Shocks such as COVID-19 and the Russian invasion of Ukraine command not only our attention but also has a deep influence of reshaping the world from industrial nations to emerging markets. It shifts – in my opinion a major transformation – that will determine the long-run trajectory of the global economy.
Let us consider five major shifts and their most potential consequences: First, let us be clear that the era of extraordinarily cheap finance is finally over. As inflation grips the world economy, a cycle of monetary tightening not seen in the last 30 years is under way. Long-term real interest rates are unlikely to rise to levels seen during the previous era of inflation, since growth now is much weaker and aging populations will in my opinion depress investment opportunities.
But the era of close to zero interest rates has ended.
Higher interest rates will as a result destroy wealth as asset prices descend from frothy valuations. They will also expose companies and countries that have accumulated large amounts of debt through for example LBO’s (leverage buy-outs) and heavy borrowing. The result will be defaults and financial crisis, especially in emerging markets as already seen in Sri Lanka and Lagos. But in my opinion is just the beginning, more countries from Africa, South America and Asia will follow.
Second, the era of trade hyper globalization is also finally over. Over the past decade, anti-globalization forces have in my opinion gathered strength. In the upcoming decade we will see this shift play out. Geopolitics will further trigger protectionism; hedging will drive greater self-sufficiency in food, energy, essential drugs, resources like commodities and technologies; the weaponization of interdependence, reflected in sanctions against Iran and Russia, will deflate the lure of globalization; and capital will in my opinion exit from odious regimes.
The world will not actually deglobalize in an ordinary way, since trade of some types like for example services and in some regions like the west will continue to expand. But the scale and speed of integration that the world witnessed for about 25 years are surely in my opinion behind us.
Third, economic convergence will stall. For three decades, poorer countries have been catching up with the living standards of richer countries, reversing two centuries of divergence. But this dynamism was in my opinion propelled in large part by cheap finance and hyper-globalization. Meanwhile, as the historic addition of the Chinese and Indian workforce to the global labor supply nears its end, the world economy will move from plentiful supply to shortfall, reinforcing further inflationary pressures.
Fourth, already weak global cooperation will in my opinion dwindle further. The pandemic revealed the shambles that now characterizes the multilateral system put in place after 1945 through several agreements like for example the Marshall Plan among many others. The financial costs of producing and distributing vaccines to the world were trivially small compared with the potential benefits in lives saved and economic losses averted. Yet the major powers and institutions proved unable to accomplish this task. But this is by far not the only example. The WTO (World Trade Organization) has been on life support for decades, a victim in my opinion of geopolitical rivalry and the west’s inability to figure out ways to provide good jobs for workers who lost out when the global industrial base shifted east. It is and was a great illusion that global integration was good for peace and would broadly restrain superpower rivalry. The new era in my opinion could and most probably will see full-blown US-Chinese rivalry in the economic and security realms. One day we will remember and remind ourselves that it used to be a G1,G2,G7 or G20 world. Now we are already destined to a G-minus world because of domestic developments in the world’s two largest economies, the US and China. This is the fifth shift.
The US is now in my opinion two different nations. An internally polarized America is a less attractive and unreliable partner for other countries. Access to its markets and provision of generous finance are no longer part of its upcoming foreign policy arsenal or its soft power.
Meanwhile, China has become a threat to its neighbors. Xi Jinping is in my opinion currently dashing both the possibility of China becoming truly rich and the hope once entertained by the world that it would become politically open.
Grim as these five shifts seem, silver linings can still be sighted. Deglobalization away from China provides in my opinion great opportunities for other countries to fill the vacated space. Vietnam, Bangladesh and Indonesia have already taken advantage, and so too can other developing countries.
Upcoming global food shortages and the drive for self-sufficiency should in my opinion encourage policymakers in south Asia and sub-Saharan Africa to focus on boosting agricultural productivity and form incomes. These countries will not only be in need of it, it could also bring faster overall growth, as South Korea, Taiwan and China already showed decades ago.
Finally, conditions in my opinion are ripe for the world to grasp that, intermittent as their gifts are, the sun and wind are more reliable, less destructive sources of energy than Russia and the Middle East. Producing more renewable resources helps the planet and drains war chests of authoritarian leaders. That in my opinion should finally motivate the world to act.