Globalization 2.0 and the Rise of the Rest

International economic conferences like the one I attended in Rio a few weeks ago can be a little tedious, when experts debate their latest econometric models.   Yet, I sat up and listened intently when an IMF official remarked, almost as an aside, that the world’s emerging economies would account for 48 percent of global GDP this year.   That means that by 2013 or so, developing countries will produce a majority of the world’s output.   Since the 1980s, globalization has proceeded largely along the lines of American capitalism.   These developments herald the beginning of Globalization 2.0, which will present entirely new challenges to the American economy. 

Experts will quibble over the numbers.  The IMF used “purchasing power parity (PPP)” to produce its numbers, adjusting each country’s official GDP data for its relative cost of living before converting it into US dollars.   However, the same pattern holds if we measure each country’s GDP simply in U.S. dollars at current exchange rates.  By that measure, the share of global output coming from the advanced economies – that’s us, plus Western and Northern Europe, Canada, Japan and Australia -- has fallen from more than three-quarters a decade ago to somewhere between 60 and 65 percent today.   Most of that decline has come out of the economic hide of Europe and Japan.  Still, our ability to shape globalization in our own economic image -- from opening up everyone else’s borders to U.S. investors and strictly protecting intellectual property rights, to the dollar’s role as the world’s reserve currency – grows weaker, year by year.

The evidence is all around us.  China and India scuttled the Doha multilateral trade round, an outcome unimaginable a decade ago when they and most developing nations were much more willing to accept our judgments about the global economy.   From Latin America to Africa and parts of Asia, the recent efforts of the international “Financial Action Task Force” to crack down on money laundering and terrorist financing have been openly flouted.   And the international financial system’s rules for dealing with sovereign debt defaults, which for decades ensured generally fair compensation for foreign lenders to developing nations, have been openly mocked and discarded by such countries as Argentina and Ecuador.  If those nations’ approach were to spread in Europe’s festering sovereign debt crisis – still a remote prospect -- it would destabilize German and French banks with awful consequences for the United States, and dampen future foreign funding for poorer developing nations.  

No country can roll back this kind of global economic development.  Experts expect China and India alone to account for 40 percent of worldwide growth over the next several years – that used to be our role – with other emerging economies accounting for another 30 percent.   Chinese, Indian and Brazilian multinationals will contest with our own for global market shares, and use their home field advantages to good effect – for them.  And on the model of the purchase of IBM’s PC division by the Chinese firm Lenovo, emerging market multinationals will begin to claim a real share of our own domestic markets by buying up our companies.   

We have our own advantages, especially in developing and applying new technologies, materials and production processes; adopting new ways of financing, marketing and distributing goods and services; and coming up with new ways to manage the workplace and organize a business.  But the rise of the developing world will inescapably intensify the dark side of Globalization 1.0, especially pressures on job creation and wages.  U.S. job losses from direct off-shoring could become less of a problem, since the new prosperity and rapid modernization of developing economies drive up their wages and other costs.   But the squeeze on job creation and wages that we’ve seen for the past decade, as intense global competition collides with fast-rising health care and other costs for U.S. employers, almost certainly will become more fierce.   

The policy imperative here is to reduce the cost of creating new jobs.  We can start right now by cutting the employer’s side of the payroll tax.  And so long as the economy remains weak, we shouldn’t try to replace those revenues.  As we recover, we can replace the foregone revenues from lower payroll taxes through a new, carbon-based energy fee, a tax shift with the extra benefits of driving greater energy efficiency and addressing climate change.  A second step we can take to address the impact of Globalization 2.0 on American jobs would involve expanding and strengthening the cost-saving provisions of the President’s health care reforms.  Under the new model of globalization as under the old one, the inescapable fact is that we  simply cannot restore strong job creation until we slow the rate of increase in medical insurance costs for both businesses and the rest of us.