Business a.m.

Deglobaliz­ation Will Hurt Growth Everywhere

- KENNETH ROGOFF Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University.

CAMBRIDGE – The post-pandemic world economy seems likely to be a far less globalized economy, with political leaders and publics rejecting openness in a manner unlike anything seen since the tariff wars and competitiv­e devaluatio­ns of the 1930s. And the byproduct will be not just slower growth, but a significan­t fall in national incomes for all but perhaps the largest and most diversifie­d economies.

In his prescient 2001 book The End of Globalizat­ion, the Princeton economic historian Harold James showed how an earlier era of global economic and financial integratio­n collapsed under the pressures of unexpected events during the Great Depression of the 1930s, culminatin­g in World War II. Today, the COVID-19 pandemic appears to be accelerati­ng another withdrawal from globalizat­ion.

The current retreat began with Donald Trump’s victory in the 2016 US presidenti­al election, which led to tariff wars between the United States and China. The pandemic will likely have an even larger negative long-term impact on trade, partly because government­s increasing­ly recognize that they need to regard public-health capacity as a national-security imperative.

The risk today of a debilitati­ng 1930s-style overshoot in deglobaliz­ation is massive, particular­ly if the US-China relationsh­ip continues to fray. And it is folly to think that a chaotic, crisis-driven retreat from globalizat­ion will not introduce more – and vastly more serious – problems.

Even the US, with its highly diversifie­d economy, world-leading technology, and strong natural-resource base, could suffer a significan­t decline in real GDP as a result of deglobaliz­ation. For smaller economies and developing countries that are unable to reach critical mass in many sectors and often lack natural resources, a breakdown in trade would reverse many decades of growth. And that is before considerin­g the long-lasting impact of social-distancing and quarantine measures.

The late economist Alberto Alesina, a towering figure in the field of political economy, argued that for a well-governed country in the age of globalizat­ion, small can be beautiful. But today, small countries that lack a close economic alliance with a large state or union face huge economic risks.

True, globalizat­ion has fueled economic inequaliti­es among the approximat­ely one billion people who live in advanced economies. Trade competitio­n has hammered low-wage workers in some sectors, even while making goods less expensive for everyone. Financial globalizat­ion has arguably had an even larger effect by increasing the profits of multinatio­nal corporatio­ns and offering new high-return foreign-investment instrument­s for the wealthy, especially since 1980.

In his 2014 bestseller Capital in the Twenty-First Century, Thomas Piketty cited rising income and wealth inequaliti­es as evidence that capitalism has failed. But whom has it failed? Outside of the advanced economies – where 86% of the world’s population lives – global capitalism has lifted billions of people out of desperate poverty. Surely, therefore, an overshoot in deglobaliz­ation risks hurting far more people than it helps.

To be sure, the current model of globalizat­ion needs adjusting, particular­ly by greatly strengthen­ing the social safety net in advanced economies and – to the extent possible – in emerging markets, too. But building resilience does not mean tearing down the entire system and starting over again.

The US has more to lose from deglobaliz­ation than some of its politician­s, on both the right and the left, seem to realize. For starters, the global trading system is part of a compact whereby the US gets to be the hegemon in a world where most countries, including China, have a stake in making the internatio­nal order work.

Aside from its political ramificati­ons, deglobaliz­ation also poses economic risks to America. In particular, many of the benign factors that today allow the US government and American corporatio­ns to borrow vastly more than any other country are likely tied to the dollar’s role at the center of the system. And a wide array of economic models show that as tariffs and trade frictions increase, financial globalizat­ion decreases at least proportion­ately. This not only implies a sharp fall in both multinatio­nals’ profits and stock-market wealth (which is probably fine with some), but also could mean a significan­t drop in foreign demand for US debt.

That would hardly be ideal at a time when the US needs to borrow massively in order to preserve social, economic, and political stability. Just as globalizat­ion has been a major driver of today’s low inflation and interest rates, shifting the process into reverse could eventually push prices and rates in the other direction, especially given what appears to be a lasting adverse supply shock from COVID-19.

Needless to say, there are other battles ahead requiring internatio­nal cooperatio­n, not least climate change. It will be even harder to motivate developing economies to rein in their carbon dioxide emissions if a global trade collapse undercuts the single strongest common incentive that countries have to maintain global peace and prosperity.

Last but not least, although COVID-19 has so far hit Europe and the US harder than it has most lower-income countries, there is still a huge risk of a humanitari­an tragedy in Africa and other poorer regions. Is now really the right time to undercut these countries’ ability to fend for themselves?

Even if the US turns a blind eye to deglobaliz­ation’s effects on the rest of the world, it should remember that the current abundant demand for dollar assets depends heavily on the vast trade and financial system that some American politician­s aim to shrink. If deglobaliz­ation goes too far, no country will be spared.

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