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Globalization Has Run Its Course…But What Comes Next?

Searching for a New Paradigm for Global Growth

While economists may believe in a smoothly adjusting system of checks and balances to keep supply and demand in reasonable equilibrium, capitalist systems rarely work as efficiently as theory requires for market efficiency to perform as advertised. We are continuously in a race between under and over capacity with price as a moderating factor. This process of creative destruction (of weaker enterprises and resale of older capital) provides the forward momentum for the economy with business fixed investment the usual mechanism for recovery from cyclical declines acting to drive the recovery. Unfortunately in this age of global companies and long distance supply chains, the net result of this creative destruction is the concentration of supply in fewer companies as the weaker firms are eliminated. Natural selection and survival of the fittest then is the natural law of nature and of modern capitalism in an age of globalization.

Since the 1930’s the usual signal to businesses that the end is near has been government intervention in the form of Keynesian pump priming and changes in monetary policy (lower interest rates). In a globalized world, the link between capacity in one country (or over capacity) and demand in others is less direct. Add in subsidies of governments to keep firms in business and it is easy to see that normal signals to investors can fail and any equilibrium in markets is random and short-lived. One final element is the Internet allowing near instantaneous changes in prices and information on available suppliers no matter how distant or remote. The usual friction coming from less information is eliminated reducing the protection of domestic suppliers and ultimately leading to their bankruptcy and to rising unemployment in small towns and cities long used to near full employment.

The tendency is to add too much capacity in one country or region going through a rapid re-make (called economic development) compounds problems especially when that excess capacity (as is the case in iron and steel) can be easily exported making excess capacity not a national problem but an international one. It is possible once the over capacity is recognized weaker, less well run or capitalized companies, collapse pulling down their financial backers be they banks or equity investors. This sends tremors throughout the economy starting a new recessionary cycle that snowballs into unemployment and cascading banking failures. The impact can even spread to more firms in geographically distant countries through links of the global supply chain. In a fully globalized economy this over capacity leads to lower prices and reduces the incentives of national champions to add capacity thus short-circuiting the investment recovery cycle and forcing governments to try to compensate for the loss of income. Over dependence on companies in this region can also lead into entropic failures across the long distance supply chains until the global economy collapses. This is what is happening today as China’s over extended companies fail one after another. The year 2015 will likely be considered the year that the costs of globalization were finally realized in the economic realm and also in the more

1 For information on the QuERI model and to contact the author call or write:David L Blond, PhD, QuERI-International, www.queriinternational.com

[email protected], 301-704-8942

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http://www.queriinternational.com/

critically important political realm. This may be the year that the establishment support for global trade integration collapses in rich and poor alike – the result could be a new round of protectionism with all the unintended consequences on businesses globally. It will, if no alternative business and social paradigm is found lead to a long period of secular stagnation with global economic growth underperforming past norms leading to more people unable to move from marginal to stable consumers and producers.

In a globalized system over, not under, capacity is a more normal condition. Economies of scale are built into the cost advantage of countries with large domestic markets or where the government supports employment actively, like in the case of China by State banks offering subsidized loans to sustain this growth. This encourages inefficient over-production until the company fails taking down supplier chains that now stretch around the globe. Cheap money from State owned banks has allowed new facilities to be built in advance of demand just to insure sufficient economic growth to absorb the flow labor from agricultural areas to urban areas. Like in the Soviet era when government investments fueled industrialization, in China cheap capital offered to private firms and subsidies to State owned companies encouraged this over investment in heavy industries with more easily exported commodity-type products (semi-finished factors of production at the first stage of processing from finished plate to extruded wire or casting products).

Where banks are mainly private (as is the case in most advanced for more fully developed emerging markets), recessions tend to dry up credit (as happened in 2008-09) and weaker firms facing reduced demand and maxed out credit lines, go out of business. Foreign firms, initially hurt by the slowdown may suffer less and have more financial staying power. With wider networks of possible markets, some of which escape the worst effects of recessions in other countries, they can better survive periods of slow growth.

Companies domiciled in large natural markets (large population countries or trading areas) may fail to widen the markets they serve thus losing the resilience to outlast growth slowdowns or recessions at home. Some of the losses of smaller American companies can be laid to milking cash cows at home and failing to see the risks of this narrow focus until its too late to change. Foreign firms, even smaller companies, usually had to widen their net of customers to maintain growth and thus can, if recessions are staggered, survive and even prosper from the recovery phase. When demand picks up as the economy recovers, long-time suppliers find they can’t recover fast enough lacking economies of scale (heavy industries) that State-owned firms with backing from government controlled banks have.

Globalization also weakened the historic relationships between first tier companies and their smaller suppliers. Information economies of scale allowing companies to shop for suppliers and even change suppliers yearly. Convinced that price matters more than quality, this often adds future costs when cheaper substitutes fail or lack quality controls, but by then bonuses for saving money have been paid to the wizards of finance. This continuous competition for the lowest prices leaves long term suppliers





without adequate business so that when foreign firms fail there no longer exist domestic substitutes. Lack of loyalty by first tier firms to second and third tier firms leaves the underlying manufacturing base hollowed out. Like companies indifference to their workers, indifference to suppliers makes the global economy less stable during downturns.

We can see this clearly in the 1990-2015 period for the United States. The late 1990’s boom, after the flat or weak growth during the first part of the decade, was filled by foreign suppliers supplanting domestic US suppliers and ultimately reduced the size of the direct manufacturing base in United States as factory jobs disappeared despite the “boom” as measured by overall employment growth and GDP. The initial impacts of the MTN agreement (January, 1995) reduced tariffs in the wealthier countries while NAFT (January, 1994) gave Mexico an advantaged source of manufactures to supply the US market causing a further loss of US manufacturing jobs to foreign workers.

The next recession – 2000-01 – had a similar impact as weaker companies failed and factory jobs continued to decline. The recovery as measured by GDP, a flawed measure of real prosperity due to its inclusion of business profits with wages, was primarily in profits, not incomes. As the first chart shows after the job growth in the late 1990’s slowed and disappeared with the Dot-com bust followed by the negative effects of the terrorist attacks in September, 2001, there was a weak recovery in GDP even as job growth and wage growth remained flat or slightly positive. As outsourcing of jobs continued to sap the strength of the economy, US trade deficits ballooned, corporate profits grew strongly. This supported the stronger GDP growth observed. The second chart shows the share of imports relative to consumption of manufactures continued to grow strongly as foreign made intermediates substituted for domestic production.

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Change in Intermediae Demand ManufacturesLinear (Change in Intermediae Demand Manufactures)Import Share of Manufactures Demand

A Virtuous Cycle without Manufacturing is a pipe dream…

The next chart illustrates how for the advanced country group the standard model for a cyclical recovery changed. In the 1980’s and 1990’s, a period of great optimism about the future of the newly integrated global economy with more countries showing improvements in their standards of living , the global investment cycle supported recoveries engineered in the late 1980’s and early 1990’s. The full integration of the Internet into the daily life of ordinary people – rich and poor – began in earnest at the start of the 1990’s with the introduction of better browsers to access services on-line. Ultimately this led to the surge in new start-ups and low unemployment creating what was believed, until it collapsed in 2000 due to over selling concepts without understanding how to monetize ideas, an idea of a virtuous cycle keeping the American economy growing despite the surge in imports destroying jobs in the Rust Belt was proposed. The sudden collapse of the NASDAQ forced many of these companies out of business leaving new hires without prospects for the next high paying job destroyed an entire generation of new college graduates optimism. New graduates moved back into their parents basements as the miracle economy that had produced millions of new jobs went into reverse. The attack of the following year on New York and Washington added to the negativity for business as uncertainty of what comes next dried up hiring and credit. Mid-1990’s consumer spending rebounded and business investment slowed with about a one year lag.

Bush tax cuts of 2001 failed to revive the employment picture with employment growth well below other recoveries while corporate profits benefited from increasing substitution of foreign inputs for domestically made products (formerly purchased from smaller suppliers) and with wages frozen, the consumption needed to sustain corporate profits came from tax cuts alone rather than a virtuous system that the Clinton boom economy allowed. Thus government replaced paying higher wages or adding new employment opportunities at home so the recovery phase that was expected to pick up





where government left off never happened. It was the failure of businesses to follow through with investments, hiring and paying living wages that forced government to subsidize consumption through tax cuts and direct payments. Government spending, some on the war and military after 9/11, helped to restart growth even if hiring was slow to recover. Government efforts to stimulate the US and world economies failed to alter business expectations. Business investment was late to the party waiting until it could see a stronger recovery. It peaked in 2004. A good portion of the observed GDP growth came in the form of profits of companies as productivity per employee soared as labor direct factory floor jobs at home were now being supplied by imports of intermediate goods from foreign sources. Later in the 2000-07 period easy money supplied by credit card companies at usurious interest rates kept consumer spending strong as government retrenched fearing deficits more than the collapse of economies. Much of the demand was absorbed by foreign producers (and their American company owners or buyers) as the American trade deficit exploded reaching a new high of $ 844 billion dollars in 2008 before plummeting the next year to $ 540 billion in 2009 (it is now almost up to its old high and will if current trends in global trade continue reach $ 1.2 trillion in red ink by 2025). Wall Street and other market indices rose steadily after 2002 from a low of 7500 to over 14000 before the Lehman Brothers debacle at the end of 2007 and then plummeted to a low of But when the financial crisis happened investment plummeted to below 7000 mid-2009. Government spending could not fill the gap despite trying. When the stimulus slowed and reversed in 2011 and with Europe adopting economic policy straight out of the Hoover administration playbook – higher interest rates and less government spending – real growth in the world economy faltered.





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Today the World Economy is awash in excess capacity making any long term burst of new growth unlikely….

