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Friday, May 03, 2013

Is this the end of globalization?


Evidence of the end of globalization is building up. According to Satyajit Das, growth in trade and cross border investment, which has underpinned prosperity and development, is being reversed in a major historical shift.

The European Central Bank cut its main interest rate to a new low of 0.50% in an attempt to drag the euro zone out of the longest recession in its history.
For many nations, following the global financial crisis, the advantages of greater economic and monetary integration are now less obvious.

By closing their economies and focusing domestically, some nations believe that they can capture a greater share of available growth and deliver greater prosperity for their citizens.

The financial crisis revealed that integration reduces the effectiveness of a nation’s economic policies, unless other nations take coordinated action.
Governments reacted to the global financial crisis by initiating large spending programs to support the economy. In many cases, there was significant financial leakage, with spending boosting imports rather than promoting domestic demand, employment, income and investment. 

Various breakdowns — restrictions on trade, currency manipulation, capital controls and predatory regulations — now signal the retrenchment of globalization and return to autarky.

 The motivation is protection of national industries, iconic businesses, employment, incomes and competitive advantage.

 Direct intervention, artificially low interest rates and quantitative easing are deliberate policies to manipulate currencies. Devaluation makes exports more competitive assisting individual countries to capture a greater share of global trade, boosting growth. Devaluation is also used to reduce real debt levels by reducing the purchasing power of foreign investors holding a nation’s debt.
Free movement of capital has become increasingly restricted. Since 2008, the growth in cross border capital flows has slowed, with global financial assets increasing by just 1.9% annually — well below the 7.9% average growth from 1990 to 2007.
In addition, nations with high levels of government debt that face financing difficulties seek to limit capital outflows.
Low interest rates and weak currencies in developed economies have led capital to flow into emerging nations, with higher rates and stronger growth prospects. Brazil, South Korea and Switzerland have implemented controls on capital inflows.
Closed economies is a natural way to deal with these pressures, reasserting sovereign control. As one nation adopts such policies, it compels other countries to pursue similar strategies — with far-reaching consequences. 

Satyajit Das is a former banker and author of Extreme Money and Traders Guns & Money 

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