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Deglobalization: Doubts or Reality?

In the last few years, the world has been witnessing a shift in a long trend that is known as globalization. Globalization can be defined as the trend of international integration on economic, political and cultural levels. Throughout history the trend of globalization has gone through ups and downs. There are two factors that influence globalization: 1) Technological development, which advances means of communication and transport, and 2) Politics, which determines the degree of openness to and acceptance of outsiders, who may be different in appearance, language and culture.

In the period of 1500s to the early 20th century, globalization was a syndrome of modern European conquest, with a great share of world land and people under the rule of some European colonial states. Spain and Portugal ruled over Central and South America from the 16th century till early 19th century; the Ottoman Empire ruled over North Africa and Arabian Peninsula from early 16th century to late 19th century; England, France, the Netherlands, Belgium, Germany, Denmark and Norway ruled South Asia from the 16th century to mid-20th century , North America from early 17th century to late 18th century, and almost all of Africa from mid-19th century to mid-20th century.  In this colonial period, the world was globalizing, cultures met one another, goods, services and financial markets were integrating and political systems were converging to a standard model.

When World War I erupted in 1914, the world closed its borders due to war conditions. European colonial powers’ resources were drained in the war, so they lost their grip on the colonies, and what is known as decolonization began. The newly liberated states expressed a level of assertiveness and that affected their openness to foreign interaction. These two factors of war conditions and decolonization reversed the trend of globalization, and that reversion lasted until the end of World War II, after which a new wave of globalization started with international economic cooperation and openness, and a progressive immigration policy in rich western states. This new wave of globalization , especially its economic aspect, reached a climax in late 1990s fueled by China’s economic growth and trade openness, until 2010, when the decline led to what is known as “deglobalization”.

Globalization can be assessed using three measures: Trade Globalization, Financial Globalization and International Immigration.

Trade (de)globalization

Trade globalization is measured by this simple formula:

(Total World Export + Imports of goods and services) / World Gross Domestic Product.

According to World Trade Organization Statistics, this ratio grew at approximately 2.7% in the 60’s and 70’s, 3.5% from 80’s until 2010, and then down to 1.3% 2010-2016. This recent slowdown has been due to world economic growth slowdown, a direct consequence of the global credit crisis of 2007-08. International trade intensity has been partially affected by the structural switch that took place in the Chinese economy from export driven growth model to domestic consumption driven growth model, a trend that is likely to continue in the coming decades as the purchasing power of the Chinese citizen is rising rapidly. The global production chain, which has been a prominent characteristic of globalization, has been going through fragmentation due to rising income in producing countries, so the “Production in East and Consumption in West” model is breaking. The current rise of nationalism and protectionism in the US, may affect its trade volume with China, knowing that trade between these two nations represent roughly 15% of world trade (in goods). These are indicators that the world may be entering a phase of trade deglobalization.

The following figure illustrate the deviation of international trade growth and world GDP from the trend (actual growth is represented by the solid line, the trend extension is represented by the dotted line)

Source: DataStream, IMF WEO and Bank calculations. Note: dotted lines show pre-crisis trend. Country data are weighted by market exchange rates to calculate the aggregate.

Financial (De)globalization

Financial globalization is measured by (Total International Capital Flow) / World GDP.

According to IMF Global, capital flows have been contracting in the last years, even after the recovery of the world economy from the 2007-08 crisis. Currently, it is around 2%, a significant fall from almost 27% in 2006. This is due to capital controls imposed by many states which has led to the rise of risk aversion of international investors as a consequence of rising uncertainty and political instability.

The following figure illustrates the contract of international capital flows.

Sources: IMF International Finance Statistics and World Economic Outlook Database. Note: For each quarter, flows are summed over all available country data, divided by an estimate of quarterly GDP, and then smoothed by averaging over the current and previous quarter.

International Migration

Currently, there is a consensus that the world today is the most unequal in at least 100 years in terms of wealth and income. The trend of rising income and wealth inequality has sped up in the last few decades since the takeover of right wing economic ideology known as “neoliberalism“. Migration mostly takes place from members of low income and middle income countries to high income countries. With rapidly rising wealth and income inequality between different countries/regions of the world, it is common sense to predict that the rich would build larger walls to guard themselves from potential threats of the poor. For example the United States have been and are still receiving the largest share of total world migrants (around 20%). However, due to immigration restrictions that were imposed after 9/11, the net number of  immigrants to the USA dropped from almost 9 million in the period 1995-2000 to around 5 million in the period 2010-2015. Similar patterns can be observed in other high income countries; namely France, the UK, Saudi Arabia, United Arab Emirates, and Japan. Germany migration statistics have been on the opposite of this trend since it has been receiving a large number of Syrian refugees in the past few years, a matter that can be excluded from this analysis.

Another major restriction was imposed on 3 March, 2017. The European Parliament has taken the first step in potentially revoking visa-free travel of US Citizens/Residents to the European Union. That’s because the U.S. doesn’t allow citizens of Cyprus, Poland, Croatia, Bulgaria, and Romania, to visit the US under the visa waiver program. Due to this unequal treatment of some of EU citizens, the European Parliament is urging similar restrictions against US citizens Another recent and major indicator of the trend of deglobalization.

Although the world is still relatively open, the trend of globalization has been going in reverse in the last few years, and this reverse is most likely to continue because its drivers are present and growing. International trade growth is plummeting despite world economic recovery from the last financial crisis, and is most likely to keep falling with the current rise of nationalism and protectionism. There has been a trend of financial deglobalization due to imposed capital controls that rendered the investment climate uncertain for foreign agents. Due to rising international income and wealth inequality, with security threats, immigration restrictions have been tightened and the international voluntary flow of people has declined in the last few years and is likely to keep declining.




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