In 2006, Thomas Friedman published his popular book The World Is Flat, in which he described the compelling story of how globalisation was flattening the world. It was a foregone conclusion during those days that the force of globalisation was not only here to stay but would also grow stronger. Who could have imagined that in less than two decades, the world would change unrecognisably? From being the pre-eminent phenomenon integrating the world, globalisation now looks like a spent force. Suddenly, the world does not seem so flat.
This is not just because of the isolationism forced by Covid-19, though the pandemic has hastened globalisation’s decline. Globalisation had started to weaken much earlier — from as far back as the 2008 global financial crisis. The increased unemployment, growing inequality and anaemic growth in the aftermath of the global financial crisis, particularly in the developed world, had started to cast an ominous shadow over globalisation.
Rise and fall
To understand the current decay of globalisation, we must trace its origin. Globalisation was the offshoot of two systems — democracy and capitalism — that emerged victorious at the end of the Cold War. The disintegration of the Soviet Union, that had begun during the 1980s, and the fall of the Berlin Wall in 1989 was a huge ideological victory for both these systems.
The mood of this era was captured perfectly in a landmark essay titled The End of History published in 1989 by Francis Fukuyama. Fukuyama argued that the evolution of politico-economic ideas had ended with the conclusion that a liberal democracy combined with free market capitalism was the best way to organise society. The essay became so popular that it was later expanded into a book with the same title.
The idea that all countries should unequivocally move towards democracy underpinned with capitalism was packaged in policies commonly referred to as the Washington Consensus or neo-liberalism. These ideas were transmitted across the world through free trade and increased inter-country movement of capital and labour — or what we today refer to as globalisation.
Globalisation was on an upswing from 1991, when the Cold War ended till the 2008 global financial crisis. It was a partnership between the developed and the developing countries based on three planks. First was offshoring of manufacturing and low-end services jobs to developing countries. Second, developed countries running large trade deficits by acting as the market for the increased output of developing countries. Third, developing countries financing the trade deficit of the developed countries by accumulating large foreign exchange reserves.
As globalisation was spreading its wings, there were many hiccups — the 1997 Asian financial crisis, the 1998 Russian debt default, the dotcom burst and 9/11. But none of these were strong enough to stall or reverse globalisation. The global financial crisis, however, was a turning point, as it struck at the twin foundations of liberal democracy and free market capitalism.
Reversal of ideologies
Post 2008, two trends shook globalisation. First, liberal democracy was being increasingly eclipsed by nationalistic democracy. The malaise of slow economic growth, wealth inequality and rising unemployment provided a perfect breeding ground for political leaders to appeal for nationalism as the solution to political and economic ills. The economic rise of China under an authoritarian regime also raised doubts over the efficacy of a liberal democracy in solving pressing domestic challenges.
Second, the neo-liberal doctrine of free markets and free trade has come under fire. While the free market ideology has been fighting a battle of credibility since it took the maximum blame for the 2008 crisis, free trade policies have now been severely impacted due to Covid-19. The pandemic has not only exposed the fragility of highly optimised supply chains that spread across countries, but has also shown such inter-country supply chains to be a threat to national security.
Nothing demonstrates this better than the press briefing by New York Governor Andrew Cuomo on April 3 this year. A visibly exasperated Cuomo was seen pleading with American manufacturers to produce basic personal protective equipment. He went on to display an N95 mask and said: “It’s fabric, it’s material. The FDA has the specifications and then it’s two pieces of elastic cord. It can’t be that we can’t make these.”
Given the economic hardships faced by the developed countries over the past decade, it was expected that the first clamour for globalisation’s reversal would come from the developed world. What was unexpected, however, is for developing countries to follow suit. We witnessed Prime Minister Narendra Modi, in his televised address to the nation on May 12, make a pitch for India to become more self-dependent. And China, one of the largest exporters in the world, used its trade policy (banning beef imports) to retaliate against Australia over the latter’s demand for investigation into the origin of the pandemic.
While the heat against globalisation has been simmering for a while, the pandemic has added fuel to the fire. The message is clear — the globalisation vehicle has made a pitstop, at best, or a crash, at worst. Ironically, the most aggressive attack against the Washington Consensus is being made by none other than Washington itself. For the doubters, this is a stark reminder of globalisation’s obsolescence.
Ravi Saraogi, CFA, is a SEBI-Registered investment adviser and co-founder of Samasthiti Advisors