Globalization Giving Way to the “Deglobalization Paradigm?”

 

http://www.fpif.org/fpiftxt/6399

In the above-linked article (one I strongly encourage you to read) Philippine economist Walden Bello, who the Economist magazine credits with coining the term “deglobalization,” advances what he calls the “deglobalization paradigm,” a new economy that he proposes to replace the failed model of globalization.  His article includes what he calls “11 pillars of the alternative” – key features of this new economy.  First and foremost among them is domestic manufacturing. 

At the same time, an article in the Economist (see 

http://www.economist.com/world/international/displaystory.cfm?story_id=13145370) observes that globalization seems to be in full retreat on all fronts.  Of course, this is a source of great consternation for the Economist, since the failure of globalization would be an indictment of the economic theories at the foundation of the Economist’s core beliefs.  What hope would there be for a magazine peddling what has been proven to be utter nonsense? 

Bello is right on in his observations of the current state of economics.  All major economies of the world have acknowledged the need to depend less on exports and more on domestic consumption as the foundation of their economies.  But none have taken any concrete steps to move in that direction.  Toyota isn’t closing any dealerships in the U.S.  LG Electronics isn’t pulling TVs from the shelves to make room for American-made alternatives.   And China hasn’t told any of its ships to turn around.  Nor has the U.S. taken even the smallest step toward tariffs designed to make domestic manufacturing the logical choice.  Instead, our government is desperately trying to resume the force-feeding of debt for the American consumer.  Like a comatose patient kept alive with feeding tubes and breathing machines, our economy is sustained with an IV drip of printed money by economic doctors who have no clue as to what to try next.  They heave a collective sigh of relief at seeing the vital signs stabilized, but know very well that it’s all an illusion – that the patient is surely dead if that life support is removed. 

Although Obama has publicly disavowed any moves toward protectionism and has, until now, pinned all his hopes on promises by export-dependent nations to boost domestic consumption and rely less on those exports, Monday’s move by Obama to name Ron Bloom a sort of manufacturing czar for the economy may be the first hint that he’s beginning to hedge his bets.  Perhaps it’s a sign that he’s losing patience with the current approach and recognizes the need for a real strategy for boosting domestic manufacturing.  Surely it hasn’t escaped his attention that the economies that have fared best in recent years, most notably China, are those that have been built on a backbone of manufacturing, while those that have eschewed manufacturing in favor of financial wizardry, as the U.S. has done, are now paying a heavy price.  And it was probably no small source of irritation that countries like Korea and Japan, who have promised to rely less on exports, pounced on his “cash-for-clunkers” program, siphoning sales away from domestic auto manufacturers, further eroding their market share and turning the program into a GDP-destroying boost in the U.S. trade deficit. 

The “deglobalization paradigm” is coming, and not a moment too soon.  But before we write the epitaph for globalization, it’s critically important to understand why, instead of boosting all economies, it produced persistent trade imbalances that finally brought the global economy to its knees. Otherwise, there will be constant attempts to re-start the process again.

The hopes for globalization were rooted in a free trade theory that all nations benefit when each specializes in what they do best, trading that product for those of other nations. But this theory failed to account for the relationship between population density and per capita consumption, and what happens when nations grossly disparate in population density attempt to trade freely with one another. When one understands this relationship, it becomes easy to predict that a nation like the U.S. would experience large, persistent trade deficits with nations like Japan, Germany, China and others that are all far more densely populated. And it becomes easy to predict the trade imbalances that finally ground the global economy to a halt.

Nations like Japan, Germany, China, Korea and others didn’t become so heavily dependent on exports out of choice or out of neglect of domestic consumption. Their extreme population densities make them incapable of domestic consumption at a rate that will gainfully employ their bloated labor forces. Globalization allowed their economies to thrive through manufacturing for export, siphoning jobs away from the U.S. and other less densely populated markets. Efforts to boost domestic consumption in such overpopulated nations will fail and without the exports that they’ve come to rely upon so heavily, unemployment in those nations will soar. And it’s just as easy to predict that, unless nations are given the freedom to set tariffs aimed at maintaining a balance of trade, nothing will change and global trade imbalances will persist.

For some period of time, the new “deglobalization paradigm” will spell huge problems for economies now dependent on exports. But in the long run, they’ll be far better off, as long as they recognize that a sustainable economic strategy is one that includes reductions in population densities to a level where domestic consumption isn’t choked off by over-crowding.