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This is the text of a speech delivered by the editor of the Financial Times at the inaugural Nikkei-FT symposium in Tokyo on January 15 2016.
Ladies and gentlemen, distinguished guests, it is an honour to speak at the inaugural Nikkei-Financial Times symposium on Japan and the World. For more than a century, the Nikkei, like the FT, has served as a trusted chronicler of globalisation and Japan’s own special contribution.
On the morning of May 18 1969, readers of the Nikkei woke up to a cracking scoop. Mitsubishi Heavy was in talks about an alliance with Chrysler. The liberalisation of capital controls, opening up Japan to the world, had begun. The fruit of those talks is what we now know as Mitsubishi Motors.
Later that day the deputy CEO of Mitsubishi Heavy arrived back at Haneda airport. He was besieged by reporters from various news organisations. “It’s just like in this morning’s Nikkei,” he declared.
The reporters on that story won a Japan Newspaper award. It was the first of a string of epoch-shaping scoops: the alliance in November 1970 between General Motors and Isuzu; Toyota’s first production in North America in Fremont, California in 1982; Nissan’s move into the UK in 1984; Toyota’s first solo US plant in 1985. The Nikkei broke them all.
When I was a foreign correspondent in Washington, Brussels and New York, I saw how a genuine news scoop can set the pulse racing. As an editor, I have come to appreciate the value of the “scoop of interpretation” — the insightful story which connects the dots for the savvy reader and investor.
Thanks to our network of more than 100 foreign correspondents, the FT can deliver this brand of quality journalism. And thanks to our new global media alliance with Nikkei, we are ideally placed to offer fresh insights from selective co-operation and cross-fertilisation. This symposium speaks to that goal.
Today, I have been invited to speak about Globalisation 2.0. This is both timely and appropriate because we are entering a new phase in the evolution of the world economy. I will look shortly at the geopolitical and geoeconomic trends that characterise “Globalisation 2.0” — but first let’s inspect the wider historical canvas.
For 500 years the west was on the rise, culminating between the late 1970s and 2007, in Globalisation 1.0 — an age of continuing “mini-revolutions” brought about by rapid economic, political and especially technological change.
These changes — the open system of trade, information flows and the spread of technology — occurred on the terms, and in the image of, the “west”. And I am using the term “west” not geographically as it includes Japan, itself a greater moderniser since the 1868 Meiji restoration, and Australia and New Zealand. What I mean by “west” is the liberal market-based democratic values that have propelled global growth since the mid-20th century.
The end of the cold war further accelerated institutional change: the creation of the EU in 1993, and launch of the single currency in 1999; the 1994 Uruguay Round agreement on global trade liberalisation and the establishment of the World Trade Organisation; the opening of a market economy in communist China followed by entry into the WTO in 2001; and far-reaching changes in national and international laws driven by the deregulatory spirit of the Thatcher-Reagan era.
The fall of the Berlin Wall and the collapse of the Soviet Union brought about an even bigger shift. The “client states” of the world’s two superpowers — the US and the Soviet Union — were no longer hemmed in by the geopolitical constraints of the cold war and were now free to pursue their own development.
As the “winner” of the cold war, many states chose to follow the advice of the “western” model prescribed by the US-influenced global institutions: the World Bank, International Monetary Fund and WTO-led trade liberalisation — the so-called Washington consensus.
At the end of the cold war, around 1bn people counted themselves in market economies. With the rise of emerging markets and the transition in India and China that number rose to between 3bn and 4bn people — a truly seismic shift.
The progressive abandonment of controls on capital, goods, services and labour — epitomised in this period by the creation of Europe’s single market and the birth of the euro — reached its apogee in the summer of 2007. At that point world financial flows had reached 14.7 per cent of global GDP.
And now we find ourselves in the second half of the second decade of the 21st century at the advent of a new age: “Globalisation 2.0.” The old western-dominated Globalisation 1.0, which assumed the universality of one global culture, has passed. Today, Globalisation 2.0 means the interdependence of several identities or cultures characterised by new forms of non-western modernity.
