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Navigating Deglobalization

May 11, 2020 Mohamed A. El-Erian

Appeals to recommit to globalization are highly unlikely to gain traction in the wake of the COVID-19 pandemic. Those keen to preserve globalization would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization and laying the groundwork for a more sustainable process thereafter.

LAGUNA BEACH – Having already been buffeted by two big shocks in the last ten years, the global economy’s highly interconnected wiring is suffering a third because of the COVID-19 pandemic. Globalization thus faces a three-strikes-and-out situation that could well result in a gradual but rather prolonged delinking of trade and investment, which would add to the secular headwinds already facing the global economy.

Appeals to recommit to the current globalization process are almost certain to fall on deaf ears – particularly because this latest shock will be driven simultaneously by governments, companies, and households in developed countries. Those keen to preserve globalization in the longer term would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization and laying the groundwork for a more sustainable process thereafter.

For starters, it is already clear that many firms will look to strike a more risk-averse balance between efficiency and resilience as they emerge from the damaging pandemic shock. The corporate world’s multi-decade romance with cost-effective global supply chains and just-in-time inventory management will give way to a more localized approach involving the reshoring of certain activities.

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Mohamed A. El-Erian

Writing for PS since 2010
134 Commentaries

Mohamed A. El-Erian, an advisor to Allianz (the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer from 2007-14) and to Gramercy, is President of Queens’ College, University of Cambridge. He is is the Rene M. Kern Practice Professor at The Wharton School at University of Pennsylvania and was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author of two New York Times bestsellers, including most recently The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

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Harlan Green May 20, 2020

Mr. El-Erian seems to have forgotten it was the corporate private sector that drove the expansion of globalization forces without regard to domestic worker security and safety, in the name of free trade. Why would we want further input from the private sector to design new rules for globalization? A weak U.S. government sector has been the problem in allowing monopsony, or concentration of too much power and growth in multinational corporate sector that caused the current populist backlash. GW Bush was probably the worst offender, allowing China into the WHO without adequate preconditions. What good was/is NAFTA and even the TPP, when the private sector writes most of the rules?
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Enrique Woll Battistini May 19, 2020

SOME 400 PEOPLE IN THE UNITED STATES - 0.0001% OF ITS POPULATION - OWN USD 3 TRILLION! THE PRODUCT OF UNFETTERED CAPITALISM

This, according to https://mkorostoff.github.io/1-pixel-wealth/?fbclid=IwAR3D2ptFqN-2CJy3WouPmrIGiAlyU3jYP_O1lO8WcK27DxEl1Tt4Se93I1k,

My take on this seemingly encroaching reality, and some ways in which it could be averted, is reflected in some of my comments below. The forthcoming deglobalization that Mohamed A. El-Erian envisions, if realized, would be akin, from a practical standpoint, with luck, to a detour to the European Middle Ages, but in far-away lands, for hundreds perhaps billions of impoverished human beings, mostly non-white, many of which, by Western standards, are still living in the states of disorganization and social blindness and hunger of pre-Roman times, who have been laboriously intent, for some ten years now, on attaining residency in the EU, for example, by resorting to all manner of forceful immigration strategies and even hundreds, maybe thousands, of deadly attempts at crossing the Mediterranean Sea mostly from Africa and the Middle East. The peoples of other Third World regions, rich and poor alike, would fare not much better than these should global investment and trade suffer the screeching slowdown and relative halt feared.

A cursory analytical look at Thomas Piketty's Thesis clearly suggests that the intrinsic nature of Capitalism ensures that the rich will get richer and the poor poorer, ad infinitum, till annihilation of the poorest, in any society in any country, unless taxation through a sole consumption tax is used to regularly redistribute the wealth created in all societies, within societies, in such a way as to preempt consumption by the poorest from falling below the threshold of autonomous survival with monotonically increasing welfare potential, that would bring their share of wealth consumption irreversibly and asymptotically closer to consumption by the richest of the rich over time. This condition would not imply equality, only the trend to equality, but when perceptible, would ensure the possibility of harmonious socioeconomic development and peace. Absolute extreme poverty as well as relative extreme poverty would be eradicated, and planetary rescue could then be pursued, essentially through voluntary population stabilization, production and consumption stabilization, and carbon emissions stabilization.

