Globalization Has Run Its Course…But What Comes Next?
Searching for a New Paradigm for Global Growth
While economists may believe in a smoothly adjusting system of checks and balances to keep supply and
demand in reasonable equilibrium, capitalist systems rarely work as efficiently as theory requires for
market efficiency to perform as advertised. We are continuously in a race between under and over
capacity with price as a moderating factor. This process of creative destruction (of weaker enterprises
and resale of older capital) provides the forward momentum for the economy with business fixed
investment the usual mechanism for recovery from cyclical declines acting to drive the recovery.
Unfortunately in this age of global companies and long distance supply chains, the net result of this
creative destruction is the concentration of supply in fewer companies as the weaker firms are
eliminated. Natural selection and survival of the fittest then is the natural law of nature and of modern
capitalism in an age of globalization.
Since the 1930’s the usual signal to businesses that the end is near has been government intervention in
the form of Keynesian pump priming and changes in monetary policy (lower interest rates). In a
globalized world, the link between capacity in one country (or over capacity) and demand in others is
less direct. Add in subsidies of governments to keep firms in business and it is easy to see that normal
signals to investors can fail and any equilibrium in markets is random and short-lived. One final element
is the Internet allowing near instantaneous changes in prices and information on available suppliers no
matter how distant or remote. The usual friction coming from less information is eliminated reducing
the protection of domestic suppliers and ultimately leading to their bankruptcy and to rising
unemployment in small towns and cities long used to near full employment.
The tendency is to add too much capacity in one country or region going through a rapid re-make (called
economic development) compounds problems especially when that excess capacity (as is the case in
iron and steel) can be easily exported making excess capacity not a national problem but an
international one. It is possible once the over capacity is recognized weaker, less well run or capitalized
companies, collapse pulling down their financial backers be they banks or equity investors. This sends
tremors throughout the economy starting a new recessionary cycle that snowballs into unemployment
and cascading banking failures. The impact can even spread to more firms in geographically distant
countries through links of the global supply chain. In a fully globalized economy this over capacity
leads to lower prices and reduces the incentives of national champions to add capacity thus shortcircuiting the investment recovery cycle and forcing governments to try to compensate for the loss of
income. Over dependence on companies in this region can also lead into entropic failures across the
long distance supply chains until the global economy collapses. This is what is happening today as
China’s over extended companies fail one after another. The year 2015 will likely be considered the
year that the costs of globalization were finally realized in the economic realm and also in the more
1
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
critically important political realm. This may be the year that the establishment support for global trade
integration collapses in rich and poor alike – the result could be a new round of protectionism with all
the unintended consequences on businesses globally. It will, if no alternative business and social
paradigm is found lead to a long period of secular stagnation with global economic growth
underperforming past norms leading to more people unable to move from marginal to stable consumers
and producers.
In a globalized system over, not under, capacity is a more normal condition. Economies of scale are built
into the cost advantage of countries with large domestic markets or where the government supports
employment actively, like in the case of China by State banks offering subsidized loans to sustain this
growth. This encourages inefficient over-production until the company fails taking down supplier
chains that now stretch around the globe. Cheap money from State owned banks has allowed new
facilities to be built in advance of demand just to insure sufficient economic growth to absorb the flow
labor from agricultural areas to urban areas. Like in the Soviet era when government investments
fueled industrialization, in China cheap capital offered to private firms and subsidies to State owned
companies encouraged this over investment in heavy industries with more easily exported commoditytype products (semi-finished factors of production at the first stage of processing from finished plate to
extruded wire or casting products).
Where banks are mainly private (as is the case in most advanced for more fully developed emerging
markets), recessions tend to dry up credit (as happened in 2008-09) and weaker firms facing reduced
demand and maxed out credit lines, go out of business. Foreign firms, initially hurt by the slowdown
may suffer less and have more financial staying power. With wider networks of possible markets, some
of which escape the worst effects of recessions in other countries, they can better survive periods of
slow growth.
Companies domiciled in large natural markets (large population countries or trading areas) may fail to
widen the markets they serve thus losing the resilience to outlast growth slowdowns or recessions at
home. Some of the losses of smaller American companies can be laid to milking cash cows at home and
failing to see the risks of this narrow focus until its too late to change. Foreign firms, even smaller
companies, usually had to widen their net of customers to maintain growth and thus can, if recessions
are staggered, survive and even prosper from the recovery phase. When demand picks up as the
economy recovers, long-time suppliers find they can’t recover fast enough lacking economies of scale
(heavy industries) that State-owned firms with backing from government controlled banks have.
Globalization also weakened the historic relationships between first tier companies and their smaller
suppliers. Information economies of scale allowing companies to shop for suppliers and even change
suppliers yearly. Convinced that price matters more than quality, this often adds future costs when
cheaper substitutes fail or lack quality controls, but by then bonuses for saving money have been paid to
the wizards of finance. This continuous competition for the lowest prices leaves long term suppliers
2
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
without adequate business so that when foreign firms fail there no longer exist domestic substitutes.
Lack of loyalty by first tier firms to second and third tier firms leaves the underlying manufacturing base
hollowed out. Like companies indifference to their workers, indifference to suppliers makes the global
economy less stable during downturns.
We can see this clearly in the 1990-2015 period for the United States. The late 1990’s boom, after the
flat or weak growth during the first part of the decade, was filled by foreign suppliers supplanting
domestic US suppliers and ultimately reduced the size of the direct manufacturing base in United States
as factory jobs disappeared despite the “boom” as measured by overall employment growth and GDP.
The initial impacts of the MTN agreement (January, 1995) reduced tariffs in the wealthier countries
while NAFT (January, 1994) gave Mexico an advantaged source of manufactures to supply the US market
causing a further loss of US manufacturing jobs to foreign workers.
The next recession – 2000-01 – had a similar impact as weaker companies failed and factory jobs
continued to decline. The recovery as measured by GDP, a flawed measure of real prosperity due to its
inclusion of business profits with wages, was primarily in profits, not incomes. As the first chart shows
after the job growth in the late 1990’s slowed and disappeared with the Dot-com bust followed by the
negative effects of the terrorist attacks in September, 2001, there was a weak recovery in GDP even as
job growth and wage growth remained flat or slightly positive. As outsourcing of jobs continued to sap
the strength of the economy, US trade deficits ballooned, corporate profits grew strongly. This
supported the stronger GDP growth observed. The second chart shows the share of imports relative to
consumption of manufactures continued to grow strongly as foreign made intermediates substituted for
domestic production.
Nominal Growth in United States GDP, Wages & Salaries,
and Profits
0.3
0.2
0.1
0
-0.1
-0.2
GDP Growth
3
Wage
Profits
For information on the QuERI model and to contact the author call or write:
David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
Weak US Growth in the early 1990's openned the door to
foreign suppliers when recovery began mid-1990's
0.3
0.2
0.1
0
-0.1
1990199219941996199820002002200420062008201020122014
-0.2
Change in Intermediae Demand Manufactures
Import Share of Manufactures Demand
Linear (Change in Intermediae Demand Manufactures)
A Virtuous Cycle without Manufacturing is a pipe dream…
The next chart illustrates how for the advanced country group the standard model for a cyclical recovery
changed. In the 1980’s and 1990’s, a period of great optimism about the future of the newly integrated
global economy with more countries showing improvements in their standards of living , the global
investment cycle supported recoveries engineered in the late 1980’s and early 1990’s. The full
integration of the Internet into the daily life of ordinary people – rich and poor – began in earnest at the
start of the 1990’s with the introduction of better browsers to access services on-line. Ultimately this led
to the surge in new start-ups and low unemployment creating what was believed, until it collapsed in
2000 due to over selling concepts without understanding how to monetize ideas, an idea of a virtuous
cycle keeping the American economy growing despite the surge in imports destroying jobs in the Rust
Belt was proposed. The sudden collapse of the NASDAQ forced many of these companies out of
business leaving new hires without prospects for the next high paying job destroyed an entire
generation of new college graduates optimism. New graduates moved back into their parents
basements as the miracle economy that had produced millions of new jobs went into reverse. The
attack of the following year on New York and Washington added to the negativity for business as
uncertainty of what comes next dried up hiring and credit. Mid-1990’s consumer spending rebounded
and business investment slowed with about a one year lag.
Bush tax cuts of 2001 failed to revive the employment picture with employment growth well below
other recoveries while corporate profits benefited from increasing substitution of foreign inputs for
domestically made products (formerly purchased from smaller suppliers) and with wages frozen, the
consumption needed to sustain corporate profits came from tax cuts alone rather than a virtuous
system that the Clinton boom economy allowed. Thus government replaced paying higher wages or
adding new employment opportunities at home so the recovery phase that was expected to pick up
4
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
where government left off never happened. It was the failure of businesses to follow through with
investments, hiring and paying living wages that forced government to subsidize consumption through
tax cuts and direct payments. Government spending, some on the war and military after 9/11, helped
to restart growth even if hiring was slow to recover. Government efforts to stimulate the US and world
economies failed to alter business expectations. Business investment was late to the party waiting until
it could see a stronger recovery. It peaked in 2004. A good portion of the observed GDP growth came in
the form of profits of companies as productivity per employee soared as labor direct factory floor jobs at
home were now being supplied by imports of intermediate goods from foreign sources. Later in the
2000-07 period easy money supplied by credit card companies at usurious interest rates kept consumer
spending strong as government retrenched fearing deficits more than the collapse of economies. Much
of the demand was absorbed by foreign producers (and their American company owners or buyers) as
the American trade deficit exploded reaching a new high of $ 844 billion dollars in 2008 before
plummeting the next year to $ 540 billion in 2009 (it is now almost up to its old high and will if current
trends in global trade continue reach $ 1.2 trillion in red ink by 2025). Wall Street and other market
indices rose steadily after 2002 from a low of 7500 to over 14000 before the Lehman Brothers debacle
at the end of 2007 and then plummeted to a low of But when the financial crisis happened investment
plummeted to below 7000 mid-2009. Government spending could not fill the gap despite trying. When
the stimulus slowed and reversed in 2011 and with Europe adopting economic policy straight out of the
Hoover administration playbook – higher interest rates and less government spending – real growth in
the world economy faltered.
5
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
Countervailing Forces
Government vs Investment
Net Change Year to Year
600000
400000
200000
0
-200000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
-400000
D[Inv}+D[Gov]
D[Inv]
D[Gov]
-600000
-800000
-1000000
Years
Today the World Economy is awash in excess capacity making any long term burst of new growth
unlikely….
Build first and then assess the damages is nothing new as a growth strategy especially in countries with
autocratic, top-down, planned economies – Russia, China, and India starting in the 1950’s and only
abandoned by the Modi government in 2014. For economies with more savings than consumption, like
Japan with demographic issues leading to higher savings rates, investment spending was used to plug
the gap in consumer spending. Much of this investment was in automated factories leaving the
government with the task of finding work for the millions of under employed Japanese. Government
funded infrastructure projects were used to help keep the economy growing. This created a bubble
economy – a mix of government pump priming investments and private sector over building of capacity.
