The hyper-speed of IT enabled globalization remains one of the most powerful, but least understood, forces at work in today’s world economy. It drives accelerated cross-border linkages through trade flows of goods and now services. It also drives an increasingly vigorous global labor arbitrage.
With this speed come equally powerful implications – both for financial markets in the form of inflationary headwinds and for the global body politic in the form of a political backlash and protectionist risks. Those who blindly extol the supposed win-win virtues of globalisation risk overlooking the pitfalls of the global speed trap.
Globalisation: why it’s different this time
This globalisation is different. A century ago, the world was also in the midst of a flourishing globalisation – a Golden Age of accelerated cross-border capital mobility and rapidly expanding international trade. It was brought to an end by a hugely disruptive confluence of geopolitical and internal shocks – two world wars, the Great Depression, and a virulent protectionism. While it lasted – roughly from 1880 to 1914 – the global economy went through a dramatic transformation. But there are three critical differences that distinguish this globalisation from its antecedent of a century ago – its financing, breadth, and speed. Understanding these distinctions is essential if we are to succeed in making this globalisation work.
The financial dimension of the current globalisation is the mirror image of that which occurred 100 years ago. Back then, the great power – Britain – was a lender to the developing world, with current account surpluses that averaged about 4.5% of GDP over the 1880 to 1914 period. By contrast, today’s great power – the United States – is a net borrower from the developing world, with a current account deficit that hit a record of nearly 6.5% of GDP in 2005. The notion of poor countries saving to support excess consumption of the rich is antithetical to everything we have been taught about the long history of economic development and globalisation.
The “breadth factor” is also very different today than it was in the first globalisation. Back then, cross-border integration on the real side of the global economy was concentrated in the exchange of tangible manufactured products. Today, there is an added and very important twist: The current wave of globalisation does not just involve tradable goods but also includes once nontradable intangibles – largely knowledge-based services of white-collar workers.
Globalisation: the speed factor
The speed factor continues to impress me as the most unique characteristic of this globalisation. It is an outgrowth of a revolutionary IT-enabled connectivity that has brought the world together as never before. That’s certainly true of tradable goods, where IT capabilities have revolutionized global price discovery and the logistics of supply chain management that sit at the center of global manufacturing platforms. Ironically, the IT-enabled upgrading of port security that occurred in the aftermath of 9-11 appears to have led to faster processing and delivery (see the World Bank’s Doing Business 2007: How to Reform). Moreover, many knowledge-based services can now be delivered on a real-time basis through IT-enabled pipelines to desktops anywhere in the world. Five years ago, such services offshoring was concentrated in the low-value functions of call centers and data processing; today, it involves much higher-valued functionality in engineering, design, software programming, accounting, medical expertise, legal assistance, financial analysis, as well as a broad array of consulting activities. In essence, the globalisation of 100 years ago was a physical integration of the global economy – with cross-border delivery of manufactured products flowing through a costly infrastructure of ships, railroads, and eventually roads. Today’s globalisation is both physical and knowledge-based – augmented by the new infrastructure of a ubiquitous and relatively inexpensive e-based delivery system.
The speed factor also reflects one of the most extraordinary by-products of this globalisation – a dramatic acceleration in the pace of competitive leapfrogging. History tells us that the gestation of competitive prowess is normally a long and drawn-out process. It typically takes a nation considerable time to develop skillsets, innovation, design, production, and distribution capabilities in globally competitive industries. As such, positions in the competitive sweepstakes have changed glacially over time. That is not the case in the current high-speed globalisation – China has re-written the script of competitive leapfrogging. This can be seen in an excellent analysis by Catherine Mann of the Institute for International Economics that illustrates the rapidly shifting market shares in global exports of two of the world’s newest and most rapidly growing product lines – information technology hardware and communications equipment (see Mann’s, Accelerating the globalisation of America, IIE, 2006). In both cases, China has come from virtually nowhere as recently as 1990 to attain positions of global dominance in 2004. The gains in marketshare have been especially dramatic since 2000, when China still ranked #13 in global market share in IT and #5 in communications equipment. A scant four years later and China was #1 in the world in export shares of both of these key product lines.
Of course, the flip side of China’s rapid ascendancy has been the equally swift decline in global leadership of the former titans – especially Japan and the United States. For IT products, Japan went from a #1 position of 20.4% of all global exports in 1990 to #5 with just a 7.9% share in 2004.
Meanwhile, US market shares in IT exports went from 19.3% in 1990 to 11.0% in 2004. A similar decline is evident in communications equipment. Japan went from an overwhelmingly dominant position with 26.7% market share in 1990 to #5 with just a 6.9% share of global exports in 2004. US market share in global communications exports was essentially cut in half over the same period – from 13.9% and a #2 position in 1990 to a 7.0% share and a #4 position in 2004. Interestingly enough, Germany has held its own in both of these two leading-edge export businesses; its 6.9% share in global IT exports in 2004 is only fractionally below that prevailing in 1990, whereas its share of global communications equipment actually inched up from 7.4% in 1990 to 8.9% in 2004.
The implications: competitive leapfrogging
The hyper-speed of IT-enabled globalisation is not without its equally powerful implications. Rapid competitive leapfrogging is but one of the telltale footprints of this development. So, too, are new sources of disinflation. The speed factor has undoubtedly played an important role in driving the increasingly rapid expansion of world trade – estimated gains averaging close to 9% per year over the 2004-06 period versus trend increases of 5% over the preceding six years. As global trade now closes in on a record 30% share of world GDP and low-cost developing economies such as China and India take an ever-larger slice of internationally-tradable goods and services, this puts downward pressure on the global price level.
I don’t think it’s an accident that as globalisation has intensified, the inflationary process has broken down in many industrial economies; that shows in the form of sharply reduced correlations between inflation and its long-standing determinants, such as labor costs, import prices, and currencies (see the 75th Annual Report of the Bank for International Settlements, June 2005). That doesn’t mean inflation can’t exhibit periodic cyclical fluctuations in response to shifting conditions in domestic labor and product markets. But it does suggest that any such cyclical pressures are likely to be tempered by the structural forces of globalisation – a bond-friendly outcome for financial markets. If the current inflation scare is put in that context, its upside could be surprisingly limited.
Equally significant are social and political pressures arising from the speed factor – traceable in this instance to the job displacement and real wage compression arising from an increasingly powerful global labor arbitrage. globalisation is spreading rapidly up the value chain to once sacrosanct white-collar workers at the same time labor compensation shares have fallen to record lows as a share of developed world incomes.
This has resulted in an outbreak of “white-collar shock” that has taken the political arena by storm. The US, with its massive trade deficit, is particularly vulnerable to such a politically-inspired backlash against globalisation. In the fine tradition of scapegoating, Washington has taken the lead in blaming China for this state of affairs – with over 20 bills having been introduced in the US Congress in recent years that would impose some form of trade sanctions on the Chinese. Unfortunately, the speed factor and protectionist risks go hand in hand.
In the end, speed is a double-edged sword in the current era of globalisation. The rapid growth of IT-enabled connectivity is bringing the world together at an unheard-of pace. In doing so, it provides exciting new opportunities for the developing world while, at the same time, it instills a new sense of fear and insecurity into workers in the developed world. Any disinflationary benefits ring hollow in an increasingly politicized climate. Courtesy of IT-enabled globalisation, the global economy is coming together more rapidly than ever. But can it avoid an increasingly perilous speed trap? That remains a critical question for world financial markets, as well as for the global economy. And it could well determine the fate of the current era of globalisation.
By Stephen Roach, global economist at Morgan Stanley, as first published on Morgan Stanley’s Global Economic Forum