Is globalisation sustainable

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The World Is Tilted
The popular idea that America is one step smarter and more sophisticated than its rivals is a dangerous myth, and a threat to the global economy.

By Clyde Prestowitz
Newsweek


Issues 2006 - For most of the last 50 years, globalization has been a win-win proposition, making America richer while lifting hundreds of millions in the developing world out of poverty and despair. Recently, however, it has begun to operate differently, undermining U.S. welfare while creating imbalances likely to end in a global economic crisis.

In this new mode, globalization is tilting the world like a giant sliding board game on which the "flattening" of old barriers is accelerating the transfer of the supply side of the U.S. economy to the rest of the world, especially Asia. Take Boeing as an example. Long America's leading exporter, it symbolizes the kind of high-tech leadership on which the future of the U.S. economy is widely said to depend. After

losing market share to the European Airbus in recent years, Boeing responded by developing the new 787 Dreamliner, which is gathering record orders. Yet these sales may not add a lot to the U.S. economy because much of the work—including production of the critical carbon-fiber wings that Boeing always insisted would be kept at home—will be done in Japan.

Even more telling is the example of the semiconductor king, Intel. When economists and political leaders say American industry should concentrate on producing very-high-technology products where it has a clear comparative advantage, Intel's chips are what they have in mind. Yet company executives recently told a presidential advisory panel that under present circumstances they must consider building more of their new factories abroad. Over the next 10 years, they explained, the cost of running a semiconductor factory in the United States could be $1 billion more than that of running it abroad.

That there is something odd here is not yet widely acknowledged. Indeed, most business, academic, media and political leaders continue to insist that globalization is proceeding smoothly, making the world rich, more democratic and more peaceful. President Bill Clinton called globalization America's strategy, and President George W. Bush describes the American economy as the "envy of the world." Nor is this view entirely unjustified. U.S. GDP and productivity growth are the highest in the developed economies, while inflation, unemployment and interest rates are among the lowest.

Nevertheless, a closer look reveals a dark side. The U.S. trade deficit is now more than $800 billion, or 7 percent of GDP, and grows inexorably as Americans continue to consume more than they produce. The trade imbalance is of unprecedented size and breadth. Economists typically expect the United States to import commodities and cheap manufactured goods while exporting high-tech products, sophisticated services and agricultural goods, for which its land and climate are well suited. In reality, the U.S. high-tech trade surplus of $30 billion in 1998 has collapsed to a deficit of about $40 billion. Agricultural trade is now also in deficit for the first time in memory, and the modest surplus in services is declining as global deployment of the high-speed Internet has made it possible for services to move offshore as easily as manufacturing. In short, U.S. exports are declining versus imports across the board, while its growth depends on foreign lenders (primarily in Japan and China) to finance the excess consumption.

Two factors explain these unexpected trends. The first has been at work for a long time. It is the gradual construction of the global economy in an asymmetrical form. For the United States, globali-zation has meant building its economy into a giant consumption machine. Easy consumer credit, home-equity loans with tax-deductible interest payments, markets largely open to imports, policies that emphasize growth through demand management and accommodative monetary policy, and myriad other incentives have led Americans to save nothing while both households and government borrow at record rates. This is often justly criticized as excessive. But it is important to understand that American buying drives most of the world's growth because the United States is virtually the only net consuming country in the world.

Globalization for most others has meant export-led growth. Particularly in Asia, "catch-up" development policies have focused on creating production and export machines. There are many flavors, but most Asian economies are characterized by relatively low consumption, savings rates of 30 to 50 percent of GDP, government intervention in markets, managed exchange rates, promotion of investment in "strategic" industries, incentives for exports and accumulation of chronic trade surpluses along with large reserves of dollars.

Indeed, the dollar is the key to this whole lopsided global structure. The dollar, of course, is not only America's money, but also the world's primary reserve currency. As long as others will accept it in payment, America can buy and borrow without concern for saving, investment or production. Thus, deficits—whether trade or budgetary—really don't matter and America can get away with fiscal irresponsibility. Oddly, the rest of the world can be just as irresponsible. By managing exchange rates to keep the dollar overvalued and their export prices low, other countries can oversave and overinvest because the excess production can be exported to the U.S. market.

