Globalism has a blind spot

For some weeks now I have been chewing on a Bloomberg article By John Micklethwait and Adrian Wooldridge. Although I thoroughly enjoyed their analysis of the Ukraine war and its further implications, I do think it deserves criticism. Not on what they said, but more on what they did not say.

According to the authors, we are in the second great age of globalization, and the current conflict may spell its end unless the West intervenes. For the casual observer of history, it may seem that globalization is a one-way street. ‘In an ever-globalizing world…’ has been a cliché in international studies for as long as I (or my parents for that matter…) can remember. If we however take a step back, we will see that the current trend of globalization only took off from the 1980s onwards. The decades before that were marked by an increase in protectionism, conflict and a drive towards self-sufficiency.

The first great age of globalization was started by the industrial revolution and came to its climax in 1914. Micklethwait and Wooldridge quote the famous economist Keynes who describes a Londoner who could order products from all over the world and invest in new enterprises on the far side of the globe. Although his telephone did not have the same functionalities as ours, the situation does contain strong similarities to the current day. Interconnected as the world’s great economies were, this could not prevent the terrible First World War (1914-1918). In these years European dominance of the world was dealt a severe blow. Sadly, European leaders were unable to form a lasting peace: the Second World War (1939-1945) was far more destructive than the first and definitively ended European world domination. Although the peace formed in Europe was to be lasting this time, a large part of the world came under the influence of communism and was thus cut off from the rest.

While this situation continued for decades, the 1980s saw a resurgence of the globalization model. US president Reagan cut taxes and liberalized financial markets while prime minister Thatcher did the same in the UK. At the same time China opened it economy to the world with reforms starting in 1978 while India thoroughly liberalized its economy in 1991. The communist block led by Russia fell apart in the late 1980s and early 1990s and allowed its constituent parts to chart their own course. All of these new countries liberalized to varying degrees with many formerly communist states joining the EU.  Moreover, great technological advances were made in telecommunications and transportation. Multinational companies took advantage of these opportunities to invest abroad to chase after the highest possible returns and the lowest possible costs. Their success is undeniable as ‘(w)orld trade in manufactured goods doubled in the 1990s and doubled again in the 2000s.’ More importantly the process ‘dragged more than a billion people out of poverty in the past three decades.’

And as the authors rightfully state, this process is under threat. President Putin has shown by invading Ukraine that he is unwilling to play by the rules and is now facing the consequences. Micklethwait and Wooldridge praise Biden as he ‘has drawn a line between supplying the resistance and becoming involved in the war (or giving others an excuse to claim the U.S. is involved). And he has put firm pressure on China to stay out of the conflict.’ I agree with this assessment: Western leaders are doing a fine job punishing Putin without escalating the military conflict. As justified as these sanctions are, it seems unlikely that they will be punishing enough to force Russia to back down. In the most likely case, the current sanctions are to become a more or less permanent fact of international relations. Globalization is thus dealt a serious blow, with Russia and its closest allies being cut off from the Western-led economy, much as they were during communist times. Even more significantly, China will also realize that access to the global economy can be limited for political reasons.

The authors decry this possibility as a negative development. However, I feel they have not made explicit for whom or in other words from which perspective. The authors state that ‘once politicians got out of the way, globalization sped up’. From that point of view globalization has been driven by the absence of ideology. I assert that this is fundamentally not true, the ideology is there, but implicit.

To illustrate this allow me to share a personal experience. When I was studying for my master’s degree in business administration at the RSM, it was made clear to the students that there was only one important measure: creating shareholder value. This is what the investor is after, the value of a stake in the company, assumed to be bought and sold at will. The great thing about shareholder value is that it is measurable and can safely be predicted as long as one’s assumptions are sound. It is, in that sense, ‘real’. And a relentless focus on shareholder value makes decisions far easier. Although the calculations behind these decisions can be highly advanced, requiring the input of experts in mathematics and computer science, the goal is always clear.

