Globalization’s ongoing challenge

Are politics and aid—in lieu of free trade—to blame for the issues facing globalization today?

The short-term nature of election cycles coupled with tough tariffs and foreign subsidy programs are just some of the factors that have led to the globalization quandary, particularly in emerging markets. In this interview with McKinsey’s Rik Kirkland, global economist and author Dambisa Moyo discusses the current state of globalization and what can be done to better deliver on its promises.

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Interview transcript

I think that there are good reasons for people to feel aggrieved, and I think that a lot of people feel that globalization has not delivered on its promise to “lift all boats.” And therefore, in a nutshell, it is broken.

Broken promises

In order to think about whether or not globalization is broken, I think it’s important for us to remember what was promised around the Washington Consensus. And there were essentially four pillars of the Washington Consensus.

One was around trade—free trade of goods and services. Two, the free movement of capital across border capital flows. Number three was about immigration and the ability for free movement of people. And finally, the size of government. And for each of these, I would argue, we’ve seen a number of failures over time.

If we take trade and cross-border capital flows, they have an overarching governance system at the global level. So with trade, it’s the World Trade Organization. With capital flows, it’s the International Monetary Fund, the IMF. We actually never established an international immigration agency; that has actually always been within the purview of the nation-state.

If you look at trade and cross-border flows, what has happened in retrospect is that we actually never saw full globalization. We were supposed to get to a point where everyone—essentially through comparative advantage—was producing what they were best at producing.

But what we’ve seen is that governments have much more power than the international agencies. And essentially we’ve had a lot of trade barriers over the last multiple decades. Over the last year alone, according to Global Trade Alert, we’ve had 644 new tariffs.

So we essentially have had a situation where common culture policy and foreign subsidy programs have locked out goods and some services from the emerging-market countries, thus creating a class of winners and losers from the globalized system.

Free trade, not aid

What I’d like to do is walk you through a simple example. Governments sign up for the idea of trade being a good idea and globalization is fantastic. But they decide—because they’re trying to protect their local farmers, for example—to impose tariffs against this (for argument’s sake, take your pick of any) emerging-market country.

The problem is, as a substitute for the money that is lost to trade revenues for those countries, many international voices decided that the best way to sort of bridge that gap was to give those countries aid. I won’t get into the details of why aid might be problematic, but what has essentially happened is that, because those countries did not have the proceeds from trade, they were unable to invest in education, in health care, other public goods, national security, and infrastructure.

So we have seen, over time, an increase in both political and economic uncertainty, because many people in those countries no longer have access to opportunity. As you know, 90 percent of the world’s population lives in an emerging market. And for many countries, 80 to 85 percent of the economy is agriculture based. So it is a significant impact if there are trade barriers that do not allow for the sale of those goods.

You then end up in a situation where those countries that are losing revenue from the trade regime are starting to have political and economic uncertainty, potentially leading to a lot of violence. And you then see the massive immigration; we’ve seen a lot of economic but also political immigration across Europe in just the last few years.

Now, the response, ironically enough, is to say, “We’d better give more aid to these countries to help secure the system, wherever they’ve come from.” But there’s not a good analysis of what the original problem actually is.

‘It’s politics, stupid’

Essentially, the problem with globalization is a mismatch of the economic intergenerational aspects of economics versus the short-termism that we see in the political decision-making process. Put another way, politicians are basically very rationally courting and catering to their national electorates and will always very rationally want to protect their voters. But as a consequence, they can never have a global interest as the priority, because ultimately [issues] will be decided in terms of their political opportunities based on national agenda.

Although there are many reasons to pursue globalization, and I, myself, love the idea of globalization, I do believe it can lift all boats. The problem is, the only way that you can have effective globalization is if you have global institutions who oversee the aspects of the key pillars of globalization—trade, capital flows, and immigration.

Unfortunately, it’s very hard to see that kind of a regime, because that would effectively require national governments to cede some of their power. Now, how that could be done or whether it could be done: I think the European Union is one where power was ceded and, many people would argue, to not-great effect.

The problem with the economic discussion and public policy is that there’s no clear route out of the globalization quandary without really reforming the global governance environment. And so do these institutions exist? Yes, they do. But are they effective? No, they’re not, because they do not have the ability to make effective and authoritative decisions on these key pillars, and they constantly get usurped by national governments.

One of the big and obvious challenges around democracy is myopia—the fact that policy makers behave very rationally but within the confines of these short-term cycles [in the United States, elections are every two years]. We’re essentially trying to deal with and solve for very long-term economic problems that are intergenerational: education, healthcare, infrastructure. There is an implicit tendency for policy makers to want to kick the can down the road.

Now, I believe in democracy. I think the idea of one man, one vote is a laudable one, but I think that there have been clear challenges with the system, and I think it’s a responsibility for all of us to think about how we could reform and improve on democracy rather than assume it has reached a particular equilibrium.

About the author(s)

Rik Kirkland is the senior managing editor of McKinsey Publishing, based in McKinsey’s New York office. Dambisa Moyo is a global economist and author.

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