By Randall Margo, Ph.D., G.L.O.B.A.L. Board Director/Treasurer
05/17/2022
To paraphrase Clausewitz, it appears NATO's response to Russia's invasion of Ukraine is to pursue economics as a continuation of war by other means. Whether this approach will yield a triumphant outcome is yet unknown, but it clearly is impeding the progress of economic integration that flourished almost unabated since the end of the Soviet Union in 1991, and accelerated with China's inclusion in the World Trade Organization in 2001. The war along with the covid-19 pandemic signals a potential damaging risk to the global economy that should not go unheeded.
Globalization, for all of its perceived shortcomings raised hundreds of millions of people out of the clutches of abject poverty, generally defined as $1.90 daily income. Regrettably, hundreds of millions remain impoverished below even this meager level of subsistence. Meanwhile, global trade enabled middle class and even working class residents within developed economies the ability to purchase smart phones, computers and other items formerly considered luxury items. This mutual benefit of an integrated global economy as with all things in life came with tradeoffs, evidenced by the off shoring of manufacturing products, certain services such as call centers and computer programming, and violation of technology patents by China among others. Yet, globalization's upward trajectory seemed unrelenting, expanding by 4,100 percent, according to WTO statistics, as capital from multinational corporations and investors exploited labor savings and tax advantages by locating in developing nations. World Bank data estimated that prior to covid-19, $19 trillion of value occurred from trade in 2019, or more than one-fifth of the world's combined gross domestic product of $87 trillion.
Covid-19 provided the first assault on globalization as the world's foremost nations closed their borders and deliberately shrunk economic activity to limit the virus from spreading. It soon became apparent, however, that this approach provided a false security as most nations were critically reliant upon others for personal protective equipment and other vital products, including the ultimate development of vaccines. Consequently, placing a full moat around a national economy, even one as large and diverse as America's became unfeasible. An undesirable and unintended byproduct of these shutdowns was the breakdown of supply chains, which had evolved over decades into a smooth and inexpensive movement of goods, to accommodate a world predicated upon just-in-time inventory management practices. Struggling to regain their efficiency amid the imposition of daunting health restrictions and accompanying labor shortages, a KPMG study last year confirmed that two-thirds of corporations were rethinking and reconfiguring business requirements to adjust for inventory shortages and rising transportation costs by adopting multiple sources for supplies closer to their major markets and a level of redundancies that will surely lead to higher costs and slower growth.
Then, just when most national economies began shedding their severe covid-19 restrictions and the global economy was starting to rebound, Russia invaded Ukraine. NATO's decision to impose economic sanctions against Russia is likely to create more serious and long-term ramifications to an integrated global economy then even the formidable covid-19 constraints. Here's why.
Although the NATO nations aligned against Russia rightfully perceive economic sanctions as a preferred alternative to direct military conflict with a country possessing a fearsome nuclear arsenal, other nations throughout the world now see how the major economic powers led by the United States can and will impose devastating financial sanctions on a particular country, even when not under specific attack themselves, or united through treaty with another sovereign country for its defense. From the standpoint of China, India, Brazil, or Iran, and multiple other nations, they sense, and in Iran's case know firsthand that what happened to Russia can happen to them. Therefore, their interest in supporting NATO sanctions at the expense of their own economic well-being is problematic, to say the least. It further raises a larger issue. Must countries that don't share the cultural and democratic values of western powers undertake their own self-interest, by either forming partnerships separate from NATO countries, or reducing their reliance on NATO countries for economic sufficiency. If the answer is yes, it's easy to envision a shrinkage in global growth, resulting in higher costs and subsequently, lower living standards for all nations. An inadvertent but likely outcome of this situation could be greater numbers of migrants attempting to flee the more impoverished countries to gain entrance to nations with greater economic wealth and opportunity.
The case for an integrated global economy has always been that mutual benefits accrue to both consumers and buyers of all nations based on price and quality of goods and services being traded. It is truly remarkable that following the devastation of World War II, independent nations led by the United States would establish a world trade organization to facilitate an integrated rules based global economy. A popular theory during the post World War II era was that economic integration among nations would make military clashes less likely, given the substantial costs to a specific country's prosperity. Until now, that concept has generally held up among the world's more affluent nations. But, what happens when nations calculate that their independent national interests could be challenged or harmed by economic warfare. Economic self-reliance then becomes a salient and perhaps overriding consideration. Thus, expanding the integration of global economies in the near future will be a monumental task, as multinational corporations and independent minded nation states attempt to navigate in a world where the next pandemic or economic war can create immediate disruption. An integrated economic system that provided unparallel global growth and prosperity in human history is now being jeopardized by its own success, leaving individual nations vulnerable to Darwinian economic measures when conflict among nations occurs. Much of the world's future economic growth rests on how businesses and governments of the world meet this changing environment.
Dr. Margo is the author of Less Work for Less Pay: Previously served as an Adjunct Professor at Golden Gate University, Research Fellow at William Jessup University, and local government administrator.