Understanding the New Global Economy

A European Perspective

Harald Sander

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000456837
• Edition: 1
• Topic: Economía
• Subtopic: Condiciones económicas

Understanding the New Global Economy: A European Perspective argues that globalisation is facing economic and political headwinds. A new global economic geography is emerging, cross-border relationships are changing, and global governance structures must come to terms with a new multipolar world.

This book clarifies the fundamental questions and trade-offs in this new global economy, and gives readers the tools to understand contemporary debates. It presents a range of possible policy options, without being prescriptive.

Following a modular structure, each chapter takes a similar approach but can also be read as a stand-alone piece. State-of-the-art academic research and historical experiences are weaved throughout the book, and readers are pointed towards relevant sources of information.

This text is an accessible guide to the contemporary world economy, suited to students of international economics, political economy, globalisation, and European studies. It will also be valuable reading for researchers, professionals, and general readers interested in economics, politics, and civil society.

1

Introduction

DOI: 10.4324/9781003057611-1

1 Towards a new global economy

Since the late 1980s, the rapid growth of cross-border economic activity, especially international trade, investment, and finance, has by far outstripped the growth of global production, a process for which the term ‘globalisation’ became popular in the 1990s. Economic globalisation, visualised in Figure 1.1 by a comprehensive index,¹ was at the heart of this process. However, since the great financial crisis of 2008–2009, and after about 30 years of economic ‘hyper-globalisation’, economic cross-border activities are stalling, though they remain at a high level. Is globalisation passé? The rapid increase in the internationalisation of data and knowledge as visualised by the index of information globalisation² in the last two decades suggests that it is premature to announce globalisation’s death. Rather, globalisation is changing its character. A new global economy (NGE) is emerging.

FIGURE 1.1 Development of De-facto Globalisation, KOF-Globalisation Index, 1970–2018.

Source: Own graph based on KOF Globalisation Index 2020 data. Gygli et al. (2019).

Economic globalisation in recent decades has been driven by falling transportation and communication costs and supported by a worldwide reduction of barriers to cross-border trade, investment, and finance. Production globalised, involving emerging economies deeply into the value chains of multinational enterprises. Smartphones designed in California and assembled in China, with chips, displays, receivers, etc. coming from many other countries, have become the hallmark of this globalisation, which now seems to have lost its momentum.

A slowed-down process of globalisation, however, can simply reflect that the internationalisation of economic activities has reached a level beyond which it is uneconomical to globalise further. Moreover, even if de-globalisation would happen, this is not necessarily something to worry about. After all, globalisation is at best a means to increase the ‘wealth of nations’, and not an end in itself. For this very reason, it is important to understand what the NGE may entail.

The first key argument for an emerging NGE relates to changes induced by new digital technologies. Digitalisation may impact globalisation in three major ways:

• Robotisation. The more robots replace workers, the less important labour costs will become for locating production in low-wage countries. Since the mid-1980s, this offshoring has been a major driver of the globalisation of production, investment, and trade, especially in manufacturing. Robotisation, thus, has the potential to reverse this trend by promoting a re-shoring of manufacturing.
• Digitalisation of intangibles. New technologies increasingly allow to digitalise services and make them tradable across borders. As digital delivery of services comes with basically zero transportation costs, outsourcing labour-intensive services to low-wage countries may become a key feature of the NGE. Current examples are software programming or back-office services, like booking systems for airlines.³
• Digitalisation of global money and finance. With the recent advances in digitalisation, new forms of digital finance are emerging. Even more drastic changes could emanate from digital currencies when used globally. Most prominently, Facebook is entertaining the idea of creating a private digital money, initially called Libra (now Diem), while major central banks are considering creating central bank digital currencies.

