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Beware Of Declarations Portending Russia’s Struggle Is The Finish Of Globalization

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Beware Of Declarations Portending Russia’s Struggle Is The Finish Of Globalization

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Russia’s President Vladimir Putin with his Defense Minister and Navy Commander in Chief. ALEXEY … [+] NIKOLSKY

AFP via Getty Images

It is hard to miss the headlines proclaiming that Vladimir Putin’s invasion of Ukraine and the subsequent imposition by the West of massive sanctions on Moscow mark the close of the era of economic globalization. Some go so far to posit this is the end of capitalism.

If only Russia, let alone all of its former Soviet satellites that currently constitute the Commonwealth of Independent States (CIS), were so economically important—although, of course, that may well be Mr. Putin’s fantasy. Nor will globalization’s termination (when, or if, it does come) be that discrete or likely to be driven by a single event. More than two centuries ago, globalization’s advent was anything but sudden, and it was engendered by a multitude of pulses.

Indeed, globalization is an evolutionary process: the structure of the world’s markets as well as their economic participants—businesses, workers, consumers and governments—are constantly transforming, being driven by many factors, frequently interacting with each other, including demography, innovation, political movements, policies, climatic conditions, natural disasters, and wars.

Since globalization is constantly changing, the proponents arguing that Mr. Putin’s Ukrainian war is globalization’s death knell must believe that the discrete shock stemming from his actions is so deep and sweeping so as to fundamentally rupture a longstanding fixture of the global economy. This is quite a dubious proposition.

Arguably the shock stemming from the COVID pandemic, which brought to the fore vulnerabilities, structural complexity, outdated pricing mechanisms and the growing role of automation and advanced technologies in global supply chains, is having—and will still have—a more fundamental impact on changes in globalization.

Today’s declarations about globalization’s demise also stem from the belief that the West’s responses to Russia will propel the establishment of a formidable alliance between Xi Jinping and Putin such that China and Russia together will counter the advanced democracies and form an integrated economic bloc of state-dominate socialist states.

Such a presumption, however, reveals a greatly misinformed, if not simplistic, view of Beijing’s calculus of the risks and opportunities stemming from China’s deep financial, supply chain, R&D and educational relationships with the West. While there are certainly strains in these relationships, especially with respect to China’s ability to capture the greatest value of pathbreaking R&D performed in the advanced democracies, decoupling them will not be easy, costless nor accomplished quickly.

The notion that such a Sino-Russo axis can be fashioned, let alone become durable and provide symmetrical benefits for both sides, also reflects naivete about Mr. Xi’s enormous ambitions and trenchant cunning to further the advance of China itself in multiple realms across the globe. It not far-fetched to believe that Xi would actually relish the demise of Mr. Putin, potentially paving the way for Beijing to infiltrate Russia and the other CIS countries just south of China. Xi is hardly unknown as someone who is masterful at playing both sides of the table.

There is also an assumption held by some of those forecasting that a China-Russia linkage will draw the curtain on globalization that Russia’s Ukraine incursion has emboldened China to invade Taiwan. That is certainly a valid issue to ponder. But the realization of such a scenario is by no means as clearcut as some might believe.

In part this is because the genesis and duration of tensions and military conflict between Beijing and Taipei is arguably much more complex than between Russia and Ukraine. It certainly has a longer history, dating back 70 years. The antagonism between the two has also almost always occupied a prominent place on the agenda of many nations and in the operations and structure of numerous global institutions. Suffice it to say, a China-Taiwan military confrontation would be a very high stakes enterprise for the two countries as well as the world community on many levels.

One presumes both the Chinese and Taiwanese—and presumably the U.S. and others—recognize the analogies with Russia’s war in Ukraine are limited. Still, it would be naïve to rule out that the odds of cross-strait military actions are now somewhat more top of mind than before.

