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Very recently, the International Labor Organization (ILO) in its report warned in its strongest of words, the Euro zone countries of the European Union that if they failed to reshape their economy and create millions of new jobs to get their tens of millions of unemployed citizens back to work, the eventual result on their already contracted economy will be a catastrophe of grand magnitude.
On similar development, the current “interest-rate fixing” scandal of European banks triggers a new the debate on the necessity and serious importance of the reshaping of the modus operandi of banks so that the eventuality of the 2008-type financial crisis which primarily caused the current financial crisis both in the United States and Europe. Economic and financial mishaps of such kind brought the issue of the importance and possibility of reshaping the current global economy in order to avoid the future global economic crisis.
The economic and financial turmoil engulfing the world marks was the first crisis of the current era of globalization. Considerable country experience has been accumulated on financial crises in individual countries or regions which policymakers can use to design remedial policies. But there has not been a world financial crisis in most people’s living memory. And the experience of the 1930s was frightening because governments at that time proved unable to preserve economic integration and develop cooperative responses.
Even before the current crisis, globalization was already being challenged. Despite exceptionally favorable global economic conditions, not everyone bought into the benefits of global free trade and movement of capital and jobs. Although economists, corporations, and some politicians were supportive, critics argued that globalization favored capital rather than labor and the wealthy rather than the poor.
Now the current crisis and the national responses to it have started to reshape the global economy and shift the balance between the political and economic forces at play in the process of globalization. The drivers of the recent globalization wave, open markets, the global supply chain, globally integrated companies, and private ownership, are being undermined, and the spirit of protectionism has reemerged. And once-footloose global companies are returning to their national roots. So what will be the best for globalization, reshaping or unmaking? This is the key question which needs thorough analysis in the process of reshaping the global economy.
The current crisis has already started to affect the drivers behind rapid globalization in recent years. To start with, as the current official data asserted, public participation in the private sector has increased significantly in the past few months both in the United States and Europe. Of the 50 largest banks in the United States and the European Union, 23 and 15, respectively, have received public capital injections; that is, banks representing respectively 76 and 40 percent of pre-crisis market capitalization depend today on taxpayers. Other sectors, such as the automobile and insurance industries, have also received public assistance.
Whatever the governments’ intention, public support is bound to affect the behavior of once-footloose global firms. Second, this crisis challenges globally integrated companies. Economic integration in the past quarter century has been driven largely by companies’ search for cost cutting and talent.
Yet globally integrated companies were first put to the test early on in the crisis, with the collapse of banks that acted across international borders. Once-mighty transnational institutions were suddenly at pains to identify which government would support them. In some cases, governments responded cooperatively as in the case of Belgium and France with Dexia Bank, but other cases ended in a breakup along national lines as with Fortis, a Belgian-Dutch lender and insurer.
This not only made clear that the existing supervision and regulation systems were inadequate for this transnational company model, but also showed that only national governments had the budgetary resources required to bail out financial institutions. Public aid risks turned global companies into national champions. As indicated on the May 18, 2006 edition of The Economist, today, no CEO of a firm that has received public support would echo the words of Manfred Wennemer’s, who is CEO of a German tire maker Continental. When justifying layoffs at the company’s Hanover plant in 2005, he said that “My duty is to my 80,000 workers worldwide”.
Third, national responses to the crisis can lead to economic and financial fragmentation. There is initial evidence that as governments ask banks to continue lending to domestic customers; credit is being rationed disproportionately in foreign markets. This was what happened recently when the Dutch government asked ING Bank to expand domestic lending while reducing its overall balance sheet. Because companies in emerging and less developed economies depend largely on foreign credit, this leaves them especially vulnerable to financial protectionism.
Furthermore, government aid-driven by a legitimate concern with jobs, often implicitly at least, shows preferences for the local economy. The French bias toward domestic employment in its auto industry’s plan, the U.S. “Buy American” provision in the stimulus bill, and former U.K. Prime Minister Gordon Brown’s now infamous “British jobs for British workers” slogan are but a few examples.
Last but not least, despite the G-20’s commitment last November not to increase tariffs; these have gone up since the start of the crisis in several countries, from India and China to Ecuador and Argentina. This follows a similar move one year ago when export restraints were introduced as countries tried to isolate domestic consumers from increasing international food prices.
It is hard to say whether these changes are merely short term reactions to a major shock or amount to new and worrisome trends. At the very least, the balance between political and economic forces has been significantly altered. Because political support for globalization was at best shallow while the global economy was in a buoyant state, this suggests the pendulum is now swinging in the opposite direction.
Against this background, two lessons from history are worth keeping in mind. One, dismantling protections takes time. It took several decades for many of the trade barriers erected during the interwar period to be brought down. Second, even if a significant part of the progress in liberalizing trade in recent times has been institutionalized, the downward spiral of protectionism acts fast.
Taken together, these risks pose a significant challenge for global integration. This is true also at the regional level. Economic divergence is rising within Europe, and cooperation within East Asia has been limited to say the least, in spite of the violent shock affecting the region. No doubt, global governance and the economic landscape will emerge from this crisis reshaped.
The main test remains fostering international cooperation at a time when there is a big temptation to look for solutions at home. It is in deeper multilateralism, rather than in nationalism, that many of the answers to the current challenges lie. However, the crucial question at this particular juncture is what exactly should global actors and national governments do?