Jacek Białek
Ministry of Infrastructure and Development
Adam Oleksiuk
Assistant Professor, University of Warmia and Mazury (Poland)
Keywords: global economy, forecasts, global capital, Gross Domestic Product, growth, world trade, globalisation, International Monetary Fund.
Abstract: The following article deals with the changes taking place in the global economy.
Our analysis discusses the developments in the main global centers of economic growth, such as the European Union, the United States, China, India, Brazil and Russia. On the basis of the available evidence we present selected macroeconomic indicators, in particular those that we consider the most important ones - namely Gross Domestic Product and Gross Domestic Product per capita. We follow by presenting short-term and mid-term forecasts of economic growth.
Inflows of global capital in the world economy
Five years ago George W. Bush gathered the leaders of the largest rich and developing countries in Washington for the first summit of the G20. Facing the worst financial crisis since the Great Depression, those leaders promised not to retreat into economic isolationism, at the same time proclaiming their commitment to an open global economy rejecting protectionism2.
They promises were fulfilled only partially though. Although there was no return to the extreme protectionism of the 1930s, the world economy has actually become less open.
Following two decades characterized by increasingly free movements of people, capital and goods across borders, new barriers started to appear, though this time erected with certain
“gates”. National authorities of various countries have become more selective when it comes to trade contacts, capital inflows and the freedom of their own companies to conduct business operations abroad3.
Though, in general, all countries stick –at least officially - to the the principles of inter-national trade and investment, trying to benefit from globalisation, inter-national governments are
1A publikáció az Európai Unió támogatásával, az Európai Szociális Alap társfinanszírozásával készült, a „Társadalmi konfliktusok – Társadalmi jól-lét és biztonság – Versenyképesség és társadalmi fejlődés” TÁMOP-4.2.2. A-11/1/KONV-2012-0069 azonosító számú projekt keretében.
The publication was co-financed by the EU and the European Social Fund. It is prepared in the framework of TÁMOP-4.2.2.A-11/1/KONV-2012-0069 project titled: “Social Conflicts – Social Well-being and Security – Competitiveness and Social Development”.
2 The Economist: The gated globe. Special report: The world economy.
http://www.economist.com/news/special-report/21587384-forward-march-globalisation-has-paused-financial-crisis-giving-way Oct 12th 2013
3 Ibidem
24 Jacek Bialek–Adam Oleksiuk: Changes in the Global Economy – Short and Mid-term Forecasts
also looking for ways to avoid the “pitfalls” of globalization” – such as volatility of capital flows or uncontrolled growth of imports.
Under such circumstance one might assert that globalisation has definitely slowed, if not stopped altogether. For example it’s telling that the share of world exports in the global GDP, rose steadily from 1986 to 2008, but since than has remained flat. Global capital flows, shrunk from over $11 trillion in 2007 to barely a third of that figure in 2012 and cross-border direct investment are lower compared to their 2007 peak.
To a large extent the above-mentioned developments are related to the business cycle.
With the recent crisis in the rich world leading to the declining business confidence and consequently adversely affecting international investment flows. On the other hand there is an important element of deliberate, discretionary policy actions on the part of individual governments. For example, since access to cross-border lending allowed the USA and certain southern European countries to post increasing current-account deficits for a quite long time, banks are now being encouraged to stimulate domestic lending, raise capital and ring-fence foreign units4.
FIGURE 1
Capital inflows in global economy
Though leaders are satisfied to have avoided protectionism following the eruption of the crisis – and their good mood seems to find justification in conventional measures of trade openness - the World Trade Organisation (WTO) data show that since 2008 the impact of explicit import restrictions has been almost negligible. However, this “official” point of view is contradicted by the prevalence of either of hidden protectionism observed under the guise of export promotion or industrial policy. According to The Economist, India constitutes vivid
4 Ibidem.
Jacek Bialek–Adam Oleksiuk: Changes in the Global Economy – Short and Mid-term Forecasts 25
example of such policy expedients by imposing local-content requirements on government purchases of ICT and of solar-power equipment. Brazil, where Petrobras (the state oil company) has been in the past compelled to increase the share of equipment purchased from local suppliers, has been tightening the said requirements even more. At the same time there has been imposition (or its threat) by the US and Europe of tariffs on Chinese solar panels (justified with the allegations of their producers being supported by the Chinese authorities) – even though the West is offering extensive support to its own suppliers of “green energy”5.