Again, at the crux of world peace, and planetary rescue, would be tax reform, via Sole Consumption Tax (SCT), that would enable eradication of absolute extreme poverty and relative extreme poverty, through regular income redistribution ensuring the attainment of autonomous survival with increasing welfare potential for the poorest, that would irreversibly approach that of the richest, voluntary population stabilization, voluntary production and consumption stabilization, and carbon emissions stabilization.

The world the baby boomer generation's grandparents knew as children has been obliterated by a century of recurring monstrous wars, concurrent with exponentially increasing revolutionary scientific and technological discoveries and inventions, and massive economic, social, political, and legal changes which for many signify development. These changes have occurred in a stark and pervasive moral and ethical vacuum, in the context of unconscionable, unsustainable, and monotonically increasing welfare disparities between the rich and the poor. The world as we know it now is at the historical fork between the threshold of recovery and the brink of a new conflagration, indeed at a very promising and very threatening tipping point, and begging for drastic global financial, economic, and social redress, which only the most comprehensive multilateral and national governance reforms that would redefine the social contracts in the East and the West, the North and the South, and between them, could satisfy. Some of the more evident issues in need of holistic attention are addressed herein.

https://www.academia.edu/…/Informal_Proof_of_Thomas_Piketty…

https://www.academia.edu/…/La_Reforma_Tributaria_del_Siglo_…

https://www.academia.edu/…/OFA_-_At_the_Brink_of_Recovery_o…
- Enrique Woll Battistini May 26, 2020
  
  The world as we know it now is at the historical fork between the threshold of recovery and the brink of a new conflagration, indeed at a very promising and very threatening tipping point, and begging for drastic global financial, economic, and social redress, which only the most comprehensive multilateral and national governance reforms that would redefine the social contracts in the East and the West, the North and the South, and between them, could satisfy. Some of the more evident issues in need of holistic attention are addressed herein.
  
  https://www.academia.edu/43111321/PROJECT_SYNDICATE_-_Navigating_Deglobalization_by_Mohamed_A._El_Erian_-_My_comments
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nigel southway May 18, 2020

Overall in the real global world globalization has in creased 8 times since 1980 but global GDP has increased only 3 times at best... so its been a poor wealth creation tool and a great wealth transfer machine
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Jay Kay May 18, 2020

"Against this background, those who appreciate the power of cross-border interconnectivity to unleash win-win economic opportunities and reduce the risk of major military conflicts will be inclined to defend the pre-pandemic status quo. "

Alas like all religions, when tested experimentally Globalism always fails to deliver on any of its predictions. Yet, the True Believers simply refuse to acknowledge that the hypothesis doesn't work...
- nigel southway May 18, 2020
  
  yep... the arguments for globalism are many... the idea that if we trade we won’t fight is one of them... the others.... the devotion to comparative advantage and the free hand of the market are others.... but these concepts are in contradiction to others that are now more important… sustainability, sovereignty and wealth inequality…. At best we have allowed the wrong form of globalism and it needs a reset.
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John Sweeney May 18, 2020

An "inclusive and sustainable process of globalization..." Think about who would actually do that. Increasingly parochial governments? Coalitions of nations? The U.N.? The only global "entity" is commerce and it will retrench and continue to do or try to "do business" as its nature and opportunities dictate. Business is the only "game in town" if you want to deliver phones in Zambia, jobs in Eastern Europe, tax moneys in South America, and food in Asia. Those are all inclusive and sustainable and don't require high flown verbiage.
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Alejandro Cabezut May 18, 2020

Globalization is not an on-off switch and deglobalization is not the dominant direction nor the post-pandemic final normal.
Companies and consumers will not give up the evident benefits of globalization, importantly comparative cost advantages, global economies of scale, access to financing and to consumer products.
The decades-long secular globalization trend is now continuing in the form of global managed redundancies: if a product, capital or talent supply chain is disrupted somewhere, back ups are being developed elsewhere. Globally.
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Janos Nagy May 17, 2020

Globalization what globalization
One should only look at the trade between India Pakistan and China 4 billion people and 1 percent the global trade
- nigel southway May 18, 2020
  
  Overall in the real global world globalization has in creased 8 times since 1980 but global GDP has increased only 3 times at best... so its been a poor wealth creation tool and a great wealth transfer machine
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Norman Kennedy May 17, 2020

