The most recent years have either exposed serious flaws in liberal democracies or a model for globalization that was unsustainable, ill-designed and oblivious to the environment. Globalization was set to usher a new era of uninterrupted growth, with the distributional effects less uneven. As economies became increasingly interlinked, with economic and capital account liberalization incentivizing capital and financial flows across borders, countries with less developed financial markets were increasingly able to access foreign finance, innovation, and expertise. This made some countries richer and groups within others’ poorer.

Source: FT

Despite millions of people moving above the poverty line in India and China, most of the emerging market world remains plagued by low and sometimes absent productivity. Although this has more to do with their location in global value chains — mainly exporting raw materials instead of manufactured products — the benefits of globalization such as increased internet access and digitization have been meager at best. As illustrated below, trade a percentage of GDP has risen dramatically, a boon for global trade, employment, capital & financial flows, wages and standards of living. But the distributional effect has been unequal amongst and within countries.

The list of unfortunate issues ranging from corruption, inadequate infrastructure to the absence of intentional public policy as well as increased electrification and internet access have prevented previously assumed economic convergence. Except for China, which has leveraged the lack of enforcement or ignored the global rules-based order and India up-skilling its population, most countries membership in the WTO or World Bank have resulted in little palpable gains. Asia is a model for most emerging market economies, from Japan providing the digital infrastructure for the likes of Brazil to China connecting South East Asia via roads, railways, bridges, and ports. A prime example of this concise and intentional approach to development and economic stability in Malaysia, whose infrastructure-centric approach to development saw trade volumes in machinery, raw materials amongst others increase with China in recent years.

Inequality is an unfortunate consequence of globalization!

Despite financial and trade interlinkages in South East Asia with billions of people lifted out of poverty, inequality is just as relevant as it is in the Western countries. A clear trend is, however, is beginning to emerge. There can be no development without physical and digital infrastructure ranging from internet cables, pipelines, roads, hospitals, schools, and ports. For all the talk about the Belt&Road initiative as debt-trap for participating countries, the infrastructure gap currency facing most countries are unlikely to be addressed via-a-vis debt sustainability concerns and precarious macroeconomic backdrops. Following the seizure of the port in Hambantota, where China now holds a 100-year lease on a strategic port; concerns of debt-trap diplomacy have grown louder. Such claims, however, appear overstated.

Counterproductive for China or not!

One could simply ascribe to the debt-trap diplomacy view based on the experience in Pakistan and China’s demand for resources — oil, iron, aluminum — as collateral, but this is misguided and naive. China expansionist strategy directly contravenes this, as they pride themselves as remaining independent from countries internal affairs. Anything designed to compromise this view will hurt China’s long-term plans and could create greater skepticism among BRI member countries. The real question regarding China’s approach to globalization is whether or not it is simply shifting its dirty industries and lower-end manufacturing industries to less developed parts fo the world? Instead of worry about China’s forced technology transfers and subsidies to state-owned enterprise, the multilateral trading system could instead be leveraged in other to ensure faster technology adoption by countries it trades with. After all, a majority of said countries are members of the WTO.

China’s commitment to the Paris Climate sends conflicting signals

Recent experience in Lamu — a global heritage site- famed for tourism has bought this question to the fore. Following its manufacturing and investment bonanza, China is slowly transitioning to a service-driven economy as its growth cycle matures. It is also transitioning away from fossil fuels slowly, whether working with western companies to produce floating solar panels, its commitment to the Paris climate agreement is increasingly palpable. Nevertheless, they’re exporting and funding coal projects abroad whilst producing the cheapest electric vehicles and working with the likes of Saft — a French company to create floating solar panels. A recent decision by the courts in Kenya abolished the new projects, which would have caused significant damage to the environment, quell tourism, economic activity, affect livelihoods and increase the risk of adverse health conditions for indigenous communities and Kenya at large shows how governments must intervene to curb the excesses of globalization. Following the decisions, the third portion of payments for a rail project in Kenya was stopped, justified by concerns of graft and mismanagement. Whether or not this is related to the recent decision on coal plants in Lamu remains; it might simply be unfortunate timing, or not!

