Dawn of the third globalisation?

Business Standard, 19 September 2022

The first globalisation ended in 1914. The second globalisation, which took off from the early 1980s, is the foundation of the gains in prosperity of the last 40 years. We may be at a turning point today, with the emergence of a third globalisation. This features a more cautious cross-border integration, where geo-political alignment is an additional factor that shapes home bias. These developments have important implications for the optimal pathways for Indian firms.

The two globalisations

In the good old days, nation states did not interfere in the four freedoms, in the movement of goods, services, labour and capital. Whether Ashoka or Akbar, rulers did not intrude in most aspects of freedom. Technical change created vast improvements in cross-border mobility. For India, two great breakthroughs were the Suez Canal (1869) through which a short sea route from Bombay to London opened up, and Bombay-London telegraph connectivity (1870).

The first globalisation ended in 1914. The movement of people was choked, for the first time, through the new intrusion of passports that prevented a person from leaving. The movement of capital was choked, for the first time, by Nazis who wanted to prevent Jews from taking their wealth out, through the new intrusion of capital controls.

After the second world war, the globalisation process gradually got back on track, and by the early 1980s, certain measures of cross-border activity exceeded the values seen in 1913. The post-1980 period is termed the second globalisation. The EU is the lab of globalisation, where nation states do not intrude on the four freedoms.

Geopolitical considerations in globalisation

Alongside this journey was a grand debate about the role of cross-border economic integration and the questions of peace and freedom. There are two camps.

One camp believes that geo-political considerations must first be sorted out, and then cross-border integration can proceed. In "The Wealth of Nations", Adam Smith wrote "Trade with barbarous nations requires forts, trade with other nations requires ambassadors". The other camp believes in the civilising influence of interdependence. Greater integration would reduce the inclination to go to war. When the people in an authoritarian country engage with the outside world, this shows them better lives, and nudges the country in favour of more freedom.

The lived experience of business people in India is that firms in advanced economies do not care about values or geo-political alignment, they only care about the lowest price. To a significant extent, this reflects the extent to which the latter camp ("hold your nose and do business in odious countries, pursue deep globalisation with no questions asked") has had the upper hand.

Recent developments on China and Russia

From the mid-19th century onwards, there has been a sentiment in the US that it must be the saviour of China. This helped shape the 1972 agreements, and the US support for bringing China into the WTO. It was felt that once the people of China see what freedom induces for human possibilities, the Chinese state will become more benign. This has been proved wrong with Xi Jinping who took power in 2013. In the following nine years, the concentration of power has gone up and freedom has gone down.

In Germany, there has always been a sense of guilt about the Wehrmacht on the Eastern Front. From the early 1960s, Germany warmed to an Ostpolitic doctrine, an attempt at trade integration with the USSR in the hope of civilising it. The phrase wandel durch handel expressed the idea that trade can bring about social and political change. German policy makers embarked upon a remarkable loss of energy security, by plugging into Russian gas pipelines. These attempts have been proved wrong with Putin's behaviour in Georgia (2008) and Ukraine (2014 to 2022). As the historian Timothy Snyder says, "For thirty years, Germans lectured Ukrainians about fascism. When fascism actually arrived, Germans funded it, and Ukrainians died fighting it."

The third globalisation?

These developments have led to modified views worldwide. While it is too early to tell, 2022 may mark the beginning of the third globalisation where geo-political issues take primacy over cross-border integration, where globalisation is limited to the democracies.

The consensus in the intellectual and policy communities has shifted in favour of the Adam Smith position. A strategy statement by Janet Yellen was out on 13 April. Numerous tactical moves have flowed from this. German purchases of oil and gas from Russia have subsided. The US has imposed unique restrictions upon some of its companies from building factories in China, and has brought about new restrictions upon inbound FDI.

The perspective in the world of business has also shifted. From 1989 onwards, the people in finance and the firms had a fundamental optimism about geo-political problems. It was felt that business considerations are supreme, and all poor countries will rapidly learn how to go from oppression to freedom. This optimism has been jolted by the shocking scale of losses that have been experienced, by investors and large corporations, in China and Russia. The board rooms of global firms are asking more questions about the political regime in countries where business is conducted, and about excessive reliance upon operations in authoritarian countries. This process has been assisted by the rise of ESG investment where concerns about freedom are brought into the investment process.

Implications for Indian firms

These developments have important implications for Indian firms. Global firms seeking to do less in authoritarian countries will explore the possibility of doing more in India. Legal persons and production platforms in advanced economies will get greater access and business continuity. The conduct of the Indian state on questions of freedom and geo-political alignment will matter more for shaping India's acceptance into globalisation. When the Indian PM met with Putin on 16 September, the headlines in the Financial Times ("Modi chides Putin over Ukraine war") and the New York Times ("India's Leader Tells Putin That Now Is Not an Era for War") were a positive for Indian firms.

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