Once America killed multilateral trade agreements, it has been a free for all. That was the game plan and now there is no game plan, just a competitive freee for all. Prosperity is created by competition and a level playing field with consistent and constant rules. Now that business must assume that the rules will change, prosperity suffers due to contingency costs. It is that simple. You are delusional if you think common sense should prevail especially when long term planning/cooperation has become a waste of time due to ignorant politicians and citizens whose intellect is limited to sweeping rationalizations.
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nicmudie May 17, 2020

The econocracy ( French scholars will relish the second syllable as equally prescriptive and descriptive) , being true believers in comparative advantage ( PPE 1.0) will always point to increased trade as the route to every participating country increasing it's GDP. Leaving aside, for the moment, the outdated usefulness of GDP as a measuring rod in an era where advanced economies have nearly 80% of activity devoted to services ,mostly non-tradeable, and sometimes up to half of the total devoted to government expenditure of sometimes questionable use, what seems to have eluded their thinking is the need to pose following questions.

What is the correct balance between an enhanced GDP and an ever worsening equality in the cutting of the cake?

Should we forgo the increases in GDP obtained through globalisation in the name of not just morality but also political stability by reversing the seemingly inexorable trend to inequality in what is somewhat smugly called the developed world?

Increasing disparities in both income and wealth at a faster rate than GDP seems like an excellent recipe for revolution. Not many revolutions have resulted in an increase in GDP! Old Ford realised that his workers had to earn enough to be able to buy his cars. In working out what he should pay he was lucky to be spared the wrangler defying contortions of most of continental Europe which reveals an ever widening disparity between wage costs and take home pay.Today,the idea of earning enough seems to have been replaced by being able to borrow enough.

The elegance of theoretical equations that so fascinate the modern practitioners of the dismal science should be given no more weight than the views of the daddy of the all, one Adam Smith who was no mean moral philosopher and recognised the dismal science to be political economy.

Whilst we’re considering the wisdom of the ancients, Locke’s definition of mad men includes those who reason perfectly from erroneous assumptions.
Do you know economic man personally and has he fallen for an indifference curve or the free market ?

The questions posed above are not intended to decry the effect that globalisation has had in lifting a vast number of people out of poverty in the poorer nations. The aim is to point out that any collapse in richer countries’ economies brought about by gross inequality will inhibit any transfers, be they by means of aid or preferably trade, to the poorer ones. Some replacement of just in time by just in case might be in order
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Ted Peters May 17, 2020

I'm pro-globalization but anti-ChiCom. Surely it is wiser to maximize diversity when it comes to supply chains rather than concentration them in a single country with an extremely repressive regime.
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About Face May 17, 2020

Globalisation is not so much about outsourcing and supply chains stretching far from markets. The model is about remaining dominant ( not relevance ) to extract maximum profits. The wealth concentration by the 1% of 40% of global wealth smacks squarely into the face of why no body quite discuss this until recently at the last Davos. The weaker players have Covid to thank to have this eco system adjusted to more favourable terms, in place of more sporadic but frequent conflicts waged by the dominant players.
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Adrian Wu May 17, 2020

Globalisation has generated winners and losers. It has also become a tool for oligarchs to take a larger share of the economic pie, at the expense of workers. It has become a new form of colonisation, but instead of natural resources being exploited as in the old colony days, it is labour. It is sort of like saying one should not rely on minerals and other resources extracted from colonies, because if something happens to these colonies (such as a revolt), supply will be interrupted. This is exactly what is happening; the low cost of labour and lax environmental regulations in China, India etc. were ripe for developed countries to exploit. Under these circumstances, when the relationship was unequal, globalisation was perfectly acceptable because it was to the advantage of the developed countries. Now that China has "grown up" and commands more bargaining power, and even have pretensions to become the boss, globalisation is suddenly bad. China is acceptable as a subjugate, but not as an equal partner. Western governments suddenly start citing the number of jobs lost locally, but never once mentioning the profits that have been made by their companies and investors. They talk about the unfairness of trade deficit, where actual goods were imported in exchange for IOU notes that they now contemplate of not honouring.
So here lies the problem of globalisation. If it developed in the spirit of mutual benefit, it could have led to long lasting prosperity and global harmony. But it was conceived as a means to exploit the weaknesses of other nations, and this was surely doomed from the beginning.
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nigel southway May 14, 2020

This is resignation not affirmation by globalists…who will not admit that we have been on the wrong track with long supply chains fueled by unwise and unplanned multilateralization that supported liberalized trade.
- Jay Kay May 18, 2020
  
  Economists:
  
  - are not scientists, they are philosopher priests. Base experimental results just interfere with the aesthetic perfection of the hypothesis.
  
