Thursday, 28 May 2009

The end of globalization

Outside the Box
John Mangun
Business Mirror

It will never be the same way again, ever. Now what do we do?

At the end of World War II in 1945, the United States was virtually the only country in the world that had its manufacturing base intact. Europe was destroyed. Asia was in pieces. And despite its having emerged from the war relatively unscathed, the USA did not have the capacity to produce goods for the world and the world did not have the money to buy those goods.

The USA spent the equivalent of billions in 2009 dollars rebuilding the economies of Europe and Japan. However, the size and strength of the US economy was so great in comparison that the USA would completely dominate and control the global economy for two decades.

In the 1960s, Japan realized that its prosperity could not depend on its own domestic consumption to grow that economy at a pace that would bring the Japanese standard of living to US levels. It began to concentrate on manufacturing goods that could compete in the US consumer market at a price advantage, if not a quality equal. Thus began the era of globalization, where one nation depended on another for its market and that second nation depended on the first for its goods and supplies.

As goods flowed into the USA from Japan, money and wealth flowed out of the USA to Japan. Other nations over the following years followed the Japanese model: South Korea, Taiwan, Western Europe, smaller Asian nations, and finally China.

At first, the outflow of wealth from the USA was offset by selling its agricultural products and other raw materials as well as its high-technology goods. But by the end of the 1960s, an irreversible economic trend started. The USA was now buying more from the world than the world was buying from the USA. As the followers of Japan came into the economic picture, the US trade deficit accelerated and grew, with 1985 being the year that China came onboard the globalization train and the US trade deficit began its climb to the sky.

By the early 1990s, the trade deficit was so large and out of control that the only way that the USA could afford to buy its imported goods, which now included essential and strategic items like autos, steel and clothes, was to borrow the money. US consumers and, therefore, the government added trillions of dollars of debt to buy the goods from overseas.

The Chinese, because of their massive exports to the USA, had in its treasury most of the dollars that they had earned from doing business with the USA. They began loaning money to the USA in order that the USA would continue to buy Chinese exports. Japan too was a large lender to the USA.

But in 2008, the cycle came to an end. The amount of debt carried by the USA and paying off that debt began dragging on the growth of the US economy. The final nail in the coffin was the rapid rise in oil prices, not the spike in 2009 to $150, but the first jump to the historic $100 level.

Until then, the USA was the center of the world’s economic growth model, the globalization model.

Trade globalization and financial globalization are the two sides of the same coin and inseparable. The economic globalization model that the world has lived in for the last 50 years is over, never to return in the same form. What do we do now?

The Philippines will continue in its own unique way through outsourcing and exporting labor (both on the edge of the globalization model) for perhaps another decade. But those, too, will fade away.

The exporting nations that depended on the USA are scrambling and rushing to quickly develop their domestic consumption to offset the economic losses from reduced exports to the USA. This will take several years. But in the long run, this will be better for the individual countries and for the global economy.

The next president of the Philippines will supervise and preside over the most fundamental economic changes in a generation. It will take a person of unusual foresight and understanding to position the Philippines for the changes that are coming. At this point, no potential candidate has yet shown any inclination or wisdom above “business as usual.” The way most sound as they position themselves for 2010 is that they are still preparing the Philippines for 1998.

Our “captains of industry” sound little better. Most look to China as the growth engine for their companies. Forget it. With few exceptions, nations will keep their wealth at home to develop their domestic industries to supply their domestic markets. The exceptions will be like China buying raw-material, primarily mineral, assets around the world for use in its domestic economy.

In many ways, the Philippines, as I have said so many times before, is positioned differently than most nations. But unless our political and business leaders start thinking about a changed and different world that we will face in the very near future, we will be engulfed by an economic tsunami, the likes of which the world has not experienced for many decades.

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