Fast growing, like China today, real estate prices accelerated until downtown property in Tokyo reached
astronomical heights before suddenly crashing back to earth. As other countries in Asia began to
replace Japanese companies (and as Japanese companies invested in new plants to remain competitive
given the wage differentials) due to the revaluation of the yen over this period, Japan’s wonder years
came to an end ushering in nearly twenty years of weak growth and near zero price inflation. Unlike the
other key countries China is attempting to drive its economy by over stimulating capital investment in
business and property. It is this over 40% share of GDP that will make keeping the world economy
growing difficult while short-circuiting the normal investment surge that comes from a cyclical rebound
after a long period of slow or negative growth. Globalization comes at a price of losing the ability to
compete when one country tries to dominate entire industry sectors as China does today.
6
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
Excess Capacity Damages Recoveries—Globalization, Outsourcing and Flexible Manufacturing May Be
the Reason
Excess capacity damages countries rich and poor. Rather than healthy retrenchment companies dump
goods on the world markets often at prices below their cost of materials. Today that means that much
of the world’s excess capacity in manufacturing is concentrated in one region – Greater China, South
Korea, and Japan. Demand in none of these countries is sufficient to absorb the supply potential. This
excess capacity distorts the global trade and drives out the possibility of building similar capacity in less
advantaged countries. The net result of globalization for many raw materials and agricultural rich
countries is the recreation of 18th to early 20th century mercantilism where countries on the periphery
were captive consumers of finished products from the center while acting as suppliers of raw materials
at the expense of domestic industrialization.
Since the early 1980’s, when the Reagan tax cuts provided significant new purchasing power to US
consumers and credit card companies inundated the country with offers to borrow money with
unsecured loans, the American consumer began a shopping spree culminating in 2007 with the highest
level of consumer debt relative to income and the reciprocal of this fact, one of the lowest US savings
rates recorded. Since then credit has been more limited, savings higher, and consumer spending
growth slower. It was during the Reagan years that global supply chains were formed taking advantage
of improvements in both communications and transportation and very few barriers to entry in part due
to a succession of tariff reducing GATT and now WTO agreements. Fax machines bridged the language
and time divide with Asia to be later replaced by the World Wide Web and email connectivity.
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7 David
L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
Customers were no longer confined even for small companies to local or regional markets, but extended
beyond national borders. That trend is continuing with inexpensive cloud computing offering the ability
to sell “information” piecemeal and allowed collaborative work that extended “globalization effects”
from physical goods to service providers.
Open markets and new rules, reduced tariffs and non-tariff barriers expanded world trade as China and
Russia joined the new global trade policing World Trade Organization. Taking advantage of this were US
companies suffering from the 1980 recession and the rapid growth in US imports induced by Reagan tax
cuts and the stronger dollar. To fight this invasion, they shifted more production of low value products
to Asia hollowing out their ability to do direct factory-floor manufacturing improving profits at the
expense of the American lower-middle class. The American trade deficit grew rapidly from near zero to
almost $ 800 billion by 2007 sending more than $ 5 trillion dollars outside the country and facilitating a
global expansion in production. The result was a slow erosion of American real manufacturing capacity
even as the value of companies listed as “manufacturers” share of US output remained relatively
constant. Companies reduced direct labor (factory floor jobs) by substituting Asian labor or American
labor while increasing employment in management functions including the overhead associated with
managing long distance supply chains. Output per employee in the US grew strongly even if little of
what was sold was still largely made by US workers. This retreat from bending metal to working the
social media came at a cost to less skilled labor.
Companies, especially American companies with weak or no unions, moved factories from high cost to
low cost venues without considering the political and even economic fall-out of these actions. Closing
factors in battleground states and opening them in Mexico during a contested primary with populist
candidates of both parties running against corporate bad behavior may ultimately lead to greater
barriers to entry for company finished goods. Backlash against Mexico and China will erode confidence
further in the value and benefits of open markets. Employment in manufacturing declined significantly
over this period from 20 million to just over 14 million while output in 1995 $ per worker increased from
$ 186,000 to $425,000. As direct labor was replaced by foreign labor, entire communities dependent
upon good, well paying, manufacturing jobs faced ruin.
Flat wage growth and the loss of stable employment (full time became multiple part-time jobs), widened
the gap between the reasonably well off thought workers tied closely to global rather than national
economies versus less skilled workers in the manufacturing sector is that they must perform their work
in the high wage country, but the products they make can be imported freely with low barriers to entry
turning once secure employment at the plant into a high stakes game of chicken when wage
negotiations start.1 or even highly trained workers like radiologists facing off against lower paid highly
trained radiologists in India is that there are no now competing for their jobs with significantly lower
paid workers from all over the world found their jobs at risk and their wages stagnant or falling. At the
1
Increasingly as high speed, low cost, internet communications has improved worldwide, we see a world where
even thee “skilled thought workers jobs” are increasingly at risk. Radiologists face this risk as digitized
8
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
same time technology improves the production process, simplifying the steps, allowing greater
automation, making it harder to fulfill promises to everyone of good jobs with good pay. While
economists believe fervently that productivity improvements can be mitigated by rewarding remaining
workers with more incomes compensating for the loss of total income nationally, the reality is that
much of the gains from labor substitution have passed on to shareholders and corporate officers rather
than line workers. In the advanced countries we are facing another problem unique to wealthy
economies -- consumption saturation and lengthening cycle times for the obsolescence of high value
electronics and even automobiles.
The loss of higher wage manufacturing jobs on production lines was finally noticed too late to stop the
hollowing out of entire sectors. Starting with Obama’s second term the emphasis has been on reversing
the outsourcing of manufacturing making it harder for private companies to easily shift jobs overseas
without facing public scrutiny. At the same time labor costs in Asia started to spike especially in China
following the pattern first observed in Korea and Taiwan. Labor disputes in Asian countries were long
suppressed by abundant supplies of rural labor moving to urban centers, but as these reserves depleted,
labor disputes on working conditions and wages increased making outsourcing more costly and risky for
foreign firms.
Globalization, that began with great promise to lift millions from poverty, has become for many poor a
nightmare by destroying local production of manufactures and agricultural products. The countries that
have gained from this are fewer than those in the group of poor countries that have lost from the
process as investments have concentrated in a few major countries leaving the remainder to fend for
themselves while being buffeted by cheap imports and trade gaps that can’t be easily closed without
incurring more debt.
But globalization has also failed in the wealthiest nations that have benefited from the cheap imports
leaving environmental But what is motivating the anger in rich countries against the economic and
political elites is that when a company, like Carrier, moves jobs that paid $ 19-22 an hour to a country
like Mexico where the jobs pay $ 19 a day then can be imported without additional costs replacing
domestic production along with jobs. The costs of “open markets and free trade” are observed in small
towns all over the country. When high cost engineers are asked to train their replacements from India
before being made redundant, then it is clear that the support for integration with the world will fast
disappear. The problem is that it isn’t easy or even practical to bring most of these lost jobs and
factories back to life without significant damage to economies. A tariff on restrictive Chinese imports,
even if there is no retaliation against US exporters, will likely have a greater impact on domestic
manufacturing and retail sales.
Understanding the Global Macroeconomics – only a complex, linked, global model can provide useful
insights….
The internal dynamics of the QuERI Global Model allows the development of independent estimates
both of the main components of GDP and also industrial and trade patterns for 72 countries divided into
six major regions and the world. Unlike traditional macroeconomic models that are demand centric, the
9
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
QuERI models take into account the supply potential of countries and regions in relationship to demand
for goods and services—manufactured in the country and imported. As one country dominates an
industry, it changes the employment and demand relationships that impact consumption, investment,
and interindustry flows. The result is that for individual products the QuERI model generates productlife cycles.
Macroeconomic Indicators-- QuERI vs EIU Baseline, October, 2015
Macro Concept (% Real GR.) Region
1990-2013
QuERI Macro Baseline
Global
0.026
EIU Macro Baseline
Global
0.026
QuERI GDP --Demand
Global
0.026
QuERI GDP --Supply
Global
0.026
2014 2015F
2016F
2017F
2018F
2019F
2020F
0.023
0.023
0.022
0.022
0.023
0.021
0.023
0.023
0.023
0.025
0.026
0.028
0.024
0.027
0.023
0.023
0.029
0.023
0.024
0.022
0.026
0.023
0.023
0.014
0.018
0.018
0.016
0.017
QuERI Macro Base
EIU Macro Base
North America
North America
0.023
0.023
0.024
0.024
0.023
0.023
0.027
0.023
0.025
0.024
0.025
0.025
0.018
0.015
0.024
0.022
QuERI Macro Base
EIU Macro Base
South America
South America
0.032
0.032
0.013
0.013
-0.014
-0.014
-0.005
-0.007
0.018
0.017
0.027
0.029
0.027
0.028
0.028
0.031
QuERI Macro Base
EIU Macro Base
Europe
Europe
0.017
0.017
0.013
0.013
0.014
0.014
0.014
0.016
0.014
0.018
0.014
0.018
0.013
0.017
0.013
0.018
QuERI Macro Base
EIU Macro Base
Asia
Asia
0.034
0.034
0.033
0.033
0.034
0.034
0.029
0.037
0.027
0.035
0.029
0.037
0.027
0.035
0.028
0.036
QuERI Macro Base
EIU Macro Base
Middle East
Middle East
0.041
0.041
0.03
0.03
0.026
0.026
0.03
0.031
0.035
0.037
0.037
0.04
0.036
0.039
0.038
0.042
QuERI Macro Base
EIU Macro Base
Africa
Africa
0.045
0.045
0.041
0.041
0.024
0.024
0.023
0.026
0.031
0.035
0.037
0.041
0.033
0.038
0.035
0.042
QuERI Macro Base
EIU Macro Base
United States
United States
0.023
0.023
0.024
0.024
0.024
0.024
0.027
0.023
0.025
0.023
0.024
0.025
0.018
0.014
0.024
0.022
QuERI Macro Base
EIU Macro Base
China
China
0.095
0.095
0.073
0.073
0.069
0.069
0.056
0.064
0.054
0.06
0.052
0.055
0.047
0.049
0.045
0.047
QuERI Macro Base
EIU Macro Base
Japan
Japan
0.009
0.009
-0.001
-0.001
0.007
0.007
0.007
0.015
-0.001
0.01
0.003
0.016
0.002
0.013
0.003
0.015
QuERI Macro Base
EIU Macro Base
India
India
0.068
0.068
0.073
0.073
0.073
0.073
0.055
0.072
0.059
0.071
0.058
0.073
0.06
0.073
0.059
0.071
QuERI Macro Base
EIU Macro Base
Brazil
Brazil
0.031
0.031
0.002
0.002
-0.037
-0.037
-0.021
-0.02
0.014
0.014
0.02
0.023
0.019
0.021
0.021
0.024
QuERI Macro Base
EIU Macro Base
Russia
Russia
0.035
0.035
0.006
0.006
-0.037
-0.037
-0.01
-0.007
0.014
0.018
0.015
0.018
0.012
0.015
0.011
0.013
QuERI Macro Base
EIU Macro Base
Eurozone
Eurozone
0.013
0.013
0.008
0.008
0.013
0.013
0.011
0.014
0.01
0.015
0.01
0.016
0.009
0.015
0.01
0.015
QuERI Macro Base
EIU Macro Base
United Kingdom
United Kingdom
0.021
0.021
0.029
0.029
0.022
0.022
0.025
0.02
0.021
0.02
0.021
0.021
0.02
0.02
0.02
0.021
10
For information on the QuERI model and to contact the author call or write:
David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
Table 1 summarizes the QuERI estimates of global GDP growth rates and EIU’s baseline projections for
the same periods. The supply side measures reflect the gross output weighted by the value-added
shares for each industry group. These are used as independent variables in a cross-country GDP model.
