Phases of globalisation usually go hand-in-hand with financial imbalances that are a direct result of the globalisation process, with growing interdependence between nations seeking to offset surplus demand for investment in some countries with surplus savings generated by others. Traditionally, developed countries have generated surplus domestic savings, recycled by funding the huge investment requirements of countries playing economic catch-up. This international financial “intermediation” has been facilitated by the liberalisation of capital flows, which drive both globalisation and development.
In the nineteenth century, for example, the New World countries (the United States, Australia, Argentina, Russia, etc.) benefited from huge swathes of unexploited land but lacked labour and capital, while the industrialised nations of the “Old World” (Europe) found themselves in the opposite situation. As such, the “golden age of finance” that preceded the First World War was conducive to rapid growth in capital flows, just as international trade was developing with the emergence of the first multinational firms.
During this period, peripheral countries sought to attract savings from core countries by adopting a series of monetary, institutional and fiscal reforms. The main lenders were the three big creditors, the United Kingdom, Germany and France, some small European countries (Belgium, the Netherlands and Switzerland) and the United States, though the latter maintained a net deficit.
This first golden age of globalisation came to a halt at the beginning of the twentieth century, as countries began to move back to a protectionist stance. The inter-war period was marked by increasing conflict and trade reprisals, in the end triggering the great 1930s trade war against a backdrop of financial crisis and economic depression.
After the end of the Second World War, the United States and Europe looked for a way to reorganise global trade to prevent a return to the protectionist policies that had lain behind the collapse of global trade and the worsening crisis of the 1930s. There then emerged a period of genuine international cooperation destined to introduce widespread and lasting free trade, with the GATT (1947) and its successor, the WTO (1995), laying down the ground rules for this new phase of globalisation, which received a boost when China joined the WTO (2001).
Thanks to trade liberalisation, the growing integration of emerging economies into international trade and the development of global value chains, the global economy experienced a long period of prosperity. However, this growth was also fuelled by significant financial imbalances, with some high levels of debt in some countries (mainly the United States) mirrored by surplus savings in others (primarily China). This unusual configuration, with the world’s leading economic power building up a recurring and growing external deficit, mostly financed by surpluses generated by emerging Asian countries, meant this new phase of globalisation was no ordinary period. However, this somewhat perverted system had its own consistency, fuelling a virtuous cycle between buoyant US consumption financed by issuing dollars on the one hand and an export-based Asian growth model on the other, with Asian – and mainly Chinese – savings closing the loop by painlessly financing US dissavings.
This approach based on imbalances fell apart after the 2008 financial crisis broke out. Global financial imbalances have since normalised, and present no imminent danger to global financial stability. Vigilance nevertheless remains the order of the day.
With all due respect to Donald Trump, US fiscal stimulus will in all likelihood deepen the US external deficit, with foreign savings once again being called upon to cheaply finance corporate tax giveaways and the US consumer lifestyle. Furthermore, with the dollar appreciating and US interest rates rising, this redirection of capital flows into safer and more lucrative dollar assets comes at the expense of emerging countries, where the first signs of cracks in the financial edifice are beginning to appear. More importantly, though, the protectionist tendencies we all thought had been relegated to the rank of ancient relics have now resurfaced and are threatening the post-war world order, raising fears of a blind return to old ways, as per Karl Marx’s caustic phrase: “History always repeats itself, first as tragedy, then as farce”.
Isabelle Job, Group Chief Economist at Credit Agricole
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