Build first and then assess the damages is nothing new as a growth strategy especially in countries with autocratic, top-down, planned economies – Russia, China, and India starting in the 1950’s and only abandoned by the Modi government in 2014. For economies with more savings than consumption, like Japan with demographic issues leading to higher savings rates, investment spending was used to plug the gap in consumer spending. Much of this investment was in automated factories leaving the government with the task of finding work for the millions of under employed Japanese. Government funded infrastructure projects were used to help keep the economy growing. This created a bubble economy – a mix of government pump priming investments and private sector over building of capacity. Fast growing, like China today, real estate prices accelerated until downtown property in Tokyo reached astronomical heights before suddenly crashing back to earth. As other countries in Asia began to replace Japanese companies (and as Japanese companies invested in new plants to remain competitive given the wage differentials) due to the revaluation of the yen over this period, Japan’s wonder years came to an end ushering in nearly twenty years of weak growth and near zero price inflation. Unlike the other key countries China is attempting to drive its economy by over stimulating capital investment in business and property. It is this over 40% share of GDP that will make keeping the world economy growing difficult while short-circuiting the normal investment surge that comes from a cyclical rebound after a long period of slow or negative growth. Globalization comes at a price of losing the ability to compete when one country tries to dominate entire industry sectors as China does today.





Excess Capacity Damages Recoveries—Globalization, Outsourcing and Flexible Manufacturing May Be the Reason

Excess capacity damages countries rich and poor. Rather than healthy retrenchment companies dump goods on the world markets often at prices below their cost of materials. Today that means that much of the world’s excess capacity in manufacturing is concentrated in one region – Greater China, South Korea, and Japan. Demand in none of these countries is sufficient to absorb the supply potential. This excess capacity distorts the global trade and drives out the possibility of building similar capacity in less advantaged countries. The net result of globalization for many raw materials and agricultural rich countries is the recreation of 18th to early 20th century mercantilism where countries on the periphery were captive consumers of finished products from the center while acting as suppliers of raw materials at the expense of domestic industrialization.

Since the early 1980’s, when the Reagan tax cuts provided significant new purchasing power to US consumers and credit card companies inundated the country with offers to borrow money with unsecured loans, the American consumer began a shopping spree culminating in 2007 with the highest level of consumer debt relative to income and the reciprocal of this fact, one of the lowest US savings rates recorded. Since then credit has been more limited, savings higher, and consumer spending growth slower. It was during the Reagan years that global supply chains were formed taking advantage of improvements in both communications and transportation and very few barriers to entry in part due to a succession of tariff reducing GATT and now WTO agreements. Fax machines bridged the language and time divide with Asia to be later replaced by the World Wide Web and email connectivity.





Customers were no longer confined even for small companies to local or regional markets, but extended beyond national borders. That trend is continuing with inexpensive cloud computing offering the ability to sell “information” piecemeal and allowed collaborative work that extended “globalization effects” from physical goods to service providers.

Open markets and new rules, reduced tariffs and non-tariff barriers expanded world trade as China and Russia joined the new global trade policing World Trade Organization. Taking advantage of this were US companies suffering from the 1980 recession and the rapid growth in US imports induced by Reagan tax cuts and the stronger dollar. To fight this invasion, they shifted more production of low value products to Asia hollowing out their ability to do direct factory-floor manufacturing improving profits at the expense of the American lower-middle class. The American trade deficit grew rapidly from near zero to almost $ 800 billion by 2007 sending more than $ 5 trillion dollars outside the country and facilitating a global expansion in production. The result was a slow erosion of American real manufacturing capacity even as the value of companies listed as “manufacturers” share of US output remained relatively constant. Companies reduced direct labor (factory floor jobs) by substituting Asian labor or American labor while increasing employment in management functions including the overhead associated with managing long distance supply chains. Output per employee in the US grew strongly even if little of what was sold was still largely made by US workers. This retreat from bending metal to working the social media came at a cost to less skilled labor.

Companies, especially American companies with weak or no unions, moved factories from high cost to low cost venues without considering the political and even economic fall-out of these actions. Closing factors in battleground states and opening them in Mexico during a contested primary with populist candidates of both parties running against corporate bad behavior may ultimately lead to greater barriers to entry for company finished goods. Backlash against Mexico and China will erode confidence further in the value and benefits of open markets. Employment in manufacturing declined significantly over this period from 20 million to just over 14 million while output in 1995 $ per worker increased from $ 186,000 to $425,000. As direct labor was replaced by foreign labor, entire communities dependent upon good, well paying, manufacturing jobs faced ruin.

Flat wage growth and the loss of stable employment (full time became multiple part-time jobs), widened the gap between the reasonably well off thought workers tied closely to global rather than national economies versus less skilled workers in the manufacturing sector is that they must perform their work in the high wage country, but the products they make can be imported freely with low barriers to entry turning once secure employment at the plant into a high stakes game of chicken when wage negotiations start.1 or even highly trained workers like radiologists facing off against lower paid highly trained radiologists in India is that there are no now competing for their jobs with significantly lower paid workers from all over the world found their jobs at risk and their wages stagnant or falling. At the same time technology improves the production process, simplifying the steps, allowing greater 1 Increasingly as high speed, low cost, internet communications has improved worldwide, we see a world where even thee “skilled thought workers jobs” are increasingly at risk. Radiologists face this risk as digitized





automation, making it harder to fulfill promises to everyone of good jobs with good pay. While economists believe fervently that productivity improvements can be mitigated by rewarding remaining workers with more incomes compensating for the loss of total income nationally, the reality is that much of the gains from labor substitution have passed on to shareholders and corporate officers rather than line workers. In the advanced countries we are facing another problem unique to wealthy economies -- consumption saturation and lengthening cycle times for the obsolescence of high value electronics and even automobiles.

The loss of higher wage manufacturing jobs on production lines was finally noticed too late to stop the hollowing out of entire sectors. Starting with Obama’s second term the emphasis has been on reversing the outsourcing of manufacturing making it harder for private companies to easily shift jobs overseas without facing public scrutiny. At the same time labor costs in Asia started to spike especially in China following the pattern first observed in Korea and Taiwan. Labor disputes in Asian countries were long suppressed by abundant supplies of rural labor moving to urban centers, but as these reserves depleted, labor disputes on working conditions and wages increased making outsourcing more costly and risky for foreign firms.

Globalization, that began with great promise to lift millions from poverty, has become for many poor a nightmare by destroying local production of manufactures and agricultural products. The countries that have gained from this are fewer than those in the group of poor countries that have lost from the process as investments have concentrated in a few major countries leaving the remainder to fend for themselves while being buffeted by cheap imports and trade gaps that can’t be easily closed without incurring more debt.

But globalization has also failed in the wealthiest nations that have benefited from the cheap imports leaving environmental But what is motivating the anger in rich countries against the economic and political elites is that when a company, like Carrier, moves jobs that paid $ 19-22 an hour to a country like Mexico where the jobs pay $ 19 a day then can be imported without additional costs replacing domestic production along with jobs. The costs of “open markets and free trade” are observed in small towns all over the country. When high cost engineers are asked to train their replacements from India before being made redundant, then it is clear that the support for integration with the world will fast disappear. The problem is that it isn’t easy or even practical to bring most of these lost jobs and factories back to life without significant damage to economies. A tariff on restrictive Chinese imports, even if there is no retaliation against US exporters, will likely have a greater impact on domestic manufacturing and retail sales.

Understanding the Global Macroeconomics – only a complex, linked, global model can provide useful insights….

The internal dynamics of the QuERI Global Model allows the development of independent estimates both of the main components of GDP and also industrial and trade patterns for 72 countries divided into six major regions and the world. Unlike traditional macroeconomic models that are demand centric, the QuERI models take into account the supply potential of countries and regions in relationship to demand





for goods and services—manufactured in the country and imported. As one country dominates an industry, it changes the employment and demand relationships that impact consumption, investment, and interindustry flows. The result is that for individual products the QuERI model generates product-life cycles.Macroeconomic Indicators-- QuERI vs EIU Baseline, October, 2015Macro Concept (% Real GR.) Region 1990-2013 2014 2015F 2016F 2017F 2018F 2019F 2020FQuERI Macro Baseline Global 0.026 0.023 0.023 0.022 0.022 0.023 0.021 0.023EIU Macro Baseline Global 0.026 0.023 0.023 0.025 0.026 0.028 0.024 0.027QuERI GDP --Demand Global 0.026 0.023 0.023 0.029 0.023 0.024 0.022 0.026QuERI GDP --Supply Global 0.026 0.023 0.023 0.014 0.018 0.018 0.016 0.017

QuERI Macro Base North America 0.023 0.024 0.023 0.027 0.025 0.025 0.018 0.024EIU Macro Base North America 0.023 0.024 0.023 0.023 0.024 0.025 0.015 0.022

QuERI Macro Base South America 0.032 0.013 -0.014 -0.005 0.018 0.027 0.027 0.028EIU Macro Base South America 0.032 0.013 -0.014 -0.007 0.017 0.029 0.028 0.031

QuERI Macro Base Europe 0.017 0.013 0.014 0.014 0.014 0.014 0.013 0.013EIU Macro Base Europe 0.017 0.013 0.014 0.016 0.018 0.018 0.017 0.018

QuERI Macro Base Asia 0.034 0.033 0.034 0.029 0.027 0.029 0.027 0.028EIU Macro Base Asia 0.034 0.033 0.034 0.037 0.035 0.037 0.035 0.036

QuERI Macro Base Middle East 0.041 0.03 0.026 0.03 0.035 0.037 0.036 0.038EIU Macro Base Middle East 0.041 0.03 0.026 0.031 0.037 0.04 0.039 0.042

QuERI Macro Base Africa 0.045 0.041 0.024 0.023 0.031 0.037 0.033 0.035EIU Macro Base Africa 0.045 0.041 0.024 0.026 0.035 0.041 0.038 0.042

QuERI Macro Base United States 0.023 0.024 0.024 0.027 0.025 0.024 0.018 0.024EIU Macro Base United States 0.023 0.024 0.024 0.023 0.023 0.025 0.014 0.022

QuERI Macro Base China 0.095 0.073 0.069 0.056 0.054 0.052 0.047 0.045EIU Macro Base China 0.095 0.073 0.069 0.064 0.06 0.055 0.049 0.047

QuERI Macro Base Japan 0.009 -0.001 0.007 0.007 -0.001 0.003 0.002 0.003EIU Macro Base Japan 0.009 -0.001 0.007 0.015 0.01 0.016 0.013 0.015

QuERI Macro Base India 0.068 0.073 0.073 0.055 0.059 0.058 0.06 0.059EIU Macro Base India 0.068 0.073 0.073 0.072 0.071 0.073 0.073 0.071

QuERI Macro Base Brazil 0.031 0.002 -0.037 -0.021 0.014 0.02 0.019 0.021EIU Macro Base Brazil 0.031 0.002 -0.037 -0.02 0.014 0.023 0.021 0.024

QuERI Macro Base Russia 0.035 0.006 -0.037 -0.01 0.014 0.015 0.012 0.011EIU Macro Base Russia 0.035 0.006 -0.037 -0.007 0.018 0.018 0.015 0.013

QuERI Macro Base Eurozone 0.013 0.008 0.013 0.011 0.01 0.01 0.009 0.01EIU Macro Base Eurozone 0.013 0.008 0.013 0.014 0.015 0.016 0.015 0.015

QuERI Macro Base United Kingdom 0.021 0.029 0.022 0.025 0.021 0.021 0.02 0.02EIU Macro Base United Kingdom 0.021 0.029 0.022 0.02 0.02 0.021 0.02 0.021





Table 1 summarizes the QuERI estimates of global GDP growth rates and EIU’s baseline projections for the same periods. The supply side measures reflect the gross output weighted by the value-added shares for each industry group. These are used as independent variables in a cross-country GDP model. The supply or production side in the model reflects the weakness in demand and the slowing of the global trade growth multipliers. As demand falls, supply adjusts, thus measuring the value-added associated with each production category and using this in the GDP equation we see that the model projects GDP growth at a rate well below that associated with estimates for output in 2016 thus reflecting negatively on the excess capacity in the world, weakness in trade, and a rapid slowdown in Latin America and Asia. The QuERI estimate for GDP is derived using an average of the demand side growth as it relates to GDP and the supply side growth averaged with a third, independent estimate of growth from the Economist Intelligence Unit (EIU).