In this regard it worth noting two points. First, it is unlikely that the somewhere in the thinking in Washington, thought was not given to how Beijing would perceive the suddenness and sweeping nature of the application by the US and its allies of sanctions on Russia. Second, that Taipei was one of the few non-Western nations to join in the imposition of sanctions on Ukraine was surely not a decision taken lightly.

What Is Globalization? Whether one is a supporter or detractor of globalization (and capitalism for that matter), the widely accepted understanding of the term “globalization” refers to the cross-border growth of economic activity.

At the most basic level, globalization is defined along a number of dimensions, such as where sales and purchases (or “consumption,” as we economist are wont to say) of goods or services takes place (involving importation and/or exporting); the location of production of goods and services, utilizing invested capital (such as machinery, computers, etc.) and employing workers; and how, where and by what means do goods and services reach their point of final usage or consumption (such as by ship, air or the internet).

From this perspective, the current declarations that the era of globalization has now ended as a result Russia’s military invasion, coupled with the subsequent imposition by the West of sanctions on Russian financial institutions and Mr. Putin’s cronies, as well as Western bans on travel by such persons and the boycotting of Russian energy seem out of place. After all, globalization generally does not refer to foreign policy, military, or political matters. This is not to suggest these matters are not connected in some fashion to the nature and patterns of economic activity. But it is too easy to oversimplify the importance of such linkages.

Is Russia an Economically Significant Enough Market? Perhaps the notion that Putin’s intrusion into Ukraine and the West’s subsequent sanctions reflect globalization’s end because there is a belief that Russia is a significant enough player in the world economy such that its retrenchment from international markets (whether by its own or others’ doing) would fundamentally halt (or alter) globalization. It is not.

The size of the country’s population has been on a fairly steady decline: as of January 2022, the number of births in Russia now stands at its lowest level in two decades; over the same period Russian mortality has increased by more than 15 percent. The demographic statistics are not the sign of a growing, healthy—and formidable—economic power.

How does the overall prosperity of the Russian populace stack up on a global basis? Russian GDP per capita in nominal terms in 2021 ranked 64th worldwide. In real terms, that is, accounting for inflation, 54 countries registered a higher level of GDP per capita than Russia in 2021.

In terms of Russia’s economic prowess in international markets, its flows of merchandise trade with other nations in 2020 were 46 percent of GDP, which marked a significant decline from 68 percent of GDP twenty years earlier.

What do the data show as to how attractive is Russia as an investment destination by foreign entities? At the time of the break-up of the Soviet Union, inflows of foreign direct investment (FDI) to Russia measured just 0.5 percent of GDP. Following the first decade of economic reforms (just prior to Putin’s ascendancy), that ratio increased by a factor 9—to 4.5 percent. Yet by 2020, after two decades of Putin’s grip on the economy and his failure to diversify the country away from being a natural resources producer—the core challenge Russia (still) faces to realize sustained growth and attract investment—it decreased back to 0.6 percent.

Perhaps one of the more telling signs recently that Russia lacks global economic significance is the rapid voluntary departure of several hundred Western firms from the market at the onset of the country’s invasion of Ukraine even before sanctions were imposed. To be sure, heightened reputational risk back in their home markets and the imminent application of sanctions on Russian banks would make conducting local business very difficult. However, it is not unheard of in such situations for businesses to attempt to press their home governments to seek carve-outs from sanctions. But this would only occur if a market in question were intrinsically commercially important. That such arguments were not even advanced in capitals suggests foreign investors do not place a premium on operating in Russia’s economy.

Could Globalization End? The history of the world economy shows it is in a constant state of flux. As every high school college student knows, for centuries the economic standing of nations has risen and fallen—akin to the kids’ game of “king of the hill.” Think the Han, Mauryan, Persian, Roman, and British empires, among others. To this end, as many of us have written, globalization, itself, has gone through phases. (I’ve argued earlier in this space that we are in the midst of “Globalization 3.0”, although some term this “Globalization 4.0”.) How to term globalization is apparently in the eye of the beholder.

