The Unintended Consequences of Globalization | Prof G Markets

It's a pleasure to be on with you.

You know, in the 1990s after the Soviet Union fell apart, the US became the dominant power in every respect. Economic, military, financial. We are now in a position where economic power at least is somewhat more evenly distributed with China and many other emerging market economies, you know, beginning to play quite an important role in the world economy. So as an economist, one's natural instinct is to think that competition is usually a good thing. It generates discipline, efficiency, and stability. So I was going to write a book about how we might just be in a volatile period of transition to a new equilibrium where things would be more stable again. And I was going to write about all the forces that would take us back towards this new equilibrium. Unfortunately, as I started thinking about each of these forces that I had in mind, it became apparent to me that they may be leading to instability rather than stability. So that became the defining theme of the book: that economics, domestic politics, and geopolitics are stuck in this negative feedback loop, which means they're sort of bringing out the worst in each other. And one simple example comes from globalization. You know, globalization used to be seen as a positive-sum game where countries could benefit mutually from trade, and that would be an offset to what is intrinsically the zero-sum game of geopolitics, where one country can gain influence only at the expense of another. But now even globalization has become seen as a zero-sum game. So it isn't offsetting the zero-sum game of geopolitics. And worse, some of the negative dynamics of globalization have started infecting domestic politics, not just in the US but in many other countries. So that's the doom loop we are stuck in now.

So my book came out a couple of weeks after Davos, but I was at Davos and got to talk about the book. And the reaction I got at the panels and closed-door meetings where I talked about the findings of the book was that it seemed to be a book for the moment. Of course, it had been written a long time before that. In fact, I should tell you that the first draft of the book was completed in October 2024, just before the November elections. And I had thought the book seemed a little too dark. So I thought, you know, let's wait for the elections and maybe rethink some part of the book. But of course, everything that has happened since November 2024 has sort of validated the thesis of the book, and that's brought us to this pass where, as you pointed out, you know, one of the themes of the book has sort of been validated by everything that has happened, including in the lead-up to and what happened at Davos, which is that instability has become the norm in the world order. And of course, globalization is only one of the forces I talk about, but there is a sense that while globalization worked very well at the aggregate level, it certainly pulled millions of people out of poverty in countries like China and India. It helped those countries and many other emerging market economies rise to middle-income status. But within countries, especially in countries like the US, the benefits were not evenly distributed, and it created this very disaffected class. Now that part of the story is sort of well known. But what is interesting is that, in my view, has created this negative feedback loop where populist politicians, or false populists as I refer to them in my book, can start vilifying the other as the cause of displacement of workers from jobs and so on. And what do I mean by the other? It could be whatever the politician feels gets traction in the voters' mind. The other could be, you know, the political and economic elites. It could be China. It could be immigrants. And why do these have so much traction? These attempts to pull in the politics of resentment, which is a phrase I use in the book. You know, the notion that the benefits of something like globalization go to the political and economic elites is certainly very prevalent. But what is interesting is that there is this additional layer that people who feel left out feel they're also left out of opportunity, and that political and economic elites can basically capture the political system so that it works even more in their favor. If you look at regulatory policy in the US, tax policies, that basically means that those who are benefiting from globalization get even more of the spoils, while those who are left out feel they don't even have an opportunity to clamber up the economic ladder once again. So in that sense, globalization affects domestic politics. In fact, I'd say it infects domestic politics, which in turn has an implication for how the US deals with the rest of the world, as Trump is doing.

No, I think what is the problem is that globalization worked very well on the aggregate. But there were two things that we did not pay enough attention to. One was distribution of benefits within each country and whether there were adequate safety nets in place to catch those who fell and give them a sense that they had opportunity to clamber back up the economic ladder. Now, in a market economy, it is natural that some industries do well, others decline. Some firms do well, others don't do so well. But the sense that the system is stacked against you and the only way you can reform it is by blowing it up, which was basically Trump's message, got a lot of resonance. The second issue is related to the rules of the game. You know, there was a sense that every country could benefit from globalization if there was a commonly accepted set of rules. But it turns out that while some countries like the US by and large played by the rules, there were others like China that took advantage of the rules. So essentially, China got access to export markets around the world but did not reciprocate by providing access to its own markets. And the interesting thing, how this came to a head in Davos, is that, you know, Trump was talking about receding from globalization and basically pushing other countries away from the US through tariff barriers and other ways of pushing aside long-standing alliances. China tried to play the adult in the room. You know, China wanted to make the case that it has become the defender of the rules-based order, of multilateralism, of globalization. The problem is not many countries want to buy that story because China right now, the second largest economy in the world, is requiring demand from the rest of the world to pull its economy along. Last year, China recorded a 1.2 trillion trade surplus. So, China's economy now has become reliant on other countries for its own growth. So, I think Mark Carney's speech actually pointed out two very important things. Number one, the rest of the world other than the US and China has to settle in for a period where instability is the norm. And second, the rest of the world has to do whatever it can to circle the wagons because it now faces these two very unsavory alternatives: the US, which is no longer seen as a trustworthy or reliable ally, and China, which wants to bring countries into its embrace but has its own problems and is not well trusted.

So the US economy, Scott, is remarkable. You know, the economists think that uncertainty, volatility of policies should hold back growth, especially because that affects investment. But the US has accomplished one thing that no other major advanced or emerging market economy has done in the post-COVID period, which is generate tremendous productivity growth. And when you have very good productivity growth, that makes a lot of things square up. That means that you can have decent growth, decent employment growth, although that seems to be slowing down a bit right now. You can keep inflation somewhat restrained even at a time when from Washington there are no clear signals about policy. Tariffs are potentially adding pressure on businesses, adding to cost and so on. So that fundamental dynamism of the US economy is certainly holding together. We see that in economic performance. We see that in financial markets. And of course, it is a relative perspective that is important here as well because the US economy looks much better, even though there are some weaknesses, relative to most of the countries. China, as I said, is growing in a very unbalanced fashion. India, it is true, is registering pretty good growth right now, but the rest of the world, especially advanced economies in Europe, Japan, the United Kingdom, are in a shambles. The one concern I have about the US is that things look very good on the surface. Whether you look at GDP growth, labor market performance, financial market indicators, under the surface, if you take the doom loop thesis seriously, there are a lot of tensions building up that I think are really fraying the social fabric.

I think the reality is that if you look at government expenditures, you know, interest expenditures on government debt have been rising and they're sucking money away from more productive investments. So going back to my discussion of productivity, that really is a crucial issue. You know, we don't quite know why productivity in the US is doing so well. I mean, we have some guesses. AI may be an important part of it. Maybe the deregulation that we've seen over the last year is an important part of it. So if we can generate this sort of dynamism, so that if you look at debt relative to GDP, that number doesn't grow too fast, then we are okay. But the difficulty is that that number has been growing over time. So there is a possibility that at one time domestic investors and also foreign investors say, we've had enough of this, and that's going to significantly affect growth because right now it's pulling in a lot of savings and that is not going to productive growth-building elements of the economy. So it is a real fragility. The US, because it still has the dominant currency in the world, the dollar, has a lot more leeway than any other economy would. But surely this is going to have an effect, negative in terms of growth, and potentially somewhat more, you know, cataclysmic effect if we reach a point where all of a sudden there is no escaping from this debt.