(London) When business and political leaders from around the world gathered in 2018 for the annual economic forum in Davos, Switzerland, the mood was one of jubilation. Growth in all major countries was up. The global economy, said Christine Lagarde, then Managing Director of the International Monetary Fund, “is in a very favorable position.”
Five years later, the outlook has darkened markedly.
“Virtually all of the economic forces that have fueled progress and prosperity over the past three decades are fading,” the World Bank warned in a recent analysis. This could result in a lost decade, not only for certain countries or regions, as has happened in the past, but also for the whole world. »
A lot has happened in the meantime: a pandemic has hit, a war has broken out in Europe, tensions between the United States and China have exploded. And the inflation, which we thought was stored in the collections of disco albums, came back with a vengeance.
But when the dust settled, it suddenly became apparent that almost everything we thought we knew about the global economy was wrong.
The economic conventions that policymakers have relied on since the fall of the Berlin Wall more than 30 years ago—the unwavering superiority of open markets, free trade, and maximum efficiency—seem to be derailed.
During the COVID-19 pandemic, the relentless drive to integrate the global economy and cut costs has deprived healthcare professionals of medical masks and gloves, automakers of semiconductors, lumber mills workmen and buyers of Nike shoes.
The proliferation of extreme weather events, which have destroyed crops, forced migrations and shut down power plants, have shown that the invisible hand of the market is not protecting the planet.
Now, as the second year of war in Ukraine drags on and countries struggle with sluggish growth and persistent inflation, questions about the new rules of the economic game take center stage.
Globalization, considered in recent decades as a force as unstoppable as gravity, is obviously evolving in unpredictable ways. The move away from an integrated global economy is accelerating. And the best way to answer it is the subject of fierce debate.
Of course, the questioning of the reigning economic consensus has been increasing for some time.
The financial meltdown of 2008 nearly devastated the global financial system. Britain withdrew from the European Union in 2016. President Donald Trump imposed tariffs on China in 2017, sparking a mini-trade war.
But beginning with COVID-19, the series of crises that followed revealed with startling clarity vulnerabilities that demanded attention.
As the consultancy firm EY concluded in its geostrategic outlook for 2023, the trends driving the shift away from increasing globalization “were accelerated by the pandemic – then they were reinforced by the war in Ukraine.” .
Today’s sense of disquiet contrasts sharply with the heady triumphalism that followed the collapse of the Soviet Union in December 1991. of history” – that liberal democratic ideas not only had defeated their rivals, but also represented “the end point of the ideological evolution of mankind”.
Associated economic theories regarding the inescapable rise of global free-market capitalism have taken on a similar luster of invincibility and inevitability. Open markets, the absence of state intervention and the relentless pursuit of efficiency were the best path to prosperity.
Optimism was in order. During the 1990s, inflation was low, while employment, wages and productivity were on the rise. World trade has almost doubled. Investments in developing countries have exploded. Stock markets rose.
The World Trade Organization (WTO) was created in 1995 to enforce the rules. The entry of China, six years later, was seen as a transformation. And connecting a huge market to 142 countries would irresistibly draw the Asian giant to democracy.
China along with South Korea, Malaysia and other countries have turned struggling farmers into productive urban workers. The furniture, toys, and electronics they have sold around the world have generated tremendous growth.
The privileged economic roadmap has helped produce fabulous wealth, lift hundreds of millions of people out of poverty, and spur marvelous technological advancements.
But there have also been bitter failures. Globalization has accelerated climate change and deepened inequalities.
Corporations have embarked on a global scavenger hunt for low-wage workers, with little regard for worker protections, environmental impact, or democratic rights. They have found many in countries like Mexico, Vietnam and China.
TVs, t-shirts and tacos have never been cheaper, but many essential services, such as health care, housing and higher education, are increasingly out of reach.
US National Security Adviser Jake Sullivan said in a recent speech that one of the major mistakes of US economic policy has been to assume “that markets always allocate capital productively and efficiently, no matter our competitors do, no matter how big our common challenges are and no matter how many guardrails we’ve knocked down.”
In developing countries, the results could be disastrous.
The economic devastation caused by the pandemic, combined with soaring food and fuel prices caused by the war in Ukraine, has spawned a wave of debt crises. Rising interest rates have aggravated these crises. Debts, like energy and food, are often valued in US dollars on the world market, so when US rates rise, debt payments become more expensive.
The loan-and-bailout cycle, however, has deeper roots.
Poorer countries were pressured to lift all restrictions on capital movements in and out of the country. The argument was that money, like goods, should flow freely between nations.
“Financial globalization was supposed to usher in an era of robust growth and fiscal stability in developing countries,” says Jayati Ghosh, an economist at the University of Massachusetts Amherst. But, she added, “she ended up doing the opposite.”
If the collapse of the Soviet Union paved the way for the dominance of free-market orthodoxy, the Russian Federation’s invasion of Ukraine has now destabilized it for good.
According to Henry Farrell, a professor at the Johns Hopkins School of Advanced International Studies, the story of international economics today is one of “how geopolitics engulfs hyperglobalization.”
Josep Borrell, head of foreign affairs and security policy for the European Union (EU), put it bluntly in a speech delivered ten months after the invasion of Ukraine: “We have separated the sources of our prosperity from the sources of our security. Europe got cheap energy from Russia and cheap manufactured goods from China. “It’s a world that no longer exists,” he said.
The supply chain bottlenecks due to the pandemic and subsequent recovery had already exposed the fragility of an economy whose sources are global. As war-related political tensions grew, policymakers quickly added self-reliance and strength to goals of growth and efficiency.
The new reality is reflected in American politics. The United States, the main architects of the liberalized economic order and the WTO, has turned away from more comprehensive free trade agreements and has repeatedly refused to comply with WTO rulings.
Although the old economic orthodoxy has been partially abandoned, it is unclear what will replace it. Improvisation is the order of the day. The only assumption that can be confidently relied upon today is that the path to prosperity and political compromise will grow murkier.