In the context of G20, let us scrutinise selected aspects at its epicentre, revealed by changing international trade patterns. First, using merchandise exports statistics, we define globalisation and its evolution and course. Second, we note a striking change in the composition and direction of trade among selected countries. Third, we point to a commensurate shift in regional trade balances. Accordingly, fourth, we can assess the role of G20 despite dampened expectations.
Over 50 years, we witnessed an exponential rise in merchandise exports (Diagram 1, right axis). Yet, the global crisis resulted in a 20-25 per cent fall in world exports in 2008-09 alone, a manifestation of a finally unsustainable heterodox consumption-driven economic stance in many advanced economies, reflected in stubbornly negative household savings.
Looking to the antecedents of the crisis, Diagram 1 (left axis) breaks down growth in the global trade index. The bottom portion shows how much trade would have grown with GDP at constant prices or, if fixed at the 1960 share of GDP. The middle portion adds in the effect of prices. The top portion then shows the additional growth in trade over this period, reflecting trade’s increasing share in world GDP. Without this, trade would have been 45 per cent lower than that actually experienced in 2008. It is this portion that reflects globalisation. Many have blamed it not only for its inability to control depletion of global non-renewable resources but also for failing to provide appropriate signals for the self-regulation of the international marketplace.
So, how did trade grow over real economic growth and inflation? First is an economic rationale — cost advantages of large-scale specialisation in particular countries resulting in greater supply than domestic demand. Second were complementary technological improvements in communication and transport (air shipment, containerisation), increasing use of billing and tracing through the Internet, to name a few. Third were reductions in trade barriers through the WTO that reduced tariffs and quotas, and customs unions such as Asean, the EU and Nafta. Fourth, globalisation accelerated with escalating consumer demand and a growing taste for high turnover and product differentiation. This consumption-linked aspect became simply unsustainable. Just as an individual household cannot dissave in the long run, so must economies at the macro level eventually be constrained by dissaving.
Diagram 2 breaks down net trade (exports minus imports as a percentage of total trade) for selected countries. The space above zero shows net export sectors, while below zero are net import sectors. Indicators for 1980 reveal China and India exporting low value-added raw materials and agriculture, with the UK and the US having the advantage in services and manufacturing. The change in comparative advantage by 2008 is equally clear: China developed a strong advantage in manufacturing and is now a net importer of raw materials, while India gained advantage in commercial services. Indeed, between goods and services, services grew steadily in relative terms, from 15 per cent to 21 per cent between 1980 and 2009. Though still small in global share, India nevertheless contributed to this changing pattern, with information technology comprising a major component.
Changes in regional trade balances in Diagram 3 reveal how North America — primarily the US — moved into deficit over recent decades, while Asia moved towards trade surpluses. The changed trade balances are symptomatic of the much-maligned “global imbalances”, cited as one of the key indicators of the need for global economic rebalancing.
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The IMF has historically argued against over-consumption. In the early annals of the IMF, its executive board did not desist from reining in post-War Europe from excessive consumption. In the 1970-80s, Latin American countries faced opprobrium that, in the 1990s, East Asian economies did not escape either. In the 2000s, the US and Europe, the historical rule-setters, themselves fell into unsustainable consumption, suffering its deleterious impact on economic growth. Reflecting the changed world economic order, G8 expanded into G20 for future global economic and financial dialogue, and revisions of IMF quotas could not be stalled any longer.
A huge socio-economic change is needed to get back to the basic habit of household savings in advanced economies where untargeted subsidies in various sectors and in multiple forms have curbed incentives to work or save, and have resulted in heavy expenditure burdens on government. This is where the need for rebalancing is most apt. Households, government and private businesses comprise an economy. They cannot all be in deficit, filling it perennially from abroad. That is unsustainable in the long run. It also leaves an unjust debt burden on posterity. Recognising this, more advanced countries are of late embracing tough, unpopular belt-tightening measures.
Thus, it is pertinent to ask what G20 can achieve to usher in less, yet better, global consumption that could form the anchor for a new exports road map from developing countries, rather than exclusively emphasising relative exchange rates or pushing artificial trade barriers. Perspicacity and reform in demand from advanced economies would naturally result in a realistic exports trajectory from developing nations, that could: (i) slow the rush; (ii) allow space for more intelligent use of depletable resources; (iii) minimise environmental degradation; (iv) enhance internationally comparable labour standards; and (v) minimise the use of child or indentured labour. G20 has included development issues in its Seoul Summit. To end on a cautionary note, it is necessary on the part of the Sherpas to ensure that crucial objectives are not lost in a creeping incrementalism of agenda items, as was evidenced in revisions in the IMF’s agenda after earlier global crises.
All views expressed are exclusively those of the author