If there is secular stagnation at work then the supply side estimates, based on production as it translates into profits and wages earned, leads to slower projected growth than the demand side of the equation that benefits from the ability to draw down savings or borrow. One exception for this rule is the United States in 2016 where the model projects real growth significantly faster than the general consensus forecast. The factors driving this higher are demand measured using standard consumption drivers through a cross-country equation and supply factors based on the value-added shares of the production base economy. Faster growth in the service economy drives United States demand allowing the economy to run large deficits on its trade and current accounts without incurring debt. Despite very weak 4th quarter growth in 2015, the US economy can continue to expand if employment growth keeps up in services. One interesting result is the slower projected growth coming from demand in the United States compared to the projected growth from the supply side model. Current negative projections for 2016 in the US is a result of macro models that suggest a slower demand from consumers even as employment growth continued and unemployment dropped to historic lows. Anemic growth in demand as wages have been depressed by competition may be the rule not just for rich advanced countries, but for the faster growing emerging markets. Our baseline for China shows an economy shifting down rapidly and that bodes ill for the Chinese government’s contract with the people – we will let you have freedom in the economic realm in return you give us the levers of government. The QuERI model projected growth for other countries and regions generally is a half a percent slower than the EIU or consensus estimates for the next five years.





So if we need at least a 3% real growth in the global economy to lift more people out of poverty, is there an alternative to the globalization paradigm that will allow the global economy to grow strongly through a broad based recovery rather than leaving it in the hands of the market to make it all right.

Restarting the Global Economy …the “Indispensable” Nation

For many years, especially during the 1990’s and continuing until today, the United States has served as the engine that once engaged could be depended upon to pull the world out of its economic doldrums. But this has come at a cost, and the cost has been the hollowing out of the American manufacturing sector leaving the nation more vulnerable today to disruption in the smooth flow of goods and even services from the rest of the world.

The reason for this role is historical --- after the end of the Second World War, North and South America were the only parts of the world not directly impacted by World War II. The United States to become “the arsenal of democracy” had built an industrial base that may, at that point in history, have accounted for 70% or more of available world capacity of manufacturing. To facilitate recovery of the war torn world, the US developed the Marshall Plan using that industrial capacity to send billions of dollars in the form of new capital and foreign aid overseas. The recovery of Western Europe and Asia was lengthy, but by the 1980’s the exchange controls that had kept the financial system from unraveling in these countries was mainly dismantled and we returned to a more normal global trading system with strong industrial players on both sides of the Atlantic and Pacific Oceans. To help the recovery, the US





adopted (and promoted) new institutions known as the Breton Woods System that included the General Agreements on Tariffs and Trade (The GATT) to manage trade disputes and lower tariff barriers, the International Monetary Fund (the IMF) to rebalance global financial imbalances to insure global trade continued to expand, and the International Bank for Reconstruction and Development (IBRD, now the World Bank) to manage the distribution of Marshall Funds and help in the rebuilding of the war torn economies of Asia and Europe. During this period, American companies shifted from being domestically oriented to some having international focuses. American foreign direct investment flows supplied new capital to the private sector as subsidiaries were built throughout the world Investments substituted for US exports making the US economy less export dependent than those of its trading partners. American companies invested in Europe building new business units including major investments in automobiles, electronics, and capital equipment. International trade as a share of the US economy was limited (less than 10% until the start of the Reagan administration).

Starting in the 1980’s and reaching a peak in 2007, the US was the primary engine of the world economy. Trade deficits increased with imports more than twice exports for much of this time after the Reagan tax cuts mid-1980s. More than seven trillion dollars in excess dollars flowed out acting as the lubrication for the world economic system – as capital, currency for transactions, or simply being banked in US Treasuries forming the reserves of Asia. With exports more critical to growth than imports, developing economies with surplus trading balances had little or no incentive to use the surplus dollars for anything other than stockpiling reserves. China would as soon burn the dollars as to spend them. The cost to the US economy was a loss of its ability to be self-sufficient in manufactures with many critical inputs only made outside the country and nearly all low margin industries packing up and closing down making US retailers dependent upon foreign-made (mainly China but increasingly from other low wage countries elsewhere) for products to sell in their stores. But again it has come at a cost – Walmart shoppers beware of gifts as rural communities found their own livelihoods threatened and destroyed as higher paid manufacturing jobs left the country. The rise of Trump and Sanders could be easily foretold in the damage done to American manufacturing even as other industries flourished in this new age.

When millions of factory jobs disappeared during the financial collapse, the American government and people began to understand the price paid for “everyday low prices” was a heavy one in terms of lives with meaning turned meaningless. The result was a new emphasis (not yet successful) in bringing back at least some of the higher skilled manufacturing countries recognized that they had fallen into a trap by the promises of globalization. For many very poor countries, previously self-sufficient in agriculture and textiles and other manufactures, opening markets has turned them back into dependencies of advanced countries and increasingly of China. Even charity given Africa in the form of clothing and shoes has resulted in the destruction of local industries. Even trade negotiations meant to improve global market productivity have stifled the natural ability of local entrepreneurs to develop home grown industries – less efficient, but the first steps on the road to modernization of economies – leaving them with work as distributors for foreign engineered and made products slowing the natural early stages of industrialization and leaving economies dependent upon agriculture and services. 2

2 The measure of services is imprecise in most markets. The significant concentration of services in developing countries is, however, likely due to the failure to fully account for agriculture in many of the poorest countries.





China’s Importance Can’t Be Underestimated…

The second growth engine, especially for Asian economies and those in Latin America and Africa dependent upon raw material exports, has been China’s extraordinary growth in productive capacity and GDP. But China has slowed as it tries to rebalance its’ economy from one dependent upon export-led growth to one that is better able to generate internalized growth reducing its dependence on trade alone for stimulus. For this shift to occur then the service economy has to replace the manufacturing economy in importance. Wages have to increase in this lower paid sector faster to drive demand for domestic manufactures. Faster growth in the value-added share (GDP compared to gross output or production share) has occurred over the period, but the service economy, like that in the US, substitutes more stable, better paying, jobs in manufacturing for less stable and lower paying employment in the service sector at a cost to the economy.

When the Chinese growth bubble finally deflated in 2014-15, the countries dependent upon selling to China the needed raw materials (and the prices paid for these products) faced ruin. Especially hard hit have been the minerals exporters and the companies in the mining and petroleum sectors. Moreover, the massive, over built, capacity of China’s manufacturing base was masked by the rapid rate of China’s economic growth rate (induced in part by the overbuilding by companies and over lending by banks) is starting to dump this excess capacity on the world causing more damage and disruption. US steel companies, hanging on like Nucor Steel, have been damaged creating the market for anti-globalization forces.

Despite the problem of agriculture’s relatively limited share, services are generally able to be measured by governments given their urban focus. It is this over concentration at the earliest stage





With Chinese demand for raw materials declining as China’s growth collapsed mid-2015, the impact has been felt widely in low prices for crude oil (impacting countries in the Middle East and Russia), raw materials and luxury food products impacting countries in Africa and Latin America (iron ore, copper, or seafood products and out of season fruits). Chinese investments in mines and transportation links ica have suffered as the money taps, once thought to be infinite, are curtailed. Given the inter-connection in the world economic system the result of this retrenchment will be felt far and wide.

This likely makes 2015 a watershed year when the hopes of billions for a lift out of poverty may have been crushed under the reality of economies well out of balance internally and externally. The over concentration of global manufacturing in a single country, China, skews the world economy in ways that make developing alternative centers of excellence difficult. The structural advantages of China – good ports, good transportation, entrepreneurial spirit, relatively low wage workers, discipline, and an educated managerial class, combined with the willingness of the government to offer low cost loans and encourage more investment—are hard to find anywhere else. The result has been a sudden, deep, and possible long lasting drop in world trade growth from an average of 6% plus real to an average of just below 5% assuming some recovery in the global GDP.

