NOTNot bad. But not great either. This sums up the atmosphere that reigned at the end of the World Economic Forum in Davos last Friday with a round table on state of the world economy. Not bad, as most countries have exceeded expectations from a year ago. Not bad, because the sharp rise in interest rates did not plunge the United States, the Eurozone and the United Kingdom into recession. Not bad, because the war between Israel and Hamas has failed to push oil prices above $100 per barrel.
That’s not great, because central banks face a balance between cutting interest rates too quickly and reigniting inflation, and keeping them too high and plunging their economies into recession. Not great, as the first weeks of 2024 have led to wider conflict in the Middle East, with implications for one of the world’s major trade routes. And that’s not great because – as Davos showed – the global economy is deeply fractured.
Inevitably, there is a risk that things could go wrong in 2024. A leading global policymaker, speaking privately, said repeated blows since 2020 mean it would be wise to prepare for the next surprise shock. Only the most incurable Davos optimist could quibble on this point.
Washington and Beijing are engaged in a fierce struggle for economic supremacy. The gap between north and south is widening and liberal democracy is being challenged by a new generation of autocrats. The planet continues to warm. In a week that marks the 100th anniversary of Lenin’s death, there are divergent views on what constitutes progress and success.
Yet the death of globalization has been greatly exaggerated. The influence of multinational corporations and banks that continue to flock to the World Economic Forum is proof of this. Just like the rapid growth of artificial intelligence (AI), which is part of a technological revolution that crosses borders and leaves national regulators in its wake. A year ago, ChatGPT was in its infancy. This year, AI was at the heart of the debate at Davos, with those who hailed its potential to solve pressing problems – such as the climate crisis – pitted against those who warned of its risks.
Globalization is therefore not dead, nor even out of breath. The same goes for the disappearance of Western liberal democracy. Certainly, productivity has been low and living standards have been reduced in recent years. German Finance Minister Christian Lindner raised eyebrows when he said his country was the tired man of Europe. But there are good reasons why there are no television images of migrants or asylum seekers trying to enter Russia or China.
What is true is that after being pushed onto the defensive, global capitalism is transforming into something different. The peak of globalization – as well as that of Davos – occurred some time ago, around the time of the 2008 global financial crisis, but it is the repeated shocks since 2020 that have changed the dynamic.
Everything that has happened since the arrival of the Covid pandemic has pointed to a new paradigm: some call it deglobalization, others call it – perhaps more accurately – “glocalization“.
An ugly term, glocalization is not the global free market, nor autarky (a nation that functions in a state of autonomy), but something in between. This involves shorter supply chains, a focus on rebuilding domestic manufacturing capabilities and a more strategic role for the government. As with any form of mixed economy, the degree of glocalization varies from country to country.
While Davos once revered frictionless supply chains stretching from China to developed countries in Europe and North America, there is now recognition that low cost is not everything and that it helps that governments know that they will not lack vaccines or protective equipment. , computer chips and energy. Attacks on cargo ships in the Red Sea, which require much longer journeys around the Cape of Good Hope, are the latest example of the vulnerability of long supply chains. As Christine Lagarde, President of the European Central Bank, said at the last Davos session: “We were focusing a little too much on efficiency rather than security.” Lagarde noted, rightly, that a little rebalancing was not a bad thing.
The long-term causes of glocalization lie in the increasingly strained relationship between the United States and China – a relationship that has deteriorated since Washington became aware of the threat posed by China’s rapid growth and its clearly announced intention to use its economic power to challenge America. global hegemony. The US Chips Act and the Inflation Reduction Act are both examples of America’s determination to rebuild its industrial base through active government intervention.
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But even if the offshoring of previously outsourced production would have happened anyway, it was certainly accelerated by the events of the past four years: a pandemic, then supply chain bottlenecks, a surge in inflation and the war in Ukraine.
The result is that industrial policy is no longer a dirty word, even in Davos. Indeed, the World Economic Forum was very interested in what the Labor Party’s plans to boost the UK’s supply side represented.
Nick Stern, author of the landmark report on the economics of climate change, believes there is a potential sweet spot where demands for stronger growth and the fight against global warming intersect. According to him, AI can act as an accelerator to help developing countries mitigate and adapt to climate change. He’s not blind to the fossil fuel industry’s pushback against measures to combat global warming, but he believes the positives outweigh the negatives.
Stern insists that investing in good green projects would be good for growth and financially responsible. In other words, a green light for Labour’s green growth plan. And glocalization in action.
