Back to borders: The attacks of September 11 will increase the costs of production and international trade. As a result, the world may start to turn its back on globalisation, says Stephen Roach:
Financial Times, Sep 28, 2001
By STEPHEN ROACH
The footprints of globalisation have left an obvious and important mark on the economic landscape during the past decade. But the terrorist attacks of September 11 and their aftermath may bring about its demise.
In the economic and financial sphere, globalisation is all about enhanced cross-border connectivity. Rapidly expanding trade and capital flows, increasingly globalised supply chains, and the rapid expansion of transnational activity of multinational corporations has made the world a smaller place. New information technologies have become the glue of globalisation, making cross-border connectivity faster, cheaper and increasingly frictionless.
Evidence of globalisation is unmistakable. According to Morgan Stanley, global trade rose to a record 26 per cent of world gross domestic product in 2000 - up from 18 per cent in 1990. Transfers between foreign affiliates of multinationals surged by nearly twice as much as global trade did over the past decade.
Trade zones such as Nafta created new linkages between the industrial world and its offshore suppliers: exports to the US account for 25 per cent of Mexican GDP, for example. Asia, excluding Japan, has also become tightly linked to the US IT demand cycle; close to 40 per cent of the region's overall economic growth in 2000 can be accounted for by surging IT exports to the US. In many ways, the world was coming together as never before.
But the rules of the game have changed. Terrorism puts sand in the gears of cross-border connectivity and the result threatens the increasingly frictionless world of globalisation. The tragic events of September 11 have, in effect, levied a new tax on such flows. The security of national borders will now have to be tightened - hardly a costless endeavour. That will affect more than airports and shipping ports. The porous borders of Canada and Mexico, the conduits of increasingly seamless Nafta linkages, will be tightened too.
As a result, cross-border transfers will now cost more and take longer, and insurance rates on such shipments will become considerably more expensive. Moreover, as the recent outbreak of the Nimda computer virus indicates, it will no longer be possible to take instantaneous transfer of information and financial capital for granted. Terrorist attacks also instil fear, raising the risk premia of global connectivity. Suddenly, the brave new world looks a lot less seamless.
Basic economics says that a tax on cross-border connections should reduce the flow of such transactions. In choosing offshore outsourcing versus domestic production, the calculus of relative cost advantages may have been permanently changed.
But there is also a psychological dimension: companies could start to look inwards. The appetite for forging new cross-border alliances may diminish in an increasingly unstable world. Risk aversion may take on ever-greater importance.
There is another important dimension to this tax on globalisation. It reflects the impact of a potential shift of national output away from productivity-enhancing investments. Productivity enhancement and globalisation have always gone hand in hand. The surge of offshore outsourcing has been critical to newfound business efficiencies.
A tax on globalisation could change all of that. It is not only the increments to business costs that might now arise from higher security, shipping and insurance expenses. It is also the potential ramifications of a shift in government spending back towards national defence, reversing one of the more important trends of the post-cold war era. This peace dividend reduced defence spending as a proportion of US GDP from more than 7 per cent to less than 4 per cent during the past 15 years. At the margin, reversal of this downtrend could crowd out private sector investment.
Productivity growth was set to decline over the next five years as the excesses were taken out of an IT-induced capital-spending expansion. The costs of fighting global terrorism may take an additional toll. A slowdown of trend productivity growth would then put concomitant pressure on corporate earning power and, by inference, on expected equity returns. Investors could be in for a particularly rude awakening.
New alliances among governments are likely, juxtaposed against the private sector's potentially diminished appetite for globalisation. The world's leading powers now seem to be coming together in an extraordinary fashion in the aftermath of the attacks. United in the goal of combating global terrorism, other grievances, such as trade disputes, are being put aside - at least for the moment.
But these new alliances may backfire in one important respect. They may drive an even greater wedge between the developed and the developing world. Such a geopolitical wedge could reinforce long-simmering economic differences and increasingly isolate the developing world. Widening income inequalities between the rich and the poor nations was an unmistakable hallmark of the 20th century. According to research by the International Monetary Fund, the richest 25 per cent of the world's population experienced a six-fold increase in real GDP per capita during the last century. By contrast, the lower quartile of world population enjoyed less than half that gain. And these disparities are being exacerbated by the "digital divide" of the information age - the contrast in economic opportunities between the computer literate and those lacking such skills.
These tensions do not speak well of the "global village" as an apt image of where globalisation is now headed. The economic benefits of cross-border connectivity have long stood in sharp contrast with social disparities between rich and poor nations. New political alliances that arise from a united front among rich nations against global terrorism may well compound this gap.
Such growing fragmentation means that the world may be turning its back on globalisation. The recent cancellation of the annual meetings of the IMF and World Bank in Washington is particularly disappointing in this regard. While both institutions have come under attack for mismanaging the process from time to time - especially during the Asian crisis of 1997-98 - these meetings offer a forum to probe the strengths and weakness of globalisation. That opportunity will be sorely missed at this critical juncture in history.
This would not be the first setback for globalisation. The integration of the Atlantic economy in the 19th century held out the promise of powerful convergence within Europe and between Europe and the US. Yet this seemingly unstoppable trend gave rise to an equally powerful backlash, brought about by the confluence of rising global income inequalities and political instability that played a role in sparking the first world war.
Yet another wave of globalisation occurred during the 1920s, only to be brought to an abrupt end by the Great Depression and a renewed outbreak of war. The preconditions of these earlier backlashes - widening global income disparities and mounting geopolitical tensions - seem haunting today. Not only does history tell us there is nothing inherently stable about globalisation, but it also highlights globalisation's tendency to sow the seeds of its own demise. Sadly, this time may be no different.
There is always a chance that we are making too much out of the implications of September 11. But the global costs of escalating terrorism are unmistakable. A new tax on the price of cross-border linkages is a big deal. The same can be said of deepening political alliances in one powerful segment of the world.
The forces of globalisation, which once seemed unstoppable, are facing new resistance. So too are the productivity-led underpinnings of the US and world economy. The playing field may be tilting before our eyes.
The writer is chief economist and director of global economics at Morgan Stanley Copyright: The Financial Times Limited
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