Myths and reality of deglobalised world

The following comment by me appeared in the latest Fund Strategy (2 February).

Is globalisation going into reverse? The answer is straightforward: yes and no.

It is true that the world is becoming less economically integrated in some respects. According to the latest update to the International Monetary Fund’s World Economic Outlook the ­volume of world trade in goods and services is likely to fall by about 2.8% in 2009.

In relative terms the advanced economies will be hardest hit, with imports falling by 3.1% and exports by 3.7%. The corresponding falls for emerging and developing economies are smaller, but because the countries are poorer they are likely to hurt more.

Meanwhile, cross-border investment flows look set to decline. The Institute of International Finance, which represents global financial institutions, estimates that net private capital flows to emerging economies are likely to fall to $165 billion in 2009 compared with $466 billion last year.

This weakening of cross-border investment links is against the trend of recent years. Trade and investment flows have generally grown faster than the world economy.

The reversal is still in its early stages but if it were to become a long-term trend it would be worrying. The last time the global economy started to unwind substantially was in 1914. Mercifully the world is not on the brink of a global war, but the downturn looks likely to be long and painful.

However, it is important to recognise that many commentators mean more by the term “globalisation” than economic integration. They see it as the result of a conscious policy drive by avid free-market fundamentalists. In this they are mistaken.

The integration of the global economy came at a time when states were hugely involved in economic activity. Some politicians may have used free-market rhetoric, but the reality was that state spending as a proportion of GDP remained high. The state may have pulled back from direct ownership of companies – at least until the banking bail-outs – but it tended to intervene in other ways.

In any case, globalisation was never a matter of policy. It developed organically rather than as a result of political action. Some politicians may have claimed credit for it but it was always a mistake to take such statements at face value.