The writer is Senior Fellow at Brown University. Josh Felman contributed to this article
Shocks such as Covid and the Russian invasion of Ukraine command our attention. But it is shifts — that is, major transformations — that will determine the long-run trajectory of the global economy. Consider five major shifts and their potential consequences.
First, the era of extraordinarily cheap finance is over. As inflation grips the world economy, a cycle of monetary tightening is under way. Long-term real interest rates are unlikely to rise to levels seen during the previous era of inflation, since growth now is much weaker and ageing populations will depress investment opportunities. But the era of zero interest rates has ended.
Higher interest rates will destroy wealth as asset prices descend from frothy valuations. They will also expose companies and countries that have accumulated large amounts of debt. The result will be defaults and financial crises, especially in emerging markets.
Second, the era of trade hyperglobalisation is over. Over the past decade, anti-globalisation forces have gathered strength. Over the next decade we will see this shift play out. Geopolitics will trigger protectionism; hedging will drive greater self-sufficiency in food, energy, essential drugs, resources and technologies; the weaponisation of interdependence, reflected in sanctions against Iran and Russia, will deflate the lure of globalisation; and capital will exit from odious regimes.
The world will not actually deglobalise, since trade of some types (services) and in some regions (the west) will continue to expand. But the scale and speed of integration that the world witnessed for about 25 years are surely behind us.
Third, economic convergence will stall. For three decades, poorer countries have been catching up with the living standards of richer countries, reversing two centuries of divergence. But this dynamism was propelled in large part by cheap finance and hyperglobalisation. Meanwhile, as the historic addition of the Chinese and Indian workforce to the global labour supply nears its end, the world economy will move from plentiful supply to shortfall, reinforcing inflationary pressures.
Fourth, already weak global co-operation will dwindle further. The pandemic revealed the shambles that now characterises the multilateral system put in place after 1945. The financial costs of producing and distributing vaccines to the world were trivially small compared with the potential benefits in lives saved and economic losses averted. Yet the major powers and institutions proved unable to accomplish this task.
This is not the only example. The World Trade Organization has been on life support for decades, a victim of geopolitical rivalry and the west’s inability to figure out ways to provide good jobs for workers who lost out when the global industrial base shifted east.
More fundamentally, the sheen has come off the idea — going back to Norman Angell’s The Great Illusion — that global integration was good for peace and would broadly restrain superpower rivalry. The new era could see full-blown US-Chinese rivalry in the economic and security realms. It used to be a G1, G2, G7 or G20 world. Now we are destined to a G-minus world because of domestic developments in the world’s two largest economies, the US and China. This is the fifth shift.
The US is now two different nations. An internally polarised America is a less attractive and unreliable partner for other countries. Access to its markets and provision of generous finance are no longer part of its foreign policy arsenal or its soft power.
Meanwhile, China has become a threat to its neighbours. Xi Jinping is dashing both the possibility of China becoming truly rich and the hope once entertained by the world that it would become politically open.
Grim as these five shifts seem, silver linings can be sighted. Deglobalisation away from China provides opportunities for other countries to fill the vacated space. Vietnam, Bangladesh and Indonesia have taken advantage, and so too can other developing countries.
Global food shortages and the drive for self-sufficiency should encourage policymakers in south Asia and sub-Saharan Africa to focus on boosting agricultural productivity and farm incomes. This could bring faster overall growth, as South Korea, Taiwan and China showed decades ago.
Finally, conditions are ripe for the world to grasp that, intermittent as their gifts are, the sun and wind are more reliable, less destructive sources of energy than Russia and the Middle East. Producing more renewable resources helps the planet and drains war chests. That should motivate the world to act.
