Is it really curtains for globalisation?

Finbarr Livesey’s From Global to Local: The Making of Things and the End of Globalisation is a terrific read, although I’m not completely persuaded by the argument that the transformation of production by global supply chains will be reversed. In fact, the book gives a nuanced and highly informative account of why firms manufacture what they do where they do – making, too, the entirely valid point that the political context is highly uncertain and we could be seeing not only a retreat from hyper-globalisation but a full-blown canter toward nationalism and protectionism. The world has seen such unwindings before.

The first part of the book describes how the increasing specialisation of manufacturing, enabled by technology and declining transaction costs, led to the development of long cross-border supply chains. It then goes on to roll forward the evolution of both transport/transactions costs and automation, covering issues such as containerisation and shipping costs, the oil price, the move to regional trade deals, and agglomeration economies. These are some of my favourite subjects, and these chapters give a very nice synopsis of the economic issues.

However, one of my queries about the argument arises in the section on agglomeration. The suggestion here is that the economic forces of agglomeration apply to cities in developed economies but perhaps not so much in the emerging markets. “One of the open questions is whether the massive collection of companies making so many things in southern China has become a self-reinforcing cluster, a location with its own internal gravity binding manufacturers to it for a significant time into the future. …. [G]iven the rise of automation and the desire of leading firms to retain design and intellectual property control over their products, some of the clustering forces for places like Guangzhou and Shenzhen may not be as strong as thought at first glance.” My guess – no more than that – is that while automation will lead to some ‘reshoring’, as Livesey suggests, the Chinese manufacturing centres do in fact have some distinctive capabilities: the ability to manufacture to consistent standards on a large scale; unparalleled logistical expertise; and growing R&D/design capabilities in a number of products from clothes design to renewables.

Having said that, the book is very strong in describing the complexity of the production decisions facing manufacturers now, and there is loads of interesting detail. One chapter covers environmental issues, including the now widespread drive to reuse and recycle (IKEA is a nice example here). Another looks at trade policy and politics, and the importance of proximity (hello, Brexiteers!), leading some companies to switch their focus from exporting to markets to owning production assets in those markets: “Government regulations on foreign ownership will become the new trade barrier,” as otherwise companies may not be able to access certain markets at all. There is a chapter about automation and additive manufacturing, and the implications of smaller factories, with lower retooling costs, becoming economically viable. Labour costs will become steadily less decisive as a reason for locating production in an emerging economy (although I think that reason has been over-stated sometimes.)

All in all, Livesey predicts: “[I]t is likely we will see anything from a 20-30% fall in global merchandise trade (services are not affected the same way) over the coming decade.” This is quite a bold prediction, implying a big restructuring of production and diminution in importance of cross-border supply chains, given how much of merchandise trade now consists of components rather than finished products. I’m not sure about this, yet do agree with that the technological, political and economic conditions that shaped the world of global supply chains are changing substantially.

From Global to Local makes a great combination read with Richard Baldwin’s The Great Convergence published earlier this year. They offer two different sets of lenses on the organisation of the world of production. One could add Stephen King’s Grave New World, a pessimistic, big picture perspective on global political economy.

Reflecting on these three recent books, they need to be combined with looking at implications for employment and incomes. As David Autor pointed out in his IFS lecture last week, trade has contributed enormously to the biggest decline in poverty recorded in human history as China has grown – and the loss of jobs, income and status among some (not very numerous) groups of people in the west, a narrow but deep cost of technology & globalisation. We surely need to think much harder about the social and economic welfare implications of current trends, including whose welfare, given how badly prepared economists and politicans were for the implications of past developments. Globalisation and automation started to eat western livelihoods around 1980, and the failure to make sure those who lost out were properly compensated with appropriate policies goes quite a long way to explain today’s politics.


The big picture – and it isn’t pretty

It’s no easy task to write a reasonably concise (about 200 pp), highly readable, well-informed synopsis of the big trends in global economic history, along with an assessment of how these are likely to play out in the near future. Stephen King, HSBC’s Senior Economic Adviser, has given us such a book in Grave New World: The End of Globalization and the Return of History. As the title indicates, it isn’t an optimistic book. But more of that in a moment.

