Globalisation no more

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One of my professional areas of interest is strategic analysis, which I’ve taught to undergraduates and postgraduates in universities in China and the UK.

The tools of strategic management can also be used by individuals, to help plan career directions, and to make significant life choices in an informed way. This is becoming essential; powerful forces of change are overtaking us, and we should all be planning and preparing.

The main issue is that the globalisation of the world economy, a process that’s been underway for almost thirty years now, has reached its limits. Indeed, it’s going into reverse, which is likely to have unpredictable and unpalatable consequences for its biggest beneficiaries: those of us who live in the West.

I’ve been trying to write this post for several weeks now, but have repeatedly held off as world events develop rapidly. Looking at the headlines, the symptoms of the end of globalisation are everywhere – but the causes may not be clear to everyone.

I need to go back to what I taught my Business and Management students in Beijing and Swansea: the global economic system which we have come to accept as the norm is based on these basic foundations:

  1. A transparent and impartial set of global structures and laws governing international trade;
  2. Cheap energy;
  3. A single global internet;
  4. A global, dollar-based, international financial system.

It’s now increasingly clear that none of these assumptions are true any longer. Not one but all have failed. Without them, the system can’t continue, and the sudden rush of conflict around the world that we’re seeing this year is the start of the fallout from that.

The end of the open trading system:

A few weeks ago we saw the annual St. Petersburg International Economic Forum. Current events, of course, gave it a greater significance than usual.

I got a little closer to it than I expected, on a trip to my clients at Pulkovo-2. International flights moved a couple of months ago to the new terminal at Pulkovo-1, so it’s been quite quiet recently. On that day, however, I got off the bus to find the road blocked by a number of jeeps and police cars; there were police and armed soldiers all around, with passage through the roadblock being controlled by suited men with sunglasses and earbead microphones; plainly, the terminal was being used for conference attendees… I had to find the back way into the business centre, as the front entrance was sealed off…

Asia Times Online‘s reporter Pepe Escobar was at the Conference, and has posted a very good report of what it was like. The key takeaway:

It all starts in Sichuan
In St Petersburg, from session to session and in selected conversations, what I saw were some crucial building blocks of the Chinese New Silk Road(s), whose ultimate aim is to unite, via trade and commerce, no less than China, Russia and Germany. 

You may well have seen recently the Princeton research, which used decades’ worth of data to conclusively demonstrate that US policy is set to reflect the needs of the rich, while the wishes of the majority only get enacted when they match those of the wealthy minority. Many reports have pointed out that this effectively makes the US an oligarchy, not a functioning democracy. I also noted a few weeks ago that the US Supreme Court recently removed caps on corporate donations for political campaigns, meaning that US politicians are now even more firmly in the pockets of corporate interests.

This leads to policies such as these, which are quite blatant about protecting corporate profits over public welfare:

  • The Republican Party has been captured so completely by corporate money that it wants anyone revealing what frackers are pumping into the ground to be sent to jail.
  • Vermont passes a law requiring the labelling of GMO food. Monsanto launches a lawsuit to stop it happening. Consumers are not to be allowed information and choice.

This approach is now reaching extremes, with the current generation of trade negotiations so blatantly serving corporate interests that they have to be conducted secretly.

China, Russia, and lots of other countries are responding to this, and are building their own trading areas and agreements. This will lead – soon, I think – to a world of separate, and to a large extent mutually exclusive, trade areas. With the West no longer producing much of what it consumes, this is a dangerous development.

The end of cheap energy:

In short: the energy supply on which the globalised economy was built is close to running out. There’s been a lot written on this, so I don’t want to add too much more. However, without cheap energy this global economy cannot exist. Furthermore, without cheap energy, life for Westerners will become much more expensive, and much grimmer. Unfortunately, it’s now unavoidable – improvements in renewable energy notwithstanding.

The end of the open internet:

In recent weeks there have been a couple of significant developments:

  • Russia has moved towards gradually introducing Chinese-style restrictions on Internet Service Providers. I recently found that for a few hours early one morning in May, I couldn’t connect to any Google services – due, I believe, to them switching over to a new data centre in Russia, anticipating new legal requirements. Since then, all Google services (search, Blogger, YouTube) are defaulting to .ru addresses. In the last week, Facebook has also started serving adverts in Russian, so I take it that they’ve also made the move.
  • The EU introduced a “Right to be forgotten”, requiring search engines to remove old but embarrassing data on individuals

The internet was supposed to be part of the infrastructure of the global economy; an international, neutral service that facilitated communication, commerce, and payment. China – with its ‘Great Firewall’ blocking social media and politically inconvenient information – has always been an exception, of course, but it was easy to say that it was the exception that proved the rule.

Google, as usual, is a bellwether – not only is it now having to process all Russian-based requests in Russia-based data centres, it now has to allow radically different approaches to individual privacy in the US and the EU. On the whole, I support the EU’s approach, but I accept it’s never going to happen in the US.

The result? There’s no such thing as ‘the Internet’ any more. Instead, there’s now a mosaic of local internets, reflecting local laws. (See here for an excellent Forbes article on the EU’s decision). For a short while, the whole world could talk to each other in the same online environment; from now on, we will increasingly be shut off from one another.

The end of the integrated global financial system:

Like the internet, a global financial system is necessary for a global economy and, like the internet, needs to be value-free infrastructure. Until recently, it was.

However, the main international payments services (Visa, Mastercard, Paypal) have shown themselves willing to act as tools of US policy – first by their blocking of payments to Wikileaks, and more recently to Russia.

In response, Russia has imposed heavy restrictions on the international payment services – so heavy, in fact, that Morgan Stanley recommended that they leave. It seems that they’re not willing to do that – so they’ll stay and help develop a Russian equivalent. That will be a few years coming, and so Russian banks may switch to China’s Unionpay. Some of them have already done so, though not exclusively.

The BRICS countries are also acting together to form a new development bank, an alternative to the IMF and World Bank.

Clearly, the eventual outcome will be withdrawal from the use of the US Dollar as the basis of international trade. Once that happens, the US economy will be in very serious trouble indeed.

What it means

Developing an effective strategy, be it personal or corporate, involves monitoring changes in the world around you, and evaluating them objectively. Clearly, strategies that were working well may not work at all if something changes significantly, or if underlying assumptions cease to be true – regardless of your feelings about the matter. This week, a number of facts and basic assumptions changed in a major way, and – in my analysis at least – that means the end of globalisation as we knew it. This is going to have significant consequences.

We will see a return to competing trade blocs; a balkanized internet, and a fragmented financial system. We’re going to see dramatically rising energy costs. All of these developments will have their most damaging impacts on the economies which gained the most from the process of globalisation: Western Europe, and North America.

The consequences are likely to be traumatic: impoverishment, and social and political instability.

It’s time to start thinking ahead, about how these developments will affect each of us.