World Economic Forum — Analysis: Globalization: Battered but Not Beaten — Ever-More Interconnected World Delivers Economic Gains to Many, While Pace of Change Stokes Unease, Political Tension

By Stephen Fidler

21 January 2015

(Copyright (c) 2015, Dow Jones & Company, Inc.)

The perils of forecasting: 12 months ago, as World Economic Forum delegates gathered in Davos, nobody predicted Russia would, within months, annex part of a neighboring state, and anyone anticipating a halving of oil prices would have been guided to a darkened room and told to lie down.

But other developments were more foreseeable: Low growth and low inflation in the eurozone were to hold back Europe’s ability to emerge from its debt crisis and reduce high unemployment. Partly as a result, the political mainstream in many European countries weakened, and nationalist parties grew in strength. Governments elsewhere struggled to cope with the powerful currents buffeting their nations.

In one way or another, most of these developments — foreseen or not — now risk further erosion of the fabric of our internationalized, interconnected world economy.

“Globalization has helped raise hundreds of millions out of poverty,” says Robin Niblett, director of the Chatham House think tank in London. But, he says, it’s moving faster than people and states can adapt to, politically, socially and institutionally. As a result, “levels of trust between governments and citizens are fraying.”

Trust among governments has also been a casualty, he argues. Russia’s annexation of Crimea and its backing for separatist rebels in Ukraine undermined the assumption that countries are all moving at a faster or slower pace to market-based democracies. China worries that the U.S. will try to contain it; while the West worries that rising powers — such as China and India — may not uphold the rules of the global game.

The collapse of oil prices will have widespread ramifications for the world economy, redistributing global income from energy producers — Russia, Venezuela and countries in the Middle East — to energy consumers, which include most of the world’s developed economies.

That should help global growth. Indeed, on the evidence of car sales and other indicators, Americans are already spending their windfall, making the U.S. perhaps the only major engine driving the world economy.

World oil production has been rising thanks in part to the development of nonconventional energy supplies, like shale oil, which has pushed the U.S. toward self-sufficiency. Saudi Arabia, meanwhile, has kept open the spigots with the apparent strategic aim of curbing further investment in the nonconventional sources.

But faltering demand also appears to be a factor, and to the extent the oil price betrays a weakening world economy — and evidence of a Chinese slowdown — it isn’t good news. Slowing demand has already hit other commodities, hurting the economies of raw-materials producers in Africa and Latin America.

Another worry is that falling energy prices might flip low-growth, low-inflation Europe into a deflationary mind-set that would lead people to postpone spending decisions, further inhibiting growth.

“If I were discussing issues in Davos, I think that the prospects of European deflation and a sudden stop in growth in China are the two things I’d be most worried about,” says Lant Pritchett, an economist at Harvard University’s Kennedy School.

Europe’s economic uncertainties are feeding through into its politics. A strong reaction against established political parties isn’t limited to Europe but is taking hold there. People see themselves as losing control over their lives, and blame government elites.

One reason for that is that the trends associated with globalization — rapid technological change, outsourcing and world finance — appear to be responsible for growing wealth disparities. Billions of people around the world are richer because of globalization but inside many nations it has resulted in growing inequalities in income and wealth.

The policy debate about how — or whether — to tackle national inequalities has intensified thanks in part to French economist Thomas Piketty, whose data-heavy tome “Capital in the Twenty-First Century” was published in English last year. Mr. Piketty proposed greater international cooperation on taxation, a move now being explored within the European Union for another reason: to curb rampant corporate tax avoidance.

In Europe, many people view the EU as being responsible for their discomfort with the globalized economy and for encouraging unwanted immigration.

Indeed, immigration is also held responsible by some of those struggling with one of the dark faces of globalization: Islamist terrorism. A few fanatics have the capacity to convulse nations, as shown by this month’s attacks in France. Terrorist atrocities meanwhile have taken the lives of thousands of people in Africa, the Middle East and Asia.

“I’m afraid that is the future,” says Mr. Niblett of Chatham House. But, he adds, “I don’t see the globalized economy being in retreat for the simple reason that everybody has seen the benefits. I think the world will hang together.”

Dow Jones & Company, Inc

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