The supply or production side in the model reflects the weakness in demand and the slowing of the
global trade growth multipliers. As demand falls, supply adjusts, thus measuring the value-added
associated with each production category and using this in the GDP equation we see that the model
projects GDP growth at a rate well below that associated with estimates for output in 2016 thus
reflecting negatively on the excess capacity in the world, weakness in trade, and a rapid slowdown in
Latin America and Asia. The QuERI estimate for GDP is derived using an average of the demand side
growth as it relates to GDP and the supply side growth averaged with a third, independent estimate of
growth from the Economist Intelligence Unit (EIU).
If there is secular stagnation at work then the supply side estimates, based on production as it
translates into profits and wages earned, leads to slower projected growth than the demand side of the
equation that benefits from the ability to draw down savings or borrow. One exception for this rule is
the United States in 2016 where the model projects real growth significantly faster than the general
consensus forecast. The factors driving this higher are demand measured using standard consumption
drivers through a cross-country equation and supply factors based on the value-added shares of the
production base economy. Faster growth in the service economy drives United States demand allowing
the economy to run large deficits on its trade and current accounts without incurring debt. Despite
very weak 4th quarter growth in 2015, the US economy can continue to expand if employment growth
keeps up in services. One interesting result is the slower projected growth coming from demand in the
United States compared to the projected growth from the supply side model. Current negative
projections for 2016 in the US is a result of macro models that suggest a slower demand from
consumers even as employment growth continued and unemployment dropped to historic lows.
Anemic growth in demand as wages have been depressed by competition may be the rule not just for
rich advanced countries, but for the faster growing emerging markets. Our baseline for China shows an
economy shifting down rapidly and that bodes ill for the Chinese government’s contract with the people
– we will let you have freedom in the economic realm in return you give us the levers of government.
The QuERI model projected growth for other countries and regions generally is a half a percent slower
than the EIU or consensus estimates for the next five years.
11
For information on the QuERI model and to contact the author call or write:
David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
So if we need at least a 3% real growth in the global economy to lift more people out of poverty, is there
an alternative to the globalization paradigm that will allow the global economy to grow strongly through
a broad based recovery rather than leaving it in the hands of the market to make it all right.
Restarting the Global Economy …the “Indispensable” Nation
For many years, especially during the 1990’s and continuing until today, the United States has served as
the engine that once engaged could be depended upon to pull the world out of its economic doldrums.
But this has come at a cost, and the cost has been the hollowing out of the American manufacturing
sector leaving the nation more vulnerable today to disruption in the smooth flow of goods and even
services from the rest of the world.
The reason for this role is historical --- after the end of the Second World War, North and South America
were the only parts of the world not directly impacted by World War II. The United States to become
“the arsenal of democracy” had built an industrial base that may, at that point in history, have
accounted for 70% or more of available world capacity of manufacturing. To facilitate recovery of the
war torn world, the US developed the Marshall Plan using that industrial capacity to send billions of
dollars in the form of new capital and foreign aid overseas. The recovery of Western Europe and Asia
was lengthy, but by the 1980’s the exchange controls that had kept the financial system from unraveling
in these countries was mainly dismantled and we returned to a more normal global trading system with
strong industrial players on both sides of the Atlantic and Pacific Oceans. To help the recovery, the US
12
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adopted (and promoted) new institutions known as the Breton Woods System that included the General
Agreements on Tariffs and Trade (The GATT) to manage trade disputes and lower tariff barriers, the
International Monetary Fund (the IMF) to rebalance global financial imbalances to insure global trade
continued to expand, and the International Bank for Reconstruction and Development (IBRD, now the
World Bank) to manage the distribution of Marshall Funds and help in the rebuilding of the war torn
economies of Asia and Europe. During this period, American companies shifted from being
domestically oriented to some having international focuses. American foreign direct investment flows
supplied new capital to the private sector as subsidiaries were built throughout the world Investments
substituted for US exports making the US economy less export dependent than those of its trading
partners. American companies invested in Europe building new business units including major
investments in automobiles, electronics, and capital equipment. International trade as a share of the US
economy was limited (less than 10% until the start of the Reagan administration).
Starting in the 1980’s and reaching a peak in 2007, the US was the primary engine of the world
economy. Trade deficits increased with imports more than twice exports for much of this time after the
Reagan tax cuts mid-1980s. More than seven trillion dollars in excess dollars flowed out acting as the
lubrication for the world economic system – as capital, currency for transactions, or simply being banked
in US Treasuries forming the reserves of Asia. With exports more critical to growth than imports,
developing economies with surplus trading balances had little or no incentive to use the surplus dollars
for anything other than stockpiling reserves. China would as soon burn the dollars as to spend them.
The cost to the US economy was a loss of its ability to be self-sufficient in manufactures with many
critical inputs only made outside the country and nearly all low margin industries packing up and closing
down making US retailers dependent upon foreign-made (mainly China but increasingly from other low
wage countries elsewhere) for products to sell in their stores. But again it has come at a cost – Walmart
shoppers beware of gifts as rural communities found their own livelihoods threatened and destroyed as
higher paid manufacturing jobs left the country. The rise of Trump and Sanders could be easily foretold
in the damage done to American manufacturing even as other industries flourished in this new age.
When millions of factory jobs disappeared during the financial collapse, the American government and
people began to understand the price paid for “everyday low prices” was a heavy one in terms of lives
with meaning turned meaningless. The result was a new emphasis (not yet successful) in bringing back
at least some of the higher skilled manufacturing countries recognized that they had fallen into a trap by
the promises of globalization. For many very poor countries, previously self-sufficient in agriculture and
textiles and other manufactures, opening markets has turned them back into dependencies of
advanced countries and increasingly of China. Even charity given Africa in the form of clothing and
shoes has resulted in the destruction of local industries. Even trade negotiations meant to improve
global market productivity have stifled the natural ability of local entrepreneurs to develop home grown
industries – less efficient, but the first steps on the road to modernization of economies – leaving them
13
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with work as distributors for foreign engineered and made products slowing the natural early stages of
industrialization and leaving economies dependent upon agriculture and services. 2
China’s Importance Can’t Be Underestimated…
The second growth engine, especially for Asian economies and those in Latin America and Africa
dependent upon raw material exports, has been China’s extraordinary growth in productive capacity
and GDP. But China has slowed as it tries to rebalance its’ economy from one dependent upon exportled growth to one that is better able to generate internalized growth reducing its dependence on trade
alone for stimulus. For this shift to occur then the service economy has to replace the manufacturing
economy in importance. Wages have to increase in this lower paid sector faster to drive demand for
domestic manufactures. Faster growth in the value-added share (GDP compared to gross output or
production share) has occurred over the period, but the service economy, like that in the US, substitutes
more stable, better paying, jobs in manufacturing for less stable and lower paying employment in the
service sector at a cost to the economy.
When the Chinese growth bubble finally deflated in 2014-15, the countries dependent upon selling to
China the needed raw materials (and the prices paid for these products) faced ruin. Especially hard hit
have been the minerals exporters and the companies in the mining and petroleum sectors. Moreover,
the massive, over built, capacity of China’s manufacturing base was masked by the rapid rate of China’s
economic growth rate (induced in part by the overbuilding by companies and over lending by banks) is
2
The measure of services is imprecise in most markets. The significant concentration of services in developing
countries is, however, likely due to the failure to fully account for agriculture in many of the poorest countries.
Despite the problem of agriculture’s relatively limited share, services are generally able to be measured by
governments given their urban focus. It is this over concentration at the earliest stage
14
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starting to dump this excess capacity on the world causing more damage and disruption. US steel
companies, hanging on like Nucor Steel, have been damaged creating the market for anti-globalization
forces.
With Chinese demand for raw materials declining as China’s growth collapsed mid-2015, the impact
has been felt widely in low prices for crude oil (impacting countries in the Middle East and Russia), raw
materials and luxury food products impacting countries in Africa and Latin America (iron ore, copper, or
seafood products and out of season fruits). Chinese investments in mines and transportation links ica
have suffered as the money taps, once thought to be infinite, are curtailed. Given the inter-connection
in the world economic system the result of this retrenchment will be felt far and wide.
This likely makes 2015 a watershed year when the hopes of billions for a lift out of poverty may have
been crushed under the reality of economies well out of balance internally and externally. The over
concentration of global manufacturing in a single country, China, skews the world economy in ways that
make developing alternative centers of excellence difficult. The structural advantages of China – good
ports, good transportation, entrepreneurial spirit, relatively low wage workers, discipline, and an
educated managerial class, combined with the willingness of the government to offer low cost loans and
encourage more investment—are hard to find anywhere else. The result has been a sudden, deep, and
possible long lasting drop in world trade growth from an average of 6% plus real to an average of just
below 5% assuming some recovery in the global GDP.
QuERI Industry Baseline, March,2016
Global
Trade by Industry Group
All Industries
Primary Products
Manufactures
Agriculture
Mining
Processed Food, Beverages, Tobacco
Textiles, Wood & Paper
Intermediate Chemicals
Intermediate Materials
Metals & Metal Manuf.
