“After decades of unbridled growth of globalization, the discontent of large portions of the population in advanced economies is curbing the expansion of international trade and global financial integration. It seems that a new era has begun or, at least, the transition to a new scenario in which capital flows and international trade will play a less relevant role.”
The vote in favor of Brexit, the victory of Donald Trump and tariffs, the rise of populist parties that defend protectionism or the closing of borders are a clear sign that in advanced economies there is an increasing part of the population that is not comfortable with the current situation.
The Great Recession has been able to influence this change, but it may not be the most relevant factor, especially now that many countries have closed their production gap and have reached record employment levels without being able to appease the population.
Decreasing returns from globalization
Globalization has limits. Extensive work published by the IMF in March highlighted that globalization shows diminishing returns, that is, as a country is more economically integrated in the world, the benefits of this process are lower. Moreover, in the more ‘globalized’ advanced countries, further increasing this economic integration does not have any benefit on growth, while it could mean an increase in income inequality within the country.
Although a higher level of globalization has little impact on growth for advanced countries, there is an increase in income inequality because individuals who are already in the upper part of income take a greater part. Even so, no stratum of the population loses income in absolute terms.
On the other hand, in developing countries it has been observed that globalization has also benefited low incomes (in addition to high incomes) by lifting millions of people out of poverty.
“The interpretation of these results is that the growth and inequality data suggest that inequality has been increased by the profits of the rich and not because the poor lose income.”
This relationship between income inequality and globalization is demonstrated in the advanced countries (whose opening to the outside is usually much higher than the average) that present a primary income inequality (without taking into account taxes and transfers) higher than the countries less globalized. However, the more globalized economies distribute secondary income much better, after the public sector is responsible for altering the distribution of these incomes.
By way of conclusion, it can be said that globalization reduces inequality between countries (global economic convergence) and reduces poverty, increases income inequality within countries, while its benefits on growth are decreasing as the country reaches a higher level of economic integration in the world.
The reaction to the limits
These limits affect mainly the developed countries, whose levels of integration are already high (they can not benefit from more intensive globalization) and where the lower classes (60% of the population with lower incomes) are not benefiting of globalization. These factors have been a brake on this phenomenon that could be the beginning of a new era.
John Iannis Mourmouras, vice president of the Bank of Greece, explained in a recent speech that “the world economy has entered a new era known as ‘post-globalization.’ According to this Greek economist, this new era could be characterized by strong migratory flows, increasing income inequality, the creation of different segments of the population within the same country and high unemployment rates in some developed countries.
This expert believes that a good example of these changes are represented by populist governments, such as Donald Trump in the US, the vote of the Brexit in the United Kingdom, the new Government of Italy or what has been seen for some time in Poland , Hungary or Austria.
However, Mourmouras emphasizes that:
“This is not the end of globalization or a deglobalization, it is a new type of globalization with new regional centers that will begin to occupy their places in a new multilateral global order.”
The change towards a multipolar world with spheres strong regional reforms implies a reduction in the role of globalization “.
The rise of China and other countries from different continents are proof that multipolarity is being launched. These countries will have a very strained relationship with the nations of their area of influence, but could lose some connection with the rest of the great powers and their allies. Today you can see how the US is approving tariffs against China but exempts its allies, while Beijing does the same.
Mourmouras warns that an escalation of these commercial conflicts “are a real danger that can have negative effects on the economy, with upward pressures on prices given that trade wars are stagflationary (low growth or recession while inflation grows hard).
To conclude, this expert points out that in post-globalization trade and capital flows between countries will have a relative weight (with respect to GDP) lower than those witnessed before 2008.
“The rivalry between the superpower of the 21st century, USA, and the emerging superpower of the 21st century, China, will shape this new era of post-globalization and decide the future of the entire world.”