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Surviving the global village

July 14, 2008 10:17 IST

Recently, I had argued that the rise of economic power in Asia seems to be leading to second thoughts about globalisation in the minds of some of its traditional supporters in the West. There is another development which may tempt politicians, particularly in the US, to get into protectionist mode: the possibility of the US slipping into recession in this election year, a result of a combination of various factors like:

The Democratic Presidential candidate in the US is already making protectionist noises.

Employment in the US has been falling for the last six months, even before the economy has officially slipped into recession. Globalisation and free trade will be extremely tempting scapegoats for the growing unemployment and stagnant wages of much of the working class: blaming Chinese manufacturing and Indian services is always so much easier!

And, in this respect, the people may be ahead of their political masters: a Pew poll taken in October 2007 has shown a sharp fall in support for free trade in Europe and the United States. Jeffrey Frieden (author of International Political Economy: Perspectives on Global Power and Wealth), in a recent interview, described globalisation as "a dirty word". Economists like Paul Samuelson, Paul Krugman, and Lawrence Summers are also singing a similar tune, though in a more sophisticated fashion.

All of these are, broadly speaking, mainstream, relatively liberal economists - not the Lou Dobbs or Patrick Buchanan types who make a far more extreme case on the subject. Is there a possibility of the pendulum starting to swing back towards greater protectionism?

The risk can hardly be ignored. In fact, there is a worrying precedent to what may happen. The 19th century's far more integrated global economy, hit by the World War I, regressed into a decade-long depression in the 1930s as country after country built tariff and non-tariff barriers against imports, and resorted to competitive devaluations for the ostensible purpose of protecting the domestic economy. CanĀ  history repeat itself? (The lack of progress in the Doha round speaks for itself. Regional trade blocs are also, in a way, against the spirit of globalisation.)

We in Asia certainly have a great deal at stake in the answer to that question, if only because we have gained so much from a liberal, global economy. Contrast India's growth rate now with what it used to be in the decades of a "socialistic pattern" of economy. And make no mistake, too many of our political masters will be happy to go back to a dirigisme state and a closed economy that will enhance their powers so much!

Worryingly, the various mega-trends in the global economy look like continuing, if not strengthening, over the coming years and decades:

Unless we make a mess, the Asian economies will keep increasing their economic power vis-a-vis the west, helped also by the ageing populations in rich countries, a point I will came back to in a later article.

The rising price of oil will keep cutting into the living standards of oil importing countries, including the west. And surely, one reason for the rise is the increase in Asian, particularly Chinese and Indian, consumption of oil. If oil is at $140 a barrel, give or take a few dollars (even without a US/Israeli air attack on Iran), with barely 10 cars per 1000 people in China and India, where will it reach when the two Asian giants come nearer to the global average of 111 cars per 1000 people? Let alone the US level of 750 cars per 1000 people?

What would be a good way to ensure that China and India do not increase their oil consumption so that, "for us in the west", the oil price remains reasonable? To be sure, nobody would raise the issue in such crude, politically incorrect, terms (though the thought surely has crossed some minds).

But, environment protection and global warming are surely worthy causes and, as President Bush argued at the G8 summit, China and India would need to accept limits on their carbon emissions if the world is to be saved from an environmental disaster - interestingly, he was denying the existence of such a possibility until recently.

Has he had a genuine change of heart on the issue after seeing Al Gore's film, An Inconvenient Truth, or has he realised that this is the best way to get Asians to limit car use and hence a continued rise in the price of oil?

But the key issue for the West's, particularly the US, political economy is going to be stagnation in real wages of the working, class, but more on this in a later article.

A V Rajwade
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