Time for a globalisation rethink?

Globalisation creates winners and losers, but in recent decades those that have been disadvantaged by globalisation have largely been ignored. It is now widely recognised that the majority of US households have experienced falling real incomes over the last 10 years, and we know that the income distribution has become increasingly skewed towards the richest in society. The Occupy movement in 2011 and Thomas Piketty’s Capital in the Twenty-First Century, published in 2013, were two important catalysts for raising the public discussion on inequality.

This is fundamentally important because high levels of income inequality damage the wellbeing of societies. As one of the biggest challenges to social cohesion, income inequality has a large impact on measures of health and wellbeing.

Globalisation also unleashes powerful financial forces. For example, the emergence of China as an important part of the world economy had the effect of exporting deflation to the developed world, contributing to lower interest rates, lower wages, substantial debt accumulation and, eventually, the financial crisis.

Furthermore, under globalisation, multinational corporations have gained power at the expense of sovereign governments. They have exploited advantages of scale on a global stage, permitting tax avoidance and indirectly affecting the ability of nations to educate their people and maintain infrastructure.

Successive waves of technological advances, accelerated by international trade, have brought substantial benefits, but also rendered many jobs redundant. Today, the rapid development of artificial intelligence raises at least the possibility of mass unemployment in the decades ahead.

Much can be done to curb the excesses of globalisation while still harnessing its benefits and this may be our best hope of averting a more disruptive populist backlash.

Policy changes in each of the following areas could bring some much-needed moderation:

• Democracy: Politicians will need to be more attuned to the needs and grievances of their constituents and be more flexible when responding to challenges to the status quo.
• Education: Politicians will need to rethink education systems for a world in which technological developments rapidly change the skills required for individuals to prosper in the workplace.
• Regulation: Ten years after the financial crisis, some are already calling for deregulation. History suggests that effective regulation of the financial system is an essential contributor to economic stability.

The above doesn’t amount to a dismantling of globalisation. Rather, it is a call for politicians to consider seriously policies that might help relieve some of the resentment that has built up after decades of neoliberal policies.

The case against rethinking globalisation

Certainly the world faces economic and political challenges. However, globalisation is being used as a convenient scapegoat by populist politicians. It is not the source of our problems but a force for good.

A historical view shows a doubling of global trade relative to GDP (a measure of the extent of globalisation) between 1870 and 1913. Between the two world wars, we had a period of de-globalisation – and the Great Depression.

The historical evidence suggests that inter-country trade reduces political tensions and lessens the likelihood of major wars.

Moreover, globalisation has done great good by elevating living standards for many of the poorest in the world. The World Bank states that, since 1850, the rate of global poverty has dropped from 83 per cent of the world’s population to 11 per cent. Meanwhile, life expectancy has doubled in many countries.

Technology, not global trade, is the main cause of job losses in developed countries. For example, participation in the US job market has dropped over the past 50 years for people with less education. This decline took place steadily throughout the period, even though global trade has picked up significantly only during the last 25 years. It follows that globalisation is not the primary cause of those job losses.

The imposition of tariffs, and especially trade wars, would exacerbate inequality and reduce growth. The most vulnerable populations would suffer the most, as those on low-incomes typically rely most heavily on cheap imports to meet their needs. Also, curbs on immigration tend to come with increased persecution of minorities. Overall, the result would be greater levels of inequality and lower global growth.

Implications for investors

Whether the world ends up taking steps to mitigate globalisation’s deleterious effects, or globalisation continues on its current course, there are several prescriptions investors can take to safeguard their portfolios in an environment of heightened political uncertainty:

• Diversify: While diversification is always wise, uncertain times make it even more important to ensure that portfolios are diversified at an asset class, region and individual security level.
• Prepare for inflation: Following decades of relatively low and stable inflation across the developed world, investors may need to adjust to an environment in which inflation is once again a risk to portfolios.
• Prepare for volatility: The potential for trade wars creates the risk of a more volatile and much less benign backdrop for equity markets. Stress testing and scenario analysis will be valuable tools in assessing risk exposures.
• Be flexible: When markets and policies change significantly, investors with a more dynamic approach will be better able to respond to emerging risks and potential opportunities.

Phil Edwards is head of research, Europe, at Mercer.