If there comes a time when globalization ends, it is highly unlikely to occur in one fell swoop. If anything, as it has over time, its nature will continue to evolve. There are currently several centers of gravity among the advanced democracies. Within them, some nations are more prone to continue a rapid pace of globalization than others. In this regard, as has been the case in the past, the contours of globalization among the West may well become more graduated since they are different states.

In contrast, the trajectory taken by China—the single largest country in the world, with 1.4 billion people—will be more consequential in terms of how the nature of globalization continues to evolve since it is a single unit. My own view, about which I’ve written several times in this space, is China’s path forward in terms of maintaining robust long-term economic growth is quite problematic. This is due to the inherent contradictions in Beijing’s economic strategy of a “socialist market economy” (which is of course an oxymoron).

India, the second largest country, with a population of 1.3 billion people is a democracy. Yet despite being blessed with enormous natural assets, including a prime location straddling two key oceans, and a population, a portion of which is highly educated in science and technology by world standards, its economic record reflects a governance structure that continues hamstring consistently high levels of growth. In a word, for decades India continues to punch significantly below its weight.

One scenario for the future of globalization is not its end, but that the world economy will continue its trend toward further formation of two or more dominant economic blocs: one comprised of the advanced democracies, the core of which would be the G7, the EU, other like-minded states; and the other being a Sino-dominated cluster. Notwithstanding the other countries choosing to belong to one or the other bloc, they will occupy a “middle ground.” Indeed, one can imagine the blocs characterized by some degree of porosity.

This paradigm raises several critical issues.

Presumably competition will take place between the two blocs. But will it be more or less intense than the status quo ante?

Moreover, it would be expected that the members within each bloc would have stronger incentives than is currently the case to integrate their markets, through free trade agreements, investment treaties, and R&D agreements.

Arguably the two most profound challenges will center around just how bifurcated will these blocs be, and how would such bifurcation affect overall economic growth, innovation and prosperity of the world, especially if the cost savings and production efficiencies arising from extant economies of scale and scope are diminished by the creation of “duplication of facilities.”

These challenges center on several issues.

Will the structure and operations of supply chains also be bifurcated, and if so, how would such a change impact efficiency and prices both at the upstream end (factories) and at the downstream end (delivery to end-users and customers)?

Needless to say, dismantling/re-routing the various nodes along supply chains could be very costly, especially if new production facilities, warehousing, and transport networks need to be built, and time intensive. Planning and executing how such transitions would take place smoothly will not be a trivial exercise.

Similar considerations arise if there is greater bifurcation of the global R&D enterprise that already exists. This cuts several ways.

First, while collaboration in R&D among the advanced democracies at present is more robust than it is among the states within the China-centric space, significant structural, institutional and policy changes are sorely needed. That the objectives driving advanced democracies’ pursuit of such collaboration is to promote “science diplomacy” in basic R&D rather that forging ways to capitalize on collectively harnessing applied R&D efforts, says it all. This is the inverse of China’s approach. Indeed, China is a master of capturing the commercial value of the basic (and some applied) R&D performed by the advanced democracies.

Second, there is certainly an appealing political economy argument for the decoupling of R&D activities and developing advances in technology between the two blocs. One must recognize, however, that by doing so, both blocs could be relinquishing the benefits obtained by economies of scale and scope on the factory floor. Of course, that may well be a price that is willing to be paid.

The question, however, is does this mean the world as a whole will be utilizing two different types of technology standards at the consumer level? While there are many examples that illustrate the point, recall battle between Betamax versus VHS. This is yet another area where economies of scale will have a direct—and very powerful effect—on the bottom line, resulting in a natural drive for global technological standards. Even more profoundly it will exert an influence on the fundamental dynamics of the nature and trajectory of innovation, which, after all is a key engine of the economic growth and prosperity of nations.

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