QuERI Industry Baseline, March,2016

Global 2015 2020 2015 2020 1995-20132014F 2015F 2016F 2017F 2018F 2019F 2020FTrade by Industry GroupAll Industries 20,453 25,633 30% 34% 0.064 0.015 -0.015 0.012 0.052 0.048 0.047 0.042Primary Products 5,323 5,895 16% 18% 0.045 0.01 -0.025 0.005 0.071 -0.019 0.059 0.006Manufactures 15,130 19,738 32% 37% 0.065 0.016 -0.015 0.013 0.051 0.053 0.046 0.045

Agriculture 632 724 6% 9% 0.023 0.042 -0.103 0.021 0.068 0.017 0.042 0.043Mining 4,558 5,000 27% 25% 0.055 0.005 0.01 -0.001 0.071 -0.031 0.064 -0.006Processed Food, Beverages, Tobacco 917 1,255 15% 13% 0.029 0.076 -0.1 0.023 0.061 0.032 0.06 0.049Textiles, Wood & Paper 525 676 19% 18% 0.026 0.028 -0.069 -0.02 0.046 0.04 0.039 0.039Intermediate Chemicals 1,448 2,299 30% 32% 0.033 -0.013 -0.034 0.019 0.053 0.057 0.046 0.046Intermediate Materials 1,158 1,522 33% 33% 0.04 -0.047 0.007 0.016 0.029 0.041 0.038 0.036Metals & Metal Manuf. 2,017 3,018 35% 35% 0.049 -0.079 -0.062 -0.005 0.044 0.043 0.048 0.049Capital Equipment 1,839 2,493 39% 35% 0.048 -0.019 -0.032 -0.029 0.038 0.041 0.044 0.046High Tech Equipment 2,968 3,248 32% 45% 0.113 0.041 0.018 0.038 0.059 0.062 0.047 0.045Transport Equipment 2,878 3,420 48% 48% 0.061 0.05 -0.031 -0.023 0.039 0.047 0.044 0.043Consumer Products 1,381 1,807 33% 36% 0.033 -0.028 -0.053 0.004 0.053 0.055 0.053 0.049Processed Petroleum 133 172 4% 6% 0.047 -0.089 -0.247 0.046 0.082 0.014 0.067 0.012

World Trade, Imports, Nominal $s Billions

Trade Share of Consumption Trade, Real Growth, October, 2015

China's real growth in the QuERI model is measured by the model based on internalized factors using relationships between employment, wages, and intermediate demand patterns. The model determined growth rate for GDP is slower than that either of the official statistics or the EIU baselines derived from those statistics (primarily a demand rather than supply and demand based model for GDP as in the case of the QuERI GDP models). This is the result of the slower growth in our trading partners. The following year the projected GDP growth is still below, but gradually adjusts to the point by 2020 it is equal to the EIU baseline which has built into it a slowing trend from just over 6% growth in 2015 to 4.7% by EIU and 4.6% by 2020. For the United States real growth in GDP is slightly better than the EIU baselines including better growth expected in 2019 when the EIU baseline shows a drop of almost 1% below the 2018





baseline growth rate. In general, however, the model developed, integrated macro outcomes are below the EIU macroeconomic baseline forecasts.





Prospects for a recovery in the Eurozone are less optimistic based on the integrated model than the EIU baseline. The EIU estimates for the Eurozone are all around 1.5% growth, while the QuERI model comes in around .5 of 1% below this. Again it is the weak growth in worldwide trade that skews down the forecasts. These negatives are the natural result of years of steady integration leading up to the current very high shares in most countries of the share of imports of manufactures relative to consumption of manufactures. The web connecting the countries is stronger today than at anytime in the past and disconnecting and interrupting this flow of goods and increasingly services must come at a cost to rich, emerging, and poor countries alike.

The Chinese Question – Has China’s Growth as a Manufacturing Center Been Good for the World Economy

The weakness we are seeing in the world may be a direct result of two trends – the rapid growth of China as both a center of manufacturing and as a source of demand for raw materials. Chinese dependency on exports remains significant. It reached a high of 52% in 2006, declined to 36% in 2009, but has recovered reaching 40% for the past few years. Strength begets strength so that the model forecasts that by 2025 almost 50% of Chinese GDP will be due to exports. The figure below, however, shows a more realistic measure of dependency of China on trade than a pure measure of Chinese export share of GDP –compare gross output value for exports with a value-added measure for GDP. China is both dependent upon exports for growth, but it is also dependent for imports to support that growth as much of what comes in as intermediates is assembled and exported. China is less dependent upon the international trade (relative to the size of the economy) than either Germany or the United States as the next chart shows. At the same time the Chinese export share has been increasing despite efforts by the government to reduce the country’s dependency upon export-led growth. Just four countries account for 40% of world trade, but China’s sudden growth from under 4% to 15% by 2025 has come primarily at the expense of other countries than these four. As a result Chinese manufacturing crowds out less well positioned countries from gaining fully from globalization and open markets. And now, as global trade has reached closer to saturation, with Chinese dominance in key manufacturing sectors firmly established (see Table), it is difficult to imagine how many of these newly emerging countries can prosper without some type of extra-market intervention.





We can measure the importance of China’s manufacturing in a number of ways. In 1990 China accounted for just 2.2% of world manufacturing production and just 6.5% of Asia’s capacity. By 2010 China’s share had increased to 16.6% of world manufacturing and 27% of Asia’s capacity. We expect this share growth to slow as trade concentrations reach saturation. Between 1990 and 2000 the Chinese share grew at an annual rate of 8%. It accelerated further to 13% per year between 2000 and 2010, a period when much of the rest of the world’s economies were depressed. Growth decelerated sharply after 2010 growing just at a rate of 4.2% between 2010 and 2020, and 4.8% between 2020 and 2025 reaching by 2025 a 28% share of world manufacturing capacity and 41% of Asia’s. China’s varied production assets are used internally and externally. In 1990 82% of domestic requirements for manufactures were supplied by Chinese companies (compared to 60% in the US down from near 80% in 1990).





As China has expanded its reach, the American share of the world productive and service capacity has declined. The table illustrates this shift from a US dominated global economy to one that some might say is starting to become more balanced even as the world economy has expanded – tradable goods by 3 times, services by just 30%, and total by 1.8 times by 2020 in constant prices and exchange rates.





Share of World Output 1990 1990 2020 2020US China US China

AGR 14% 5% 6% 13%MIN 9% 7% 9% 4%UTIL 11% 1% 7% 9%CONST 13% 0% 21% 4%FUELS 25% 2% 26% 20%FOOD 20% 2% 13% 16%INTERM.FIBRES 21% 4% 10% 30%CHEMICAL 10% 1% 11% 13%INTERM.MAT. 16% 2% 8% 25%CONSUMER 15% 4% 10% 30%MATERIALS 15% 2% 9% 28%CAPITAL 14% 2% 10% 20%HTECH 24% 1% 8% 25%TRAN.EQ. 22% 1% 18% 17%RETAIL 23% 1% 17% 4%TRANS.SERV. 23% 1% 17% 6%INORM.SERV 36% 0% 34% 1%FINANCE 37% 0% 40% 3%OSERVICES 7% 0% 27% 4%GDP 25% 2% 24% 10%Source: QuERI December, 2015 Baselne

How Globalization Creates Wage and Income Inequality

Inequality remains the major issue if the global economy is to grow at rates that can alleviate the dire poverty of so many billions. Inequality takes many forms – within countries with the split of incomes skewed towards the richest quintiles. This happened far quicker in the Emerging markets group than in the advanced countries group during their period of rapid industrialization – likely the byproduct of the globalized economy with its multiple opportunities for the better educated and better connected. But this inequality comes at a price – the risks of social revolution have increased. Donald Trump is not an isolated phenomenon today as far right and far left parties battle for the souls of nations. Much of the problem can be laid to the negative consequences of giving up economic sovereignty to the needs of private, globe spanning, internationalized companies with no real allegiances except to their shareholders.

Modeling advanced countries as a group, emerging and developing. The average constant dollar GDP per capita (urban population) for the advanced country group is $ 43,000, $ 7200 for the emerging group and $ 3500 for the developing country group. As we will see the potential of the global economy to create wealth is enormous and can, with the right conditions in place, be driven by the increasing





income in emerging and developing economies. Unlike the per capita income gaps that mask differences in living standards, these charts show the difference in per capita consumption for specific product groups

ADV Advanced EMG Emerging DEV DevelopingAT Austria AE United Arab EmiratesBD BangladeshAU Australia AR Argentina BG BulgariaBE Belgium BR Brazil BO BoliviaCA Canada CL Chile CM CameroonDE Germany CN China CO ColombiaDK Denmark CR Costa Rica EC EcuadorES Spain CZ Czech Republic EG EgyptFI Finland HK Hong Kong HN HondurasFR France HU Hungary IR IranGR Greece IA India JM JamaicaIE Ireland ID Indonesia JO JordanIT Italy IL Israel KE KenyaJP Japan KR Korea LK Sri LankaNL Netherlands KW Kuwait MA MoroccoNW Norway MX Mexico NG NigeriaNZ New Zealand MY Malaysia PE PeruPT Portugal PH Philadelphia PA PanamaSE Sweden PL Poland PK PakistanSZ Switzerland SA Saudi Arabia RO RomaniaUK United Kingdom SG Singapore SN SenegalUS United States TH Thailand TN Tunisia

TR Turkey UA UkraineTW Taiwan UY UruguayRU Russia VE VenezeulaSK Slovakia VN Vietnam

ZA South Africa

The main reason for this expansion in the faster growing middle income group is that it benefits from the accumulation of physical objects -- hard goods and soft goods. Ultimately, after this period of rapid accumulation of manufactures (from processed foods to automobiles), economies shift consumption habits towards more services. Advanced economies are more service oriented in part due to the declines in employment opportunities in agriculture and manufacturing as these two sectors became more productive.

It is a process that begins as productivity in the agricultural sector improves driving workers from the farms to the cities where they need more manufactured products. Extremely high labor productivity is





then captured in food processing for employees in the manufacturing sector, housing and shelter for urban workers, and finished goods for the new homes and stores of the cities. For a long time this accumulation of stuff continued with smaller improvements in the capital/labor ratio and the output/labor ratios. But as technologies shifted and globalization allowed substitution of foreign inputs for domestic higher cost inputs, direct labor per unit of sales declined in the advanced countries. But the next and current phase then began the long process of capturing this productivity gain of industry. The very success of these global conglomerates and their higher paid thought workers necessitated new services. The need for more income with leisure replacing hard goods as necessities and even take-out food for overworked dual income families added to the growth of the service sector. Thus in advanced countries labor and output are now more concentrated in services, yet as the final phase in this long process of development starts we are seeing the service sector starting to improve productivity – brick and mortar stores give way to next day service from warehouses and suppliers, and we can even see outsourcing of back-office services reducing the need for higher paid professionals.

Services including design, engineering, consulting, interior design and the culinary arts drained productivity created by machines and outsourcing. Manufacturing became less important supplanted by advertising, marketing, and software designed for organization of the “new production” process. This has spawned the development of billion dollar companies selling only services. As employment opportunities opened up for women, new services that had been provided by the “home maker” in the past expanded. As hours worked in offices increased, leisure time activities that once may have been just watching tv or reading a book, passive activities, shifted to become active ones with the development of new entertainment and food emporiums and even the growth of gyms and personal trainers. This natural progression of rich economies has yet to be fully realized in emerging and developing countries.