This new era, while long in the making, was hastened by the 2008 global financial crash. Since the Great Crash, cross-border capital flows have fallen to 3.1 per cent of global gross domestic product, less than one-quarter of their pre-crisis peak. This is the result of a massive re-regulation of the banking sector marked by the repatriation of capital, curbs on proprietary trading and the ring fencing of commercial banking from investment banking. We might call this the partial “disintegration” of the financial system.
The benefits of the western-dominated “Globalisation 1.0” system over the past 30 years led to the rise of the emerging economies. The wider G20 grouping reflects their increasing weight. Yet those same countries are experiencing shocks as a result of the slowdown in China, inadequate local governance, meaningful economic reforms, and, crucially, excessive borrowing at home, both among corporates and households. Think Brazil.
Now these one-time market favourites face a period of prolonged and painful adjustment, especially those overly dependent on commodity cycles. As Robert Zoellick, former president of the World Bank and US trade representative, has remarked: some of the governments of the so-called Brics countries started to believe their own press releases.
To date, we have witnessed a reappraisal but not a repudiation of globalisation. Globalisation has made borders porous to information, foreign investment and popular culture but also to cyber crime, pollution and human trafficking. Security is harder to achieve and to maintain. National governments are desperate to regain a measure of control.
So while the flow of ideas continues across borders, there are signs of a backlash — from the great firewall of China to Europe’s insistence post-Snowden on locating data storage on its own continent. The internet is not (yet) Balkanised but the age of the seamless global internet has almost certainly passed.
The rise of radical Islam marks a second significant geopolitical shift. A bloody struggle for supremacy is unfolding between Shia and Sunni Islam in a Middle East where postcolonial borders are being erased and the old autocratic order breaking down. Al-Qaeda, Isis and other terrorist groupings may not pose an existential threat to the west, but their newfound global reach poses a clear and present danger.
Finally, as I have witnessed during my visits over the past 15 years, China’s steady rise challenges the postwar order in Asia. China’s GDP has quintupled since 1990 but it is a premature superpower. The ruling Communist party is striving to create jobs, raise the quality of economic growth and preserve its own legitimacy. At the same time, and perhaps not coincidentally, China has become increasingly assertive in the Pacific, interrupting investment and trade with neighbours who stand up to its territorial claims.
China has also actively begun to reshape the postwar international economic order, which it views as skewed in favour of American and western interests. It is a rulemaker now, not just a rule-taker. The launch of the Asian Infrastructure Investment Bank is one example; but so are the Brics Bank and Beijing’s One Belt, One Road initiative for connecting western China to Central Asia, as well as the seaborne route through the West Pacific, Indian Ocean, the Gulf and on to east Africa.
Let me now turn to how I see things unfolding.
First, the Federal Reserve’s recent move to raise interest rates suggests we are finally moving from crisis management to a semblance of normality in policymaking. Mervyn King, former governor of the Bank of England, described the period after the Lehman Brothers collapse as “wartime”. By that he meant governments and central banks taking extraordinary measures such as bank nationalisation, bank recapitalisation and the launch of quantitative easing in the US, Europe and Japan.
The Fed’s interest rate hike signals, finally, that we have reached the beginning of the end of unconventional monetary policy as a means of generating economic growth.
In Europe, we see a fragile truce. The eurozone crisis has moved from acute to chronic. Greece remains in the eurozone, just. The European Central Bank, under the astute leadership of Mario Draghi, has bought time with its pledge to “do whatever it takes” to stop deflation. But the ECB’s limited QE measures have done little more than buy time for governments to take the necessary structural reforms to restore economic growth.
There is a common thread here with the US and China. The Fed’s move makes it imperative that Congress (and a new president) consider fiscal and structural measures such as tax reform and, yes, immigration reform to inject new dynamism into the US economy. At the same time, Silicon Valley and the shale gas energy revolution are showing, once again, the power of the private sector to drive growth in the US.
On China, much has been written about Beijing’s mis-steps in managing the exchange rate and intervening in the stock market. Yet the ultimate test will surely be implementation of the Communist party’s five-year plan. This recognises the central place of structural economic reform from state-owned enterprises to the labour market.
These reforms are intended to propel the shift from an investment-reliant, credit-fuelled, export-heavy, low cost manufacturing growth to one based more on consumer demand, services and environmentally friendly growth; as well as opening the capital account and the internationalisation of the renminbi. However, after the tumultuous market movements this new year and the ferocious anti-corruption campaign targeting Chinese business, I would say the game is finely balanced.