This structure has grown for so long because it has great benefits for both sides. America gets to live above its means, as cheap imports and foreign capital keep inflation and interest rates down and home values rising. The rest of the world, especially Asia, gets to climb the ladder of technology faster than it would otherwise. By accumulating dollars, Asia also gains strategic leverage over the lone superpower—which, by outsourcing management of the dollar, has ceded a degree of control over its own long-term interest rates.

There is a downside, however. By keeping the dollar chronically overvalued and providing investment subsidies to attract strategic industries out of the United States, the Asian export-led-growth approach has long tended to shrink U.S. productive capacity. For some time, this was true mostly of commodity manufacturing, and the significance of the trend was discounted with the rationale that the U.S. economy was moving to the "higher ground" of high-tech and sophisticated services.

This argument was never entirely satisfactory because of the exchange-rate management and the investment subsidies used by export-led-growth countries to attract high-tech production to their shores. For instance, Boeing is outsourcing much of the 787's construction to Japan in part because an overly strong dollar reduces yen-based costs, and in part because the Japanese government will provide production subsidies unavailable in the United States while "encouraging" Japanese airlines to buy the planes if the work is done in Japanese factories. For Boeing, this is all of critical importance as a way to offset the launch subsidies provided by the EU to archrival Airbus.

But if it was always flawed, the argument is now in tatters in the face of the second aforementioned factor: the entrance into the global economy of China and India. Not only do they offer low costs, which the strong dollar further reduces, but—contrary to common assumptions about developing countries—significant portions of their populations are highly skilled. They can thus be competitive across the entire range of manufactured goods and services. The negation of time and distance by the Internet and air-express services makes this all the more true.

Further, the potential size of these markets attracts investment in anticipation of growth, even if the initial production cost is not fully competitive. This is particularly true of China, where national pride and an authoritarian government willing to offer large investment incentives create an environment in which foreign companies are encouraged to engender "trust" by transferring factories and technology to China, regardless of the fact that the comparative cost advantage lies elsewhere.

This, combined with the asymmetric global economic structure, is why the U.S. trade balance is collapsing even in advanced-technology products and serv-ices. The growing trade imbalance, in turn, makes the current mode of globalization unsustainable. To finance the deficit, the United States is already absorbing about 80 percent of available world savings. The value of U.S. imports is now more than double that of exports. To merely stabilize the deficit at its current rate would require that exports grow more than twice as fast as imports.

But this cannot happen if the supply side continues to move offshore. If it doesn't happen and the deficit keeps growing, world savings will eventually be insufficient and a financial crash will be inevitable. Of course, U.S. consumption and imports could be cut, but if that were to occur without a commensurate increase in consumption elsewhere, the whole world economy would suffer recession, if not depression.

Some economists speak bravely of a "soft landing." In this scenario, the United States reduces its budget deficit and excess consumption, while a gradually falling dollar results in rising exports to foreign markets where governments are stimulating consumption. While desirable, this will not occur automatically. Interest groups in all the key nations will defend the status quo.

Thus, for the sake not only of the United States but of all nations with a stake in globalization, it is imperative that political leaders change its current mode. The game cannot continue with one participant playing consumer while nearly all the others play producer. For the long-term success of all, everyone must agree to play the same globalization game.

Prestowitz is president of the Economic Strategy Institute and author of "Three Billion New Capitalists: The Great Shift of Wealth and Power to the East."

© 2005 Newsweek, Inc.

© 2005 MSNBC.com

URL: http://www.msnbc.msn.com/id/10206250/site/newsweek/

 

[Autumnleaf]

Good article. I'm not an economist so I'm wondering what the others here think.