A careful reader may wonder if services become more productive then what comes next. Rules and regulations, higher taxes on corporate profits, higher wages for workers thus doing what economists have traditionally believed companies do, reward productivity gains in wage boosts. All these things can help stabilize the circular flow, but are fought by corporations in courts and legislatures. Globalization is used as the excuse for wage stagnation. The result is that the natural capture of the value-added improvements now going to profits are not recaptured by workers, governments, or regulations requiring expenditures to abate the worst effects of industrial and agricultural production.

Globalization’s Impact

Manufacturing shifted to the emerging market economies with less per capita incomes and growing populations. The combination of growing populations and rising incomes and the availability of lower priced manufactures allowed living standards in these nations to increase. They are in the pre-service economy consumption stage of development. That combined with their focus on manufacturing and exports to the deindustrialized advanced economies has meant that service shares have declined as consumption of traded goods shares of production (and consumption) have increased.





The less developed developing countries have lost in this game of musical chairs. They are the suppliers of primary goods and importers of manufactures. Domestic manufacturing sectors fail to fully develop. In these countries the agricultural and extractive industries dominate production, but as these are often becoming more capitalized and less labor intensive, this has driven more rural population to the cities where economies are mainly vendors of one good selling to another or providing services. This group is disadvantaged when it comes to developing a domestic manufacturing sector as a result of the concentration, existing over capacity in the emerging markets group, and the legacy manufacturing sectors in the advanced country group. Add to this the prevalence of charitable giving in the poorest countries by well-meaning Church groups sending containers of used cloths, furniture, cars, etc. and it is doubtful that this last group will fully develop beyond their current level of consumption without changing the rules of globalization in favor of local production rather than imported products consumption.

We can illustrate this using a single year’s consumption data (based on QuERI’s consumption models) showing the per capita consumption of Household Durables compared to per capita GDP. Advanced economies with their higher standard of living spend more per capita per year on household durables – furniture, furnishings, and equipment for the home. It takes an increase of around $ 41 in income to increase consumption by $ 1.0. The average consumption for the group is $ 1000 per year. For the emerging markets it takes just $ 32 in additional income to add a $ 1.0 to the purchase of these goods. The average consumption per year in this group is $ 415. For the developing group it takes a similar $ 31 for every $ 1 of additional consumption but the average for this group is $ 115.





Trade has slowed because we are beginning to reach a kind of saturation of traded products. The low lying fruit picked off during the boom years is gone. The rearrangement of the supply-demand patterns that open markets allow (Ricardian trade theory where nations benefit from improvements in use of labor by specialization) is at an end. The negative effects of open markets on labor employment and wages have run their course so that the costs of globalization are beginning to outweigh the benefits leading to backlash. The result is that we will endure a period of relative slow growth in trade likely to continue. Adding to the negatives is that with so much of the world economy in the hands of a few successful countries – Germany for capital equipment, America for high end technologies from biomedicine to electronics, and a few emerging markets like China and the Asian countries surrounding it, there is less ability of less advantaged countries to fully develop. Moreover financial assistance is likely to be in short supply while deficits in trade accounts become unserviceable leading to austerity or worse social and economic collapse.





The Economic-Political Backlash Grows and International Trade Suffers

International trade growth will slow further as more government reassesses the benefits of open markets and limited barriers to entry for foreign made products. The last thirty years of open markets has meant that more countries are specialized and thus dependent upon selling their products in order to buy necessities – from food products to luxury goods. One impact has been to hold real wages down both in rich and poor alike. The constituency supporting more open markets is declining with only companies and their shareholders cheering on this “progress”. The result will be more barriers erected in the near future. It is quite possible that the recently negotiated trade agreements in the Pacific and the Atlantic with the United States will fail to make it through the political process as the well of good will has been poisoned by companies inverting to avoid taxes or moving jobs overseas while demanding more concessions from remaining workers.

In the following two charts we show the direct, observable, relationship between the import share of traded goods and changes in real wages for the United States and China. While Chinese wages have been increasing year to year from 38 cents an hour in 1990 to over $ 3.00 an hour by 2025, there’s a direct relationship observable between the rate of change in imports of traded goods to the rate of change in real wages. A change in imports depresses the change in wages in both countries. Not surprisingly the shift from good paying manufacturing jobs to lower wage service jobs in the economy





Manufacturing share of total US employment was 16% of total in 1995, but only 11% today. During this period of decline, imports of manufactures increased and the US ran a large deficit in traded products with the rest of the world. While economists pondered if “manufacturing mattered to the health of an economy”, the structural underpinnings of rural economies where much of the small and mid-sized





factories were located often to serve regional consumers of semi-finished manufactures collapsed as factories closed and jobs disappeared. Small towns that depended upon a single industry found themselves ghost towns filled with old people. Tax bases that had supported a good standard of living surrounded by a thriving rural agricultural economy complimented by the manufacturing heart of the towns collapsed leaving shells visible along the old US highway system and by-passed by the more modern Interstates.

It has been the structural decay in manufacturing jobs, often concentrated in rural areas, that has fueled the discontent in the heartland against trade and trade agreements like the Transpacific Partnership of the North Atlantic Free Trade zone.





All of the factors cited above have contributed to the sudden slow down and then outright drop in world trade that began in 2014 and continued into 2015. This is different from the cyclical pattern of 2008-09 when trade declined by about the same amount during the financial recession but made up for the lost growth by a strong recovery in 2010. Since that period world trade growth has been uneven.

What is different from the panic that led to the deep decline in world trade growth in 2009 is that there is little prospect of a full recovery. Compare the declines in 2015 to the 2009 and the recovery year 2016 to the recovery year in 2010 and you can see that globalization as a paradigm for rapid and





sustained progress in rich and poor countries alike is possibly dead now that there is a populist revolution against open markets. We are at the stage where the winners and losers from the march towards a single global market – a winner take all system that rewards scale economies – can see the benefits and the damage done. The winner in the race to be the manufacturing center of the global economy goes to Greater China (China, Hong Kong, Korea and Taiwan). Advanced countries have been the losers as Asia’s share has increased. But there is scant growth—measured in missed opportunities coming from the maturing of advanced nation industrial output and the rapid growth in the emerging markets of more industrialized economies – in the remaining emerging markets or in the developing country group. The failure to shift from primary to manufacturing center in these other groups will ultimately lead to their secular stagnation as wages in primary sectors are lower than in manufacturing.

Wages in developed countries have been flat for years and manufacturing jobs and middle income service jobs that supported these companies have been depressed as a result of this push towards openness. The model does not integrate protectionism and popular revolutions that could cause further slowdowns in real trade growth. Both the short and the long-term patterns illustrate the dilemma of countries beginning to industrialize or trying to earn sufficient hard currency to purchase capital equipment or import necessities. The QuERI model, one of the most sophisticated models imposes few controls although the outsized growth of the past for a few countries has been constrained in the forecast on the assumption that 15 to 30% growth in trade is more an anomaly a by-product of starting from a small base. The slowdown is more the natural effect of saturation. So many industries are already nearly fully converted to being dependent upon suppliers spread throughout the world. During the period of more rapid global growth this shift from national to international sources for factor inputs and semi-finished manufactures was continuing as the same time that the vertical integration model shifted to purchases from arms length suppliers. As a result the share of factor inputs (intermediate inputs) increased as the cross product of these two trends allowing international trade to grow at rates well above global growth in output measured by gross output or value-added. Now that global supply chains are mature and the potential for this kind of substitution almost exhausted – at least in the advanced country groups – world trade will grow at rates aligned more closely with world output growth.

We can see how this plays out in the QuERI forecast for trade growth beyond the current near collapse. Unlike in 2010 when trade recovered suddenly returning closer to the previous trend, the past few years have been marginal at best. The European currency sudden devaluation set off competitive devaluations against the dollar essentially leading to a revaluation of the US currency.





The effect of nominal dollar declines in trade for major and minor countries translated into even deep declines in real trade volumes (a devalued exchange rate should increase nominal US imports assuming no change in real volumes rather than a collapse in reported trade). We have spent much time and energy in trying to decide if these declines are real, and have come to the conclusion that they represent real volume declines. One exception is the US export volumes increased, but the prices also fell as a result of the stronger dollar, while US export volumes declined.





driving down demand for primary products – raw materials, energy, and agricultural products as European recession worries and a significant devaluation of the euro combined with a slowdown in Chinese growth as leading to a sudden drop in nominal European trade that impacted the worldwide trading system negatively. The combination of euro fatigue with the long, drawn out crisis in Southern Europe after the financial crisis and the continued retrenchment in country after country – from Asia to Latin America – has left the world trading system in a state of crisis. Globalization, the panacea for the failure of countries to internalize development, has run its course. The opposition to the TPP and the counterpart agreement being forged across the North Atlantic, is due to the apparent failure of globalization to raise all boats evenly.

The End of the Washington Consensus

Major imbalances in world trade with just a few countries running surpluses – China, Japan, Germany, and the OPEC countries of the Middle East –and most others sizable or just niggling deficits has led to the crisis in Europe with the euro. Countries like Spain, Portugal and Greece, dependent as they are on tourism for much of their income and employment, needed the flexibility of exchange rate changes to reign in imports (thus promoting domestic production of competing goods). Without that ability then vacationing in Greece was as expensive as vacationing in Germany, German tourists went farther afield to find warm weather and cheap food and lodging.

The financial crisis in 2008 came at a time of massive global imbalances due, in part, to the euro allowing debtor countries to run up large and unsupported real trade deficits. Imbalances destabilized domestic





industries, increased unemployment, and make bankers nervous as imbalances indicated weak economies and bad credit risks. Governments facing rising unemployment borrowed against future prosperity making it difficult to contemplate leaving the euro-zone as the borrowed money would have to be paid back with devalued currencies adding to the debt outstanding. In short, European rules bound policies had turned what was a good idea – targets for debt to GDP as well as other rules – into time bombs that forced austerity on economies already weakened by the collapse of global confidence. Again it was the Washington Consensus with its seemingly fixed ideas about how to recover from trade induced recessions that offered few solutions to the problem of weak demand and lack of confidence in future prosperity. We project world trade growth if lucky may be closer to 4% ad world output fails to crack 3% for the foreseeable future.