To sum up: we have moved from what Claire Jones, our ECB correspondent in Frankfurt, recently described as “peak central banking”, where monetary policy was doing all the work to a post-crisis era where the burden falls more on politicians to take responsibility for structural reforms to generate economic growth.
Are they up to it? Sitting in Europe, where populists have toppled or laid siege to governments in Greece, Poland, France and Spain, the omens do not look especially good.
As for America, the improbable rise of Donald Trump may not presage the arrival of a middle-market hotelier-cum-reality TV host in the White House in November; but it does reflect how a large segment of the public feels unhinged by globalisation and spurned by the political elite.
The UK faces similar strains on inequality, but not to the same degree. The Conservative party, defying all predictions, won an absolute majority in parliament after a period of austerity. The Tory government, guided by David Cameron and his putative successor George Osborne, is radically reshaping the state, reforming the welfare system, and increasing the incentives to work. The UK is now close to full employment.
Let me turn briefly to the Japan experience. It has become fashionable to speak of two “lost decades” after the collapse of the late 1980s bubble and the onset of deflation. By this account, Japanese business failed to fully exploit the postwar economic miracle, especially in hardware manufacturing. Apart from its groundbreaking lead in robotics, it largely missed the software revolution. One Japanese diplomat told me, half jokingly, that the greatest Japanese export in the past 25 years has been cultural: Japanese cuisine. Sushi as soft power! (Well, we should add the Japanese film industry.)
In fact, historians may well pay more attention to the innate qualities of the Japanese people: discipline, hard work and resilience in adversity. These strengths helped the country to recover from not one but two devastating earthquakes and make Tokyo one of the great modern cities. They may also take note of Japan’s cleanliness, top class education, healthcare and transportation systems and its ability (unlike the US) to deliver a national strategy. And, crucially, they would remember that Japan has since the 1870s combined modernisation with the preservation of national culture.
Today, Japan faces a choice about Globalisation 2.0. How far is it ready to open up further to the rest of the world, to temper its traditional homogeneity with a willingness to exploit global networks, interact with other cultures and, yes, embrace English as the dominant language of international business?
Fewer interpreters and more women in the workforce — think of the gains in productivity!
On my last trip to Tokyo, a senior Japanese official told me that Abenomics represented the “last chance” for Japan to break out of deflation and restore its role as a front rank economic and political power.
Abenomics emphasises — alongside monetary and fiscal policy — the importance of structural economic reform such as more women in the workforce, corporate governance, improving productivity and the role of external catalysts such as the Trans-Pacific Partnership. There is evidence of success; nearly 760,000 women have entered the workforce. Many are part-time jobs and equality is a distant prospect, but this is nevertheless real progress in exploiting one of Japan’s great natural resources: women.
The FT has no party political affiliation. But I would say that Abenomics — if implemented in full — could turn out to be an effective antidote to the theory of secular stagnation, which has gained currency in the west. And Japan will have a chance to showcase its economic and political power when it plays host to this year’s G7 meetings.
Ladies and Gentlemen, I have sought to sketch some of the main characteristics of Globalisation 2.0. How bullish should we be about the next 10 to 15 years?
The less benign prognosis is that the forces of resistance to Globalisation 2.0 prevail. Populists in the mould of Farage, Le Pen and Trump do not necessarily assume power but they define the political debate. The reformers are cowed. The forces of fragmentation gain ascendancy from the Middle East to Europe. Nationalism rises in China, Russia and the rest of Asia. Globalisation 2.0 starts to look like globalisation before 1914.
There is, however, a more optimistic outlook. The reformers prevail, from Beijing to Tokyo, Delhi, Brussels, London and Washington. China continues to globalise and opens its capital account — a potentially huge shift in global financial power. Japan continues to reform apace and grows closer to India, which itself, finally, becomes a big player. The shift of economic power eastward to Asia accelerates. And the west continues to play a constructive role.
We do not know what the future brings. But here’s what we do know. The new global media alliance between Nikkei and the FT is in fact an act of Globalisation 2.0. Together we will be there to tell the story. Without fear and without favour.