Douglas Irwin on the past and future of globalisation
Populism is due to too little globalisation, not too much
So this finally happened, four years later than originally planned, but well worth the wait. Professor Douglas Irwin gave a tour de force presentation on the past and future of globalisation for the H W Arndt Lecture at ANU on Tuesday, followed by the Richard Snape Lecture for the Productivity Commission in Melbourne on Wednesday. Here is the video from the Arndt lecture:
As Doug notes, those of us who came of age in the 1980s and 1990s have lived through an extraordinary era of global poverty reduction and rising living standards due in no small part to globalisation. By 2018, more than half the world, 3.8 billion people, were middle class or rich instead of poor.
But we also stand at a potential inflection point, with the pace of globalisation having slowed over the last 25 years and with the global economy fragmenting due to geopolitical tensions. Free trade no longer has a political constituency in Washington. The Biden administration has delivered near perfect continuity with the Trump administration on trade policy. A second Trump administration, with its proposed across-the-board 10% tariff on imports and 60% tariff on imports from China, threatens a renewed global trade war, not to mention one of the the biggest tax increases in US history.
It is sometimes claimed that globalisation has given rise to a populist backlash and that ‘neo-liberalism’ was responsible for the election of Donald Trump in 2016 and potentially again in 2024. But Doug’s work shows that the timing does not fit (my interpretation, not necessarily Doug’s). The pace of globalisation was fastest in the 1980s and 1990s. Globalisation slowed from around 2000 and has flat-lined on many dimensions since the global financial crisis, as shown here on the KOF Globalisation Index.
If there was to be a populist backlash against globalisation, we should have seen it well before 2016. You could argue that this was just a long lag, but as I noted in my paper for USSC marking the 20th anniversary of China’s accession to the WTO, the adjustment to that shock was over well before 2016.
I have suggested an alternative thesis, that the outbreak of populism around 2016 reflects too little globalisation rather than too much. The loss of economic dynamism and the disappointment of expectations for growth in incomes due to a slower pace of globalisation is a plausible explanation for the outbreak of populism, not least because the timing is a much better fit.
As early as 1997, scholars like Dani Rodrik were questioning whether globalisation had gone too far. The protests against the World Trade Organization Ministerial Conference in Seattle in 1999 were an early manifestation of anti-globalisation sentiment. The civil society campaign against the OECD’s Multilateral Agreement on Investment, also in the late 1990s, was another manifestation. The mid-2000s were perhaps the high point of pro-globalisation sentiment, as exemplified by two books published in 2004: Martin Wolf’s Why Globalization Works, and Jagdish Bhagwati’s In Defence of Globalization. However, as their somewhat defensive sounding titles suggest, these books were written largely in response to globalisation’s critics. Martin Wolf would not write that book now. These publications perfectly timed the early to mid-2000s peak in globalisation.
In 2007, Mark Thirlwell prophetically observed that ‘some of the world’s leading economies are having second thoughts about globalisation.’ These second thoughts were occasioned as much by globalisation’s successes as its failures, in particular, the rise of China and India. Thirlwell noted that ‘the possibility that the country which has done the most to promote the current global economy [the United States] may rethink its stance towards globalisation would represent a big change in the international economic environment.’ Mark’s 2007 speculation is now our lived experience.
It is interesting to consider the cyclical backdrop to the US election in 2016. There was a mini-global recession in the run-up to the election, evident in this chart of world trade volumes and global industrial production:
World trade volumes rose only 0.4% in the year to October 2016. The 2015-16 mini-recession shows up even more dramatically in the Kilian index, derived from a panel of dollar-denominated global bulk dry cargo shipping rates that serve as a proxy for the volume of shipping in global industrial commodity markets.
Tight Fed policy meant that the US was undershooting its inflation target and there was a large gap between expected and actual nominal GDP. The Mercatus nominal GDP gap was -2.3% in Q4 2016. Tight Fed policy is a contractionary shock for the global economy.
The cyclical backdrop to the 2024 election should be more favourable to the incumbent President. Indeed, global trade was coming out of a slump in the final months of 2023. But cyclical strength has not translated into Biden’s approval numbers, most likely because of the associated inflation. Biden’s current approval numbers are equal to some of Trump’s worst readings:
One of the many risks associated with a second Trump Presidency is a downward spiral in which the economic consequences of even more protectionist policies feed greater political populism and authoritarianism. One of Doug’s themes was the parallels with the 1930s, drawing in part on Heinz Arndt’s Economic Lessons of the 1930s. As suggested in this space previously, my fear is that the current moment more closely resembles 1914, when a world economy that was in some ways even more integrated than our own stood on the edge of the abyss.
ICYMI
The Treasury is running an EOI process for appointments to the RBA’s Monetary Policy and Governance Boards under the RBA Reforms bill. Get your applications in before 24 March.
Substack has introduced a new direct messaging feature, which I have turned on for paid subscribers only.
Let people build up to go green: How to insulate old homes without spending billions.
Welcome to the winter of the wonk: Society has given up on policy and gone back to politics.
Britain’s interwar apartment boom: A decade of Art Deco densification.
Lever those equity longs: