A Flat World Gets Bumpy With Globalization in Retreat
World leaders blame open borders for economic woes, trying protectionist controls rather than reducing inequality
Uncertainty and instability threaten the global economy, and monetary stimulus by the central banks, including negative rates, is not delivering growth or confidence. So far, the United States is alone in breaking away from the pack to engage in monetary tightening and gradually lifting interest rates. China employs strict controls to prevent businesses and savers from sending cash outside the country and its industries struggle with over-capacity. That in turn has slowed demand for commodities and pushed many emerging economies including Brazil and Russia into recession. Terrorism, climate change, and conflicts heighten the uncertainty. “Support for free trade will continue to falter unless countries enact reforms, managing exports and domestic production to encourage full employment and prevent stagnation,” writes economist David Dapice. “Free trade thrives when there is growth and full employment.” Protectionist controls could limit trade, immigration, and the free flow of information including the Internet. Policies reforms include reducing inequality and uncertainty.
A container ship berths at the port of Qingdao in northeast China's Liaoning Province on Jan. 20, 2014. Steve Keen explains why free trade with China and Mexico hasn't worked out for U.S. workers. STR/AFP/Getty Images
The world economy has slowed substantially, and monetary stimulus is losing its punch. Several countries are employing negative interest rates to weaken their currencies and discourage capital inflows, even though these rates do little to boost real economic growth. Terrorist attacks in Europe and the refugee crisis emerging out of the Middle East add to the negative sentiment of the global economy.
Support for free trade will continue to falter unless countries enact reforms, managing exports and domestic production to encourage full employment and prevent stagnation. Preventing destabilizing terrorist attacks is a longer-term task.
On the economic front China, among others, is using increasingly strict measures to curb capital outflows—Chinese officials fear that excessive devaluations would reward speculators and spark capital outflows, but do not want to raise interest rates as that would further weaken China’s highly indebted firms and shaky banks.
Only the United States seems willing to exercise its own monetary tightening, using caution, while allowing the dollar to appreciate. Yet this stance hurts exporters and manufacturing. Its low share of manufacturing relative to services gives it a little room to maneuver.
