Growing inequality and environmental dangers
After World War I had ended the first wave of economic globalisation, a second one was launched in reaction to World War II, which had been a consequence of the Great Depression of the 1930s. The pillars of the new global order were the UN, the Bretton Woods System of monetary management, the rule-based multilateral trading system of the GATT which later became the World Trade Organization (WTO) and the economic integration of western Europe. The Soviet Union only joined the UN and soon raised an “iron curtain” against the West. Its most visible expression was the Berlin Wall.
The Berlin Wall fell in 1989, and the ensuing dissolution of the Soviet Union opened the floodgates to the latest wave of globalisation. It engulfed not only the former Warsaw Pact, but also China and India, two giants that were eager to regain the status they had had in the world economy before European colonialism and imperialism. Economic reforms were bungled in Russia, but China, India and several other emerging markets did better and benefited from integrating into the world market.
Over the decades, capitalism changed fundamentally however. The Bretton Woods system of fixed exchange rates was abandoned in the 1970s, and the financial sector was deregulated step by step, allowing for progressive “financialisation”. This term stands for an increasing share of financial services in GDP, growing public and private debts and short-term speculation prevailing over long-term strategies.
Moreover, financial markets became increasingly integrated across borders. There were two consequences:
- Banks made excessive profits and their managers were paid excessive salaries. This trend led to more inequality of income and wealth in most countries that were exposed to global market forces.
- The volatility of financial markets and speculators’ herd behaviour increased the risk of contagious financial crises and ensuing depressions.
In 1997, the Asian crisis was a first reminder of global capitalism’s inherent instability even in the new age of full-fledged globalisation. The stock market slump after the terror attacks on New York and Washington on 11 September 2001 were another one, and the financial crisis of 2008 dealt the final blow at the globalisation hype of the early 1990s.
In order to prevent a second Great Depression, governments and central banks quickly returned to active fiscal and monetary stimulus policies. They applied the very Keynesian strategies that had proved useful in the 1930s, but were rejected in the 1980s and 1990s.
Europe in crisis
The global financial crisis of 2008 started in the USA. Nonetheless, the USA recovered faster than the EU. Its economic stimulus programmes were more audacious and effective. The EU struggled with problems in the Euro zone. Its members no longer have a currency of their own, so they cannot adopt monetary policies to escape the downturn. Eurozone members cannot opt for devaluation to boost exports and limit imports, and their room for fiscal stimulus was constrained by the austerity demands of the Troika (European Commission, European Central Bank and IMF).
To some extent, the European Central Bank (ECB) alleviated the plight of deficit countries by bringing down the interest rate close to zero and buying government bonds. It indicated – to no avail – that fiscal stimulus in Germany and other northern EU members was necessary too, since monetary policy alone could not solve the problems. Loose monetary policy is risky, moreover, as it may lead to new speculation bubbles and thus trigger another crisis.
When the Euro was introduced, policymakers expected monetary union to lead to economic convergence. In reality, however, divergence has grown. There is wide consensus that the Euro zone lacks some important mechanisms, such as joint depositors’ insurance, a joint system of unemployment benefits and other transfer mechanisms to channel funds from surplus to deficit countries.
In the past, the EU was known to establish new mechanisms on course to further integration whenever it was hit by crisis. Today, the rise of nationalist and populist parties make bold steps toward deeper integration look ever more unlikely. Immigration from the world’s conflict areas is worsening this vicious circle of European disintegration.
Slowing engines of growth
The big emerging markets, however, weathered the global financial crisis surprisingly well. For some years, they became the engines of global growth. Thanks to their demand for commodities, resource exporting countries, including many sub-Saharan ones, prospered too. These positive trends, however, went along with growing inequality in all major world regions. It is worrying, moreover, that the momentum of the emerging markets has slowed dramatically.
Around the world, rising inequality of income and wealth has become one of the major challenges. The appeal of nationalism has grown. In Europe and the USA, populist politicians are stoking xenophobia and complaining about globalisation. In the developing world, anti-colonial and anti-imperialist rhetoric is becoming more prevalent again.
Brexit and Donald Trump’s agenda as US president mean that the global order that has facilitated trade liberalisation is being put in question. Weaker international institutions, however, also mean that it is becoming more difficult to tackle global problems, including maintaining peace and dealing with environmental challenges.
Environmental activists have a history of opposing economic globalisation and demanding stricter ecological regulations. The populist backlash that is building up now, however, cannot please them. After all, leaders like Trump have a history of denying the need to mitigate climate change and show little interest in multilateral cooperation.
Better global governance is certainly needed however. That has been understood for at least a quarter century. In 1992, the Earth Summit in Rio de Janeiro set the goal of sustainable development and spelt out action plans for governments, business, academia and civil society – the Agenda 21. In view of the financial crisis of 2008, UNEP and other UN agencies propagated a “Global Green New Deal” for climate, energy and economic and social development. The idea was to link employment generation to the prevention of global warming. Internationally coordinated public investment programmes for renewable energies and related infrastructure would have served the purpose.
So far, however, governments have mostly paid only lip service to green-economy goals rather than taking action for a fundamental transition towards sustainability. Oil prices are currently low, and that is not helpful. Higher prices would be an incentive to invest in alternative energy options.
There were some signs of hope in the past two years, however. The UN adopted the Sustainable Development Goals and the Paris Agreement, a major step towards effective and globally coordinated action concerning global warming. It was ratified in record speed. In contrast to the Millennium Development Goals (MDGs), moreover, the SDGs are a universal agenda for action that applies to every country and concerns all relevant actors, including governments, the private sector, civil society, the media, universities and faith-based institutions. No doubt, the advanced economies are now expected to assume a leading role, but emerging markets must play their part as well. They are becoming ever more important. Their populations are growing, their market clout is increasing, and their middle classes are expanding.
New technologies matter too. Robots, artificial intelligence and three-dimensional printers are becoming ever more sophisticated. The digitalisation of office work is progressing fast. These trends are undermining the comparative advantage of developing countries in labour-intensive manufacturing and back-office services.
Multinational corporations have begun to reverse offshoring, bringing production back to their home countries in North America, Europa and Japan. Compounding social divergences in the advanced economies, however, this trend is not creating many jobs, and the employment that is generated is mostly for high-skilled and professional staff.
Humankind is obviously facing huge challenges. They need to be assessed thoroughly. Scholars must provide policymakers with relevant and tangible advice.
Jürgen Wiemann is vice president of the European Association of Development Research and Training Institutes (EADI), which is preparing its 15th General Conference under the title “Globalisation at the Crossroads”. It will take place together with the Nordic Conference on Development Research in Bergen, Norway, from 21 to 23 August 2017.