The World is Round
October 27, 2014
In the few months since the Ebola virus emerged as a global concern, a number of valuable lessons have been learned: the virus doesn’t have to be fatal; large nations can contain the virus, as Nigeria has done; and, at least initially, one such capable large nation is not the United States. Amidst debate of travel bans and other restrictions, we should all heed one other lesson: the openness that supports much of the global economy is not inevitable and is reversible.
We all hear the received wisdom time and again. “Globalization can’t be stopped. Yes, it may move haltingly amidst pockets of resistance. But as politics and technology advance, political and technological barriers to trade inexorably fall. Countries grow wise to the costs of isolation and the gains of connectivity. And innovations like the Internet drives down communication and transportation costs. Here in 2014, borders are basically meaningless.”
We do find this narrative inspiring. Well over 1 billion people in emerging markets have higher living standards today thanks to a liberalization of the global economy over the last generation. And, commentators heralding the death of distance and a world rendered flat do capture some important trends. But this story is far too simplistic. Moore’s Law may be akin to a law of physics, but globalization overall is not. Indeed, de-globalization is a very real phenomenon that can take hold for decades with pernicious effects.
Start with the reality that the world is not as integrated as commonly claimed. Pankaj Ghemawat of New York University’s Stern School of Business has documented some striking statistics here. On a number of indicators, by his estimation the world is less than 20 percent or even 10 percent globalized. Foreign direct investment represents only about 10 percent of all fixed investment. Only 3 percent of the world’s population lives outside the country of their birth. Only 2 percent of students attend a university somewhere other than their home country. Yes, lots of people and things cross borders but, no, distance has not died.
Moreover, integration can reverse as policy barriers rise. Financial crises create such barriers. Cross-border capital flows totaled $8.5 trillion in 2007—but averaged just $3 trillion each of the past three years. So does illness. The Ebola virus has led to travel restrictions (just as SARS did in 2003). Consider that, despite centuries of medical progress, a virus detected 38 years ago and named for a river in what is today the Democratic Republic of Congo today threatens to hamstring national economies across the globe. Most sadly of all, so does war. Think of the 9/11 terrorist attacks, which cost the plotters just $500,000 to execute, according to the 9/11 Commission. The security measures that followed, running the gamut from TSA to tougher immigration rules, surely rendered the United States more secure—but also less open.
One hundred years ago the global economy had become extremely open—a byproduct of technology innovations such as the telegraph and steam travel, as well as political liberalization. Amidst few restrictions on the cross-border movement of goods, capital, or people, many wise commentators thought the peace and prosperity that prevailed in much of the world was permanent. But then that assassin’s bullet in Sarajevo ignited hostilities that ultimately led to World War I and its subsequent aftershocks. By some measures, the level of economic integration at the start of the 20th century has yet to be restored today.
Yes, technology tends to continually reduce the natural barriers to globalization. But there is no such inevitability about the political barriers to it. As we have discussed in various missives, efforts toward further policy liberalization remain stalled—at best—in much of the world. The Doha Development Round is moribund, 13 years after its launch in the World Trade Organization. Progress on the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Partnership remains halting. As we noted earlier this year, there is now some high-level support in Europe for restricting cross-border movement of what may be the most valuable resource of the 21st century: data. And, as we noted last week, today in many advanced countries citizens legitimately voice concerns about the labor-market pressures of globalization.
Just as governments can be the greatest facilitators of globalization, they also have the greatest ability to restrict it—through economic measures (such as protectionist trade policies) or non-economic measures (such as war). Though you may be reading this at 35,000 feet thanks to your in-flight Internet connection, don’t forget that the world is round—and always will be.
Articles © 2014 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2014 Trustees of Dartmouth College. All rights reserved.