World Economic Forum 2003 Roach: The Asymmetries of Globalization

  • by Stephen Roach, Chief Economist Morgan Stanley

Most of us tend to analyze globalization from rather com-fortable perches - and in relative isolation. During the five days of the annual World Economic Forum, Davos, Swit-zerland, becomes a real-time laboratory of globalization. I know of no other world gathering - and I?ve been to them all - that brings the major constituencies of globalization to the same table. Politicians, policy makers, academics, corporate leaders, artists, religious leaders, and senior representatives of most of the world?s leading NGOs (non-governmental organizations) come to Davos with a serious-ness of purpose and an urge to engage. Davos is not about glitz - it?s about probing the toughest issues of our time.

The official theme of Davos 2003 was "Building Trust." The agenda was carefully set to focus on how trust can be restored after a year of corporate malfeasance, post-bubble havoc in markets and economies, and ever-mounting geopolitical and religious tensions. For me, that was the starting point. The debate took off in an unexpected direction, essentially forcing me to rethink many of my preconceived notions about globalization. In theory, globalization is often depicted as the rising tide that lifts all boats. Through trade liberalization and increasingly integrated capital and infor-mation flows, a new global connectivity is supposed to raise world standards of living and help facilitate a narrowing of global income gaps between rich and poor. Yet reality has deviated sharply from this theory in recent years. At work may well be the inherent asymmetries of globalization. Three such possibilities came to mind in Davos:

  1. At the top of the list is America?s response to the asymmetrical threats of global terrorism. As widely reported in the press, the looming battle in Iraq permeated most of the discussions in Davos. The bottom line is that the world at large simply doesn?t buy America?s case. The Bush ad-ministration sent ist first team to make that case at Davos. Colin Powell?s speech left me soaring with a pride and re-solve. Picking up on the forum?s official theme, the US secretary of state appealed to the world to trust America?s motives. He made the case for trust on the basis of experience, starting with America?s pivotal role in liberating oc-cupied Europe in World War II and ending with an equally principled intent to do the same in Afghanistan. In his words, "?I don't think I have anything to be ashamed of or apologize for with respect to what America has done for the world." At the same time, he was tough and to the point. While he, alone, probably deserves the greatest credit in the administration for shifting the response to Iraq from unilat-eral to multilateral, he stressed that "Multilateralism cannot become an excuse for inaction." Secretary Powell left little doubt, in my view, as to the endgame. During the Q&A session that followed, he concluded, "We are probably approaching [a] moment where we will have to take that next step. And history will judge us." The long run case for globalization is hard to refute. It?s over the shorter-term where problems are now arising.

    While many Americans? eyes brimmed with tears - including my own - the rest of the audience reacted quite differently. There was stoic resignation on the faces of most Europeans I encountered afterward. Still smarting from US Secretary of Defense Donald Rumsfeld?s recent gaffe about "Old Europe," they were not in a mood to accept America?s promises without evidence. Those from the Middle East expressed more of a mood of resignation. War is thought to be a very different commodity for those who have experienced it in their own backyards. Asians were equally disturbed by the inevitability of looming conflict. Mahathir bin Mohamad, Malaysia?s outspoken prime minister, explicitly warned that global terrorism could well gather greater strength from a US invasion of Iraq. My point is not to take sides on this issue. The observable reality of Davos is that a very real schism exists: Unilateral American action is perceived to strike at the heart of the collectivism of globalization. The asymmetry of global power is a bitter pill for many to swallow as the world moves to the brink of war.

  2. A second asymmetry - the perils of a US-centric world - was viewed very differently by the Davos crowd. Few took issue with my view that the non-US portion of the world economy was in trouble. Europe was singled out for special attention by this heavily European group. Lacking in domestic demand, an ever-strengthening euro was feared to be choking off external demand, Euroland?s sole surviving growth source. With structural reforms lagging and pro-cyclical fiscal and monetary policies reinforcing the down-side, Europe was viewed as caught in a vise. The plight of Japan made Europe look good by comparison. Japan?s economic czar Heizo Takenaka made an impassioned case that Japan?s economy was now only two years away from revival. Sadly, that?s the point - another two years.

