Economics and politics - comment and analysis
23. January 2023 I Heiner Flassbeck - Friederike Spiecker I Countries and Regions, Economic Policy, Economic Theory, General Politics, Globalisation and Development

Globalisation à la carte?

(first published in German in “Freitag”, 20 January)

Globalisation has become the talk of the town. People no longer want to be so dependent, many say. In future, one cannot simply rely on the efficiency gains of globalisation, say others. It must be possible to produce all important products at home, most believe. Only in the case of raw materials that we do not have, politicians in industrialized countries argue, we would like to keep the markets open at all costs.

Globalisation à la carte, so to speak, is what people and politics in the industrialised countries want. After the total globalisation that the global North offered the global South in the 1990s, now selective globalisation, in which everyone is careful not to become too dependent.

One wonders according to which rules the selection should take place. Total openness, the principle of free markets, was simple. Selective openness, on the other hand, is complicated and there is no institution willing and able to moderate the negotiations on such a globalisation. In addition, there is the simple question of who should be the partners in selective globalisation. The developing countries have experienced that the free markets were by no means as beneficial for them as they had been promised from all sides.

Let us take a current example. In his first two terms in office (2003-2011), Brazilian President Lula da Silva had to experience that the openness of markets that was recommended by the North fell massively on his feet. With open capital markets, the Brazilian currency became the punching ball of speculators and appreciated (in real terms) so much over a period of ten years that Brazilian industry lost enormous ground in international competition. Current account deficits and unemployment were the result. The subsequent waves of devaluation came too late to provide Brazil with sufficient positive impulses through international trade. Instead, Brazil struggled with high rates of interest and inflation. This cocktail of disastrous macroeconomic conditions eventually prepared the ground for the right-wing government under Bolsonaro.

The second government under Lula da Silva spoke of a “currency war” at the time. If, during his visit to Brasilia a few weeks ago, the German president had brought Lula the willingness of the German government to work within the G7 and in Europe for a monetary framework in which speculation with currencies no longer has a chance, the warm handshake of congratulation for the third term would have been accompanied by substantial help.

But there is no thought of that. Germany and Europe are proud of their monetary union and the single market, but spare no thought for a sensible global financial order. The USA and Great Britain are strictly against any change because Wall Street and the City of London are making good money from speculation. In addition, the International Monetary Fund (IMF), on behalf of the USA and Europe, has imposed neoliberalism on developing countries on all continents as soon as a country got into trouble. Latin Americans and Africans can sing many songs about how IMF prescriptions regularly failed and led to the greatest political turmoils imaginable.

Free trade was a sham

Consequently, even “free” trade with open financial markets inviting speculation under the IMF regime is a sham for developing countries. Who can expect to find even one iota of willingness in the rest of the world to engage in selective trade in goods under the conditions of free capital markets, in which raw materials, of all things, are exempt from selection?

Globalisation á la carte will not be that easy. Germany in particular, with its enormously large export sector and its unjustifiably huge current account surpluses, is the proverbial elephant in the china shop. No one has more to lose if the fragile global system collapses. Those who want change must make constructive proposals that go a long way towards accommodating the developing countries, and not be solely concerned with their own advantage.

What does the world need?

Fifty years after the end of Bretton Woods, the world again needs a global economic and monetary system built on the recognition that trade and finance are inseparable. Companies that want to be successful in international trade must, not unlike at the national level, develop absolute advantages over their competitors. They must be cheaper – taking quality into account. The comparative cost advantages in international trade held up by economists for centuries are a chimera.

What is true for companies, however, is not true for countries. If many companies in a country are successful in terms of increasing productivity, then under reasonable economic conditions wages in that country must increase to such an extent that the productivity advantage no longer works in favour of the companies of that country in international comparisons. With higher productivity, unit labour costs then rise just as much as in other countries with lower productivity growth.

If wages rise at different rates in relation to domestic productivity between countries, inflation differentials arise that bring absolute advantages to entire countries, namely those with the lowest inflation rates. It is therefore imperative that the inflation differentials be balanced by the monetary system.

The currencies of countries with low inflation rates must appreciate and vice versa. Constant real exchange rates, i.e. constant competitive positions of countries, are the core of the solution to the problems of globalisation. Competition at the level of countries is exactly the opposite of what the world needs. The positions of companies can change in the same way as in a single market, even with constant real exchange rates, so that the benefits of competition are preserved without bankrupting entire societies and causing waves of emigration.

Consequently, the world needs a trading system complemented by a monetary system that ensures that no country has absolute advantages or disadvantages in the long run. Which means nothing other than that no country should have permanent current account deficits and none should have permanent current account surpluses. This is the only way to create a new beginning that relies on the integration of developing countries and on cooperation instead of confrontation.

Rivalry is fundamentally out of place

In general, the attitude of the industrialised countries towards the developing countries must change fundamentally. Rivalry is just as out of place as the natural antagonism of the North with the South, which comes up again and again in international organisations. There is no diplomat of the North who does not “know” that the developing countries are the antagonists of his own country. These are forms of intellectual colonialism that urgently need to be stopped.

The rivalry with China, which has just been discovered by German foreign policy, also does not fit in at all with a cooperative strategy. Those who carelessly declare China a rival and talk about a rules-based order with the Northern “value partners” have already missed the chance to talk to the developing countries at eye level.

This also and especially applies to climate cooperation. The results of the recent World Climate Conference in Egypt prove how little the West is willing to change its trade model in favour of the poorer parts of the world and thus reduce its instruments of domination, although this is in the long-term interest of its future generations as well.

The establishment of a fund to compensate for climate-related damages in countries particularly vulnerable to the climate crisis speaks volumes, beyond its non-binding funding and unclear distribution policy. What has not been established is a fund to make green technologies and corresponding know-how available worldwide at low cost and thus prevent or at least reduce potential damage from the outset. On top of that, this would put the producers of fossil raw materials under pressure from falling demand and make it more difficult to develop and exploit new fossil deposits.

Why is this not happening? In the West, people dream of earning so well from technological leadership in climate-friendly production that they can maintain the prosperity they are used to while managing the structural change towards climate neutrality. So you don’t want to spread this knowledge cheaply or even for free, but at the same time you expect poorer countries to commit to binding CO2 reduction targets. Why should developing countries, which are by no means the main cause of climate change, but certainly the main sufferers, agree to such an almost colonialist straitjacket? They would have to buy the expensive Western technology with their cheap labour, which they are unlikely to be able to do to a sufficient extent for climate protection.

A truly successful international climate protection policy, i.e. one that goes beyond symbolic politics and morally green vest, will be the litmus test for a fair globalisation in the future. The West is called upon to follow up its warm words in support of democracy, human rights and climate protection with deeds.