The book starts with an extract from a speech by Joseph Chamberlain as Secretary of State for the Colonies in 1897. It was an ‘end of history’ speech: in ruling the Empire, he sdai, “[W]e are fulfilling what I believe to be our national mission, and we are finding scope for the exercise of those faculties and qualities which have made us a great governing race….” The Introduction segues into the inevitability that empires that rise subsequently fall. The Whig interpretation of history is still wrong.

The remainder of the book is similarly ambitious and wide-ranging, although consequently covering vast events in a page or two; this can inevitably feel breathless. But this is a worthwhile price to pay for the breadth of reference. For instance, few books by financial market economists about global trends manage to include reference to the work of development economist Arthur Lewis (although I’d like to mildly complain that he’s referred to here as the first black academic at the LSE; he was the first black professor appointed in the UK, and that was by the University of Manchester, where my office is in the Arthur Lewis Building).

The other merit of a wide-ranging book of course is that you learn some things you didn’t know. For me, it was the detail about China’s extension of its economic and political reach in Asia and beyond. For all that China’s path will be turbulent (see Martin Wolf in the FT today), there can be no doubt about where the centre of gravity of the world economy is moving.

The final part of Grave New World is titled ‘Globalization in Crisis’. It describes the multiple weaknesses of existing global institutions but concludes there’s nothing better around than sticking with, and improving, the WTO, the EU, NATO etc. I think one has to forgive the un-stirring conclusion – I certainly have no better ideas, although in glum moments (there are may, watching the news) I rather fear that events in the near future will destroy the existing institutional landscape leaving no option but to go back to the drawing board.

The book ends even more pessimistically than me, however, with an imagined Ivanka Trump Inauguration speech in 2044. Oh my, history is definitely baaack.71coBmyck4L


Prospects for the Swedish model

There’s an interesting new book, Digitalization, Immigration and the Welfare State, by Marten Blix of Sweden’s Research Institute of Industrial Economics. It brings together two deep trends, technology and immigration, in the context of the relatively rigid labour market structures of Sweden and some other European countries. Blix asks, what are the implications for the welfare state, the high tax, high spend social contract? He argues that the combined trends are increasing inequality, and the longstanding social support for redistribution and high taxation is eroding. Sweden has been at the forefront of both trends. It ranks high on measures of digitzation, and has taken in more refugees per capita than most other European countries. It has consequently had one of the biggest increases in income inequality in the OECD (the level of inequality is still relatively low – similar to Canada or Germany).

Ultimately, the book suggests a Swedish model of social democracy can potentially survive, thanks to the country’s high productivity and high initial levels of social capital. Sweden’s public finances are also in better shape than in many other countries. However, it certainly doesn’t look like an easy path. Absorbing the new immigrants will require a focus on enhancing their skills – and also those of the already-resident. One prescription is reducing the rigidities in the labour market and housing market. Another area where greater flexibility will be needed is in accommodating the increase in work – via digital platforms for instance – outside the traditional collective wage bargaining. Some Swedish unions are apparently working to establish employment standards on the digital platforms.

As the book concludes, however, the obstacles to the reinvention of the Swedish model – or any other social contract – are not problems of economic analysis but political obstacles. Economists often talk of the need for ‘structural reform’ when this is code for ‘politically bloody difficult.’ Immigration makes the politics harder, Blix argues: “Sweden is no longer the homogeneous country it used to be and the social contract holding people together is at risk of disintegrating.” All the more dangerous, then, he says to pretend everything is fine and nothing needs to change. The newcomers have to be brought into the fold or the future of the Swedish model looks to be in doubt.

Much of this debate is of course familiar to those of us more familiar with the UK and US economies, as is the kind of political lunge to the populist right or left that accompanies these tech and migration trends. It’s interesting to read about the challenges in the context of a country that has so long been an admired model for the centre left (and even some of the centre right). I accept that it’s essential to try the kind of policy response the book suggests, hard as that is, given the do-nothing alternative. But it’s quite hard to feel optimistic these days. Even Sweden!