I have to admit that this idea held serious appeal for me. It is incredibly hard for any person in this world, at this time, to know what they want they do. A clear, objective and quantifiable goal is an advantage of not only instrumental but moral and spiritual value. What is more, in a truly free market you are never able to force another person. Any transaction is based on a ‘win-win’ principle: both parties get better for it. Also keep in mind that shareholder value does not care about a person’s ethnicity, religion or lifestyle. Every person is equal in the pursuit of more value.

And thus, the West embarked on a new mission: financial markets were liberalized, factories moved to cheaper locations, interest rates lowered to facilitate borrowing. Our success came to be measured by GDP growth, stock market performance and ‘ease of doing business’. And by those measures we are doing great. Stock markets are at all-time highs, interrupted neither by the pandemic nor by the war. Real estate has never been more valuable and unemployment never lower. Micklethwait and Wooldridge describe this as ‘paradise’, sadly the serpents ‘from ethnic rivalries to angry autocracies to a generalized fury with the rich — are slithering where they will.’

These ‘serpents’ are irrational and defy economic logic. They make decisions that are ‘economically self-harming’. Furthermore ‘these stupidities reinforce each other: Thus, the French are responding to Britain’s act of self-harm in leaving the EU by cutting their companies off from the continent’s main source of cheap capital in the City of London.’ This raises a very obvious question: why are people not happy with this paradise? or more to the point: why did almost a quarter of the French electorate vote for Marine le Pen? Are they just stupid? I do not think so, on the contrary; I think the globalization discourse is missing some indicators.

Globalization has pushed shareholder value to new highs but has done so by keeping wages low. A retreat of globalization means risk for free global flows of ‘trade, capital flows and migration’. Each of those has made most Europeans worse off. Free trade means that production can be moved to the far end of the world, forcing Western workers to compete with those in Asia and elsewhere, mostly places that do not have the strict rules that govern production at home. Free capital flows mean that financial risks taken in one country can have repercussions across the globe, as we painfully learned in 2007. Migration is a double-edged sword that has impacted both peripheral and central regions. In peripheral regions the young and entrepreneurial have left, making the region ‘left-behind’, while in central regions the additional supply of labor has put wages under pressure and has added fuel to the fire of housing markets, on which one now has to compete not only with other citizens but also with investment funds all over the globe.

Micklethwait and Wooldridge rightfully mock populists who talk about ‘sneering elites and hidden conspiracies.’ However, this discourse hides the deeper truth behind the populist voters’ concerns. It is great that the stock market is doing so well but for most people that is not the most important measure. First of all, 50% of people do not own any assets, for them any increase in share prices and house valuations has no benefit. Furthermore, the current economic situation means the end of social mobility. The only way a ‘have-not’ will ever be able to become a ‘have’ is if their earned income is high enough to catch up and get on the property ladder. A world in which wages remain subdued while assets grow at an unprecedented pace is bad news if your income mainly consists of wages. This is why this is not only a class conflict but also a generational conflict. In that context it is not surprising that incumbent president Macron has the largest level of support among those older than 70. Globalists everywhere will need to address this economic discrepancy if they want to retain voters apart from the rich and retired.

One electoral strategy often employed is a call for ‘liberal values’, it seems however that what these values entail is increasingly unclear. Micklethwait and Wooldridge urge Biden to form an alliance of democracies with ‘Singapore and Malaysia.’ While these two states have made great progress in recent decades in ease of doing business and other indicators, they can hardly be called democracies. Malaysia segregates its citizens based on religion while Singapore’s streets remain spotless by threatening litterers with corporal punishment. And that illustrates the great downfall of the ’shareholder value’ brand of ideology: it rings incredibly hollow.

For those left behind by globalization, a new and improved version of globalization does not inspire much trust. This new version should ‘include a focus on making multinational companies pay their taxes’. But why would we trust a system that has been printing money for years and handing it over to these same corporations? Also ‘the environment should be to the fore’. But why should we trust a system that has used the money printer as well as taxation to generate funds for corporate subsidies under the flag of ‘going green’? Is it any surprise that for many Europeans a less globalized world seems like a better alternative to the status quo? In another well-worn cliché the globalized world has been described as a ‘global village’. To me it seems more like a global carnival: its only fun if you have money.