Capital Equipment
High Tech Equipment
Transport Equipment
Consumer Products
Processed Petroleum
World Trade, Imports,
Nominal $s Billions
2015
2020
Trade Share of
Consumption
2015
2020 1995-2013 2014F
Trade, Real Growth, October, 2015
2015F
2016F
2017F
2018F
2019F
2020F
20,453
5,323
15,130
25,633
5,895
19,738
30%
16%
32%
34%
18%
37%
0.064
0.045
0.065
0.015
0.01
0.016
-0.015
-0.025
-0.015
0.012
0.005
0.013
0.052
0.071
0.051
0.048
-0.019
0.053
0.047
0.059
0.046
0.042
0.006
0.045
632
4,558
917
525
1,448
1,158
2,017
1,839
2,968
2,878
1,381
133
724
5,000
1,255
676
2,299
1,522
3,018
2,493
3,248
3,420
1,807
172
6%
27%
15%
19%
30%
33%
35%
39%
32%
48%
33%
4%
9%
25%
13%
18%
32%
33%
35%
35%
45%
48%
36%
6%
0.023
0.055
0.029
0.026
0.033
0.04
0.049
0.048
0.113
0.061
0.033
0.047
0.042
0.005
0.076
0.028
-0.013
-0.047
-0.079
-0.019
0.041
0.05
-0.028
-0.089
-0.103
0.01
-0.1
-0.069
-0.034
0.007
-0.062
-0.032
0.018
-0.031
-0.053
-0.247
0.021
-0.001
0.023
-0.02
0.019
0.016
-0.005
-0.029
0.038
-0.023
0.004
0.046
0.068
0.071
0.061
0.046
0.053
0.029
0.044
0.038
0.059
0.039
0.053
0.082
0.017
-0.031
0.032
0.04
0.057
0.041
0.043
0.041
0.062
0.047
0.055
0.014
0.042
0.064
0.06
0.039
0.046
0.038
0.048
0.044
0.047
0.044
0.053
0.067
0.043
-0.006
0.049
0.039
0.046
0.036
0.049
0.046
0.045
0.043
0.049
0.012
China's real growth in the QuERI model is measured by the model based on internalized factors using
relationships between employment, wages, and intermediate demand patterns. The model determined
growth rate for GDP is slower than that either of the official statistics or the EIU baselines derived from
those statistics (primarily a demand rather than supply and demand based model for GDP as in the case
15
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of the QuERI GDP models). This is the result of the slower growth in our trading partners. The following
year the projected GDP growth is still below, but gradually adjusts to the point by 2020 it is equal to the
EIU baseline which has built into it a slowing trend from just over 6% growth in 2015 to 4.7% by EIU and
4.6% by 2020. For the United States real growth in GDP is slightly better than the EIU baselines
including better growth expected in 2019 when the EIU baseline shows a drop of almost 1% below the
2018 baseline growth rate. In general, however, the model developed, integrated macro outcomes are
below the EIU macroeconomic baseline forecasts.
16
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Prospects for a recovery in the Eurozone are less optimistic based on the integrated model than the EIU
baseline. The EIU estimates for the Eurozone are all around 1.5% growth, while the QuERI model comes
in around .5 of 1% below this. Again it is the weak growth in worldwide trade that skews down the
forecasts. These negatives are the natural result of years of steady integration leading up to the current
17
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very high shares in most countries of the share of imports of manufactures relative to consumption of
manufactures. The web connecting the countries is stronger today than at anytime in the past and
disconnecting and interrupting this flow of goods and increasingly services must come at a cost to rich,
emerging, and poor countries alike.
The Chinese Question – Has China’s Growth as a Manufacturing Center Been Good for the World
Economy
The weakness we are seeing in the world may be a direct result of two trends – the rapid growth of
China as both a center of manufacturing and as a source of demand for raw materials. Chinese
dependency on exports remains significant. It reached a high of 52% in 2006, declined to 36% in 2009,
but has recovered reaching 40% for the past few years. Strength begets strength so that the model
forecasts that by 2025 almost 50% of Chinese GDP will be due to exports. The figure below, however,
shows a more realistic measure of dependency of China on trade than a pure measure of Chinese export
share of GDP –compare gross output value for exports with a value-added measure for GDP. China is
both dependent upon exports for growth, but it is also dependent for imports to support that growth as
much of what comes in as intermediates is assembled and exported. China is less dependent upon the
international trade (relative to the size of the economy) than either Germany or the United States as the
next chart shows. At the same time the Chinese export share has been increasing despite efforts by the
government to reduce the country’s dependency upon export-led growth. Just four countries account
for 40% of world trade, but China’s sudden growth from under 4% to 15% by 2025 has come primarily at
the expense of other countries than these four. As a result Chinese manufacturing crowds out less well
positioned countries from gaining fully from globalization and open markets. And now, as global trade
has reached closer to saturation, with Chinese dominance in key manufacturing sectors firmly
established (see Table), it is difficult to imagine how many of these newly emerging countries can
prosper without some type of extra-market intervention.
18
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19
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We can measure the importance of China’s manufacturing in a number of ways. In 1990 China
accounted for just 2.2% of world manufacturing production and just 6.5% of Asia’s capacity. By 2010
China’s share had increased to 16.6% of world manufacturing and 27% of Asia’s capacity. We expect
this share growth to slow as trade concentrations reach saturation. Between 1990 and 2000 the
Chinese share grew at an annual rate of 8%. It accelerated further to 13% per year between 2000 and
2010, a period when much of the rest of the world’s economies were depressed. Growth decelerated
sharply after 2010 growing just at a rate of 4.2% between 2010 and 2020, and 4.8% between 2020 and
2025 reaching by 2025 a 28% share of world manufacturing capacity and 41% of Asia’s. China’s varied
production assets are used internally and externally. In 1990 82% of domestic requirements for
manufactures were supplied by Chinese companies (compared to 60% in the US down from near 80% in
1990).
20
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21
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As China has expanded its reach, the American share of the world productive and service capacity has
declined. The table illustrates this shift from a US dominated global economy to one that some might
say is starting to become more balanced even as the world economy has expanded – tradable goods by
3 times, services by just 30%, and total by 1.8 times by 2020 in constant prices and exchange rates.
22
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Share of World Output
1990
1990
US
China
AGR
14%
5%
MIN
9%
7%
UTIL
11%
1%
CONST
13%
0%
FUELS
25%
2%
FOOD
20%
2%
INTERM.FIBRES
21%
4%
CHEMICAL
10%
1%
INTERM.MAT.
16%
2%
CONSUMER
15%
4%
MATERIALS
15%
2%
CAPITAL
14%
2%
HTECH
24%
1%
TRAN.EQ.
22%
1%
RETAIL
23%
1%
TRANS.SERV.
23%
1%
INORM.SERV
36%
0%
FINANCE
37%
0%
OSERVICES
7%
0%
GDP
25%
2%
Source: QuERI December, 2015 Baselne
2020
US
6%
9%
7%
21%
26%
13%
10%
11%
8%
10%
9%
10%
8%
18%
17%
17%
34%
40%
27%
24%
2020
China
13%
4%
9%
4%
20%
16%
30%
13%
25%
30%
28%
20%
25%
17%
4%
6%
1%
3%
4%
10%
How Globalization Creates Wage and Income Inequality
Inequality remains the major issue if the global economy is to grow at rates that can alleviate the dire
poverty of so many billions. Inequality takes many forms – within countries with the split of incomes
skewed towards the richest quintiles. This happened far quicker in the Emerging markets group than in
the advanced countries group during their period of rapid industrialization – likely the byproduct of the
globalized economy with its multiple opportunities for the better educated and better connected. But
this inequality comes at a price – the risks of social revolution have increased. Donald Trump is not an
isolated phenomenon today as far right and far left parties battle for the souls of nations. Much of the
problem can be laid to the negative consequences of giving up economic sovereignty to the needs of
private, globe spanning, internationalized companies with no real allegiances except to their
shareholders.
Modeling advanced countries as a group, emerging and developing. The average constant dollar GDP
per capita (urban population) for the advanced country group is $ 43,000, $ 7200 for the emerging
group and $ 3500 for the developing country group. As we will see the potential of the global economy
to create wealth is enormous and can, with the right conditions in place, be driven by the increasing
23
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income in emerging and developing economies. Unlike the per capita income gaps that mask
differences in living standards, these charts show the difference in per capita consumption for specific
product groups
ADV
AT
AU
BE
CA
DE
DK
ES
FI
FR
GR
IE
IT
JP
NL
NW
NZ
PT
SE
SZ
UK
US
Advanced
Austria
Australia
Belgium
Canada
Germany
Denmark
Spain
Finland
France
Greece
Ireland
Italy
Japan
Netherlands
Norway
New Zealand
Portugal
Sweden
Switzerland
United Kingdom
United States
EMG
AE
AR
BR
CL
CN
CR
CZ
HK
HU
IA
ID
IL
KR
KW
MX
MY
PH
PL
SA
SG
TH
TR
TW
RU
SK
Emerging
DEV Developing
United Arab Emirates
BD Bangladesh
Argentina
BG Bulgaria
Brazil
BO Bolivia
Chile
CM Cameroon
China
CO Colombia
Costa Rica
EC Ecuador
Czech Republic EG Egypt
Hong Kong
HN Honduras
Hungary
IR Iran
India
JM Jamaica
Indonesia
JO Jordan
Israel
KE Kenya
Korea
LK Sri Lanka
Kuwait
MA Morocco
Mexico
NG Nigeria
Malaysia
PE Peru
Philadelphia
PA Panama
Poland
PK Pakistan
Saudi Arabia
RO Romania
Singapore
SN Senegal
Thailand
TN Tunisia
Turkey
UA Ukraine
Taiwan
UY Uruguay
Russia
VE Venezeula
Slovakia
VN Vietnam
ZA South Africa
The main reason for this expansion in the faster growing middle income group is that it benefits from
the accumulation of physical objects -- hard goods and soft goods. Ultimately, after this period of rapid
accumulation of manufactures (from processed foods to automobiles), economies shift consumption
habits towards more services. Advanced economies are more service oriented in part due to the
declines in employment opportunities in agriculture and manufacturing as these two sectors became
more productive.
It is a process that begins as productivity in the agricultural sector improves driving workers from the
farms to the cities where they need more manufactured products. Extremely high labor productivity is
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then captured in food processing for employees in the manufacturing sector, housing and shelter for
urban workers, and finished goods for the new homes and stores of the cities. For a long time this
accumulation of stuff continued with smaller improvements in the capital/labor ratio and the
output/labor ratios. But as technologies shifted and globalization allowed substitution of foreign inputs
for domestic higher cost inputs, direct labor per unit of sales declined in the advanced countries. But
the next and current phase then began the long process of capturing this productivity gain of industry.
The very success of these global conglomerates and their higher paid thought workers necessitated new
services. The need for more income with leisure replacing hard goods as necessities and even take-out
food for overworked dual income families added to the growth of the service sector. Thus in advanced
countries labor and output are now more concentrated in services, yet as the final phase in this long
process of development starts we are seeing the service sector starting to improve productivity – brick
and mortar stores give way to next day service from warehouses and suppliers, and we can even see
outsourcing of back-office services reducing the need for higher paid professionals.
Services including design, engineering, consulting, interior design and the culinary arts drained
productivity created by machines and outsourcing. Manufacturing became less important supplanted
by advertising, marketing, and software designed for organization of the “new production” process.
This has spawned the development of billion dollar companies selling only services. As employment
opportunities opened up for women, new services that had been provided by the “home maker” in the
past expanded. As hours worked in offices increased, leisure time activities that once may have been
just watching tv or reading a book, passive activities, shifted to become active ones with the
development of new entertainment and food emporiums and even the growth of gyms and personal
trainers. This natural progression of rich economies has yet to be fully realized in emerging and
developing countries.
A careful reader may wonder if services become more productive then what comes next. Rules and
regulations, higher taxes on corporate profits, higher wages for workers thus doing what economists
have traditionally believed companies do, reward productivity gains in wage boosts. All these things can
help stabilize the circular flow, but are fought by corporations in courts and legislatures. Globalization is
used as the excuse for wage stagnation. The result is that the natural capture of the value-added
improvements now going to profits are not recaptured by workers, governments, or regulations
requiring expenditures to abate the worst effects of industrial and agricultural production.