Power, plenty – and Brexit

It seems a good time to take this wonderful book, Power and Plenty: Trade, War and the World Economy by Ronald Findlay Kevin O’Rourke, off the shelf again: “It would be foolish … to simply assume that the remarkable progress achieved by globalization in the last few decades will be sustained into the future.”

Although I agree with this VoxEU column that the gains are well worth defending, the global political context for continuing trade growth is depressing. And yet the UK government seems determined to get as bad a deal as possible in removing the country away from the most successful free trading area there has ever been. A bad move being made ever worse by its incompetent implementation.



The trade-investment-service-intellectual property nexus

I’ve managed to resist reviewing Richard Baldwin’s new book The Great Convergence: information technology, trade and the new globalization until now, and it has taken serious self-restraint as the book is so relevant to (among other things) the Brexit debate. I would for one thing force every Cabinet member to read it and not allow them to keep their jobs unless they could pass an exam based on it. Anyway, the book’s published on 14th November and now it’s November my self-denying ordinance can end.

The Great Convergence offers a compelling framework for thinking about how trade is organized and why and how it benefits whom. The first part is a historical overview of trade leading up to the first, the Old Globalization or the 19th century. This phenomenon, due to steam power reducing trading costs, industrialization and a context of relative global peace led to the Great Divergence: the major economies of Asia, which had been richer than the West, fell behind, dramatically so over the course of two centuries. The New Globalization, since the 1980s, driven by the new information and communication technologies, has taken the rich countries’ share of global output back to its 1914 level in little over two decades. China is the standout story, going from uncompetitive in 1970 to 2nd biggest in the world by 2010, but other rapidly industrializing nations in the New Globalization are Korea, India, Poland, Indonesia and Thailand (ie. a different group from the notorious BRICs).

However, as the book goes on to document, the New Globalization is a completely different kind. Trade over distance has three costs: the costs of moving goods, ideas and people. When moving goods got cheap, the first explosion of trade occurred, but ideas were costly to move so the innovations of the industrial revolution were not easily exported. The Old Globalization was the result of low shipping costs and high communication costs. ICTs have reduced the latter significantly, so industrial competitiveness is defined in terms of production networks, interlinked supply chains, that cross national borders. Knowledge has been offshored, and the rapid growth in a few previously poorer countries has come about because of their geographical location, close enough to G7 industrial centres that managers can travel there, sharing knowledge within the confines of the production network.

This means the New Globalization happens at the level of stages of production and occupations. This makes it harder to predict who will be affected – which jobs will be offshored, which areas most affected. “Nations are no longer the only natural unit of analysis”. Much of the book describes a new data set making it possible for economists to begin to explore the ‘value added’ pattern of trade created by the switch from trading finished goods toward trading components in global production chains. The picture is going to be utterly different – the famous example being the iPhone which is sourced conventionally as a Chinese export to the US but where the value added is concentrated in the American business and the Chinese import a lot of the components they assemble and re-export with not much value added at that stage.

This is one insight the Brexiteers need to appreciate, although the Nissan letter suggests at least some members of the government realise the signficance. British businesses are woven into supply chains with our near neighbours: we aren’t importing prosecco and salami so much as gear boxes. Brexit threatens to tear apart these links. If the cost appears to be too high, the multinationals at the head of the supply chains will relocate chunks of their production networks, and won’t care if they’re exporting gear boxes to the Czech Republic rather than Britain.

The book adds: “Twenty-first century supply chains involve the whole trade-investment-service-intellectual property nexus, since bringing high quality, competitively priced goods to customers in a timely manner requires international coordination of production facilities via the continuous two-way flow of goods, people, ideas and investments. Threats to any of these flows become barriers to global value chain participation…” Baldwin adds that the movement of people is still a binding constraint on globalization, and face-to-face communication – and so distance – remain important. He argues that the improving quality of telepresence is changing this, but I think that remains to be seen.

Ultimately, trade policy today is not just about trade nor about nations. It involves deploying the nation’s productive resources through overseas connections. This is why 90% of the economics profession thought, and thinks, Brexit so damaging, and the idea that the UK has more economic self-determination outside the EU a delusion. The Great Convergence is not about Brexit – it ranges far wider. I can’t imagine a better and more accessible analysis of trade and globalization in the digital era.


(20 November: minor typos corrected)