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In defence of globalisation

The pandemic is threatening to exacerbate the backlash against globalisation. This would be dangerous
June 16, 2020

The pandemic is accelerating the retreat from globalisation. The World Trade Organisation (WTO) expects that world trade will fall even faster than output this year; companies are reconsidering whether long international supply chains really are reliable; and governments around the world are trying to reduce reliance upon imported medical equipment. All this is reinforcing pre-existing trends. As Stephen Davies of the Institute for Economic Affairs points out, in the new political alignment of cosmopolitans versus nationalists (which is of course not confined to the UK) there’s a large constituency which is antipathetic to globalisation.

This should trouble us, because (economically speaking) there is much to be said for globalisation.

For one thing, it’s good for productivity. Before the financial crisis, rapid growth in world trade was accompanied by strong productivity gains, and the subsequent slowdown in trade has seen productivity falter. Of course, correlation is not causality: many other things have depressed productivity growth. But there is some link here. The first line of the first book in modern economics says: “The greatest improvement in the productive powers of labour… seem to have been the effects of the division of labour.” In creating a deeper division of labour, globalisation raises productivity.

Granted, productivity is not so important right now. But in the long term, it’s crucial. Whether you want higher wages, higher profits or more public spending, you need more productivity.

What’s more, it is difficult to actually engineer a more national and less globalised economy. As Abhijit Banerjee and Esther Duflo show in their book, Good Economics for Hard Times, economies are “sticky”. People and capital can’t easily shift into new industries – as the government’s difficulties in procuring UK-made ventilators demonstrated. Much has been said about how some people have been “left behind” by globalisation. But that tells us that all economic adjustments are difficult. The shift from globalisation could be as hard as globalisation itself was.

There’s more to be said for globalisation. In principle, if capital can flow freely across countries it will move from where profitable opportunities are scarce to where they are more plentiful. This will sometimes mean it moving to low-wage countries where it will increase demand for labour and bid up wages. Which is why the era of globalisation also saw a fall in global poverty. Granted, this process hasn’t gone as far as it should; in the eurozone, for example, we’re a long way from equalising wages between Germany and Greece. But that reminds us that capital is in fact not as mobile as you might think.

A further benefit of what capital mobility we have is that it supports fiscal policy. In a globalised world, governments can tap into the global pool of savings which means they can borrow more without raising interest rates. Again, this process is imperfect: rich western countries have much more fiscal space than poorer ones. But it is something we need if economies are to recover from the coronavirus lockdown.

None of this is to say that globalisation has been well-handled. The American rustbelt, British post-industrial towns and Parisian banlieues all testify to how many governments failed to spread the benefits of globalisation to all its citizens. And they failed to appreciate that this was necessary not merely as a matter of charity or justice but to maintain the legitimacy of a liberal market economy. To retreat from globalisation, however, would be to throw out the baby with the bath water.