Globalisation at the crossroads

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The CEO session on globalisation brought together some of the people who bear the greatest responsibility for keeping the global economy running. As well as the CEOs of major international corporations, the speakers included Pascal Lamy, the director-general of the World Trade Organisation and John Lipsky, first deputy managing director of the IMF. They also included some of the world’s most distinguished economists, including two Nobel laureates – Edmund Phelps and Joe Stiglitz.

The session focussed on three specific areas where the globalised economy could come under strain - trade, financial regulation and regional imbalances. The conclusions reached were not entirely optimistic. For while it was pointed out that IMF projections for 2007 suggest that the global economy is about to mark its fastest five-year period of growth for decades, it was also clear that there are considerable political and economic risks to globalisation.

All the participants seemed to agree that it is vital that the Doha world trade round is brought to a successful conclusion. But there was also wide agreement that success needed to be more broadly defined than in the past. What is at stake said one participant is the re-balancing of the rules that govern world trade to make globalisation more development friendly. The three capitals where the key decisions now have to be made are Washington, Brussels and Delhi.

Business people, politicians and economists all seemed to bring slightly different perspectives to the future of the Doha round. Some of the CEOs felt that business should make a greater effort to sell the benefits of world trade to the public. One prominent economist suggested that it was more important to get a good agreement than a quick agreement. He argued that there were failings in the last big world trade deal – the Uruguay round – that contributed to the backlash against globalisation.

A prominent American politician poured some cold water on proceedings, by suggesting that even if a Doha deal was agreed, it would be impossible to get it though Congress in the current political climate. One international civil servant pointed out that it is extremely worrying that protectionist and nativist sentiment is so high in the United States at the moment, even in the midst of a long economic expansion. He wondered how bad things would get, if a real recession took place. The politician responded that too many ordinary people felt they were not sharing in the benefits of globalisation. He suggested that politicians needed to re-assure ordinary Americans on questions like health-care and pension security.

Bu there were worries that politicians could instead take actions that would be damaging to the global economic system. In particular, the group discussing global financial regulation were concerned about ill-thought out efforts to regulate global financial markets. One former regulator said that the Sarbanes-Oxley Act in the United States was a very quick political response to a very unpleasant episode – the Enron scandal. But he argued that its consequences had not been properly thought through. And he was worried that there might be similarly ill thought-out efforts to regulate hedge funds and private equity. He suggested that perhaps politicians should limit themselves to setting general goals – and leave it up to expert agencies to draft the regulations.

In the discussion it was generally agreed that there is still scope for national regulators in a globalised world. But increasingly they are likely to be punished by withdrawal of business and funds, if they are too heavy-handed or politically-driven.

The main focus of the discussion on global economic imbalances was the US current account deficit. The mainstream view was this represented a significant risk to the global economic system, and needed to be unwound over the medium term. This unwinding could happen either in an orderly or a disorderly fashion.

An orderly unwinding of the US current account deficit would involve slower American consumption and increased American exports, as well as higher consumption in Asia and Europe, driven by economic reforms. But a disorderly unwinding would be enforced by the global financial markets – this would involve a collapse in the dollar, higher US real interest rates, a fall in US asset prices, an American recession and knock-on effects for rest of world. There needs to be some degree of international co-ordination and discussion to avoid this outcome.

But there was also a contrarian school represented in the room. This argued that the global economy is always characterised by imbalances of one sort or another. The US current account deficit is in large part a reflection of the attractiveness of the US as a home for funds. And an effort to unwind global imbalances could be counter-productive; the cure could be worse than the disease.

Listening to the discussion, I emerged with a much clearer picture of how the three areas of discussion – trade, financial markets and global economic imbalances are linked. In recent years, the three have been part of a virtuous circle that has driven faster economic growth. But it also clear that there is potential for a vicious circle. If global uneconomic imbalances are unwound in a disorderly fashion, the financial markets would react badly. And a financial market crash could cause a recession, which in turn would spark protectionism and an attack on the global trading system. Such a scenario sounds strangely reminiscent of the 1930s.

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