  - in all likelihood never grew up building model planes and rockets, because someone with that type of background develops an innate understanding of the limitations and foibles of the modelling/abstraction process, which is something our philosopher priest economists clearly lack.
  - nigel southway May 18, 2020
    
    So, this means engineers need to learn and practice economics?... just joking... i get it and agree.
    - Jay Kay May 19, 2020
      
      Having worked side by side with them on creating new commercial tech, I found that sadly even the hardest of sciences are not immune to being occupied by philosopher-priest warriors types who call themselves scientists.
      
      Even more sadly these priestly types were otherwise sterling individuals that were both talented and uncorrupted - just misguided as to their fundamental mission by dint of decades peer and institutional pressure.
      - nigel southway May 19, 2020
        
        true
        
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Patrice Horner, CFP, MBA May 14, 2020

Thank you Mohammed, Excellent as always. Has anyone connected the dots between the difficulty in obtaining PPE at the onset and the trade frustrations caused by Trump? Perhaps the crisis could have been minimized with a more diplomatic approach. Kind Regards.
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Patrice Horner, CFP, MBA May 14, 2020

Thank you Mohamed, Excellent as always. Has anyone connected the dots between the difficulty in obtaining PPE at the onset and the trade frustrations caused by Trump? Perhaps the crisis could have been minimized with a more diplomatic approach. Kind Regards.
- Jay Kay May 19, 2020
  
  In the midst of the Wuhan pandemic the Chinese Communist Party suspended Wuhan flights to other Chinese cities, whilst deliberately allowing Wuhan flights to international cities, thereby deliberately mass bombing the West with a lethal biological weapon.
  
  As a result and only to date, hundreds of thousands of Westerners have died an agonising death, tens of millions have lost their jobs, and Western economies have suffered trillions of dollars of damage.
  
  This was a sneak attack on the West using a mass biological weapon that is already two orders of magnitude more devastating than the sneak attack on Pearl Harbour. And the deaths and the costs are still escalating...
  
  Pearl Harbour begat Hiroshima and Nagasaki and the occupation of Japan as a response.
  
  Trump is yet to respond to the Chinese Communist Party biological sneak attack on the US and the West more generally. However when the response comes, and come it will, the result will be as emphatic and as unexpected as Hiroshima and Nagasaki.
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John James May 14, 2020

Dr. El-Erians presentation is well written. I would be interested to see a more mathematical/structural presentation of how this "deglobalization" would take place.
As I currently understand it, the developed world accounts for a major but declining share of consumption and a minor share of production(ex services).
The developed world is also demographically characterized by 1) most aged population, 2) chronic current account national deficits, 3) high social welfare spending and low and declining manufacturing production. They also represent approximately 10%-15% (and declining) of total global population. The opposite obtains for the rest of the world.
Given these facts, I am in a constant state of worry as to how to navigate, from an investment perspective, this terrain. It is difficult for me to see, in an increasingly commoditized, concentrated global economy how restrictive investment planning options placed by national governments will trump objective, private sector (and even SOE) financial/investment planning.
- Michael Hullevad May 14, 2020
  
  I fully agree! We will see a "new world" with more productiom based on much shorter supply lines,
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Alex Calfee May 14, 2020

Mohamed, I respect your optimistic opinion on this but it has been made pretty clear to any casual observer that the people driving globalization did so cynically. They sought to reduce exposure to higher regulatory regimes (environmental and labor) that layered cost on their operations. Their ultimate goal was not to reduce conflict or tighten the brotherhood of nations, but to increase the bottom line.

