The process of globalisation will need to take a break, in light of the stresses it has imposed on some parts of the global economy. We have long argued that trade globalisation would entail a monumental global labour arbitrage that would push labour in the developed West to its limits. Judging by the recent geopolitical developments around the world, we believe we may have breached that limit. While we do not believe it is possible to permanently reverse the process of globalisation, the world does need a period of consolidation, analogous to how China needs to consolidate its own economic development in order to resume its growth path.
- Globalisation is one of several ways economies can develop and grow; it is not the only option. Innovations, education, and de-regulation are all familiar ways in which countries thrived before the latest phase of globalisation that began in 2001. We believe that, during this ‘downshifting’ phase of globalisation, economies will need to find new engines of growth; indeed, there are several potential engines of growth that may be temporary substitutes for globalisation.
- In our view, the world will become more Darwinian between countries, even if it may become less Darwinian within countries. Countries will need to work harder to devise economic strategies that help their private sectors thrive in this world. At the same time, the markets of the economies that can generate ‘growth alpha’ will likely be rewarded more than those that continue to rely on ‘growth beta.’
- We believe nations should and will contemplate promoting targeted industrial policies to better concentrate their political, financial, and intellectual firepower to develop ‘winning’ sectors. In a world where the payoffs to winners are disproportionate (the winner-takes-all dynamics), it should pay for nations to back winners and specialise.
- Regular readers of our work should be familiar with our belief that Japan’s main challenges are micro, not macro, in nature, and that it could re-invent an industrial strategy to give some of the industries a strategic push. Similarly, the UK, faced with daunting challenges after Brexit, also has reasons to enhance its global competiveness by concentrating on selected industries.
The bottom line
The first phase of modern globalisation, where the relative costs of factors of production motivated the reconfiguration of the world’s economy, is coming to an inflection point, not a turning point. President-elect Trump will find out, we believe, that protectionism is no solution to protecting the US workforce; global labour arbitrage will almost certainly continue unless the US completely seals itself up. An alternative to dealing with cheap foreign labour through protectionism is through innovations. Not at all empty talk, South Korea is a living example of how this strategy can be successful and generate enormous prosperity and credibility for the nation. Rather than slavishly following the edicts of Keynesian economics, policy makers around the developed world will likely be pressured to formulate winning economic strategies through specialisation. This is particularly important for medium- amd small-size economies. Finally, we think it is worth remarking that often crises are blessings in disguise, depending on one’s reactions. Had it not been for the Asian Crisis, South Korea would not be what it is today. This lesson, we believe, applies to Italy, Japan, and even the UK today. For the financial markets, all else equal, more ‘growth alpha’ should mean a stronger currency, higher equities, and higher bond yields. We will likely see more differentiation among countries that belong in similar categories, reflecting their efforts in supply-side reforms.
The above article is an extract from our research paper “The Prospective Return of Industrial Policies" published on December 7, 2016.
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