 

[billwald]

Conditions are reverting to the pre-WW2 norm. The middle class will shrink and half the people in the USofA will live in poverty however the nature of poverty as changed due to increased productivity. Poor people have the same sorts of consumer goods as the rich people but a poorer quality. There will be sufficient food, cheap booze, and the sports channel for all.

The other factor is that since the breakdown of old social barriers the young people are forming relationships on the basis of education and ambition. Social Darwinism at work.

 

[Guardian4981]

Keynsian economics which imo is real economics believes that demand side controls the market. Of course in the world economy the demand side is lead by the US.

Roughly 25 percent of the trade deficit is because of China whos currency is undervalued giving them an unfair advantage in all trade with countries who have a free floating currency including the US.

The us government has grown to large. Thanks to the bush administration spending has increased by over 40 percent since he took office (I guess thats what his electors call conservative??). Of course with such in increase in spending deficits will arise. With higher deficits confidence in the dollar falls, value of the dollar falls, and trade deficits rise. Normally with a lower currency exports will rise, and they have somewhat but not fast enough chiefly because interest rates have risen and are expected to continue to rise.

There is growing sentiment among buisness towards the us thanks to the iraq war. Secondly after the invasion of iraq until now iraqi oil production has fallen by over 1 million barrels a day. Addd one million barrels of oil a day in the market and the price of gas might very well have stayed under 2 dollars. Wither lower gas prices auto giants like ford and gm could have kept up there suv sales and sales in general, and not be downsizing so much. Automaking is one large part of the deficit. The price of oil because of the fall in iraqi production also is a large part of the deficit combined with a lower dolalr value, and some countries beggining to price some oil in euros.

Us education standards compared to the rest of the world has fallen, 30 years ago we used to be in the top 3 for reading science and math now we barely make the top 15. Buisness goes where people are educated, that is no longer the us. We spend more on each student then any other country, the problem isnt money the problem is the us culture. Todays generation get whatver they want from there parents thanks to easy credit and the american culture, this causes kids to lose sight of the value of education, and even more money is needed just to keep them at a decent level let alone top notch of the world. Kids in china and india who see alot of there country in poverty have reason to try hard in skill, motivation and drive is everything and americans are losing it.

Goods makes up more of an economy then service in terms of what can be traded. Nobody wants to slave away in a factory to make shirts, toys, or anythin gin the us. So all we have to export is a few advanced services, but in comparison to both commodidties like oil and manufactured goods like toys, the value is way off key.

The problem with america and globalization is this in summary.

The current administration has tried to help the us with a giant government, but this only has limited short term benefits and overall its hurting us even more.
The Iraq war has caused an increase in oil prices due to less iraqi production. This effects both us buisness production and trade deficits negatively.
Us culture has caused youth to have less education skillz then many other countries
The us government is overencumbered because of reactionary type services including policing, health care, education, etc. In the long run this costs more causing higher taxes to be needed.
Interest rates must rise to keep foreign investment in debt sustainable thanks to the budget deficit, with igher interest rates again buisness is hurt

Is globalization sustainable??

Of course, even if the us falls and the world economy goes through a great depression, government will always be overthrown, debts wil be forgiven or defaulted, etc. The technology is here and will always be here, that is what will allow globalization.

What is likely to happen??
Im not positive one of two options I see likely.

One- Sometime within the near future a revolutionary leader in the us wil emerge like FDR was. This leader will tell it how it is, americans will see there surrounding in troiuble, but this leader will use americas last resources and standing to regain progress and revolutionize america to pave the way once again. Such changes would include drastic changes in the way government operates, everything from how classrooms run to how the cabinent is utilyzed. Americans will see there prominance threatened and patriotism will get americans and representatives to cooperate and work for positive change. America will emerge once again number one

Two- America will attempt to use military leverage as the bush admin has to attempt to maintain us control. The economy will slowly become to depandent on others. Over time the us treasury will default, other countries will be unwiulling to fund us anymore. At this point the us will have to try to live in isolation. Without access to key imports like oil and electronics the us economy will have to start all over. The us will see itself as a 3rd world country and have to struggle its way to regain world trust, lending opportunities, trading partners, etc. This process would prolly take at least 30-50 years.

