Winds Of Change

Some of the most powerful influencers of human history are counter intuitive. Prior to the world war II, it was a norm for the victors of a war to impose excessively harsh and punitive measures on the vanquished. But this fuelled greater hatred, and further wars. It is now commonly acknowledged that part of what precipitated the second world war was the humiliating treatment meted out to Germany after the world war I. The Germans were hurting, and Hitler effectively channeled their anger to build probably the most frightening war machinery ever seen in human history. Ultimately, the world had to unite under the Allies to defeat the Axis powers, but not before it had paid an excessively steep price. But what fundamentally separates World War II from most of the other big wars in history is the treatment of the losers. After the war, the Allies, and the US specifically, spent billions of dollars rehabilitating Germany and Japan. The result was that Japan and Germany quickly emerged as important global players, and to this day remain economic powerhouses. And this switch in thinking was brought to us by a man whose teachings are in vogue again in a world crippled by the global financial crisis... John Maynard Keynes.

Globalization, and the concept of free trade, are similarly counter intuitive when thought about in narrow terms. After all, how can purchasing widget x from a far corner of the globe at the expense of a widget manufacturer in your neighborhood benefit your local economy? But this limited view does not quite follow the argument to its logical conclusion. The argument continues something like this: You purchase the widgets from a manufacturer in a far corner of the world because he is a more efficient manufacturer of widgets than your local widget manufactuer. Loss of business drives your local widget manufacturer to evolve to being a provider of service y, which he discovers he is really good at. What this little example illustrates is that globalization and the competition it enables drives efficiencies and everybody is better off.

Between 2002 and 2007, the the global economy grew at the fastest rate in history, thanks in no small part to increased global trade. So, what does this growth really mean in human terms? Again, examples to the rescue: China's supercharged economic growth over the past decade and half,facilitated by its emergence as the world's manufacturing hub, has helped pull hundreds of millions of people out of poverty. The rapid growth of the export oriented IT products and services industry in India has helped create millions of new middle class consumers, which in turn has boosted the broader economy by creating opportunities for the provision of services to this new class of consumers. None of this would have been possible if not for increased globalization and lowering of trade barriers. But all that might be about to change...

One of my professors at B-school once made a prediction that looks more and more likely with each passing day. He said that he believed 2007 represented the pinnacle of globalization and free trade, and that we would be moving towards an era of increasing protectionism and greater resistance to free trade in the form of trade barriers and tariffs. I think we are already seeing the first signs of these unwelcome winds of change, with the Obama administration's attempt to slip in a "Made in America" clause as part of conditions in its proposed stimulus package. Fierce global backlash forced the US to back off and water down the clause, but the trend is quite clear. When the economic engine is humming nicely and unemployment is almost non-existent, it is easy to sing praises of the benefits of globalization. What is infinitely more difficult is sticking by the philosophy when your growth is negative, unemployment near double digits and your constituents are baying for blood. The way the global economic future evolves will be largely determined by how the world reacts to the current financial crisis. Let's just hope policymakers in our world have the foresight to see beyond the current crisis, and don't steer us into a closed and insular future...