Globalization’s Impact
Manufacturing shifted to the emerging market economies with less per capita incomes and growing
populations. The combination of growing populations and rising incomes and the availability of lower
priced manufactures allowed living standards in these nations to increase. They are in the pre-service
economy consumption stage of development. That combined with their focus on manufacturing and
exports to the deindustrialized advanced economies has meant that service shares have declined as
consumption of traded goods shares of production (and consumption) have increased.
25
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The less developed developing countries have lost in this game of musical chairs. They are the suppliers
of primary goods and importers of manufactures. Domestic manufacturing sectors fail to fully develop.
In these countries the agricultural and extractive industries dominate production, but as these are often
becoming more capitalized and less labor intensive, this has driven more rural population to the cities
where economies are mainly vendors of one good selling to another or providing services. This group is
disadvantaged when it comes to developing a domestic manufacturing sector as a result of the
concentration, existing over capacity in the emerging markets group, and the legacy manufacturing
sectors in the advanced country group. Add to this the prevalence of charitable giving in the poorest
countries by well-meaning Church groups sending containers of used cloths, furniture, cars, etc. and it is
doubtful that this last group will fully develop beyond their current level of consumption without
changing the rules of globalization in favor of local production rather than imported products
consumption.
We can illustrate this using a single year’s consumption data (based on QuERI’s consumption models)
showing the per capita consumption of Household Durables compared to per capita GDP. Advanced
economies with their higher standard of living spend more per capita per year on household durables –
furniture, furnishings, and equipment for the home. It takes an increase of around $ 41 in income to
increase consumption by $ 1.0. The average consumption for the group is $ 1000 per year. For the
emerging markets it takes just $ 32 in additional income to add a $ 1.0 to the purchase of these goods.
The average consumption per year in this group is $ 415. For the developing group it takes a similar $ 31
for every $ 1 of additional consumption but the average for this group is $ 115.
26
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27
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28
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Trade has slowed because we are beginning to reach a kind of saturation of traded products. The low
lying fruit picked off during the boom years is gone. The rearrangement of the supply-demand patterns
that open markets allow (Ricardian trade theory where nations benefit from improvements in use of
labor by specialization) is at an end. The negative effects of open markets on labor employment and
wages have run their course so that the costs of globalization are beginning to outweigh the benefits
leading to backlash. The result is that we will endure a period of relative slow growth in trade likely to
continue. Adding to the negatives is that with so much of the world economy in the hands of a few
successful countries – Germany for capital equipment, America for high end technologies from
biomedicine to electronics, and a few emerging markets like China and the Asian countries surrounding
it, there is less ability of less advantaged countries to fully develop. Moreover financial assistance is
likely to be in short supply while deficits in trade accounts become unserviceable leading to austerity or
worse social and economic collapse.
29
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The Economic-Political Backlash Grows and International Trade Suffers
International trade growth will slow further as more government reassesses the benefits of open
markets and limited barriers to entry for foreign made products. The last thirty years of open markets
has meant that more countries are specialized and thus dependent upon selling their products in order
to buy necessities – from food products to luxury goods. One impact has been to hold real wages down
both in rich and poor alike. The constituency supporting more open markets is declining with only
companies and their shareholders cheering on this “progress”. The result will be more barriers erected
in the near future. It is quite possible that the recently negotiated trade agreements in the Pacific and
the Atlantic with the United States will fail to make it through the political process as the well of good
will has been poisoned by companies inverting to avoid taxes or moving jobs overseas while demanding
more concessions from remaining workers.
In the following two charts we show the direct, observable, relationship between the import share of
traded goods and changes in real wages for the United States and China. While Chinese wages have
been increasing year to year from 38 cents an hour in 1990 to over $ 3.00 an hour by 2025, there’s a
direct relationship observable between the rate of change in imports of traded goods to the rate of
change in real wages. A change in imports depresses the change in wages in both countries. Not
surprisingly the shift from good paying manufacturing jobs to lower wage service jobs in the economy
30
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Manufacturing share of total US employment was 16% of total in 1995, but only 11% today. During this
period of decline, imports of manufactures increased and the US ran a large deficit in traded products
with the rest of the world. While economists pondered if “manufacturing mattered to the health of an
economy”, the structural underpinnings of rural economies where much of the small and mid-sized
31
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David L Blond, PhD, QuERI-International, www.queriinternational.com
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factories were located often to serve regional consumers of semi-finished manufactures collapsed as
factories closed and jobs disappeared. Small towns that depended upon a single industry found
themselves ghost towns filled with old people. Tax bases that had supported a good standard of living
surrounded by a thriving rural agricultural economy complimented by the manufacturing heart of the
towns collapsed leaving shells visible along the old US highway system and by-passed by the more
modern Interstates.
It has been the structural decay in manufacturing jobs, often concentrated in rural areas, that has
fueled the discontent in the heartland against trade and trade agreements like the Transpacific
Partnership of the North Atlantic Free Trade zone.
32
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All of the factors cited above have contributed to the sudden slow down and then outright drop in world
trade that began in 2014 and continued into 2015. This is different from the cyclical pattern of 2008-09
when trade declined by about the same amount during the financial recession but made up for the lost
growth by a strong recovery in 2010. Since that period world trade growth has been uneven.
What is different from the panic that led to the deep decline in world trade growth in 2009 is that there
is little prospect of a full recovery. Compare the declines in 2015 to the 2009 and the recovery year
2016 to the recovery year in 2010 and you can see that globalization as a paradigm for rapid and
33
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sustained progress in rich and poor countries alike is possibly dead now that there is a populist
revolution against open markets. We are at the stage where the winners and losers from the march
towards a single global market – a winner take all system that rewards scale economies – can see the
benefits and the damage done. The winner in the race to be the manufacturing center of the global
economy goes to Greater China (China, Hong Kong, Korea and Taiwan). Advanced countries have been
the losers as Asia’s share has increased. But there is scant growth—measured in missed opportunities
coming from the maturing of advanced nation industrial output and the rapid growth in the emerging
markets of more industrialized economies – in the remaining emerging markets or in the developing
country group. The failure to shift from primary to manufacturing center in these other groups will
ultimately lead to their secular stagnation as wages in primary sectors are lower than in manufacturing.
Wages in developed countries have been flat for years and manufacturing jobs and middle income
service jobs that supported these companies have been depressed as a result of this push towards
openness. The model does not integrate protectionism and popular revolutions that could cause further
slowdowns in real trade growth. Both the short and the long-term patterns illustrate the dilemma of
countries beginning to industrialize or trying to earn sufficient hard currency to purchase capital
equipment or import necessities. The QuERI model, one of the most sophisticated models imposes few
controls although the outsized growth of the past for a few countries has been constrained in the
forecast on the assumption that 15 to 30% growth in trade is more an anomaly a by-product of starting
from a small base. The slowdown is more the natural effect of saturation. So many industries are
already nearly fully converted to being dependent upon suppliers spread throughout the world. During
the period of more rapid global growth this shift from national to international sources for factor inputs
and semi-finished manufactures was continuing as the same time that the vertical integration model
shifted to purchases from arms length suppliers. As a result the share of factor inputs (intermediate
inputs) increased as the cross product of these two trends allowing international trade to grow at rates
well above global growth in output measured by gross output or value-added. Now that global supply
chains are mature and the potential for this kind of substitution almost exhausted – at least in the
advanced country groups – world trade will grow at rates aligned more closely with world output
growth.
We can see how this plays out in the QuERI forecast for trade growth beyond the current near collapse.
Unlike in 2010 when trade recovered suddenly returning closer to the previous trend, the past few years
have been marginal at best. The European currency sudden devaluation set off competitive
devaluations against the dollar essentially leading to a revaluation of the US currency.
34
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The effect of nominal dollar declines in trade for major and minor countries translated into even deep
declines in real trade volumes (a devalued exchange rate should increase nominal US imports assuming
no change in real volumes rather than a collapse in reported trade). We have spent much time and
energy in trying to decide if these declines are real, and have come to the conclusion that they represent
real volume declines. One exception is the US export volumes increased, but the prices also fell as a
result of the stronger dollar, while US export volumes declined.
35
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driving down demand for primary products – raw materials, energy, and agricultural products as
European recession worries and a significant devaluation of the euro combined with a slowdown in
Chinese growth as leading to a sudden drop in nominal European trade that impacted the worldwide
trading system negatively. The combination of euro fatigue with the long, drawn out crisis in Southern
Europe after the financial crisis and the continued retrenchment in country after country – from Asia to
Latin America – has left the world trading system in a state of crisis. Globalization, the panacea for the
failure of countries to internalize development, has run its course. The opposition to the TPP and the
counterpart agreement being forged across the North Atlantic, is due to the apparent failure of
globalization to raise all boats evenly.
The End of the Washington Consensus
Major imbalances in world trade with just a few countries running surpluses – China, Japan, Germany,
and the OPEC countries of the Middle East –and most others sizable or just niggling deficits has led to
the crisis in Europe with the euro. Countries like Spain, Portugal and Greece, dependent as they are on
tourism for much of their income and employment, needed the flexibility of exchange rate changes to
reign in imports (thus promoting domestic production of competing goods). Without that ability then
vacationing in Greece was as expensive as vacationing in Germany, German tourists went farther afield
to find warm weather and cheap food and lodging.
The financial crisis in 2008 came at a time of massive global imbalances due, in part, to the euro allowing
debtor countries to run up large and unsupported real trade deficits. Imbalances destabilized domestic
36
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industries, increased unemployment, and make bankers nervous as imbalances indicated weak
economies and bad credit risks. Governments facing rising unemployment borrowed against future
prosperity making it difficult to contemplate leaving the euro-zone as the borrowed money would have
to be paid back with devalued currencies adding to the debt outstanding. In short, European rules
bound policies had turned what was a good idea – targets for debt to GDP as well as other rules – into
time bombs that forced austerity on economies already weakened by the collapse of global confidence.
Again it was the Washington Consensus with its seemingly fixed ideas about how to recover from trade
induced recessions that offered few solutions to the problem of weak demand and lack of confidence in
future prosperity. We project world trade growth if lucky may be closer to 4% ad world output fails to
crack 3% for the foreseeable future.
Why Globalization Isn’t a Panacea for Growth
There has been significant progress over the past thirty years for the developing and emerging nations
of the world coming in part as a result of trade integration, but the question remains might that
progress been greater if countries paying on average 25 cents an hour had been allowed to trade more
exclusively with countries with similar wage rates. During the formative period after the industrial
revolution in the West, wages and prices remained roughly in alignment with mass production driving
down prices, while productivity growth coming from industrialization often allowed firms to pay higher
wages so that incomes could increase stimulating real demand. When wages and prices are out of
alignment, the circular flow of money then can’t sustain demand. As globalization drew more poor and
emerging economies into the global trading system, their raw materials and semi-finished manufactures
could be sold at world market prices even as wages often were driven down by competition with other
emerging and developing nations. Domestic manufacturers selling less complicated or differentiated
products have to compete with foreign buyers for factor inputs making the finished products priced so
that they can be sold to a smaller domestic market with sufficient income. Economists measure these
alternative prices in the purchasing power parity exchange rate. In the 1990’s the PPP for China was
according to the World Bank around 3 -- or a US consumer would need three times the income to buy
the equivalent amount of goods at US prices. Wages in China were in that year around $ .15 an hour
compared to $ 13 in the United States. In the following charts we can array many countries PPP Indices
on one axis compared to the wage index (US wages as denominator). This chart shows the relationship
between US purchasing power, as measured by US nominal wages, and the adjusted purchasing power
for four countries – China, India, Germany and France. While there has been significant improvement
the consumption available to the average US worker is even in 2014 is almost 5 times that of the
average Chinese worker in manufacturing. German workers are, however, around 25% better off in
terms of what they can buy in Germany with their wages compared to American workers.
