deals have certainly wreaked havoc. “Liberalization can have effects on a particular trade or industry, in some cases concentrated in a specific geographical area,” notes Douglas Lippoldt, senior trade economist at HSBC. For an unemployed autoworker or steelworker in a one-industry town, it is easy to blame cheap labor in developing countries and tempting for politicians to promise to “bring jobs back home.”

Ira Kalish, chief global economist at consultancy Deloitte Touche Tohmatsu, says, however, that globalization is not to blame. “Some people have seen their incomes stagnate as manufacturing jobs have disappeared in developed countries,” he notes. “However, the main reason for this is changes in technology.”