Kenneth Rogoff wrote an article (Deglobalization Will
Hurt Growth Everywhere, Project Syndicate, June 3, 2020) in which he convincingly
argues that deglobalization will put the brakes to growth and hurt everyone,
which is a shame given that globalization helped lift billions of people out of
poverty. This is understandable, but Rogoff left a few loose ends flutter in
the air, and they need tiding up.
Look
what Rogoff says: “True, globalization has fueled economic inequalities among
the approximately one billion who live in advanced economies.” In the next
paragraph, he says this: “Global capitalism has lifted billions of people out
of desperate poverty”.
Well,
it does not take a PhD in economics to see that the wealthy in the advanced
economies transferred enough of the means of production from the countries
where they began life, to the poorer economies, thus helped the latter raise
their standard of living somewhat, but also helped the wealthy become wealthier
… and all that was achieved on the back of the working middle-class in the
advanced economies.
So,
what was the political result? It was a backlash that brought serious
consequences. It was the rise of populism in North and South America, as well
as Eastern and Western Europe. That's where right-wing politicians, as bumbling
idiots as they are, were able to get themselves elected simply by promising to
bring back the means of production, and revive the middle class that
globalization had decimated.
Was
the trade-off worth it to begin with? Apparently, Kenneth Rogoff does not mind
it, now that globalization is here. In fact, he believes that a rollback of
globalization will be bad for both the developing and developed economies. He
says that, “for smaller economies and developing countries, a breakdown in trade
would reverse many decades of growth”.
He
also reckons that whereas the largest and most diversified economies will
survive the ordeal of deglobalization despite some losses, the smaller
economies that lack a close economic alliance with a large state, face huge
economic risks, and will suffer “a significant fall in their national incomes”.
He
went on to discuss the dubious kind of benefits that globalization has brought
with a passage such as this: “Financial globalization has arguably had an even
larger effect by increasing the profits of multinational corporations and
offering new high return foreign-investment instruments for the wealthy.” Bear
in mind that getting wealthy by wheeling and dealing in financial instruments
means getting wealthy without adding one iota of real wealth to the economy,
whether it is a developing economy or a developed one. It is like gambling in a
casino, playing a zero-sum game where the dealer is the central bank that never
gets back all its money.
So
then, why is it that in a world where, “the US gets to be the hegemon, most
countries, including China, have a stake in making the international order
work”? Well, they have a stake because until a new system is invented and put
in place, the existing one remains the only game in town. And those that have a
say in the matter, benefit from what's there, and so they don’t rock the boat.
This situation can be understood by doing a simple thought experiment. So,
imagine the following:
One
of two small nations, similar in almost every way, tries something new and
deteriorates its economy. The worth of its currency goes down to zero and so,
it officially adopts the American dollar as its currency pending the issuance
of a new currency of its own. That day comes, but the country continues to
dollarize its economy, using both the dollar and its new currency as official
tenders. In no time, the economy gets back in shape, the currency is now worth
twice as much as the other nation, and its people seem to enjoy a higher
standard of living. How and why did this happen?
The
answer is that every transaction done with the use of a currency, subjects the
currency to danger. The bigger and more frequent the transactions, the greater
the danger. Thus, while it suits every country to use its currency to serve its
local economy, it tolerates using someone else's currency to do business both
at home and abroad.
Since
the dollar is accepted everywhere, most nations use it to do business abroad if
and when they have it, to protect their own currency. This maintains the local
currency at a high level, while a favorable exchange rate gives the impression
that the population enjoys a higher standard of living than the fundamentals of
the economy would warrant. This is why no country is eager to dump the dollar
as yet.
Rogoff
decries trade frictions because, he says, they cause three things that please
some people and displease others. They would be (1) a decrease in financial
globalization. (2) A fall in the profits of multinationals as well as the value
of stocks on the stock exchanges. And (3) they cause a drop in foreign demand
for US debt instruments. Like Rogoff said, not many people would shed tears
over that.
Can
rules be negotiated and implemented among the nations of the world so as to
avoid the pitfalls of having or lacking worldwide free trade, while maximizing
the benefits of international trade?