Why Globalization Isn’t a Panacea for Growth

There has been significant progress over the past thirty years for the developing and emerging nations of the world coming in part as a result of trade integration, but the question remains might that progress been greater if countries paying on average 25 cents an hour had been allowed to trade more exclusively with countries with similar wage rates. During the formative period after the industrial revolution in the West, wages and prices remained roughly in alignment with mass production driving down prices, while productivity growth coming from industrialization often allowed firms to pay higher wages so that incomes could increase stimulating real demand. When wages and prices are out of alignment, the circular flow of money then can’t sustain demand. As globalization drew more poor and emerging economies into the global trading system, their raw materials and semi-finished manufactures could be sold at world market prices even as wages often were driven down by competition with other emerging and developing nations. Domestic manufacturers selling less complicated or differentiated products have to compete with foreign buyers for factor inputs making the finished products priced so that they can be sold to a smaller domestic market with sufficient income. Economists measure these alternative prices in the purchasing power parity exchange rate. In the 1990’s the PPP for China was according to the World Bank around 3 -- or a US consumer would need three times the income to buy the equivalent amount of goods at US prices. Wages in China were in that year around $ .15 an hour compared to $ 13 in the United States. In the following charts we can array many countries PPP Indices on one axis compared to the wage index (US wages as denominator). This chart shows the relationship between US purchasing power, as measured by US nominal wages, and the adjusted purchasing power for four countries – China, India, Germany and France. While there has been significant improvement the consumption available to the average US worker is even in 2014 is almost 5 times that of the average Chinese worker in manufacturing. German workers are, however, around 25% better off in terms of what they can buy in Germany with their wages compared to American workers.





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Using XY charts we can test the theory that prices and wages, even when compared using the PPP indices – are in line. If they remain skewed to one side of the 45 degree line then the disconnect between wages and what equivalents you can buy on a US consumption basis widens. Fewer people gain from the integrated world economy as the circular flow weaken

How well have the poorest countries in the group of advanced nations fared in a globalized system. Southern European countries in many ways face the same issues as poor emerging market states with the difference being a long history of seeing themselves equal to the wealthier countries of the north. Climate likely played a big role in limiting manufacturing potential for several different reasons. Growing seasons were long and winters mile creating a social climate less akin to savings and planning. Without air conditioning, productivity in factories is less than when weather conditions are more temperate. The trend lines for the advanced group of countries are skewed by the low wages reported for Spain, Greece and Portugal relative to the US or even higher sometimes European wages. At the same time they face higher domestic prices due to the close integration in the customs union. Most of the other countries do group on or slightly above or below the 45 degree line, but the outliers are important. In 1990 Ireland was a relatively poor country with low wages but some geographical advantages given its position closer to the US East coast than the rest of the Europe and also within the European with a young, educated work force. In the 2010 graph we see Ireland more shows wages and prices in almost perfect alignment. For most of the countries in the advanced country group prices and wages are in a good alignment higher or lower or on the 1:1 ratio line. We are measuring the wage index relative to the price index which uses the US purchasing power as the base (1.0). The reason is that the PPP is equivalent to what a local could buy for the same amount of local currencies as a US consumer. It should be compared to the wage index since it is wages that define purchasing power. If the marker is above the line then prices are higher than wages so consumption is less than self-sustaining. A Chinese worker earning a good wage, say $ 1.00 an hour, can purchase $ 3 dollar’s equivalent of Chinese goods, but the US worker an buy $ 30 worth of US goods for that same hours work. We measure everything in





nominal wages reflecting the impact of currency changes and differentials in prices for the same reason that the PPP is measuring the available purchasing power as of the year in question not some hypothetical period when all things like prices and exchange rates are equal.

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When Wages and Prices Diverge …. Economic Growth Suffers

In 1990 Japanese wages more than other countries but its prices were equally as high. The ratio of the price to the wage index was almost exactly 1 (.7 to .7). By 2010 wages in Japan were lower relative to US wages measured using the nominal exchange rate. Calculated PPP indices showed the prices in Japan were higher than in the US for the same equivalent basket of goods. If the rule of the dollar price holds then Japanese companies had to move at least the lower value factor inputs to cheaper foreign locations while driving workers from first to second and second to third tier companies depressing wages further. As a result consumption suffered and the economy stagnated. The import share of consumption increased. Over the period of the yen’s revaluation Japanese firms held dollar prices relatively constant to maintain market share in world markets at the expense of profits and workers purchasing power.





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Emerging Markets as a group are assumed to be winners benefiting from globalization. Investments linked to trade have encouraged higher value manufacturing and brought much needed capital and technical expertise to countries with the right set of human capital assets and physical location and infrastructure, but greater integration with the world has increased prices even as wages have been depressed by competition. In the emerging markets the wages are well below what you can buy meaning that only the upper strata of workers can benefit fully from the globalization. It also means that the countries are unable to make the real transition from being export dependent to being in control of their own economic destinies. With trade slowing to more normal levels in the advanced countries the net result will be slower growth in emerging and developing countries. The rule of the dollar price dominating every financial and business decision has led to this problem. When advanced countries began their march towards economic success they were trading mainly among themselves – all countries with similar prices and wage levels. The cost of traded goods were no out of line with these local wages so producing a car with imported iron ore or engine parts was not that much different from buying locally made goods. But today the price willing to be paid by the market for iron ore or auto parts is set by the richest countries with the highest wages. The result is that fewer local goods can be priced low enough that the majority of the wage workers can buy them in sufficient quantities to support domestic manufacturing. This limits he net benefits to the economy coming from the initial boost that came from export-led growth. The rule that “likes should trade with likes” has been broken and with international trade slowing (from saturation of markets to protectionist impulses) it will be hard for countries, even countries with partially planned economies like China, to force the transition from external to internalized growth.

Emerging Markets Group Chart Sequence

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We can see this more clearly in the 2014 chart excluding the remaining outliers with respect to the average wages paid in manufacturing (India and Indonesia). The trend line remains skewed to the left of



2014



the 45 degree line so wages are below needed rates to sustain domestic consumption. Thus to get strong enough growth to propel countries from poor to lower middle income the export-led growth model had to be followed. But as consumption of imports slows in the advanced countries due to saturation of markets and blowback from populist movements, fewer countries will be able to follow this model making it imperative to find an alternative that allows sustained growth from trading more with countries with similar wages and prices.

Yet if an American company, a retailer, contracts for a dress made in China much of the material is supplied by the company and may come from outside the country. The fabric could be imported from Thailand, cut in Hong Kong then assembled in China leaving the Chinese only with the value-added components (in this case mainly labor and local transport costs). In our model we find that the import of clothing and apparel into the United States from the world (mostly from China exceeds the reported gross output in China for clothing and apparel. We have to adjust up the Gross Output to be at least as great as China’s exports to the world of this commodity (we assume 15% over export value. Much of this regionally integrated trade in Asia may be financed by the businesses in the advanced country who ordered the finished product to their designs and specifications. The effect is even more perverse for the local industry. Rather than prosper from the exports by supplying the fabric, thread, design, marketing and distribution networks associated with the transaction, they get just a small part of the final products value-added making the export less valuable as a stimulus for the domestic industries that still must contend with having to compete for raw materials and factor inputs not available at domestic prices with international buyers and international prices that may make even local goods more expensive in terms of average workers wages limiting the ability of the economy to self-sustain growth during periods of global weakness. This leaves the government with the task of overstimulating the parts of the local economy through building vast infrastructure projects to kick start economies that remain out of balance. But while infrastructure rebuilding is neglected in countries like the United States with low taxes and consumption sometimes more than GDP (if imports exceed exports than a country is essentially living beyond its means), these infrastructure projects are often white elephants as economic development fails to follow the Field of Dreams theory that if we build it, then they will come.





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Progress Has Been Made Despite the Odds

What may be the most interesting observation from the table is that there has been progress as a result of a globalized and better integrated world. One measure of progress should be if the wage index declines closer in line to the PPP index so that prices and wages are consistent with improved economic performance. As we can see in general between 1990 and 2010 this has happened in some of the emerging market countries, but there has been regression in others. What is clear from the table is that the dependence on global commerce for all of the emerging markets has increased so that more countries are fully dependent upon global markets for the food they consume and the clothes they wear and to pay for this must export nearly all of their production. A globalized economy is in everyone’s future, the question is how to make it more fair and sustainable allowing everyone to improve their living standards.

The Ratio of PPP/Wage Index measures how globalization has impacted this group of countries. Our estimates of the ratio of PPP to wages for many countries in 1990 is closer to a unity than the ratios in 2010 and 2014. We have seen, however, that there has been an improvement for many countries, and especially in China as wages have increased faster than price indices have fallen, to show ratios that have consistently increased. But for many countries it was easier, despite low wages, to live in the past than after years of changing relative prices coming from global trade combined with the demonstration effect of modern communications on what a comfortable life actually requires. In





The table below shows for the emerging markets group of countries the ratio of domestic prices relative to the US price index (assumed to be 1.0). Thus in Argentina prices for local goods of similar type are 5 times less than in the US or the wages in Argentina can buy five times the amount an American worker can buy with his earnings. At the same time US wages relative to wages in Argentina are 4 times as high so in this mixed up world of PPP the workers in Argentina are better off living there. In neighboring Brazil, however, the PPP is just over 1 while the Brazilian wages are ¼ of US wages so that American workers are only able to buy 30% more for their wages than US workers making the ratio of PPP to Wage Index 30% of a fair exchange of unity.

