Consequences of a non-Western globalization

Blockchains, artificial intelligence and quantum computing, among other breakthrough innovations, will create a brave new world of higher total factor productivity and faster economic growth, or so say their advertisers. And a good thing it would be because long-term trends suggest the global economy is going in the polar opposite direction.??

According to the latest data from the International Monetary Fund (IMF), the 10-year moving average rate of world’s real GDP growth slowed to 3% in 2023, after the peak of 4.2% in 2008, right before the Global Financial Crisis (GFC).1 To be sure, there are a few aggregation problems in measuring transnational performances, the most complex being the calculation of the weight of each economy in the total monetary value of all finished goods and services worldwide. Oftentimes overvaluation and undervaluation plague market exchange rates, thus leading to overestimation or underestimation of countries’ contributions, while corrections by means of purchasing power parity methods are usually controversial. Therefore, it is instructive to employ alternative estimation processes that avoid this problem and draw other useful inferences.??

The IMF’s World Economic Outlook database compiles macroeconomic statistics of 196 nations. The calculation of the median real GDP growth rate of all countries in their own currencies every year produce results that, over the long haul, draw a trend line similar to that obtained by using weighed averages (Chart I). There are, however, two key differences. First, according to the alternative methodology, the 10-year rate of global economic growth slowed more abruptly than indicated by the traditional metric, to 2.7% since 2021, after having peaked at 4.3% before the GFC. Quite possibly the weaker performance of late results from the fact that the currencies of the two largest economies on earth – United States and China – are currently overvalued (15% and 13%, respectively, as per estimates based on the Bank for International Settlements’ database of effective exchange rates),2 which overstates their contribution to activity worldwide in the conventional yardstick. In itself, that is a major finding, whose potential consequences are of first order importance: a depreciation of the U.S. dollar and the Chinese yuan to help correct their overvaluation should send shock waves through markets.??

Second, the median approach makes it possible to measure the discrepancy of economic growth rates, for instance by calculating the standard deviation in the sample. The main conclusion here is that the Great Convergence is over: global dispersion is no longer trending lower. On the contrary, divergences across countries are increasing, thus reversing a trend of 20 years. Counterintuitively, dissimilarity is becoming greater in Advanced Economies (Chart II), not in Emerging Markets, even though the latter are still growing significantly faster than the former. What factors could explain that? A different kind of globalization, it turns out, is very likely the driving force behind such oddities.

The body of references investigating the links among endogenous changes, adverse or favorable shocks, and long-term output growth is extensive. A recent and intriguing study strongly suggests that the forces that have powered global prosperity since the early 1990s have weakened.3 Improvements in human capital, labor force increase, gross fixed capital formation, and total factor productivity all decelerated. Some of these changes are a direct result of secular trends, population aging being a particularly relevant one, but a significant majority of them are the effect of new sort of globalization. To be sure, the interdependence of the world’s economies, cultures, and ecosystems marches on, however it no longer follows Western tenets. Large nations such as China, India and Russia are following an agenda of their own, which push other countries to gravitate towards a multipolar international distribution of power.?

In this novel environment, the signs of involution are visible. Among other evidence, international trade flows became more erratic, whereas gross foreign direct investment is sharply lower than it was up to the GFC (-66%; Chart III). With its main engines sputtering, global potential economic growth is falling. The above-mentioned research of the World Bank estimates its real rate at 2.6% p.a. during 2011-21, roughly identical to the number resulting from the median estimation process described earlier. While the weakening is widespread, it affects relatively more Advanced Economies (nearly all of them) than Emerging Markets (about three-fifths), and this discrepancy may explain the recent patterns of dispersion.?

A general reassessment of economic activities with a focus on national security is a glaring outcome of the non-Western globalization. But then that reevaluation goes well beyond high tech industries, which are the subject of most media stories. As an enlightening example, there is the case of a very basic need. Foodstuff is perhaps the best-known face of Agribusiness, a truly global activity. This industry consists of crop and livestock production, aquaculture, fisheries and forestry for food and non-food products, as well as the processing, warehousing, and distribution of such goods or their derivatives. The estimated value-added of the combined businesses was worth 12% of world’s GDP, or U.S. $12 trillion, in 2022. In particular, the planet’s food balance became problematic in a context of rising geopolitical risks. Of the six main geographies, two – Africa and Oceania – are at best self-sufficient in terms of local supply and consumption, two – Asia and North America – are major importers, and the remaining two – Europe and, above all, Latin America – must feed the billions of people outstanding (Chart IV). More investment in local production – i.e. re-shoring – can mitigate but not change this configuration, which signifies stiff competition among importers to secure deals with net exporters in that critical area.?

1 World Economic Outlook database https://www.imf.org/en/Publications/WEO.??

2 Bank for International Settlements https://data.bis.org/topics/EER/.??

3 “Kose, M. A. and Ohnsorge, F. (2024). Falling Long-Term Growth Prospects: Trends, Expectations, and Policies. World Bank: Washington, DC. https://hdl.handle.net/10986/39497.??

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