KWR International Advisor #12 December 2001

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Since the raucous 1999 meeting of the World Trade Organization in Seattle, we have grown accustomed to the violent disruption of international gatherings of elected politicians, bankers and private investors. All of this has taken place under the banner of the "anti-globalization" movement. Of course, there is no coherent position represented by the thousands of protesters. Their agendas vary, but all view themselves more or less against "globalization". In reality, globalization is a code word. For some it simply stands for anti-American, for others anti-poverty, some believe it means anti-trade or anti-coal, anti-nuclear energy, or anti-petroleum. As so many grassroots movements before them the anti-globalization forces only articulate the many things they are against without providing or proposing workable alternatives. The fuzziness of the anti-globalization movement itself is partially a function of the fuzziness of the term globalization. It is also partially intended to give refuge to disgruntled and bored members of generations X and Y.

Even a fragmented grassroots movement usually carries some message that has been overlooked by the political establishment. In reaction to such movement and to protect its own position, the establishment usually picks up some of the ideas of the movement, takes ownership and hence undermines its medium-term impact. The world has done so in abundance since the WTO meeting three years ago. As a matter of fact, some claim that the World Bank and its President James Wolfensohn have bent over backwards to accommodate each and every one of the protesters. Some even believe the World Bank has become the resident apologist for the undemocratic means with which some of these groups are trying to force their minority view on the world’s vast majority. The IMF too tried to be come a gentler and kinder monetary fund, introducing poverty reduction and other ancillary programs that were in clear deviation from its mandate.

Finally, in a near Chamberlain-like appeasement effort, the World Bank and IMF cut their planned annual meeting in September 2001 from the traditional five days to two and sharply reduced private sector participation out of sheer fear that 100,000 demonstrators threatened to descend upon Washington DC. The meeting was subsequently and appropriately canceled altogether following the events of September 11. The organizers of the meeting could not have done themselves a greater disservice with their decision pre-September 11, however. There was no doubt in my mind that those few, who had violently hijacked the diffused and often confused, but democratically legitimate causes of the "movement", were going to act in even greater violence in Washington DC after the decision of the organizers. They smelled blood. They were indeed succeeding in curtailing free and unencumbered exchange of ideas among representatives from the world’s nations. Had the meeting not been cancelled for other reasons, this might have been the last World Bank/IMF meeting of its kind.

In a strange way, September 11 may have altered our behavior permanently. The majority of the world’s population wants a prosperous, peaceful and equitable world. They wish to benefit and share the benefit of a world that has grown ever closer since the invention of the wheel. After September 11, the majority of the world has become to realize that it needs to stand up to defend these values against those who prefer the Stone Age or pure anarchy.

At the same time, a U.S. recession magnified by the terrorist attacks of this fall is helping us to define globalization more clearly and understand the downside of it. At 10 trillion dollars of GDP, the U.S. economy is by far the largest and it has been the largest economy in the world for many decades. As such, U.S. economic prospects have influenced global economic growth directly and indirectly ever since. European economies have usually lagged with their own underperformance following a U.S. recession.

There are some things, however, that have changed permanently and irreversibly during the last 15 to 20 years. First of all, trade liberalization has led to a tremendous growth opportunity around the world. Compared to 1980, trade accounts for 26% of economic activity today -- an increase of nine percentage points. Capital flows have also been liberalized and global capital allocation is more efficient than ever (to pre-empt any critics, this is not to say that capital allocation is optimal in its efficiency).

As this has brought us closer together, it has also deepened the world’s dependence on the largest player of the lot, the United States. The fallout from the Mexican Tequila crisis of 1994/95 was quickly overcome not only because of prudent policy-making but also because a rapidly growing U.S. economy helped Mexico recover. The Asian crisis of 1997/98 was not as catastrophic as it might have been in the late 1970s, because strong U.S. growth allowed Asian exporters to lift their countries out of the economic morass.

All of this testifies to the fact that the U.S. economy has critical mass in today’s world economy and that trade and financial flows, and hence the prospects of other regions, whether emerging or in their post-industrial state, depend on the U.S. growth outlook more than ever. This is part of the resentment that has been the basis for the anti-globalization forces.

There have been also technological changes that have impacted the cyclicality and increased synchronization of economic cycles. Ease of transportation has made multinational companies truly transnational. Inventories have come down as just-on-time delivery systems have been developed. This has lowered costs and helped price inflation to be moderate, even in periods of high rates of growth. It has also shortened the transmission period of an economic slowdown between and within the United States and other economic regions. Our pain is felt more quickly elsewhere. The ease of financial flows simplified especially by the Internet magnifies this development. This leads to economic downturns, which may be smoother, yet more widespread and hopefully shorter than global recessions in previous decades. Thus, at the end there is not just a win-win situation deriving from closer integration worldwide in times of economic prosperity, but there is even a reduced loss position in times of economic contraction.

This does not suggest, however, that all economies will be synchronized more or less going forward. The above only applies to the consequences of natural business cycles. Countries with structural fundamental problems will underperform regardless of U.S. growth. This was true for Japan, especially, during the 1990s and continues to be the case today. It is also true to a lesser degree for the European Union and for many emerging markets.

For 2002, this means that we will indeed experience a global recession during the first and may be second quarter of 20002, because our world is greatly integrated via trade and financial flows and because of the high transmission velocity of cycles. During the third and fourth quarter global growth will feed on itself and by 2003 we might experience the beginning of yet another extended economic boom period.

Contributing Writers to this Edition: Scott B. MacDonald, Keith W. Rabin, Uwe Bott, Jonathan Lemco, Jim Johnson, Andrew Novo, Joe Moroney, Russell Smith, and Jon Hartzell