Globalization: Has it led to the rise of free trade or the rise of powerful economic agents?

Have we really seen a rise in free trade as globalization enveloped the farthest reaches of the world? Several empirical and anecdotal evidence point the other way.

Take China, for instance. In the last decade, no other country could boast of a much faster pace of economic growth than China. With its unequaled growth, you would think that business activity has been spreading to a broader swathe of its population. But has it? Just “how much more capitalist has China become in the last few years” ?

China Economics Blog, a good source-compendium of China-related articles, linked to this MIT paper a few months back. The general findings of the paper were:

- Many economists used output share of private sector as evidence that China's business environment became more liberal over time. Measured by output share, China's private sector has grown enormously since 1978. But output share is not an accurate measure of private sector policy because it is correlated with efficiency differentials between private-sector firms and state-owned enterprises (SOEs). During the 1989-1991 period when China cracked down on private sector, the output share of private firms still increased.

- A superior measure of policy evolution is capital allocation. By this measure the most liberal policy period, by far, was in the 1980s and in the 1990s the investment share by purely private sector businesses fell substantially. (The share only began to rise after 2002.)

- The changing investment share by the private sector suggests a development few Western academics have noticed - a substantial policy reversal in the 1990s. Survey and documentary evidence suggests that private access to finance was easier in the 1980s than in the 1990s and this was especially true in rural China.

- Evolution of capitalism in China is a function of a political balance between two Chinas - the entrepreneurial, market-driven rural China vis-à-vis the state-led urban China. In the 1980s, rural China gained the upper hand but in the 1990s, urban China gained the upper hand. Although China made notable progress in the 1990s in terms of FDI liberalization and reforms of SOEs, this book assigns greater weight to the rural developments in determining the overall character and the pace of China's transition to capitalism.

-Rural household income grew substantially faster in the liberal 1980s than in the illiberal 1990s. Also social performance deteriorated in the 1990s as well.

A similar phenomenon could be said to be happening in the developed nations. As much of the gains of globalization were increasingly sucked by the large multinational corporations, this came at the cost of the small-scale businesses.

Did we really see the trickling of economic opportunity to a greater multitude, or did we merely see the rise of large, powerful economic agents, who basically grew at the expense of the small?

Multinationals feeding on the carcasses of small business owners. Strong-state Government taking away the economic reins and draining the financial pipeline from the private sector. This environment can probably be illustrated with some analogy.

Business is war. As your enemies grow, so should you. As multinationals grew in power, developing nations without similar large-scale institutions adapted by instituting more powerful government. Now that powerful governments have the upper hand, multinationals from developed countries will fade onto the shadows of their own national governments, who are themselves becoming more powerful, and the economic war escalates to the next level.

This won’t probably end amorously.

Could this be the beginning of the end of nation-states?

Dani Rodrik is right in saying that the next phase in capitalism will entail a major change, and the change will mainly account for the increase of globalization.

In my view, that change, more than anything else, will be labor mobility.

Everything else in the world is mobile – capital, technology, products, entire businesses. But one crucial aspect of enterprise isn’t, and that’s people. This has resulted in a severely lopsided globalization process.

Myriad financial arbitrage are currently possible because any globalization initiative potentially increases prosperity in a particular country or sector, while causing social upheaval in another. Inequality arises because while businesses can take their money and technology anywhere in the world, their workers cannot follow suit, or counter with similar moves of their own. And not least, because the politics of nation-states are where the people’s will and sentiment are heard and played out, national politics has the potential to evolve into a force for counter-globalization and anti-international business sentiment.

Think about it. Much of economic policies formed at the national level could be interpreted as “beggar-thy-neighbor” at some level. A loose monetary policy in one country affects the capital allocation in another, and a tight policy determines trade policy in others. An aggressive fiscal program can trigger similar moves in others, or have unintended consequences on those unable to do so. Currency controls in one country affects consumption patterns in trading partners, while inflation targets in other countries affects employment and purchasing parity in still others.

All this is true because people cannot mitigate the effects of a relatively-more benign policy in one region by migrating to it, or mute the harsh consequences of a neighbour country’s (competing or trading partner) actions, by piling on to that country.

Countries currently compete to attract capital and technology, but not a lot also compete to attract labor.

Countries try to increase their earnings by increasing net exports. But taken on the whole, an increase in one country will have to result in a balancing increase in another’s imports. The country increasing its earnings will theoretically have more kitty that be divided among its populace, while the other country that loses will have less. The improved country meanwhile, does not have to worry about foreign people suddenly surging toward its borders seeking to join in its successful earnings initiative.

So we either start to see less globalization, or we will gradually start seeing borders coming down over the coming decades. The twenty first century could well go down in history as the era of decline of the nation-state.