A decade after the collapse of Lehman Brothers, the world economy is back on shaky ground.
Tariff wars are making headlines but the underlying problem is a failure to tackle the imbalances and inequities that led to the crisis in the first place.
Since 2008, leading central banks have pumped trillions of dollars into the global economy. The big commercial banks at the centre of the crisis have recapitalised and financial markets have rebounded; government spending, which initially helped stabilise the global economy after the crisis, has been squeezed; and wages have stagnated. This economic mix has failed to generate robust recoveries in advanced economies, and with debt levels higher than ever and income gaps widening, more and more people feel anxious about future prospects. The arc of politics has bent accordingly.
Emerging economies were also hit by financial shockwaves but recovered more quickly, declaring themselves decoupled from the problems of the advanced world. In reality, much of their recovery was dependent on the liquidity splurge in advanced economies, triggering a borrowing spree, particularly by the corporate sector, as investors sacrificed caution in search of yield.
Though advanced economies have not done enough individually or together to rebalance the global economy, the worry now is that normalising monetary policy could send shockwaves through capital and currency markets in developing countries. The damage is already apparent in some emerging economies but there are many others in a vulnerable position. Mitigating the problem is likely to be all the more difficult given the failure of post-crisis reforms.
The financial crisis revealed the difficulties for policy makers when banks become “too big to fail” but in our hyperglobalised world, the accumulation of concentrated economic power is not confined to financial markets. Global trade is dominated by big firms, including through their organisation and control of global value chains. The spread of these chains contributed to a very rapid growth of trade from the mid-1990s up to the financial crisis, with developing countries seeing the fastest growth, including trading more with each other.
Participation in these chains seemed to promise a path to higher value-added tasks and more diversified economies. This has rarely happened, and where it has, notably in the case of China, the policies that made it possible are now being presented as a source of disruption to the trading system, requiring reforms to the World Trade Organisation to ensure other developing countries cannot follow suit.
Moreover, as less of the value created has been retained in the fabrication links in these chains, rents have flowed to pre- and post-production activities, with the gains skewed in favour of the lead firms thanks to a mixture of increased market concentration and control of intangible assets. As a result, the profits of larger firms, particularly those operating internationally, are hitting all-time highs as the share going to wages declines. And when international corporations are (on paper) making more money in Luxembourg and the Bahamas than in China and Germany, people instinctively recognize that they are playing a rigged game in an ever more unequal world.
With big multinationals skimming the economic cream, many developing countries are putting their faith in disruptive digital technologies, hoping the widespread use of data intelligence will strengthen development prospects. It may well be. However, monopolisation is, if anything, an even bigger threat in the digital economy than in the analogue economy. In particular, super platforms have been able, through strengthened intellectual property rights, first-move advantages and sheer market power, to establish a monopolistic hold over data that allows them to create super profits and to close down the possibility of newcomers entering the field. Developing countries are particularly vulnerable on both fronts.
Active policy initiatives combining targeted industrial policies, tailored financing mechanisms and regulatory measures, including support for data localisation, will be essential along with south-south cooperation to ensure international agreements preserve policy space.
The uncomfortable truth of our hyperglobalised world is that footloose finance plus unequal trade plus unaccountable corporations are posing challenges for policy makers everywhere. But neither a retreat to nostalgic nationalism nor a doubling down on support for “free trade” provide the right response.
In this world, deploying the big tariff guns will do little to correct the macroeconomic imbalances that lie behind the heightened anxiety of depressed northern communities or to break the Medici vicious circle of corporate political capture and rent-seeking behaviour. Equally, calls for extending free trade will simply provide ideological cover for a world dominated by large, footloose corporations.
where free trade agreements, while promising a level playing field and more inclusive outcomes, have curtailed policy space for developing countries and cut away protections for working people and small businesses, even as they have carved out more space for predatory international firms to boost their profits.
Reviving multilateralism will only happen if trust can be restored to the system. That will require rules for managing trade that can support commitments to full employment and rising wages, regulations for curtailing predatory corporate behaviour and guarantees of sufficient policy space to ensure countries can integrate into the global economy without compromising sustainable development goals. So far, too much of the talk about reforming the system is moving in the wrong direction.
Richard Kozul-Wright, Director of the Division on Globalisation and Development Strategies, UNCTAD.