 

[Autumnleaf]

For a 20 year old you're pretty insightful Guardian4981.

 

[JC4Dude]

In the short run, there will be "dislocations" in the US economy as jobs leave to foreign countries. In reaction, US companies, will chase the opportunites left which are NOT wage oriented. This can include particularly media creation and other intellectual assets. But that domain is limited in quantity. What will save people's bacon will be development of things related to our crisis - be it alternative energies, alternative energy conversion, and dare I say, finally, asset liquidation.

In the medium term, countries like China will develop a middle class. This will have the affect, perhaps 75-100 years out, of making things slightly better for our great grandkids, since the overall wage demands of the "rest" of the world will have risen.

The good thing to remember about economics though is that there never IS a static picture. For every development, there are reactions and further developments which ameliorate and change the expected (and actual) outcomes. A common example of this is the saying "the stock market has accurately predicted 8 out of the last 3 recessions."

 

[inquisitor_11]

In the short run, there will be "dislocations" in the US economy as jobs leave to foreign countries. In reaction, US companies, will chase the opportunites left which are NOT wage oriented. This can include particularly media creation and other intellectual assets.

Unfortuently, such a shift in economic orientation means that whilst emerging knowledge/culture industries will pick up some of the jobs, they will still be a vast glut of surplus labour in the US. Increasing unemployment (both reported and hidden) is likely to continue in the US, which when accompanied by the looming recession is going to mean very rough years ahead for the majority of Americans.

Is globalisation sustainable? In a word, no. Contemporary and historical capitalist globalisation (the colonial era) presuppose limitless economic growth within a finite system. From a position of entropy this is simply not feasible. Since the 1960's it was clear that if the population of China was to consume at the same levels as the US, there would simply not be enough raw materials in the entire world to achieve that outcome. And yet the entire developing world is being shunted along this path.

 

[billwald]

Globalization is a done deal until world wide communications collapse. Has nothing to do with "entropy." The system is finite but has a 14 billion light year or so diameter.

 

[inquisitor_11]

Globalization is a done deal until world wide communications collapse. Has nothing to do with "entropy." The system is finite but has a 14 billion light year or so diameter.

For 200 odd years globalization has had nothing to do with communication.

No the system is far more finite when you realise that globalised consumption at the same rates as the western world is entropically impossible. There is simply not enough raw material for a "economic growth" models of globalization to be a viable short term option for 2/3rds of the world, and certainly not a viable long term option for any of us.

The world IS in decline, and economic globalisation merely accelerates it

 

[billwald]

Commercial communication began with pack trains.

Raw materials is not the problem with recycling and substitution. Consider the substitution of sand for copper in electronic communications. We have lots of sand. The limitation will be clean water or the energy to produce it.

 

[inquisitor_11]

Raw materials is not the problem with recycling and substitution. Consider the substitution of sand for copper in electronic communications. We have lots of sand. The limitation will be clean water or the energy to produce it.

riiiggghhttt....

 

[billwald]

Keep in mind that there is sufficient land in Texas to provide a city sized building lot (2500 sq ft minimum) for every family in the world.

 

[inquisitor_11]

Well that really is quite interesting, but totally irrelevant.

The issue is not space, Australia is a massive country, but at a population of around 20 million is already pushing the limits of what its biosphere can support.

The issue is competeing access to resources in a planet where there is limited amounts of arable land, declining fresh water sources and peaking world oil supplies. Combining these factors with exponential population growth and the industrialisation of India and China (an extra 2-3 billion people), and you realise just how fallicous a the current conception of perpetual economic growth is.

 

[Silent Enigma]

exponential population growth

I thought the "population bomb" hype was over. Now it's "birth dearth" hype.

 

[inquisitor_11]

"Birth Dearth" is only a western issue i.e. less than a third of the worlds population. The rest of the world, particularly China and India as I mentioned before, are rapidly increasing population.

 

[Silent Enigma]

But for how long? Not like they're going to be having large families forever.