A second set of arguments posits that a NGE will emerge because the effects of the past incarnation of globalisation are undermining its sustainability in three major ways:

• A globalisation backlash. Globalisation has created losers, especially among low-skilled workers in advanced countries. If policies do not sufficiently pay attention to the negative side effects, anti-globalisation sentiments can emerge, ultimately undermining globalisation by lending support to a new protectionism.
• The climate imperative. Globalisation has promoted an unprecedented rise of economic activity in emerging economies. However, this rise is at odds with curbing climate change. To reconcile this ecological imperative with the desire for an increasing standard of living in the global South, economic growth in the NGE must become climate-neutral.
• The emergence of a multipolar world. The last two decades of globalisation have helped the rise of new economic superpowers. An emerging multipolar world is replacing a world order that has been economically dominated by the incumbent advanced countries. Figure 1.2 shows that China’s share in world gross domestic product (GDP), measured in purchasing power parity, has already overtaken the share of the European Union (EU) in 2012, and the share of the United States of America (USA) after 2016. In a similar vein, the group of emerging economies and developing countries has jointly increased its share from 37% in 1980 to close to 58% in 2020.

FIGURE 1.2 Share of World GDP: EU, USA and China (In Percent, Based on Purchasing Power Parity), 1980–2020.

Data source: IMF World Economic Outlook database. October 2020. 2020 data are IMF estimates.

As a consequence of the arguments above, this leads to a third key argument for a NGE to emerge:

• A new governance of globalisation. The governance of globalisation as it used to be, will have to undergo changes. Whether this will result in more global governance, a move to unilateral decision making, or a rebalancing of governance at the global, regional, and national levels, remains to be seen. Whatever the way forward, whether it supports or restrains forces of globalisation, a new governance of globalisation will impact the future of the emerging NGE.

This book takes the reader on a tour of the emerging NGE, visualised in Figure 1.3, by discussing the various ways it impacts global production, global trade, global investment, global intangibles, global money and finance, and finally governance.

FIGURE 1.3 The Emerging New Global Economy.

The remainder of this introductory chapter familiarises the reader with the meaning (Section 2) and history of globalisation (Section 3), before outlining the major determinants of a potential evolution of the NGE (Section 4). Section 5 provides a preview of the book.

2 What is globalisation?

2.1 The two meanings of globalisation

The first and most intuitive meaning of globalisation relates to the rapid increase of cross-border activities, particularly international trade, investments and finance, and increasingly information and knowledge as visualised in Figure 1.1. Economists refer to this meaning of globalisation as economic integration.

Why cross-border activities? The first reason is arbitrage: Goods are cheaper in a foreign country, profits on producing abroad are higher, higher wages and a higher standard of living attract foreign workers and migrants, financial investments elsewhere offer a higher return, more safety, or lower taxation, etc. In other words, when countries are different in terms of prices, incomes, wages, profits, interest rates, etc., these very differences invite cross-border activities. The second reason is search for variety: Foreign goods may be different from ours, and we like them for that very reason, some people enjoy work and the living experience abroad, and investors strive not to put ‘all eggs in one basket’. Hence, even in a world that does not provide incentives for arbitrage, cross-border activities make sense and can be quite intense.

A second meaning of globalisation has been popularised by a book by Thomas Friedman (2005), The World Is Flat. The title suggests that in a fully globalised world, arbitrage affects every corner. As a consequence, economic activity sprawls equally over the globe. Hence, the more arbitrage is doing its job, the more globalised the world becomes, and the more equal would be the spread of economic activity over the globe.

Scholars of economic geography usually respond to this claim by showing a NASA map of the ‘world at night’, created from satellite photos (Figure 1.4). Emitted light is used as an indicator of economic activity. The map shows that the earth is indeed not flat in terms of economic activity. Rather, there are economic hotspots in a few major regions of the world. In fact, it appears that activities are both globalised and regionally concentrated at the same time, a phenomenon often referred to as global localisation, or for short “glocalisation”.

FIGURE 1.4 The Glocalisation of Global Economic Activity. Image credit: NASA/NOAA.

As long as the world is not flat, there is room for arbitrage. While some emerging economies have been developing fast and started converging to advanced country per-capita income levels, many countries are still left behind. Obviously, trade in goods, investment, and finance have not been sufficient to flatten the world. In the NGE, it will be interesting to see to what extent increasing cross-border services and knowledge flows will help to flatten the world. Ultimately, in a world of persistent huge differences in living standards, this will surely push the most effective, yet most regulated arbitrage mechanism – labour migration.

2.2 The drivers of globalisation

Technological advancements, from the introduction of steam ships and railways in the 19th century to modern information and communication technologies (ICT), are key drivers of cross-border activities. However, the speed with which globalisation takes p...