37
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35
1.2
30
1
25
0.8
20
10
India
0.4
Germany
France
2014
2012
2010
2008
2006
2004
2002
2000
0
1998
0
1996
0.2
1994
5
1992
China
0.6
15
1990
Purchasing Power Adjusted Relative to
US Wages
US Wages / PPPI Adjusted Wages
Using XY charts we can test the theory that prices and wages, even when compared using the PPP
indices – are in line. If they remain skewed to one side of the 45 degree line then the disconnect
between wages and what equivalents you can buy on a US consumption basis widens. Fewer people
gain from the integrated world economy as the circular flow weaken
How well have the poorest countries in the group of advanced nations fared in a globalized system.
Southern European countries in many ways face the same issues as poor emerging market states with
the difference being a long history of seeing themselves equal to the wealthier countries of the north.
Climate likely played a big role in limiting manufacturing potential for several different reasons.
Growing seasons were long and winters mile creating a social climate less akin to savings and planning.
Without air conditioning, productivity in factories is less than when weather conditions are more
temperate. The trend lines for the advanced group of countries are skewed by the low wages
reported for Spain, Greece and Portugal relative to the US or even higher sometimes European wages.
At the same time they face higher domestic prices due to the close integration in the customs union.
Most of the other countries do group on or slightly above or below the 45 degree line, but the outliers
are important. In 1990 Ireland was a relatively poor country with low wages but some geographical
advantages given its position closer to the US East coast than the rest of the Europe and also within the
European with a young, educated work force. In the 2010 graph we see Ireland more shows wages and
prices in almost perfect alignment. For most of the countries in the advanced country group prices and
wages are in a good alignment higher or lower or on the 1:1 ratio line. We are measuring the wage index
relative to the price index which uses the US purchasing power as the base (1.0). The reason is that the
PPP is equivalent to what a local could buy for the same amount of local currencies as a US consumer. It
should be compared to the wage index since it is wages that define purchasing power. If the marker is
above the line then prices are higher than wages so consumption is less than self-sustaining. A Chinese
worker earning a good wage, say $ 1.00 an hour, can purchase $ 3 dollar’s equivalent of Chinese goods,
but the US worker an buy $ 30 worth of US goods for that same hours work. We measure everything in
38
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nominal wages reflecting the impact of currency changes and differentials in prices for the same reason
that the PPP is measuring the available purchasing power as of the year in question not some
hypothetical period when all things like prices and exchange rates are equal.
4.5
3.5
Portugal
3
2.5
2
1.5
Greece
1990
1
3
Inverse Wage Index
Inverse wage Index
4
3.5
Portugal
2.5
2
Greece & Spain
1.5
2010
1
0.5
0.5
0
0
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
0
PPP Price Index
0.5
1
1.5
2
2.5
3
3.5
PPP Pricer Index
When Wages and Prices Diverge …. Economic Growth Suffers
In 1990 Japanese wages more than other countries but its prices were equally as high. The ratio of the
price to the wage index was almost exactly 1 (.7 to .7). By 2010 wages in Japan were lower relative to
US wages measured using the nominal exchange rate. Calculated PPP indices showed the prices in
Japan were higher than in the US for the same equivalent basket of goods. If the rule of the dollar price
holds then Japanese companies had to move at least the lower value factor inputs to cheaper foreign
locations while driving workers from first to second and second to third tier companies depressing
wages further. As a result consumption suffered and the economy stagnated. The import share of
consumption increased. Over the period of the yen’s revaluation Japanese firms held dollar prices
relatively constant to maintain market share in world markets at the expense of profits and workers
purchasing power.
39
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The Japanese Problem
0.12
1.2
Growth Rate GDP & Import Share
0.1
1
0.08
0.06
0.8
0.04
Import Share
0.02
0.6
0
0.4
-0.02
-0.04
GDP Growth Rate
PPP/PPW
0.2
-0.06
-0.08
0
Years
3.5
Portugal
3
2014
Inverse Wage Index
2.5
2
Greece
1.5
Japan & New
Zealand
1
0.5
0
0
0.5
1
1.5
2
2.5
3
PPP Index
40
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3.5
Emerging Markets as a group are assumed to be winners benefiting from globalization. Investments
linked to trade have encouraged higher value manufacturing and brought much needed capital and
technical expertise to countries with the right set of human capital assets and physical location and
infrastructure, but greater integration with the world has increased prices even as wages have been
depressed by competition. In the emerging markets the wages are well below what you can buy
meaning that only the upper strata of workers can benefit fully from the globalization. It also means
that the countries are unable to make the real transition from being export dependent to being in
control of their own economic destinies. With trade slowing to more normal levels in the advanced
countries the net result will be slower growth in emerging and developing countries. The rule of the
dollar price dominating every financial and business decision has led to this problem. When advanced
countries began their march towards economic success they were trading mainly among themselves –
all countries with similar prices and wage levels. The cost of traded goods were no out of line with these
local wages so producing a car with imported iron ore or engine parts was not that much different from
buying locally made goods. But today the price willing to be paid by the market for iron ore or auto
parts is set by the richest countries with the highest wages. The result is that fewer local goods can be
priced low enough that the majority of the wage workers can buy them in sufficient quantities to
support domestic manufacturing. This limits he net benefits to the economy coming from the initial
boost that came from export-led growth. The rule that “likes should trade with likes” has been broken
and with international trade slowing (from saturation of markets to protectionist impulses) it will be
hard for countries, even countries with partially planned economies like China, to force the transition
from external to internalized growth.
Emerging Markets Group Chart Sequence
30
30
Inverse Wage Index
20
Inverse of Wage Index
India & Indonesia
25
Philippines
Thailand
15
2010
China
10
5
Argentina
25
India
Indonesia
20
Philippines
15
2014
10
China
Argentina
5
0
0
0
10
20
PPP Index
30
0
10
PPP Index
20
30
We can see this more clearly in the 2014 chart excluding the remaining outliers with respect to the
average wages paid in manufacturing (India and Indonesia). The trend line remains skewed to the left of
41
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the 45 degree line so wages are below needed rates to sustain domestic consumption. Thus to get
strong enough growth to propel countries from poor to lower middle income the export-led growth
model had to be followed. But as consumption of imports slows in the advanced countries due to
saturation of markets and blowback from populist movements, fewer countries will be able to follow
this model making it imperative to find an alternative that allows sustained growth from trading more
with countries with similar wages and prices.
Yet if an American company, a retailer, contracts for a dress made in China much of the material is
supplied by the company and may come from outside the country. The fabric could be imported from
Thailand, cut in Hong Kong then assembled in China leaving the Chinese only with the value-added
components (in this case mainly labor and local transport costs). In our model we find that the import
of clothing and apparel into the United States from the world (mostly from China exceeds the reported
gross output in China for clothing and apparel. We have to adjust up the Gross Output to be at least as
great as China’s exports to the world of this commodity (we assume 15% over export value. Much of
this regionally integrated trade in Asia may be financed by the businesses in the advanced country who
ordered the finished product to their designs and specifications. The effect is even more perverse for
the local industry. Rather than prosper from the exports by supplying the fabric, thread, design,
marketing and distribution networks associated with the transaction, they get just a small part of the
final products value-added making the export less valuable as a stimulus for the domestic industries
that still must contend with having to compete for raw materials and factor inputs not available at
domestic prices with international buyers and international prices that may make even local goods more
expensive in terms of average workers wages limiting the ability of the economy to self-sustain growth
during periods of global weakness. This leaves the government with the task of overstimulating the
parts of the local economy through building vast infrastructure projects to kick start economies that
remain out of balance. But while infrastructure rebuilding is neglected in countries like the United
States with low taxes and consumption sometimes more than GDP (if imports exceed exports than a
country is essentially living beyond its means), these infrastructure projects are often white elephants as
economic development fails to follow the Field of Dreams theory that if we build it, then they will come.
42
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9
8
China
Inverse of Wge Index
7
Mexico
6
5
2014 excludes
outliers
4
3
2
1
0
0
1
2
3
4
5
6
7
8
9
PPP Index
Progress Has Been Made Despite the Odds
What may be the most interesting observation from the table is that there has been progress as a result
of a globalized and better integrated world. One measure of progress should be if the wage index
declines closer in line to the PPP index so that prices and wages are consistent with improved economic
performance. As we can see in general between 1990 and 2010 this has happened in some of the
emerging market countries, but there has been regression in others. What is clear from the table is that
the dependence on global commerce for all of the emerging markets has increased so that more
countries are fully dependent upon global markets for the food they consume and the clothes they wear
and to pay for this must export nearly all of their production. A globalized economy is in everyone’s
future, the question is how to make it more fair and sustainable allowing everyone to improve their
living standards.
The Ratio of PPP/Wage Index measures how globalization has impacted this group of countries. Our
estimates of the ratio of PPP to wages for many countries in 1990 is closer to a unity than the ratios in
2010 and 2014. We have seen, however, that there has been an improvement for many countries, and
especially in China as wages have increased faster than price indices have fallen, to show ratios that
have consistently increased. But for many countries it was easier, despite low wages, to live in the past
than after years of changing relative prices coming from global trade combined with the demonstration
effect of modern communications on what a comfortable life actually requires. In
43
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The table below shows for the emerging markets group of countries the ratio of domestic prices relative
to the US price index (assumed to be 1.0). Thus in Argentina prices for local goods of similar type are 5
times less than in the US or the wages in Argentina can buy five times the amount an American worker
can buy with his earnings. At the same time US wages relative to wages in Argentina are 4 times as high
so in this mixed up world of PPP the workers in Argentina are better off living there. In neighboring
Brazil, however, the PPP is just over 1 while the Brazilian wages are ¼ of US wages so that American
workers are only able to buy 30% more for their wages than US workers making the ratio of PPP to
Wage Index 30% of a fair exchange of unity.
