The author is a Senior Fellow at Brown University. Josh Felman contributed to this article
Shocks such as Covid and the Russian invasion of Ukraine hold our attention. But it is the changes – that is, the major transformations – that will determine the long-term trajectory of the global economy. Consider five major changes and their potential consequences.
First, the era of extraordinarily cheap finance is over. As inflation grips the global economy, a cycle of monetary tightening is underway. Real long-term interest rates are unlikely to reach the levels seen in the previous period of inflation, as growth is now much weaker and an aging population will reduce investment opportunities. But the era of zero interest rates is over.
Higher interest rates will destroy wealth as asset prices fall from frothy valuations. They will also expose companies and countries that have accumulated large amounts of debt. This will result in defaults and financial crises, especially in emerging markets.
Second, the era of hyper-globalization of trade is over. Over the past decade, anti-globalization forces have grown stronger. Over the next decade, we will see this change happen. Geopolitics will trigger protectionism; coverage will lead to greater self-sufficiency in food, energy, essential medicines, resources and technologies; the weaponization of interdependence, reflected in sanctions against Iran and Russia, will deflate the lure of globalization; and capital will emerge from odious regimes.
The world will not truly de-globalize, as trade of certain types (services) and in certain regions (the west) will continue to expand. But the scale and speed of integration that the world has witnessed for some 25 years is surely behind us.
Third, economic convergence will stagnate. For three decades, the poorest countries have caught up with the standard of living of the richest countries, thus reversing two centuries of divergence. But this dynamism has been propelled in large part by cheap finance and hyper-globalization. Meanwhile, as the historic addition of Chinese and Indian labor to the global labor supply draws to a close, the global economy will shift from abundant supply to scarcity, bolstering inflationary pressures.
Fourth, the already weak global cooperation will decline further. The pandemic exposed the shambles that now characterizes the multilateral system set up after 1945. The financial costs of producing and distributing vaccines around the world were insignificant compared to the potential benefits in lives saved and economic losses averted. Yet the major powers and institutions have proven incapable of accomplishing this task.
This is not the only example. The World Trade Organization has been on life support for decades, a victim of geopolitical rivalry and the West’s inability to find ways to provide good jobs to workers who lost out when the global industrial base crumbled. moved east.
More fundamentally, the brilliance broke away from the idea – returning to At Norman Angell’s The Great Illusion – that global integration was good for peace and would largely curtail superpower rivalry. The new era could see real US-China rivalry in the economic and security spheres. It was a G1, G2, G7 or G20 world. Now we are destined for a G-minus world due to domestic developments in the world’s two largest economies, the United States and China. It’s the fifth shift.
The United States are now two different nations. An internally polarized America is a less attractive and unreliable partner for other countries. Access to its markets and the provision of generous financing are no longer part of its foreign policy arsenal or its soft power.
Meanwhile, China has become a threat to its neighbors. Xi Jinping destroys both the possibility of China becoming truly wealthy and the hope the world once harbored that it would become politically open.
As sinister as these five shifts seem, silver linings can be seen. De-globalization away from China provides opportunities for other countries to fill the vacated space. Vietnam, Bangladesh and Indonesia have benefited, as have other developing countries.
Global food shortages and the quest for self-sufficiency should encourage policymakers in South Asia and sub-Saharan Africa to focus on increasing agricultural productivity and farm incomes. This could accelerate global growth, as South Korea, Taiwan and China showed decades ago.
Finally, the conditions are in place for the world to understand that, however intermittent their gifts, the sun and the wind are more reliable and less destructive sources of energy than Russia and the Middle East. Producing more renewable resources helps the planet and drains the war chests. This should motivate the world to act.