Been there, done that, now it’s all coming back
“History does not repeat itself, but it rhymes.” Although it nearly sounds like a cliché, it is hard not to associate what happens today with what has been through in the past.
The world economy was once fragmented after the Second World War. Cross-border trade barriers were high, and portfolio capital mobility was restrained. Multinational companies were perceived as new economic imperialism from the West in newly independent sovereign countries when nationalism underlay the thinking of development and economic policy design then.
For many decades, the Cold War has defined the border of international economic cooperation. It was containment rather than engagement, and encirclement instead of integration between the Western and Eastern blocs.
Just as financial market observers would shout for sovereign debt crises whenever they see a rise in debt ratio, the market is obsessed with the word “stagflation” should oil prices skyrocket. This, of course, is rooted in the 1970s with two infamous oil price shocks, resulting in soaring inflation and slowing economic growth.
What was more destructive for the developing world, particularly for the Latin America, was what came next in the 1980s: the incredible Volcker disinflation. Paul Volcker, the then chairman of the Board of Federal Reserve, rolled out policies that pushed the interest rates to a record high, engineering a hard landing in the U.S economy that tamed the running-wild inflation.
It did work, but at the expense of the developing world that has borrowed heavily in dollars during the heyday of spiraling commodity prices in the 1970s. Welcome the lost decade!
We then entered the 1990s.
Following the fall of the Berlin wall in 1989, the Eastern bloc began to collapse. By waving goodbye to the communism, democracy has finally found its way to reach the doorstep of eastern European countries. Liberal international order became the hegemonic global order since then, as if the world was politically united.
While hegemonic stability provides a stable environment conducive for global economic expansion, three fundamental changes further facilitated global flows of resources: the emergence of internet communication technology, containerization in shipping, and declining tariffs.
The 1990s were always remembered as a decade of new dawn. Financial markets were liberalized for international risk sharing and new wealth creation, cross-border trade grew much faster than the world GDP, and production value chains were sliced up and fragmented globally, giving rise to the global value chains known as today.
Perhaps the greatest ambition of liberal international order was the American effort to integrate China into the existing order in return for China’s pursuits of economic liberalization and, wishfully, political reform. China’s accession into the World Trade Organization in November 2001 has massively reoriented global value chains towards China, accelerating the growth of world trade, and deepening the economic co-dependency between China and the United States.
But as Denzel Washington said to Will Smith after the smacking incident, “At your highest moment, be careful. That’s when the devil comes for you.” Well, liberal international order apparently has been smacked by its own devil, more than once.
Waves of financial crises, from the Tequila crisis in 1995 to the global financial crisis in 2008, have destructed enormous wealth and social value, provoking backlashes against global integration.
Global trade, particularly the “China’s shock”, has caused substantial job loss and absolute declines in average real income in local labour markets in the advanced economies that house import-competing industries. Labour market turmoil becomes the culprit, at least partially, to the rise of populism with myopic nationalism that strikes back against globalization since 2008.
And China is neither South Korea, Japan nor Taiwan. China is huge enough to resist external pressure compelling for internal political liberalisation. To the contrary, miraculous economic development enhances the legitimacy of the authoritarian regime. The relation between China and the West is growingly fraught. Co-dependency is giving way to confrontation and decoupling.
All these challenges, which occurred one after another over the past decades that took turn to shake the foundation of the world economy, now seem to have a reunion in 2022.
Don’t they? The global economy now runs the risk of a reversal in economic integration, initially as a reaction to minimize the supply disruption due to trade war and the pandemic, now to prepare for the fragmentation along the geopolitical fissures. The war in the Ukraine would certainly have a repercussion effect in the Indo-Pacific, and the trust as the coin of the trade realm between different political alliances is evaporating.
We haven’t even mentioned soaring fossil fuel energy prices and food insecurity that call for an action to cut oil dependence and to ensure self-sufficiency.
Chairman Powell, who greatly admires the credentials of Paul Volcker, has already rolled out his cycle of interest rate hikes. The Federal Reserve turns hawkish, doubling down bond-tapering, and could potentially shrink the balance sheet by May this year. At the same time, the U.S treasury yield curve once again inverts, signaling a pending economic recession while inflations remain high.
So, are we going to experience 1960’s confrontation between ideological blocs, 1970s’ stagflation, and 1980s’ lost decade for the highly indebted emerging markets and developing countries post-pandemic all at once?
Or the “rhymes” could just be the noises in the present, reminding us of days long gone. It is no more than experiencing a déjà vu, not new reality, as the world is now less intensive in fossil fuels energy, the Fed is more credible and skilful in rolling out disinflation, economic interdependence is too interwoven to risk a breakup, and the sovereign debt in the developing world is less dollar denominated.
Perhaps. For that, we have to wait and see.