The Interregnum

While the rest of you were struggling under grey skies and rain, I spent the end of last week under the blue skies and fresh Atlantic breeze of Porto, Portugal. Now, before I lose half my audience through jealousy, I can say that I was working at a corporate event on the topic of the uncertain future for globalization.

With supply chains in chaos and the key trade relationship between the US and China still in a delicate state, the future of globalization is something that bears heavily on corporations as they emerge into the post covid recovery.

While many of the people I met felt that the image of a deflated globe (see the logo above, and cover of ‘The Leveling’) was too pessimistic a representation of the state of the world economy, my current roadmap is that we are on a path away from the globalization of the period 1990-2020 (fall of communism to the fall of Hong Kong), and towards a new multi polar form of world order, that has largely yet to be constructed.

To give this phase or path a name, I propose ‘Interregnum’, an English term to denote a pause between periods of government (notably used between the end of the reign of Charles I and the ascension of Charles II to the throne between 1649/60 – highly relevant to the Levellers by the way).   

Today, the Interregnum is the mid stage of a paradigm shift (see Thomas Kuhn’s Structure of Scientific Revolutions) and is characterized by noise, uncertainty, and multiple contests between the ‘old’ and the ‘new’ (finance is a good example with the emergence of ‘DeFi’ or decentralized finance).

In the Interregnum, new leaders have yet to emerge (think of the USA, Russia and China) and the firm ‘rules of the game’ of the new world order have not yet been fixed (there is no binding agreement on the rules of engagement of cyberwarfare for example).

That’s not an optimistic sounding diagnosis, though a realistic one, and one that should also challenge the view that everything is well in our world.

What is also confusing is that in the context of globalization (an intertwined, interconnected and interdependent world where nations are willing to sacrifice some sovereignty for better trade relations), there are several emerging trends that could be taken as representing a return to globalization, but in fact do not do so.

One of these is the upturn in the business cycle, which has had a huge helping hand from government spending and developed world central banks. Indeed, one interesting snippet from the earnings calls of large US banks is that households are cash rich and this should fuel consumer spending into the second half of next year. In contrast, I suspect that China is now close to a recession.

More broadly, my point is that a rise in economic activity is not the same thing as a resumption of globalization. Globalization is a very specific pattern of activity and while many of the drivers of globalization such as the flow of people and ideas are in abeyance, other, distinct patterns are emerging.

In general, globalization and the business cycle (see the NBER page on business cycles) have a very odd relationship. Prior to the beginning of this wave of globalization the world enjoyed a regular rhythm of short business cycles. In contrast, the period of globalization has been marked by the two longest periods of expansion in modern economic history (1991-2001, 2009-2020), punctuated by the dot.com bubble and the global financial crisis.

A partial explanation for this is that the positive effects of globalization – China exporting deflation, emerging economies growing up, greater global consumption and the international disintermediation of financial risks have all helped to dampen and sustain business cycle expansion phases.

Another positive trend that bears watching is the acceleration of the digital economy, which from an investment point of view is exciting and disruptive. There is a temptation to say that the advent of the digital economy portends the revival of globalization but my sense is that the effects of digitization will be largely confined to industry verticals and nation states.

Consider the point someone made to me of the hundreds of thousands of Indian ‘tele-doctors’ – they will disrupt the Indian rather than say the UK health system. Consider also the vast amounts of data that will be created by the application of 5G and then 6G to our cars – the use and storage of much of this will be local (at least in Europe) than global.

However, the idea that technology is transforming the nature of economic activity is a very important one, and one that gives clues as to what will replace globalization. For corporations, globalization meant that they could optimize their activities through an interconnected network of activity – a factory in Mexico, fed by research and development in Zurich from a head office in Berlin, inspired by marketing specialists in Barcelona and sold to consumers in North America.

The effective end of cheap labour, the rise of protectionism as a political issue and advances in robotics most likely mean that the trend of ‘going abroad’ is slowing. What is more interesting is what is happening to consumers and workers – to a large extent they are ‘coming home’ – feeling freer that they can, even at the margin, work from the city of their choice and consume more services online (from legal advice to trying on clothes virtually).

I am not sure what the long term effects of this can be but I suspect that in Europe at least people flows will be better distributed around second and third cities (Bordeaux, Porto, Munich, Malmo for example) and that there will be greater attention to local political issues (one sub trend I have picked up on is the growth in applications that seek to make participation in local democracy easier and more innovative – see Polyteia, Citizen Lab, Civocracy and Fluicity for example).

That’s probably a hopeful way to end this chapter of the debate on the future of globalization, or ‘what’s next?’

Have a great week ahead,

Mike 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s