Why it seems everything we knew about the global economy is no longer true

When the world’s business and political leaders gathered in 2018 at the annual economic forum in Davos, Switzerland, the mood was jubilant. Growth in every major country was on an upswing. The global economy, declared Christine Lagarde, then the managing director of the International Monetary Fund, “is in a very sweet spot.”

Five years later, the outlook has decidedly soured.

“Nearly all the economic forces that powered progress and prosperity over the last three decades are fading,” the World Bank warned in a recent analysis. “The result could be a lost decade in the making — not just for some countries or regions as has occurred in the past — but for the whole world.”

A lot has happened between then and now: A pandemic hit; war erupted in Europe; tensions between the United States and China boiled. And inflation, thought to be safely stored away with disco album collections, returned with a vengeance.

But as the dust has settled, it has suddenly seemed as if almost everything we thought we knew about the world economy was wrong.

The economic conventions that policymakers had relied on since the Berlin Wall fell more than 30 years ago — the unfailing superiority of open markets, liberalised trade and maximum efficiency — look to be running off the rails.

During the Covid-19 pandemic, the ceaseless drive to integrate the global economy and reduce costs left health care workers without face masks and medical gloves, carmakers without semiconductors, sawmills without lumber and sneaker-buyers without Nikes.

The idea that trade and shared economic interests would prevent military conflicts was trampled last year under the boots of Russian soldiers in Ukraine.

And increasing bouts of extreme weather that destroyed crops, forced migrations and halted power plants have illustrated that the market’s invisible hand was not protecting the planet.

Now, as the second year of war in Ukraine grinds on and countries struggle with limp growth and persistent inflation, questions about the emerging economic playing field have taken centre stage.

Globalisation, seen in recent decades as unstoppable a force as gravity, is clearly evolving in unpredictable ways. The move away from an integrated world economy is accelerating. And the best way to respond is a subject of fierce debate.

Of course, challenges to the reigning economic consensus had been growing for a while.

The financial meltdown in 2008 came close to tanking the global financial system. Britain pulled out of the European Union in 2016. President Donald Trump slapped tariffs on China in 2017, spurring a mini trade war.

But starting with Covid, the rat-a-tat series of crises exposed with startling clarity vulnerabilities that demanded attention.

As the consulting firm EY concluded in its 2023 Geostrategic Outlook, the trends behind the shift away from ever-increasing globalization “were accelerated by the Covid-19 pandemic — and then they have been supercharged by the war in Ukraine.

‘The end of history’

Today’s sense of unease is a stark contrast with the heady triumphalism that followed the collapse of the Soviet Union in December 1991. It was a period when a theorist could declare that the fall of communism marked “the end of history” — that liberal democratic ideas not only vanquished rivals but represented “the end point of mankind’s ideological evolution.”

Associated economic theories about the ineluctable rise of worldwide free-market capitalism took on a similar sheen of invincibility and inevitability. Open markets, hands-off government and the relentless pursuit of efficiency would offer the best route to prosperity.

It was believed that a new world where goods, money and information crisscrossed the globe would essentially sweep away the old order of Cold War conflicts and undemocratic regimes.

There was reason for optimism. During the 1990s, inflation was low while employment, wages and productivity were up. Global trade nearly doubled. Investments in developing countries surged. The stock market rose.

The World Trade Organisation was established in 1995 to enforce the rules. China’s entry six years later was seen as transformative. And linking a huge market with 142 countries would irresistibly draw the Asian giant toward democracy.

China, along with South Korea, Malaysia and others, turned struggling farmers into productive urban factory workers. The furniture, toys and electronics they sold around the world generated tremendous growth.

The favoured economic road map helped produce fabulous wealth, lift hundreds of millions of people out of poverty and spur wondrous technological advances.

But there were stunning failures as well. Globalisation hastened climate change and deepened inequalities.

Companies embarked on a worldwide scavenger hunt for low-wage workers, regardless of worker protections, environmental impact or democratic rights. They found many of them in places such as Mexico, Vietnam and China.

Televisions, T-shirts and tacos were cheaper than ever, but many essentials such as health care, housing and higher education were increasingly out of reach.

The job exodus pushed down wages at home and undercut workers’ bargaining power, spurring anti-immigrant sentiments and strengthening hard-right populist leaders such as Trump in the United States, Viktor Orban in Hungary and Marine Le Pen in France.

Jake Sullivan, US national security adviser, said in a recent speech that a central fallacy in American economic policy had been to assume “that markets always allocate capital productively and efficiently — no matter what our competitors did, no matter how big our shared challenges grew and no matter how many guardrails we took down.”

Poor countries paid price

In developing countries, the results could be dire.

The economic havoc wreaked by the pandemic combined with soaring food and fuel prices caused by the war in Ukraine have created a spate of debt crises. Rising interest rates have made those crises worse. Debts, such as energy and food, are often priced in dollars on the world market, so when US rates go up, debt payments get more expensive.

The cycle of loans and bailouts, though, has deeper roots.

Poorer nations were pressured to lift all restrictions on capital moving in and out of the country. The argument was that money, like goods, should flow freely among nations. Allowing governments, businesses and individuals to borrow from foreign lenders would finance industrial development and key infrastructure.

“Financial globalization was supposed to usher in an era of robust growth and fiscal stability in the developing world,” said Jayati Ghosh, an economist at the University of Massachusetts Amherst. But, she said, “it ended up doing the opposite.”

Return to self-reliance

Although the collapse of the Soviet Union cleared the way for the domination of free-market orthodoxy, the invasion of Ukraine by the Russian Federation has now decisively unmoored it.

The story of the international economy today, said Henry Farrell, a professor at the Johns Hopkins School of Advanced International Studies, is about “how geopolitics is gobbling up hyperglobalisation.”

Old-world-style great power politics accomplished what the threat of catastrophic climate collapse, seething social unrest and widening inequality could not: It upended assumptions about the global economic order.

Josep Borrell, the EU’s head of foreign affairs and security policy, put it bluntly in a speech 10 months after the invasion of Ukraine: “We have decoupled the sources of our prosperity from the sources of our security.” Europe got cheap energy from Russia and cheap manufactured goods from China. “This is a world that is no longer there,” he said.

Supply chain chokeholds stemming from the pandemic and subsequent recovery had already underscored the fragility of a globally sourced economy. As political tensions over the war grew, policymakers quickly added self-reliance and strength to the goals of growth and efficiency.

The new reality is reflected in American policy. The United States — the central architect of the liberalised economic order and the WTO — has turned away from more comprehensive free-trade agreements and repeatedly refused to abide by WTO decisions.

Although the previous economic orthodoxy has been partly abandoned, it is not clear what will replace it. Improvisation is the order of the day. Perhaps the only assumption that can be confidently relied on now is that the path to prosperity and policy trade-offs will become murkier.

This article originally appeared in The New York Times

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