Globalization is in transition – but there are at least two recent moments in history that we can draw parallels with.
After the fall of the Berlin Wall in 1989 and the dismantling of the Soviet Union in 1991, the power of the markets led to the free flow of goods and services and to an increase in the diffusion of international investment. Foreign direct investment (IDE) has enabled the strengthening and expansion of global supply chains across a range of product sectors.
Many countries have contributed to the production of everyday objects. Take, for example, a volleyball ball – the leather would come from Germany, the glue from Thailand, and the marketing from Brazil. Inputs from different countries, united by global supply chains, seemed to illustrate that – increasingly – free trade and open markets were the way to go.
It also reinforced another trend during this period: the establishment and deepening of regional integration processes, including the European Union, the North American Free Trade Agreement, the Association of Nations of Southeast Asia and Mercosur in South America. This regional integration could be seen as a lead to strong globalization trends to suspend their efforts.
From 1989 until the global financial crisis that erupted in 2007-08, the world underwent deep globalization. After 2008, a new, more protectionist phase of globalization began, a phase less open to world trade – which is now growing more slowly than the world GDP – and there has been a revival of old import substitution policies. A number of countries are adopting local containment measures that allow fewer international transactions of goods, resulting in greater concentration of trade within each territory. In this new phase of globalization lurks the risk of de-globalization.
With so much disconnection in the world, the question today is: will de-globalization persist or are we going to move into something different? I have the impression that globalization is changing again. There is no clear vision of what the world will look like in the future; however, three important avenues must be considered.
First, the purchasing power and the relative economic weight of various countries are changing. The Group of Seven (G7) has a handset GDP, measured in purchasing power parity terms, of about $ 40 trillion. However, in the seven emerging economies of Brazil, China, India, Indonesia, Mexico, Turkey and Russia – known collectively as the E7 – GDP is $ 53 trillion.
Emerging markets are increasing their trade with each other. For example, in the first 10 months of 2020, Brazil exported more to Bangladesh than to all Scandinavian countries combined. Emerging economies will represent a larger share of the global economic pie, and the E7 will ultimately exercise more economic weight in the world GDP that the G7 has traditionally.
The second characteristic concerns the way in which global value chains are being hijacked by the growing presence of emerging economies. This phenomenon is much broader than global supply chains, as consumption will also be affected. China, for example, has become one of the most important sources of IDE.
Geopolitics is a major driving force in reconfiguring these new supply chains, but other factors are more important, such as the natural evolution of some of the world’s largest economies. Take the example of China. As a young diplomat at the Brazilian Ministry of Foreign Affairs, I undertook research in the science and technology division. My research took into account the share of countries devoted to research and development (R&D) and innovation. In the early 1990s, China spent about 0.2% of its GDP at R&D. Today it is more than 2%, almost reaching the average for member states of the Organization for Economic Co-operation and Development.
China is no longer a low-cost country or just a manufacturer of low-value-added products. On the contrary: it is the world leader in so many advanced technologies. As a result, some lower value-added economic activities have migrated from China to geo-economic neighbors such as Vietnam, Indonesia, Myanmar, Pakistan, Bangladesh and India.
It is a phenomenon which is not new in history. In the 1970s and 1980s, the “Asian Tigers” – Hong Kong, Singapore, the Republic of Korea and Taiwan – replaced Japan as low-cost, low-wage manufacturers in the region. But this time around, China is a bigger economy and therefore is likely to have a much wider reach.
International trade and investment agreements also influence the re-routing of global value chains. In November 2020, 15 Asia-Pacific countries signed the Comprehensive Regional Economic Partnership. In a trading system where the term “international” applies to the exchange of goods even at the intra-firm level, it is not surprising that these trade agreements influence investment flows. Ambitious countries also promote national economic reforms that allow their economies to become more business-friendly and open to business. IDE.
We should no longer think of traditional physical infrastructure as separate from technology
Talent takes center stage
The last problem that has an impact on globalization is that of talent. In this context, talent means going beyond the economic theory of comparative advantage. Countries need to ask themselves: “What can I do besides what I am already very good at?” It is a complex challenge that some at the World Economic Forum call “talentism”. From such a perspective, we no longer live in the era of capitalism but in a world of talent because human talent has become the most essential factor of production.
So how do development banks, like the New Development Bank (NDB), contribute positively to this metamorphosis of globalization? They have a major role to play and must focus on three key areas.
The first is infrastructure. We should no longer see traditional physical infrastructure as separate from technology. New infrastructure must meet not only the needs of the 20th and 21st centuries, but also the demands of what will be the fourth industrial revolution – or Industry 4.0. Development banks should focus their activities on responding not only to the demands of the past, but also to those of the future.
Second, the traditional approaches of certain business models – export driven / nationally driven, public sector led / private sector led – will be redefined. Multilateral development banks should be part of this discussion.
Finally, in a world where international cooperation is so needed, development banks provide the necessary framework in which countries can come together and work constructively on areas of common interest, and thus help to write a virtuous next chapter. of globalization.
This article is part of the IFF China 2021 Report, which draws primarily on content provided by the China-based think tank, the International Finance Forum, and is published in association with the Central Bank.