Globalization has reached a stage, where in order to overcome reversals and the “new normal” of lower global growth rates, it has to become more inclusive and realistic with respect to the balance of its costs and benefits. Sidelining whole parts of the global economy from economic integration backfires not only in the country-specific or regional, but also in global context – we are all parts of the “global circuit” after all.
It has been said that arguing against globalization is like arguing against the laws of gravity. - Kofi Annan
The similarity of the natural laws of physics with the patterns observed in economics has been noted by many observers and researchers. In fact one prominent economist by the name of Jan Tinbergen, a Nobel prize laureate in Economics, discovered that applying physical laws of gravity to the examination of trade flows significantly improved the predictive power of economic modeling. As a result today’s “gravity model” is a standard tool among economists in predicting trade and investment flows. Drawing analogies between economic and physical worlds may seem far-fetched, but drawing parallels between the economic and physical worlds may at the very least have some illustrative merits. Take the case of the electrical circuit and the global economy.
The globalized economy is in a lot of respects similar to the concept of an electrical circuit in that it is a closed system, where the various channels of trade and investment act as an electric current that energizes various regions of the global economy. In the world of Physics according to Ohm’s law, the current between those two points (I) is equivalent to the electric potential difference between two points on a circuit (ΔV) divided by the total resistance of all electrical devices present between those two points (R). In the economic world of trade and investment the intensity of trade and investment flows is positively related to the economic potential and the complementarity between two economies and negatively related to the barriers to trade and investment, whether political, logistical or economic.
The liberalization of markets and capital flows in the post-war period led to the emergence of what may be termed as a “global circuit” characterized by ever intensifying flows of capital, trade and labour. The global circuit was progressively expanded in rounds of liberalization as new regions and sectors were subsumed into the economic global system – one of the most significant expansions taking place as a result of the disintegration of the Soviet Union. In the 1990s all seemed to be destined for an integrated “global circuit” in which trade and investment flowed seamlessly across ever thinner national borders.
Then it turned out that the electrifying force of the globalization current hit a snag. Firstly, it turned out that not all countries were to be integrated into the “global circuit” – protectionism and sanctions created voids in regional integration as well as voids in the process of globalization. While some of the countries were subjected to outright sanctions (for Russia one case in point before 2014 was the Jackson-Vanik amendment), others were not accepted into regional and/or global clubs (again Russia’s nearly 20-year-long accession to the WTO is a case in point). Then there was the backlash against globalization in both developing and emerging market economies – the ever intensifying race to compete was accompanied not just by dividends, but also significant costs. Instead of the model of a “superconductive” global economy without friction, the real world globalization turned out to be fraught with resistance and significant parts of the circuit being left out of the globalization process.
These voids in globalization created tensions that are fraught with a breakdown in the system much similar to the short-circuit phenomenon, which is a circuit that allows an electric current to flow along an unintended path resulting in an excessive electric current of the rest of the network and leading to a circuit breakdown. In the world economy context this means that as sizeable parts of the global economy appear to be isolated and left out of the globalization circuit, the flows in trade, investment and migration are redirected to other parts of the global economy that may turn out to be “excessive” to those parts of the system that have already featured as significant recipients of such flows.
The result is a “surfeit of globalization” in the developed economies and a lack of integration/globalization in parts of the developing world. The isolation of significant parts of the world economy from the globalization process leads to an uneven process of globalization, which is accompanied by rising imbalances and inequality. The uneven distribution of globalization may grow progressively/cumulatively further exacerbating the contrast between those countries that experience a shortage of trade and investment and those that receive amounts that may be hard to digest if not in economic, then in political terms.
It is not accidental that in the past several years nearly all of the major international economic organizations (OECD, IMF, World Bank, EBRD) have declared that one of the key impediments to economic growth are rising inequality and global imbalances, while developing countries’ opposition to “selective integration/globalization” led to alternative institutions being created to represent the developing world.
The main message coming out of the “short-circuit” analogy is that globalization has reached a stage, where in order to overcome reversals and the “new normal” of lower global growth rates, it has to become more inclusive and realistic with respect to the balance of its costs and benefits. Sidelining whole parts of the global economy from economic integration backfires not only in the country-specific or regional, but also in global context – we are all parts of the “global circuit” after all.