    With the world economy flying on only one engine, there was considerable hope in Davos that another US recovery would save the day. While I certainly didn?t endorse that view, most US experts did - from Commerce Secretary Donald Evans on down. Evans? case was based on what he called fundamentals - the ability of the US economy to weather successfully 70 years of difficulties, from war and terrorism to depression and periodic recessions. I countered that there?s a big difference between inherent resilience and fundamentals. And in the latter regard, I continued to press the points on America?s historical lows in national saving, a record current-account deficit, and outsize private-sector indebtedness. The Davos crowd sided with Washington on this aspect of the debate. However, a sinking dollar, at a time of geopolitical tension, tempered the enthusiasm. Nevertheless, I was struck by the paradoxical perceptions of Pax Americana evident at Davos: The world may resist the US tilt toward geopolitical power, but it embraces US-centric support for the global economy.

  3. A third asymmetry that struck me in Davos was the possibility of a deflationary bias to globalization. I pushed the case for deflation hard, but my concerns fell largely on deaf ears. Most believe that the US has ample ammunition to stave off this threat, even if the Federal Reserve has run out of basis points with its main policy instrument. Yet two experts - former US Treasury secretary Larry Summers and former Fed vice-chairman Alan Blinder - raised concerns about the efficacy of the so-called non-traditional tools that Fed Governor Bernanke and Chairman Greenspan are currently arguing will save the day. Senior German officials seemed particularly oblivious to the perils their economy was facing. "No way" was the response of Caio Koch-Weser, German secretary of state of finance, when asked about the risks of German deflation. Of all the major industrial countries in the world, Germany was singled out for the most criticism in Davos. The "one size fits all" credo of EMU was widely viewed as totally out of sync with the real interest rates and fiscal stance that a weakened German economy now required.

    But the case for deflation took an intriguing twist when the developing world was brought into the picture. China crept into the story at nearly every turn. Fortunately, it was not in the context of what I have called the blame game, holding China responsible for world deflation. Instead the China factor was viewed as emblematic of a more fundamental asymmetry of globalization: With the impact of economic development initially skewed more to the supply side (i.e.,exports) than to the demand side (i.e., private domestic con-sumption), the global economy could suffer. Context is crucial in assessing the impacts of this asymmetry. With a sluggish world currently closer to outright deflation than at any point in the post-World War II era, the globalization of supply chains in the low-cost developing world could well continue to push the global price level dangerously toward the deflation threshold.

In my own work I have stressed a similar development with respect to services, as worldwide deregulation, cross-border M&A activity, and IT-enabled outsourcing have transformed supply curves in many service industries from na-tional to global. Many industry leaders cornered me in the halls of Davos to confirm just such a trend - stressing, in particular, the emergence of India?s rapidly growing IT-enabled services industry. In my view, until domestic demand comes to life in the developing world, the globalization of both tradable goods and the so-called non-tradable services will continue to exert a powerful deflationary force on a sluggish industrial world. Thus, aggregate demand growth in the industrial world needs to run much faster than normal in order to counter these developments - precisely the opposite of current conditions.

There is no standard script or theory for globalization. We?re making it up as we go along. But some obvious bumps in the road surfaced this year in Davos. All along, the main critique of globalization from abroad has been that it could be the functional equivalent of Americanization of standards, institutions, and the rules of cross-border transfer. That was a key aspect of the Asian backlash to the financial crisis of 1997-98. But now concerns over globalization have taken a new twist. Paradoxically, a weak world econ-omy welcomes a renewal of US-led global growth, but it resists America?s geopolitical and military power. Moreover, there is good reason to believe that successes in the developing world may well deepen the world?s deflationary biases. In the long run, the case for globalization is hard to refute. It?s the shorter run - and apparently the medium term, as well - that are proving so problematic.

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