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Is digitization the brand new globalization?

Economic

Is digitization the brand new globalization?

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CHONGQING, CHINA – OCTOBER 21: An employee walks in an exhibition hall for the new Chongqing type … [+] Internet of Things (IoT) Big Data Service Platform for Digital Transportation in a branch of Chongqing City Construction Investment on October 21, 2020 in Chongqing, China. (Photo by Chen Chao / China News Service via Getty Images)

China News Service via Getty Images

While the rest of you struggled under gray skies and rain, I spent the end of last week under the blue skies and fresh Atlantic breeze of Porto, Portugal. Before I lose half of my audience to envy, I can say that I worked at a company event on the subject of the uncertain future of globalization.

Given the chaotic supply chains and the still delicate trade relations between the US and China, the future of globalization is something that depends heavily on the companies embarking on the post-Covid recovery.

While many of the people I met felt that the image of a deflated globe (see the logo above and the cover of ‘The Leveling’) was an overly pessimistic representation of the state of the world economy, my current roadmap is that we We are on the right path away from globalization in the period 1990-2020 (fall of communism to the fall of Hong Kong) and towards a new multipolar world order, which has largely yet to be established.

Deflated world

To give this phase or path a name, I suggest “Interregnum”, an English term that denotes a pause between periods of government (especially between the end of the reign of Charles I and Charles II’s accession to the throne 60 – very relevant for, by the way the levelers).

Today the Interregnum is in the middle stage of a paradigm shift (cf. Thomas Kuhn’s Structure of Scientific Revolutions) and is characterized by noise, uncertainty and multiple disputes between “old” and “new” (finance is a good example with the emergence of “DeFi” or more decentralized Financing).

In the Interregnum there are no new leaders (think USA, Russia and China) and the firm “rules of the game” of the new world order have not yet been established (there is no binding agreement on the rules of engagement for cyber warfare for example).

Tied together

This is not an optimistic sounding diagnosis, but a realistic one that should also challenge the view that everything is fine in our world.

Also confusing is that in the context of globalization (an intertwined, interconnected, and interdependent world where nations are willing to sacrifice some sovereignty for better trade relations) there are several emerging trends that could, but do, be seen as a return to globalization In fact, you don’t.

One of these is the upswing in the business cycle, which has been massively supported by government spending and the central banks of the industrialized countries. Indeed, an interesting snippet of big US bank profit calls is that households are cash rich and this should boost consumer spending in the second half of next year. On the other hand, I suspect that China is now on the verge of a recession.

Economy

More generally, my position is that an increase in economic activity is not the same as a resumption of globalization. Globalization is a very specific pattern of activity and while many of the drivers of globalization such as the flow of people and ideas are pending, other, different patterns emerge.

In general, globalization and business cycles (see NBER’s Business Cycles page) have a very strange relationship. Before this wave of globalization began, the world had a regular rhythm of short business cycles. In contrast, the era of globalization was marked by the two longest expansion phases in modern economic history (1991-2001, 2009-2020), interrupted by the Dot.com bubble and the global financial crisis.

This can be partly explained by the fact that the positive effects of globalization – China exports deflation, emerging economies, increased global consumption and the international disintermediation of financial risks – all helped to dampen and sustain periods of economic expansion.

Another positive trend to watch is the acceleration of the digital economy, which is exciting and disruptive from an investment perspective. The temptation to say that the advent of the digital economy is a revival of globalization, but I have a feeling that the impact of digitization will be largely confined to industries and nation states.

6G

Look at the point someone said to me of the hundreds of thousands of Indian “tele-doctors” – they would disrupt the Indian health system instead of saying the British health system. Also think of the huge amounts of data that will be created by applying 5G and then 6G to our cars – much of it will be used and stored locally (at least in Europe) rather than global.

However, the notion that technology is changing the nature of economic activity is very important and provides clues as to what will replace globalization. For corporations, globalization meant that they could optimize their activities through a networked network of activities – a factory in Mexico, fed by research and development in Zurich from a headquarters in Berlin, inspired by marketers in Barcelona and selling to consumers in North America.

The effective end of cheap labor, the rise of protectionism as a political issue, and advances in robotics likely mean that the “out-of-town” trend is slowing. What is more interesting is what consumers and employees – largely “coming home” – experience, who feel more free, that they can also work on the outskirts of the city of their choice and can consume more services online (from legal advice to virtual trying on Clothing).

I’m not sure what long-term effects this can have, but I suspect that in Europe at least the flows of people will be better distributed between second and third cities (Bordeaux, Porto, Munich, Malmö for example) and that there will be more attention too local political issues (a sub-trend that I have picked up is the increase in applications that make participating in local democracy easier and more innovative – see, for example, Polyteia, Citizen Lab, Civocracy and Fluicity).

This is probably a hopeful way to end this chapter of the debate on the future of globalization, or what’s next.

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