Talk of ‘inevitable globalisation’ ignores the extent to which capital and its flows still reside at the national level, the importance of domestic policy and lets leaders off the hook, argues Ian Fletcher.
If there is one fact we have learnt to accept, whether they’re happy about it or not, it is that we live in a borderless global economy. To dispute this is to risk being considered, not simply wrong, but ignorant. Yet this widely held belief does not survive serious examination when we get down to the hard numbers.
The most obvious is this: because the US is roughly 25 per cent of the world economy, a truly borderless world would imply that imports and exports would each make up 75 per cent of its economy, since its purchase and sale transactions would be distributed around the world. This would entail a total trade level (imports plus exports) of 150 per cent of GDP. Instead, the US total trade level is 29 per cent: imports are 17 per cent and exports 12 per cent. Furthermore, US trade is almost certainly destined to be balanced by import contraction, rather than an export boom, in the next few years, with trade levels almost certainly poised to go down, not up. So unless the US can somehow magically find a way to keep sucking in $300 to $700 billion a year in imports it doesn’t pay for with exports, America in a few years will be importing significantly less and will be a less globalised economy.
Economists James Anderson and Eric van Wincoop have calculated that the average cost of international trade (ignoring tariffs) is the equivalent of a 170 per cent tariff. Even between adjacent and similar nations like the US and Canada, national borders still count: economist John McCallum has documented that trade between Canadian provinces is on average twenty times as large as the corresponding trade between provinces and American states. And much of international trade is interregional, not global, but centered on European, North American, and East Asian blocs.
So, the world economy remains what it has been for a very long time: a thin crust of genuinely global economy (more visible than its true size due to its concentration in media, finance, technology, and luxury goods) over a network of regionally linked national economies, over vast sectors of every economy that are not internationally traded at all (70 per cent of the US economy, for example). On present trends, it will remain roughly this way for the rest of our lives.
The nation-state is a long way from being economically irrelevant. Most fundamentally, it remains relevant to people because most people still live in the nation where they were born, which means that their economic fortunes depend upon wage and consumption levels within that one society. Unemployed Americans are learning this the hard way right now.
Capital is a similar story. Capital cares very much about where it lives, frequently for the same reasons people do. (Few people wish to live or invest in Zimbabwe; many people wish to live and invest in California.) We should not be surprised that capital behaves very much like people do when: 70 per cent of America’s capital is human and another 12 per cent has been estimated by the World Bank to be social capital; the value of institutions and knowledge not assignable to individuals.
Although liquid financial capital can flash around the world in the blink of an eye, this is only a fraction (under 10 per cent) of any developed nation’s capital stock. Even most non-human capital resides in things like real estate, infrastructure and types of financial capital that don’t flow overseas, or don’t flow very much. As a result, the output produced is still largely tied to particular nations. So although capital mobility causes big problems of its own, it is nowhere near big enough to abolish the nation-state as an economic unit.
Will it do so one day? Unlikely. Even where assets, like fiber optic telecom lines, are added – assets that supposedly make physical location irrelevant – they are still largely being added where existing agglomerations of capital are. For example, although fiber optic backbones have gone into places like Bangalore in India, which were not global economic centers a generation ago, big increments of capacity have also gone into places like Manhattan, Tokyo, Silicon Valley, and Hong Kong. Existing geographic centres of capital are largely self-reinforcing and here to stay, even if new ones come into being in unexpected places (often through decisions made by national governments). These are shaped by national factors such as past history; legacy effects can be extremely durable.
The reality for most people and corporations is that national policies still matter.
Ironically, the enduring relevance of the national economy is clearest in some of the ‘poster child’ countries of globalisation, like Japan, Taiwan, South Korea, Singapore and Ireland. In each of these nations, economic success was the product of policies enacted by governments that were in some sense nationalist. For example, Japan industrialized after the Meiji Restoration of 1868 to avoid being colonized by some Western power, while Ireland did it to escape economic domination by England. In each case, the driving force was not simply desire for profit but national political needs that found a solution in economic development.
Politics is still mostly practiced at the national level, and practiced with sovereignty only at that level. The reality for most people and corporations is that national policies still matter. It matters whether one has good physical infrastructure and basic security. It matters whether one must constantly pay bribes to get things done and whether one gets cut out of the best opportunities in favor of political cronies. It matters whether the local education system produces skilled employees and whether one has a sound currency. It matters whether the local population reveres things like science, efficiency and entrepreneurship. And it matters whether politicians are wise enough to keep them that way, and whether the people (in a democracy) elect the right politicians.
Globalisation makes these things more not less important: the rewards for getting them right (and the punishments for getting them wrong) in a globalised world are larger. ‘Inevitable globalisation’ is a catch phrase that doesn’t accurately describe current trade, economic or political reality. That the phrase has so many unthinking users especially among elites is disturbing; the risk is this feeds people a concept that lets their leaders off the hook. How can politicians and big business be expected to provide jobs if the omnipotent forces of globalisation trumps every time? Globalisation makes national policies more important than ever. Our political leaders need to start getting these right or their people will suffer the consequence.
Ian Fletcher is the author of the Free Trade Doesn’t Work: What Should Replace It and Why.