PPP Index (US = 1.0)
1990
2010 2014
United Arab Emirates3.453 1.649 1.500
Argentina
9.501 6.389 5.475
Brazil
2.422 1.441 1.305
Chile
1.878 1.578 1.413
China
3.050 2.142 1.758
Cost Rica
1.996 1.714 1.409
Czech Republic*
3.373 1.305 1.548
Hong Kong
1.363 1.434 1.386
Hungary*
1.955 1.574 1.775
India
2.944 3.421 3.553
Indonesia
4.594 3.191 2.773
Israel
1.224 0.955 0.932
Korea
1.324 1.433 1.228
Kuwait
1.177 1.883 1.600
Mexico
2.153 1.669 1.686
Malaysia
2.773 2.420 2.201
Philippines
3.583 2.679 2.382
Poland*
2.651 1.592 1.764
South Africa
3.436 2.382 2.382
Singapore
1.952 1.570 1.438
Thailand
2.901 2.767 2.540
Turkey
1.929 1.611 1.784
Thailand
1.324 1.433 1.228
Russia
2.364 1.994 1.657
Slovakia*
1.112 1.396 1.526
US Wage/Local Wage Ratio PPP/Wage Index
1990
2010
2014 1990 2010 2014
2.371 4.443 4.776 1.457 0.371 0.314
4.698 4.320 4.373 2.022 1.479 1.252
3.372 4.182 4.137 0.718 0.345 0.315
7.606 5.121 4.623 0.247 0.308 0.306
94.414 12.398 7.847 0.032 0.173 0.224
4.876 7.196 5.905 0.409 0.238 0.239
3.049 3.049 3.134 1.106 0.428 0.494
2.220 2.809 2.440 0.614 0.510 0.568
5.962 4.147 3.935 0.328 0.379 0.451
30.097 26.425 23.875 0.098 0.129 0.149
47.156 25.398 21.942 0.097 0.126 0.126
1.724 1.811 1.625 0.710 0.527 0.573
2.417 1.946 1.591 0.548 0.736 0.772
1.567 2.656 2.775 0.751 0.709 0.577
7.043 7.131 6.486 0.306 0.234 0.260
8.668 6.374 5.265 0.320 0.380 0.418
16.993 18.483 15.578 0.211 0.145 0.153
9.617 4.265 4.046 0.276 0.373 0.436
4.143 5.051 4.423 0.829 0.472 0.538
1.822 1.792 1.519 1.071 0.876 0.947
25.862 15.672 12.280 0.112 0.177 0.207
3.064 3.349 3.292 0.629 0.481 0.542
2.401 4.160 3.784 0.551 0.344 0.324
6.695 5.305 4.805 0.353 0.376 0.345
4.229 3.247 2.978 0.263 0.430 0.512
Import Share Traded Goods
Consumption
1990
2010
2014
0.401788 0.841697 0.847173
0.049801
0.1399 0.110376
0.10356 0.074391 0.096217
0.233296 0.507972 0.51086
0.11913 0.21115 0.228137
0.437092 0.199596 0.267231
0.054249 0.794794 0.802437
0.694543 0.879988 0.843841
0.116135 0.691255 0.649494
0.233486 0.182766 0.157283
0.293767 0.175563 0.139826
0.377398 0.239174 0.302783
0.218899 0.148512 0.227426
0.272854 0.381871 0.590806
0.384551 0.583002 0.61593
0.373199 0.484147 0.496654
0.209277 0.355145 0.29377
0.050961 0.559466 0.517466
0.34825 0.542994 0.598555
0.695124 0.444598 0.509173
0.302486 0.525946 0.471556
0.319858 0.426211 0.337327
0.312224 0.310229 0.297271
0.862177 0.398377 0.323666
0.287532 0.625242 0.683692
Export Share Trded Goods
Production
1990
2010
2014
0.5670032 0.707545 0.743509
0.1410286 0.226958 0.160119
0.1118614 0.058842 0.073514
0.2509898 0.45597 0.465472
0.1094482 0.175282 0.156435
0.2000556 0.141503 0.188668
0.0702545 0.711369 0.771936
0.7227706 0.867047 0.852114
0.1542263 0.622236 0.607578
0.0952527 0.12174 0.15047
0.3164619 0.131802 0.131356
0.3629361 0.25225 0.295737
0.214815 0.234275 0.304784
0.447814 0.454425 0.556143
0.1807633 0.467531 0.506013
0.3865291 0.514808 0.535018
0.1590489 0.428577 0.409844
0.1502907 0.466938 0.477659
0.4295682 0.502157 0.498511
0.6701968 0.572184 0.613221
0.2217069 0.566125 0.511454
0.1735094 0.265527 0.30363
0.3233434 0.426947 0.441832
0.8405516 0.24153 0.215483
0.2427322 0.583609 0.638959
While the model’s estimate of future growth in the world economy may be in error, the signs and logic
of slow long term global trade growth have been evident for years. The key determinant of the rapid
and sustained earlier periods of trade growth at twice or more the rate of GDP growth came from the
Ricardian substitution of foreign-made inputs and finished goods replacing domestic production. As the
foreign share increased the amount of traded goods imported increased faster than the overall growth
in demand for traded goods total. The next chart shows this clearly. It is true for rich and emerging
markets as a group. The developing countries benefit initially from higher shares of imports (lacking
local manufacturers) and the share declines as more local producers replace foreign ones. As incomes
increase in the developing countries, the trend reverses and more imports begin the process of
44
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Import Share of Consumption of
Traded Products
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Advanced
Emerging
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
Developing
1990
Percent of Consumption of Traded
Goods
replacing domestic output or fulfilling a rising expectation of increasingly wealthy upper income
shoppers. During the late 1980’s and 1990’s when Japan’s surpluses increased as a result of its
specialization in a few, high value, technology intensive, sectors allowing economies of scale of
production to drive down prices tapping by exporting the majority of their production (in automobiles,
electronics, and capital equipment) what Japan imported, aside from factor inputs such as raw and
semi-finished materials as well as crude petroleum and natural gas, imports often were in the form of
consumables such as beer, wine, and spirits. Luxury products that could easily fit into small apartments
were equally important component of the import consumption basket buying a few, name, high fashion
accessories or apparel rather than stuffing closets with low cost substitutes. Without closets of
sprawling houses, Japan consumption took the form of miniaturized electronics and luxury consumables
rather than clothing and furnishings. China’s imported consumption – aside from inputs used for
exports (from cut fabrics to semi-conductor chips) – often resembled that earlier Japanese pattern of
consumption concentrated in basic raw materials and high end components and luxury goods rather
than more mass consumption items.
Studying the import share of consumption of traded products one thing is obvious – it has leveled off at
around 30% for the advanced and emerging countries groups with only a rare inroad above this
maximum. Given that services are increasing as a share output then GDP growth will be marginally
greater in services leaving less income devoted to traded products. Thus the long-term growth in world
trade must gradually settle into the 4 possibly 4.5% average. The next chart illustrates this point, but
also that the emerging markets group – primarily China – has crowded out the developing country group
by taking advantage of economies of scale. The GDP shares while larger shows a similar trend to the
trade shares with the emerging markets slice of the total pie becoming larger and the advanced country
share smaller. Developing countries, however, are unlikely with the current pattern of global trade, to
benefit from international trade. And while we may wishfully want the QuERI baseline forecast for
around 4.5 to 5% real growth in world trade for the next decade to be closer to the 6% growth rates of
45
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the previous decades, it is unlikely the conditions for trade to serve, as it has in the past decades, as an
engine of global growth.
Share of GDP & Trade Share
GDP & Trade Shares
1.2
0.25
0.2
1
0.15
0.8
0.1
0.6
0.05
0
0.4
-0.05
0.2
-0.1
GDP Emg
GDP Adv
Trade Adv
Trade Emg
Trade Dev
World
2023
2020
2017
2014
2011
2008
2005
2002
1999
1996
1993
-0.15
1990
0
GDP Dev
Where Do We Go From Here…the Future of the Global Economy
The world eco-system of interlinked industrial chains at a cross roads as the costs of a globalized
economy are added up and weighed against the benefits. Clearly the low prices and ability to buy
almost anything at any time using credit rather than cash has benefits, but it also has come at a cost in
terms of human capital and entire communities discarded. In the United States the costs are observed
in depressed rural and small town communities where factories have closed and where drugs have
replaced honest labor. It is no wonder that candidates like Donald Trump in the United States and
leaders of right wing parties in Europe have prospered by using nativist slogans and simple ideas that
resonate with the millions disposed by the rapid changes coming from an internationalized system.
Greed and self-interest are at the heart of the capitalist paradigm but with more people losing from the
often high handed decisions of companies using the profit maximization model that this paradigm
implies the costs may be greater than the benefits of efficiency. As computer memories and processors
became less expensive, more and more mundane tasks of less skilled and even skilled workers could be
carried out by computers and machines. Productivity is a two edged sword that benefits owners of
capital at the expense of workers whose “rice bowls” are eliminated.
United Technologies decision to close the carrier air conditioning plant in Indiana and move the jobs to
Mexico may be right for the company’s bottom line, but it creates a political backlash that could make
this move ultimately costly if it starts a trade war if high import tariffs are imposed making Mexican
made air conditioner units 45% more expansive as Donald Trump has implied he would impose tariffs on
imports of these finished products from Mexico. Whether he had any legal authority to do it is less
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46 David
L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942
important than the implied threat. Pfizer Pharmaceuticals efforts to shed its US identity for tax benefits
through some fancy legal footwork adds to the problems that ordinary tax payers have with companies
that want the benefits of American domicile without the costs. Without lifting a finger, the Obama
Administration could stop the inversion by simply noting that American companies get first crack at NIH
Research or that FDA trials of Pfizer drugs may be delayed. Stock prices would reflect the risk to the
bottom line of what is at most a marginal gain in profits from the tax savings.
Carrier and Pfizer see themselves not as national champions for their industries but as global companies
without allegiance to any single national entity. So if companies are perceived as global in scope then
perhaps they need to be incorporated under a United Nations charter. Such incorporation could be a
benefit, but it could also carry with it the obligation to set their plans in light of the global best interest
rather than simply the interests of their senior managers or shareholders.
Economists worried about calling alarms to the growing imbalances observed in the global economy
with so much of the surplus concentrated for so long in just a few countries and product groups
suggested that ultimately prices and wages would adjust and the imbalances would be reversed. Factor
price equalization, one of Paul Samuelson’s earliest contributions to economics, was formulated when
there were mainly advanced countries so that the equalization of labor wages and prices could lead to
an adjustment in trade balances in ways that benefit both countries – labor becomes cheaper but capital
becomes less expensive in the low wage country so capital/labor ratio equalize allowing a fairer
exchange and trade. Everyone is in theory better off from the exchange. It also assumes that exchange
rates between labor and capital adjust to keep trade in balance.
Factor price equalization is working, however, and driving down the wages in the advanced country, but
the gap is so wide that there is no exchange rate that can balance trade between haves and have nots.
At the same time capital and technology are able to be easily transferred from rich to poor making
productivity and costs higher than theory might suggest assume products and technology are home
grown. Trade theory, as simplified by pundits and politicians, as beneficial because of the work of an
English economist in the 19th century, David Ricardo, who argued that a country could benefit even if it
were at a disadvantage in land and labor by specializing in one product that is less costly to produce.
But Ricardo didn’t assume that a country could borrow money or that the advantages of one country in
production were sufficient to destroy completely the industry in the weaker one (given that some
exchange rate between land/labor in country one and land/labor in country two had to be sufficient to
either fully balance trade or limit it allowing the weaker industry to survive). He also didn’t assume that
countries could run chronic deficits by borrowing money from winners.