1990 2010 2014 1990 2010 2014 1990 2010 2014 1990 2010 2014 1990 2010 2014United Arab Emirates3.453 1.649 1.500 2.371 4.443 4.776 1.457 0.371 0.314 0.401788 0.841697 0.847173 0.5670032 0.707545 0.743509Argentina 9.501 6.389 5.475 4.698 4.320 4.373 2.022 1.479 1.252 0.049801 0.1399 0.110376 0.1410286 0.226958 0.160119Brazil 2.422 1.441 1.305 3.372 4.182 4.137 0.718 0.345 0.315 0.10356 0.074391 0.096217 0.1118614 0.058842 0.073514Chile 1.878 1.578 1.413 7.606 5.121 4.623 0.247 0.308 0.306 0.233296 0.507972 0.51086 0.2509898 0.45597 0.465472China 3.050 2.142 1.758 94.414 12.398 7.847 0.032 0.173 0.224 0.11913 0.21115 0.228137 0.1094482 0.175282 0.156435Cost Rica 1.996 1.714 1.409 4.876 7.196 5.905 0.409 0.238 0.239 0.437092 0.199596 0.267231 0.2000556 0.141503 0.188668Czech Republic* 3.373 1.305 1.548 3.049 3.049 3.134 1.106 0.428 0.494 0.054249 0.794794 0.802437 0.0702545 0.711369 0.771936Hong Kong 1.363 1.434 1.386 2.220 2.809 2.440 0.614 0.510 0.568 0.694543 0.879988 0.843841 0.7227706 0.867047 0.852114Hungary* 1.955 1.574 1.775 5.962 4.147 3.935 0.328 0.379 0.451 0.116135 0.691255 0.649494 0.1542263 0.622236 0.607578India 2.944 3.421 3.553 30.097 26.425 23.875 0.098 0.129 0.149 0.233486 0.182766 0.157283 0.0952527 0.12174 0.15047Indonesia 4.594 3.191 2.773 47.156 25.398 21.942 0.097 0.126 0.126 0.293767 0.175563 0.139826 0.3164619 0.131802 0.131356Israel 1.224 0.955 0.932 1.724 1.811 1.625 0.710 0.527 0.573 0.377398 0.239174 0.302783 0.3629361 0.25225 0.295737Korea 1.324 1.433 1.228 2.417 1.946 1.591 0.548 0.736 0.772 0.218899 0.148512 0.227426 0.214815 0.234275 0.304784Kuwait 1.177 1.883 1.600 1.567 2.656 2.775 0.751 0.709 0.577 0.272854 0.381871 0.590806 0.447814 0.454425 0.556143Mexico 2.153 1.669 1.686 7.043 7.131 6.486 0.306 0.234 0.260 0.384551 0.583002 0.61593 0.1807633 0.467531 0.506013Malaysia 2.773 2.420 2.201 8.668 6.374 5.265 0.320 0.380 0.418 0.373199 0.484147 0.496654 0.3865291 0.514808 0.535018Philippines 3.583 2.679 2.382 16.993 18.483 15.578 0.211 0.145 0.153 0.209277 0.355145 0.29377 0.1590489 0.428577 0.409844Poland* 2.651 1.592 1.764 9.617 4.265 4.046 0.276 0.373 0.436 0.050961 0.559466 0.517466 0.1502907 0.466938 0.477659South Africa 3.436 2.382 2.382 4.143 5.051 4.423 0.829 0.472 0.538 0.34825 0.542994 0.598555 0.4295682 0.502157 0.498511Singapore 1.952 1.570 1.438 1.822 1.792 1.519 1.071 0.876 0.947 0.695124 0.444598 0.509173 0.6701968 0.572184 0.613221Thailand 2.901 2.767 2.540 25.862 15.672 12.280 0.112 0.177 0.207 0.302486 0.525946 0.471556 0.2217069 0.566125 0.511454Turkey 1.929 1.611 1.784 3.064 3.349 3.292 0.629 0.481 0.542 0.319858 0.426211 0.337327 0.1735094 0.265527 0.30363Thailand 1.324 1.433 1.228 2.401 4.160 3.784 0.551 0.344 0.324 0.312224 0.310229 0.297271 0.3233434 0.426947 0.441832Russia 2.364 1.994 1.657 6.695 5.305 4.805 0.353 0.376 0.345 0.862177 0.398377 0.323666 0.8405516 0.24153 0.215483Slovakia* 1.112 1.396 1.526 4.229 3.247 2.978 0.263 0.430 0.512 0.287532 0.625242 0.683692 0.2427322 0.583609 0.638959

US Wage/Local WagePPP Index (US = 1.0) Ratio PPP/Wage IndexImport Share Traded Goods

ConsumptionExport Share Trded Goods

Production

While the model’s estimate of future growth in the world economy may be in error, the signs and logic of slow long term global trade growth have been evident for years. The key determinant of the rapid and sustained earlier periods of trade growth at twice or more the rate of GDP growth came from the Ricardian substitution of foreign-made inputs and finished goods replacing domestic production. As the foreign share increased the amount of traded goods imported increased faster than the overall growth in demand for traded goods total. The next chart shows this clearly. It is true for rich and emerging markets as a group. The developing countries benefit initially from higher shares of imports (lacking local manufacturers) and the share declines as more local producers replace foreign ones. As incomes increase in the developing countries, the trend reverses and more imports begin the process of





replacing domestic output or fulfilling a rising expectation of increasingly wealthy upper income shoppers. During the late 1980’s and 1990’s when Japan’s surpluses increased as a result of its specialization in a few, high value, technology intensive, sectors allowing economies of scale of production to drive down prices tapping by exporting the majority of their production (in automobiles, electronics, and capital equipment) what Japan imported, aside from factor inputs such as raw and semi-finished materials as well as crude petroleum and natural gas, imports often were in the form of consumables such as beer, wine, and spirits. Luxury products that could easily fit into small apartments were equally important component of the import consumption basket buying a few, name, high fashion accessories or apparel rather than stuffing closets with low cost substitutes. Without closets of sprawling houses, Japan consumption took the form of miniaturized electronics and luxury consumables rather than clothing and furnishings. China’s imported consumption – aside from inputs used for exports (from cut fabrics to semi-conductor chips) – often resembled that earlier Japanese pattern of consumption concentrated in basic raw materials and high end components and luxury goods rather than more mass consumption items.

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Studying the import share of consumption of traded products one thing is obvious – it has leveled off at around 30% for the advanced and emerging countries groups with only a rare inroad above this maximum. Given that services are increasing as a share output then GDP growth will be marginally greater in services leaving less income devoted to traded products. Thus the long-term growth in world trade must gradually settle into the 4 possibly 4.5% average. The next chart illustrates this point, but also that the emerging markets group – primarily China – has crowded out the developing country group by taking advantage of economies of scale. The GDP shares while larger shows a similar trend to the trade shares with the emerging markets slice of the total pie becoming larger and the advanced country share smaller. Developing countries, however, are unlikely with the current pattern of global trade, to benefit from international trade. And while we may wishfully want the QuERI baseline forecast for around 4.5 to 5% real growth in world trade for the next decade to be closer to the 6% growth rates of





the previous decades, it is unlikely the conditions for trade to serve, as it has in the past decades, as an engine of global growth.

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Where Do We Go From Here…the Future of the Global Economy

The world eco-system of interlinked industrial chains at a cross roads as the costs of a globalized economy are added up and weighed against the benefits. Clearly the low prices and ability to buy almost anything at any time using credit rather than cash has benefits, but it also has come at a cost in terms of human capital and entire communities discarded. In the United States the costs are observed in depressed rural and small town communities where factories have closed and where drugs have replaced honest labor. It is no wonder that candidates like Donald Trump in the United States and leaders of right wing parties in Europe have prospered by using nativist slogans and simple ideas that resonate with the millions disposed by the rapid changes coming from an internationalized system.

Greed and self-interest are at the heart of the capitalist paradigm but with more people losing from the often high handed decisions of companies using the profit maximization model that this paradigm implies the costs may be greater than the benefits of efficiency. As computer memories and processors became less expensive, more and more mundane tasks of less skilled and even skilled workers could be carried out by computers and machines. Productivity is a two edged sword that benefits owners of capital at the expense of workers whose “rice bowls” are eliminated.

United Technologies decision to close the carrier air conditioning plant in Indiana and move the jobs to Mexico may be right for the company’s bottom line, but it creates a political backlash that could make this move ultimately costly if it starts a trade war if high import tariffs are imposed making Mexican made air conditioner units 45% more expansive as Donald Trump has implied he would impose tariffs on imports of these finished products from Mexico. Whether he had any legal authority to do it is less





important than the implied threat. Pfizer Pharmaceuticals efforts to shed its US identity for tax benefits through some fancy legal footwork adds to the problems that ordinary tax payers have with companies that want the benefits of American domicile without the costs. Without lifting a finger, the Obama Administration could stop the inversion by simply noting that American companies get first crack at NIH Research or that FDA trials of Pfizer drugs may be delayed. Stock prices would reflect the risk to the bottom line of what is at most a marginal gain in profits from the tax savings.

Carrier and Pfizer see themselves not as national champions for their industries but as global companies without allegiance to any single national entity. So if companies are perceived as global in scope then perhaps they need to be incorporated under a United Nations charter. Such incorporation could be a benefit, but it could also carry with it the obligation to set their plans in light of the global best interest rather than simply the interests of their senior managers or shareholders.

Economists worried about calling alarms to the growing imbalances observed in the global economy with so much of the surplus concentrated for so long in just a few countries and product groups suggested that ultimately prices and wages would adjust and the imbalances would be reversed. Factor price equalization, one of Paul Samuelson’s earliest contributions to economics, was formulated when there were mainly advanced countries so that the equalization of labor wages and prices could lead to an adjustment in trade balances in ways that benefit both countries – labor becomes cheaper but capital becomes less expensive in the low wage country so capital/labor ratio equalize allowing a fairer exchange and trade. Everyone is in theory better off from the exchange. It also assumes that exchange rates between labor and capital adjust to keep trade in balance.

Factor price equalization is working, however, and driving down the wages in the advanced country, but the gap is so wide that there is no exchange rate that can balance trade between haves and have nots. At the same time capital and technology are able to be easily transferred from rich to poor making productivity and costs higher than theory might suggest assume products and technology are home grown. Trade theory, as simplified by pundits and politicians, as beneficial because of the work of an English economist in the 19th century, David Ricardo, who argued that a country could benefit even if it were at a disadvantage in land and labor by specializing in one product that is less costly to produce. But Ricardo didn’t assume that a country could borrow money or that the advantages of one country in production were sufficient to destroy completely the industry in the weaker one (given that some exchange rate between land/labor in country one and land/labor in country two had to be sufficient to either fully balance trade or limit it allowing the weaker industry to survive). He also didn’t assume that countries could run chronic deficits by borrowing money from winners.

When we shift form the simplified example to multi-commodity systems with many countries the world becomes much more complex to sort out. What is clear is that companies have the power to change the direction of the world economy for the better or they can through their actions and in following what passes for the current capitalist system based on self-interest or as some might say, personal greed and avarice of senior managements create the paradox first described by Karl Marx that capitalism plants the seeds of its own destruction (by the actions of capitalists).