Globalization had positive impacts for two main groups: owners of capital and the destitute in the nations that attracted said capital. There are plenty of economic indicators that show everyone else ended up with a net negative outcome.
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Mirek Fatyga May 11, 2020

One cannot navigate well without a good map. A good map of the modern world seems to elude the establishment thinkers for reasons that, frankly, baffle me ever more.

One cannot understand the problems of the contemporary world without pondering consequences of the XXth Century population growth. And yet, the very fact of population growth, never mind the consequences of it, is hardly ever mentioned in the pages of this whole outfit, Project Syndicate, supposedly populated by the leading lights of politics and economics. Why would that be?

The population growth occurred primarily in the developing world, a side effect of rapid improvements in childhood mortality colliding with cultural imperatives still attuned to the old reality of ~50% mortality. The population of the whole globe nearly tripled in my lifetime. The consequences of this are quite straightforward and can be understood with a reasonably easy math: the United States, with ~4% of world population is still using ~20% of world oil production. To bring the multitudes to the US level of oil consumption one would need to roughly quadruple the world oil production. To bring them to the EU level, roughly double. And this is just one resource.

While supply chains can be surely shortened, and some are probably nonsensically long and complex, the aspirations of newly born multitudes cannot be squashed, particularly given the globalization of information flows which is unlikely to go away. The old hat trick of the developed world was to corrupt the poor countries, while at the same time loudly complain about their corruption and lecture them about virtues of the rule of law. Then, their resources could be extracted and used in the West, and all one had to do was to provide a refuge for corrupt rulers and their progenity when the time came. This strategy is wearing thin, as the primitives are unexpectedly learning and aspiring to keep some of their bounty for themselves. These aspirations could have been slowed down 20-30 years ago, though probably not indefinitely thwarted, but this was then ,Ross Perot had his moment. The horse is out of the barn. China added the whole US worth of consumers in the last 20 years, and they have another, cool, billion to go. And then there is India and all of Africa.

The only plausible solution to this is technological development, assuming that the solution does exist. The elites in the rich countries should have leveled with their populations long ago and explained to them that globalization reflects an inevitable process of equilibration of resource use and the only way out of the predicament is to innovate. The West needs to move away from fossil fuels, gradually, not because of non-existent climate crisis, but because there is not enough of them to go around. Say this to the young generation, as a challenge ,and they will understand. Much better than trying to scare them with chimeras of everything melting into the living hell ,which debases science and thus makes people ever more cynical and distrustful as the scientific case melts away instead of the arctic ice.

We need to start talking about scarcity and it's consequences, urgently. Otherwise demagogues will inevitably win. They do not need to be truthful, just sound plausible to win power. And, frankly, some of them may simply be deluded (calling Peter Navarro ...).
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Frans Verhagen May 11, 2020

This well-articulated position on a response to the three punch on globalization does not measure up to demands of new thinking and action during this pandemic, let alone the looming climate catastrophe. This time of deglobalization and systemic disruption of economies presents the opportunity for new thinking and action.

Notwithstanding the present trend of deglobalization we should be clear about the demands for a just and sustainable global governance system. An important component of such system is a 21st century quality of economies in the Global North and South that are embedded with businesses based on the triple-bottom line or sustainability principle, economies that are also distributive and regenerative. These economies should strive, each in their own way, to make emergency quantitative easing permanent and thus develop money-based financial systems away from the present debt-based financial systems.

Due to the enormous social and economic demands of the looming climate catastrophe political leaders notwithstanding the deglobalization trend should decide to transform the unjust, unsustainable, and therefore, unstable international monetary system by basing it on the monetary carbon standard of a specific tonnage of CO2e per person. The ethical, commercial, intellectual, ecological and strategic dimensions of such carbon-based international monetary system are seminally presented in Verhagen 2012"The Tierra Solution: Resolving the Climate Crisis through Monetary Transformation" (www.timun.net) and are being updated in its sequel “The Tierra Pathway”.
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Sy Pra May 11, 2020

Hi
Very well articulated and argued. Would be great to get clarity, perhaps via another piece, of how the issue of the global commons for which time is of essence- aka Climate Change can be addressed, please.
- anime enemy May 13, 2020
  
  Exactly, sy. This article would be more explicit has it analysed this paragraph.
  - Michael Hullevad May 14, 2020
    
    The solution is cheap energy that can out-compete the coalfired powerplants. We have to invest in nuclear solutions.
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