When we shift form the simplified example to multi-commodity systems with many countries the world
becomes much more complex to sort out. What is clear is that companies have the power to change the
direction of the world economy for the better or they can through their actions and in following what
passes for the current capitalist system based on self-interest or as some might say, personal greed and
avarice of senior managements create the paradox first described by Karl Marx that capitalism plants
the seeds of its own destruction (by the actions of capitalists).
47
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An Alternative Economic Architype for the 21st Century—the Post-Competitive Model
If private greed (self-interest) is out, then what could be its replacement as the organizing principle for
the global economy? Cooperative self-interest is one possible solution to this problem. Declining
incomes lead to slower growth and economic weakness and if this analysis is correct then it becomes in
every stakeholder’s interest to maintain incomes and subsequently expand the market—in rich and poor
countries alike. Wealth disparities between advanced countries and poor are so great that slow growth
in Western Europe may be worth more than double digit growth in incomes in sub-Saharan Africa.
Destroying high paying jobs in the United States without replacing incomes there weakens all companies
even if it appears to be beneficial in the short-run to the country shifting production to save a few
dollars to pass through to the bottom line. Since the end of the era of the great business trusts,
governments have been in the business of breaking up or reducing business combinations that distort
competition. It is illegal almost to talk to competitors in quasi-social settings. With each firm acting
alone, as if its business decisions have no impact on the economy as a whole, the result is to amplify the
unusual event that begins the downturn, turning what could be a short-lived retrenchment into a longlasting recession or as in the early 1930’s a Great Depression.
The question then is there a better way to coordinate strategies. The Presidential bully-pulpit no longer
works with companies seeing themselves as citizens of the wider world. Obama tried it tapping GE CEO
Jeff Immelt to head a business panel back in 2011 to boost jobs as the economy began to falter as the
stimulus wound down. Little came of this initiative because it ignored the problem that CEO’s answer
not to the nation state where they sell their products, but to their shareholders alone. But failure to see
the woods from the trees can lead to the kind of bombastic statements of someone like Donald Trump
who views the Presidency as a Kingship offering to impose by his own fiat massive tariffs directed a
companies that move production overseas.
And finally the popularity of Bernie Sanders on the left and Donald Trump on the right should be
sufficient warning to companies long used to doing as they please with workers and economies in their
quest to maximize private worth to see the bigger picture that without individual worth there is no
change of recovery. It is not surprising then to me that there is a renewed interest in adopting universal
basic incomes as a strategy to insure stability. The unequal sharing of knowledge and the ability of firms
to produce value without paying workers full value for their work, thus concentrating wealth in fewer
and fewer people’s hands will ultimately reduce the ability of economies to maintain growth, but will
also lead to social revolutions. Of course blowback from mechanization is not new. Luddites destroyed
machines to stop the rapid industrialization of British industry that destroyed jobs and livelihoods.
Productivity is a double edged sword that can lead to periods of slow or even negative growth despite
record levels of output per worker if the benefits are passed to the owners of the machine capital rather
than human capital.
48
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As the Economist in its June 4th, 2016 issue discusses in its special section on the history of “Universal
basic incomes” report suggests that in light of the ability of outsourcing and automation of work to
destroy useful activities the only way to sustain demand and maintain a healthy circular flow of funds is
through some form of income redistribution. While living off the dole may be attractive to some, it is
morally offensive and psychologically damaging to the majority of the population still able to find gainful
employment and pay taxes to support the dispossessed of an economy. The problem isn’t automation
of manufacturing, but rather how to split the benefits of that mechanization in ways that encourage
useful activities in the service sector and the government sector. At the turn of the century the larger
share of the work was carried out on the farm and agricultural sector with food products sold closer to
their bulk forms, but as agricultural productivity increased, employment declined and labor shifted
towards manufacturing. Farmers sold raw wheat grains to millers who sold to industrial size bakeries
and break became a commodity. As productivity increased in manufacturing labor shifted to services
and more subsectors stole the value-added as productivity increased again shifting labor towards other
activities and the average hours worked declined from six days a week to five. Today we are seeing
more workers under employed leaving a financial hole in the circular flow.
Corporate Cooperation with Government Oversight
As history has shown government intervention, as well intentioned as it might be without the
concurrent support of the private sector to pick up where the government stimulus ends it fails. So long
large, multi-national companies, are competing with one another to maximize shareholders benefits
alone (profits rather than growth), then systematic slowdowns will become lengthy and difficult to
manage. No single nation can stand alone, and the corollary slowly being learned, no large company can
stand alone in face slowdowns that are mainly due to missed signals by policy makers and company
executives. There is no magic bullet to change corporate psychology, but there could be some kind of
change in acceptable corporate behavior that shifts responsibility to maintaining healthy markets from
government to the private sector.
Governments, jointly through the United Nations Economic and Social Council, agree on a broad based
international corporate registration supplemental to the national or state organized incorporation for
companies. Large and medium sized companies would be free to reorganize using this form of
international incorporation that would carry multiple benefits including fewer restrictions on currency
repatriation for profits and no restrictive rules on ownership of subsidiaries allowing majority control by
non-country nationals. Guarantees against expropriation and rebates for tariffs above some agreed
maximum could be useful as well. Fewer visa restrictions on foreign nationals working in management
positions could be an added benefit.
In return for these benefits, companies would be organized into Sector Corporate Cooperation Councils
along vertical supply chains with at least two Sector Councils for each major industrial group – High
Technology, Machinery and Capital Equipment, Basic Materials, Food Products including Agriculture, etc.
A Council of Councils would set minimum targets for growth, employment, investment, profits, and
49
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relative wages (between the highest and lowest paid workers by location). Multi-national government
organizations would be responsible for setting these goals, but corporate councils would be asked to
find ways through cooperative business behavior to meet these goals. The responsibility for insuring
stable, long-term, healthy growth and meeting environmental goals as well would be jointly shared.
Competition is maintained by having multiple organized corporate keritsu’s in the same industrial chains
and smaller and medium sized companies would be allowed to grow in symbiotic relationship to these
global supply chains with the aim of eventually reaching critical mass to either join one chain or be
reorganized into a new competitive chain. Like the effort of today’s Central Banks with their loosely
coordinated monetary strategies during periods of low or negative growth, the Council of Councils
would be charged with coordinating strategies for maintaining global growth and also meeting larger
goals of reducing carbon and insuring sufficient energy to allow faster development and even survival in
the poorest countries.
Can Cooperative Behavior Work in Today’s Overly Competitive World
Why should this system work better than the beggar-thy-corporate-competitor model used today
especially during times of economic slowdown or collapse. One reason is that failure of companies to
follow through with plans individually could be reason for withdrawing global incorporation benefits.
Losing these carrots might be a worse alternative than forgoing profits in the short-run to hire more
workers or opting for investments in new businesses despite the risks of business failure.
In the Phoenix Year trilogy the collapse of markets allowing a single Trust to own sufficient number of
shares to take over Boards of Directors is the mechanism through which this coordination is achieved.
Companies voluntarily submit to this new discipline as managements are replaced by managers willing
to take a chance on cooperation and sailing against the prevailing negative winds because they no
longer are rewarded by share prices and stock options. But could this be achieved with as suggested
some form of internationally sanctioned global corporate incorporation. I suggested this approach so
many years ago while I was working at UNCTAD and published it in an article in Business Economics
sometime in 1973. For this cooperative economic plan to work, then governments must perceive that
coordination of their own policies and laws is the only way to insure that goals reached independent of
private sector actors for meeting climate change goals or insuring global economic stability can be
achieved is if the private sector has buy-in to these plans.
Final Thoughts
Changing corporate culture may be the most useful approach to insuring long-term economic prosperity
for rich and poor alike. Populist backlash against globalization is a natural outcome of the uneven
pattern of benefits and costs that the last three decades have offered both to rich and poor countries
alike. If we are to insure stable, beneficial economic growth then companies will have to do their part.
Keynesian stimulus without support from the private sector has often led to growing and unsustainable
imbalances on current accounts and government balance sheets. With world population size reaching
50
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towards 9 billion, mass migrations occurring as climate change affects regions already in food deficits
destabilize social and political balance in countries still better off leading to backlash against immigrants.
In this paper we have examined how globalization has impacted long-term growth for three groups of
countries – wealthy advanced countries, emerging markets, and developing countries. Gaps between
these three groups remain wide and are unlikely to narrow without changes in the way the private
sector and national governments interact. No single nation, including the United States, can change its
destiny by closing off the world, and yet this is the message of populist candidates everywhere. Turning
the clock back on the past is impossible, but allowing the current system of disjointed growth to
continue will also fail to solve the most pressing of the world’s problems:





Income inequality and depressed real wages from global completion leading to uneven
growth in demand and forcing governments to support growth through tax breaks and
direct aid. One study suggested that the top 1% took in 85% of the income growth
occurring since the recession began in 2008 reducing significantly the circular flow
needed to lubricate and support short and long-term growth.
Concentration of early stage manufacturing in single countries or regions opens the
world economy to supply chain failures and economic blackmail leading to populist
outrage against globalization as jobs shift from higher valued manufacturing jobs to
lower value service employment for less skilled workers.
Managerial capitalism with its short-term goals of the next quarter’s numbers reduces
the ability of governments to influence company behavior using the “bully pulpit”
making recovery from economic recessions difficult. Failure of companies to hire and
invest using excess profits to maintain depressed share prices often with borrowed
money opens the door to a 1930’s style depression.
Corporate internationalism helped by trade agreements that reduce barriers to entry for
foreign-made products opens the door for anti-globalization nationalism leading to the
potential for backlash against existing and future agreements to integrate the world
economy.
Climate change and drought may be the final straw forcing a reassessment of
internationalism as nations start to look inward for solutions to problems despite
decades of integration making slogans like “America first” or Brexit obsolete and
dangerous simplifications and solutions.
In a way we are inching closer to the 1930’s world with just the major actors changing. Russian
nationalism and feelings of loss of global position replaces German nationalism with military expansion
taking precedence over economic opportunities. The recovery from the financial crisis of 2008 has
been in spurts of optimistic growth followed by sudden collapses in confidence and rising wage
inequality in ways similar to the late 1930’s. In the Pacific Chinese expansionism replaces Japanese and
is in the process of developing an economic sphere of influence as the US retrenches leaving a vacuum
for China to fill. In short the idea of a cooperative global strategy to solve the pressing issues and
motivate world spanning corporations to work in concert with governments may be just a pipe dream.
51
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The question is will it take another war, one fought with impossible to control weapons of mass
destruction, to finally unite what’s left of the world community after its end into finding real solutions?
And yet I believe that perhaps there is a possible solution that comes out of the disruption that Brexit
might cause to global harmony. China and the United States in the Pacific can if united in a single
purpose – to get the world economy of which they are both major players moving strong enough to
damp down the forces breaking apart the globalized economy if they offer solutions to the above
problems that are real and constructive and can shift the global economic paradigm from private selfinterest to cooperative benefit.
52
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David L Blond, PhD, QuERI-International, www.queriinternational.com
[email protected], 301-704-8942