An Alternative Economic Architype for the 21st Century—the Post-Competitive Model

If private greed (self-interest) is out, then what could be its replacement as the organizing principle for the global economy? Cooperative self-interest is one possible solution to this problem. Declining incomes lead to slower growth and economic weakness and if this analysis is correct then it becomes in every stakeholder’s interest to maintain incomes and subsequently expand the market—in rich and poor countries alike. Wealth disparities between advanced countries and poor are so great that slow growth in Western Europe may be worth more than double digit growth in incomes in sub-Saharan Africa. Destroying high paying jobs in the United States without replacing incomes there weakens all companies even if it appears to be beneficial in the short-run to the country shifting production to save a few dollars to pass through to the bottom line. Since the end of the era of the great business trusts, governments have been in the business of breaking up or reducing business combinations that distort competition. It is illegal almost to talk to competitors in quasi-social settings. With each firm acting alone, as if its business decisions have no impact on the economy as a whole, the result is to amplify the unusual event that begins the downturn, turning what could be a short-lived retrenchment into a long-lasting recession or as in the early 1930’s a Great Depression.

The question then is there a better way to coordinate strategies. The Presidential bully-pulpit no longer works with companies seeing themselves as citizens of the wider world. Obama tried it tapping GE CEO Jeff Immelt to head a business panel back in 2011 to boost jobs as the economy began to falter as the stimulus wound down. Little came of this initiative because it ignored the problem that CEO’s answer not to the nation state where they sell their products, but to their shareholders alone. But failure to see the woods from the trees can lead to the kind of bombastic statements of someone like Donald Trump who views the Presidency as a Kingship offering to impose by his own fiat massive tariffs directed a companies that move production overseas.

And finally the popularity of Bernie Sanders on the left and Donald Trump on the right should be sufficient warning to companies long used to doing as they please with workers and economies in their quest to maximize private worth to see the bigger picture that without individual worth there is no change of recovery. It is not surprising then to me that there is a renewed interest in adopting universal basic incomes as a strategy to insure stability. The unequal sharing of knowledge and the ability of firms to produce value without paying workers full value for their work, thus concentrating wealth in fewer and fewer people’s hands will ultimately reduce the ability of economies to maintain growth, but will also lead to social revolutions. Of course blowback from mechanization is not new. Luddites destroyed machines to stop the rapid industrialization of British industry that destroyed jobs and livelihoods. Productivity is a double edged sword that can lead to periods of slow or even negative growth despite record levels of output per worker if the benefits are passed to the owners of the machine capital rather than human capital.





As the Economist in its June 4th, 2016 issue discusses in its special section on the history of “Universal basic incomes” report suggests that in light of the ability of outsourcing and automation of work to destroy useful activities the only way to sustain demand and maintain a healthy circular flow of funds is through some form of income redistribution. While living off the dole may be attractive to some, it is morally offensive and psychologically damaging to the majority of the population still able to find gainful employment and pay taxes to support the dispossessed of an economy. The problem isn’t automation of manufacturing, but rather how to split the benefits of that mechanization in ways that encourage useful activities in the service sector and the government sector. At the turn of the century the larger share of the work was carried out on the farm and agricultural sector with food products sold closer to their bulk forms, but as agricultural productivity increased, employment declined and labor shifted towards manufacturing. Farmers sold raw wheat grains to millers who sold to industrial size bakeries and break became a commodity. As productivity increased in manufacturing labor shifted to services and more subsectors stole the value-added as productivity increased again shifting labor towards other activities and the average hours worked declined from six days a week to five. Today we are seeing more workers under employed leaving a financial hole in the circular flow.

Corporate Cooperation with Government Oversight

As history has shown government intervention, as well intentioned as it might be without the concurrent support of the private sector to pick up where the government stimulus ends it fails. So long large, multi-national companies, are competing with one another to maximize shareholders benefits alone (profits rather than growth), then systematic slowdowns will become lengthy and difficult to manage. No single nation can stand alone, and the corollary slowly being learned, no large company can stand alone in face slowdowns that are mainly due to missed signals by policy makers and company executives. There is no magic bullet to change corporate psychology, but there could be some kind of change in acceptable corporate behavior that shifts responsibility to maintaining healthy markets from government to the private sector.

Governments, jointly through the United Nations Economic and Social Council, agree on a broad based international corporate registration supplemental to the national or state organized incorporation for companies. Large and medium sized companies would be free to reorganize using this form of international incorporation that would carry multiple benefits including fewer restrictions on currency repatriation for profits and no restrictive rules on ownership of subsidiaries allowing majority control by non-country nationals. Guarantees against expropriation and rebates for tariffs above some agreed maximum could be useful as well. Fewer visa restrictions on foreign nationals working in management positions could be an added benefit.

In return for these benefits, companies would be organized into Sector Corporate Cooperation Councils along vertical supply chains with at least two Sector Councils for each major industrial group – High Technology, Machinery and Capital Equipment, Basic Materials, Food Products including Agriculture, etc. A Council of Councils would set minimum targets for growth, employment, investment, profits, and





relative wages (between the highest and lowest paid workers by location). Multi-national government organizations would be responsible for setting these goals, but corporate councils would be asked to find ways through cooperative business behavior to meet these goals. The responsibility for insuring stable, long-term, healthy growth and meeting environmental goals as well would be jointly shared.

Competition is maintained by having multiple organized corporate keritsu’s in the same industrial chains and smaller and medium sized companies would be allowed to grow in symbiotic relationship to these global supply chains with the aim of eventually reaching critical mass to either join one chain or be reorganized into a new competitive chain. Like the effort of today’s Central Banks with their loosely coordinated monetary strategies during periods of low or negative growth, the Council of Councils would be charged with coordinating strategies for maintaining global growth and also meeting larger goals of reducing carbon and insuring sufficient energy to allow faster development and even survival in the poorest countries.

Can Cooperative Behavior Work in Today’s Overly Competitive World

Why should this system work better than the beggar-thy-corporate-competitor model used today especially during times of economic slowdown or collapse. One reason is that failure of companies to follow through with plans individually could be reason for withdrawing global incorporation benefits. Losing these carrots might be a worse alternative than forgoing profits in the short-run to hire more workers or opting for investments in new businesses despite the risks of business failure.

In the Phoenix Year trilogy the collapse of markets allowing a single Trust to own sufficient number of shares to take over Boards of Directors is the mechanism through which this coordination is achieved. Companies voluntarily submit to this new discipline as managements are replaced by managers willing to take a chance on cooperation and sailing against the prevailing negative winds because they no longer are rewarded by share prices and stock options. But could this be achieved with as suggested some form of internationally sanctioned global corporate incorporation. I suggested this approach so many years ago while I was working at UNCTAD and published it in an article in Business Economics sometime in 1973. For this cooperative economic plan to work, then governments must perceive that coordination of their own policies and laws is the only way to insure that goals reached independent of private sector actors for meeting climate change goals or insuring global economic stability can be achieved is if the private sector has buy-in to these plans.

Final Thoughts

Changing corporate culture may be the most useful approach to insuring long-term economic prosperity for rich and poor alike. Populist backlash against globalization is a natural outcome of the uneven pattern of benefits and costs that the last three decades have offered both to rich and poor countries alike. If we are to insure stable, beneficial economic growth then companies will have to do their part. Keynesian stimulus without support from the private sector has often led to growing and unsustainable imbalances on current accounts and government balance sheets. With world population size reaching





towards 9 billion, mass migrations occurring as climate change affects regions already in food deficits destabilize social and political balance in countries still better off leading to backlash against immigrants.

In this paper we have examined how globalization has impacted long-term growth for three groups of countries – wealthy advanced countries, emerging markets, and developing countries. Gaps between these three groups remain wide and are unlikely to narrow without changes in the way the private sector and national governments interact. No single nation, including the United States, can change its destiny by closing off the world, and yet this is the message of populist candidates everywhere. Turning the clock back on the past is impossible, but allowing the current system of disjointed growth to continue will also fail to solve the most pressing of the world’s problems:

Income inequality and depressed real wages from global completion leading to uneven growth in demand and forcing governments to support growth through tax breaks and direct aid. One study suggested that the top 1% took in 85% of the income growth occurring since the recession began in 2008 reducing significantly the circular flow needed to lubricate and support short and long-term growth.

Concentration of early stage manufacturing in single countries or regions opens the world economy to supply chain failures and economic blackmail leading to populist outrage against globalization as jobs shift from higher valued manufacturing jobs to lower value service employment for less skilled workers.

Managerial capitalism with its short-term goals of the next quarter’s numbers reduces the ability of governments to influence company behavior using the “bully pulpit” making recovery from economic recessions difficult. Failure of companies to hire and invest using excess profits to maintain depressed share prices often with borrowed money opens the door to a 1930’s style depression.

Corporate internationalism helped by trade agreements that reduce barriers to entry for foreign-made products opens the door for anti-globalization nationalism leading to the potential for backlash against existing and future agreements to integrate the world economy.

Climate change and drought may be the final straw forcing a reassessment of internationalism as nations start to look inward for solutions to problems despite decades of integration making slogans like “America first” or Brexit obsolete and dangerous simplifications and solutions.

In a way we are inching closer to the 1930’s world with just the major actors changing. Russian nationalism and feelings of loss of global position replaces German nationalism with military expansion taking precedence over economic opportunities. The recovery from the financial crisis of 2008 has been in spurts of optimistic growth followed by sudden collapses in confidence and rising wage inequality in ways similar to the late 1930’s. In the Pacific Chinese expansionism replaces Japanese and is in the process of developing an economic sphere of influence as the US retrenches leaving a vacuum for China to fill. In short the idea of a cooperative global strategy to solve the pressing issues and motivate world spanning corporations to work in concert with governments may be just a pipe dream. The question is





will it take another war, one fought with impossible to control weapons of mass destruction, to finally unite what’s left of the world community after its end into finding real solutions?

And yet I believe that perhaps there is a possible solution that comes out of the disruption that Brexit might cause to global harmony. China and the United States in the Pacific can if united in a single purpose – to get the world economy of which they are both major players moving strong enough to damp down the forces breaking apart the globalized economy if they offer solutions to the above problems that are real and constructive and can shift the global economic paradigm from private self-interest to cooperative benefit.





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