Despite being previously viewed as somewhat a thing of the past, capital controls have regained importance as a tool to stem both inflows of “undesirable” capital and outflows of hot money. Of course, governments are very “diplomatic” in justifying such moves – for example Brazilian authorities, while imposing a tax on capital inflows in 2009-10, took efforts to emphasise that not all foreign investment was unwelcome, differentiating between
“productive” investments (i.a. in infrastructure) and “speculative” ones.
Commentators are not saying that the trade liberalization has been completely aban-doned. However its focus had shifted from the multilateral WTO to regional and bilateral pacts. The failure of WTO’s Doha trade talks, before Lehman Brothers collapse in 2008, was caused by India and China pressure for safeguards against agricultural imports that wasn’t acceptable to the US, which subsequently focused on “regional integration” joining talks on the so-called Trans-Pacific Partnership, which also includes Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Moreover, the US President indicated that the TPP is the sort of agreement that China should aspire to join6.
At the same time foreign direct investment are also witnessing efforts at liberalisation, however, the UN Commission for Trade and Development pointed out to increasing restrictions in that area. For example in December 2012 Canadian authorities cleared the purchase of a Canadian sand-oil firm by a Chinese state-owned enterprise, suggesting at the same time that this was the last purchase by Chinese unit7.
More “restricitive” approach, than one prevailing prior to the crisis, is being also applied to the management of cross-border flows of people. Though borders have not been closed, the criteria for admitting immigrants have become more strenuous, with many countries simultaneously making entry easier for scarce highly skilled workers and for entrepreneurs.
Global leaders, including President Barack Obama, perceive globalisation as a process that should be influenced by national authorities towards assuring the pursuit of broader objective. In his opinion other countries should raise their standards of labour, environmental and intellectual-property protection, thereby allowing US firms to compete on equal footing and as the commentators of the Economist put it “pay decent middle-class wages once again”.
After the tragic collapse of the clothing factory in Bangladesh in April of 2013, which caused the death of over 1,000 people, the US suspended America’s preferential tariffs on numerous imports from the former country, calling for the improvement in workers’ rights8.
5 Ibidem.
6 Ibidem.
7 Ibidem.
8 Ibidem.
26 Jacek Bialek–Adam Oleksiuk: Changes in the Global Economy – Short and Mid-term Forecasts
Looking at the patterns of international trade and of economic exchanges in general, one can discern a visible pattern being formed, namely expansion of national authorities’
intervention in the flow of money and goods, more regionalisation of trade (with countries expanding their economic ties with “like-minded” neighbours, as well as increasing tensions caused by growing importance of self-interest over the will of international co-operation).
This phenomena taken together, form- as certain commentators call it a new, “gated kind of globalization”.
Such an approach to globalisation is characteristic of state capitalism, which allowed China and the other big emerging markets (India, Brazil and Russia) to navigate the recent crisis more effectively than the developed countries managed to do. Perceiving their approach to globalization (and to development in general) as superior to the “Washington consensus”
whose sway prevailed before 2008, leaders of such countries do not notice, however, that the system espoused by them isn’t itself free of structural flaws. For example China’s, state-owned enterprises and state-directed lending have “siphoned” credit from the private sector causing a property bubble, while in case of India and Brazil, insufficient infrastructural investments led to rising inflation and to sharp growth slowdown.
However, identifying the flows in the “gated” approach to globalization espoused by many emerging market countries is not tantamount to overlooking the obvious weaknesses that existed in the developed countries before the crisis. One of those was excessive reliance on the self-regulating power of the markets, which resulted in “staggering volumes of highly leveraged and opaque cross-border exposures”. The absence of barriers allowed subsequently the crisis to spread instantly from the US to Europe, with the resultant shift of sizeable parts of public opinion towards anti-globalisation stance9.
Currently, even the staunchest proponents of liberalism, such as experts writing for The Economist, started expressing opinions that certain constraints on global finance can have their merit. They relate to the limits placed historically on banks’ foreign-currency borrowing, by South Korea authorities as as a solution which decreases those banks’ risk of failure in case of adverse foreign exchange movements. On the other hand one shouldn’t pretend that the “gated” approach to globalisation is not devoid of risks and hidden costs. Since policymakers are not capable of avoiding mistakes when trying to separate “good” capital from the “bad” one, they can, while trying to stimulate exports and innovation, reward entrenched interests. The free movement of capital before the crisis was instrumental in
“linking” willing capital to the best investment opportunities, and at the same time lowering prices for consumers and promoting competition. In the view of many authors interference with this process reduces given country’s growth potential, and should be avoided, despite the loftiest justification behind such actions.10
9 Ibidem.
10 Ibidem.
Jacek Bialek–Adam Oleksiuk: Changes in the Global Economy – Short and Mid-term Forecasts 27