Can there be clean globalization?

Recent experience suggests, a significant challenge to clean growth stems from the absence of global standards for trade. It strikes me so vividly, that international organizations are only waking up to this now. Although one must commend the International Maritime Organisation (IMO) for reducing the sulfur requirements in crude for ships and freight travel, a global approach to environmental policy and enforcement appears to be the most efficient way to address environmental concerns and economic inequity. An excellent starting point is the Belt& Road initiative; should investors demand more rigorous environmental standards, green financing will precede green growth in member countries, increasing accountability and governance from Chinese companies.

Nevertheless, whilst world leaders grapple with the design and implementation of more forward-looking policy, countries should advocate investment in climate-resilient infrastructures such as solar panels and wind turbines to create a more effective and diverse energy mix. Asking for solar farms instead of coal plants is a start, but there is a chance emerging markets will get caught in the development trap through no fault of China, but rather a less-exacting vision for their growth and economic prosperity. There is no reason why investors shouldn’t demand countries to work with firms leading the climate revolution. Not only will this speed up the adoption of a STEM education due to the labor market needs, which is the only way to enable EMs to compete effectively and contribute higher-up in global value chains, but the Paris Climate Agreement will also likely be achieved.

Technology can tame the excesses of capitalism

There is no doubt that wind, solar and biofuels are becoming increasingly prevalent but the market will be transformed sooner, rather than later, as investments in battery storage technologies become more prevalent. Companies such as silicon valley-based firm “Megapack” and Mitsubishi Hitachi power systems are prime examples of the transition towards renewables.

Meanwhile, Scottish Power, an energy provider, recently spent $7.2 billion on renewable energy (IEEFA) on renewable energy and battery storage, generating all its power from renewables sources. The World Bank is also investing $1 billion in battery storage projects, including one of the largest storage power-mix for wind and solar in India, with one underway in South Africa. High capacity batteries were expensive until recently, falling by 40% since 2015; as have lithium and vanadium, two keys materials used in such batteries. The speed of the climate transition now almost certainly hinges on the policy inertia and the absence of intentional policies to ensure active labor market programs support a cleaner and more efficient economy.

Good Lessons from the East

Additionally, the quality of solar modules has improved significantly in South Korea, which bodes ill for countries looking to transition to cleaner sources of energy. Rather than allow China to invest in coal plants in countries with less stringent environmental regulation such as South Africa, development assistance and bilateral relationships should seek to replicate such successes. According to South Korea’s Ministry of trade, industry, and energy (MOTIE), newly installed PV installations reached 1.64 GW in the first half of the year, following a 2.02 GW outcome in 2018. This improvement in production could accelerate the rate of taking up in emerging market economies.

Globalization and Inequality

As widely known, one of the most unfortunate externalities of globalization is inequality, in spite of the gap narrowing amongst countries somewhat. The most worrying trend is that manufacturing jobs requiring human dexterity are unlikely to lift millions out of poverty. As artificial intelligence and robotics improve, the apparel industry is unlikely to relocate to low-cost destinations in droves. As such, the under-skilled population, which comprises a significant portion of the labor market in developing economies are unlikely to see significant income growth, which will skew wage gains towards more skilled individuals in the labor market. A recent paper by the World Trade organization underscores this point, the benefits of globalization and trade are already accruing to more skilled individuals, exacerbating inequality.

Making globalization less unequal

Before imagining a more equal world, where the benefits of globalization are more evenly distributed, emerging economies must understand their development trajectories. The traditional path to development where countries move from exporting primary goods to manufacturing, high-tech manufacturing and services is unlikely to serve poorer countries well. A recognition of the global skills gap and convergence towards services and Intellectual property- driven growth should enable governments to plan better on how to improve their competitiveness over the longer term. The need to leapfrog has never been more urgent. Rather than seeking to emulate China, a mixed approach is more salient and likely to lead to more pragmatic outcomes.

Education isn’t the answer if it isn’t skills-based

The global consensus is to increase attendance rates and completion of secondary school. However, this approach has significant drawbacks. It is now widely known that capitalism hinges on data, be it in tech, retail, manufacturing or services. The focus for governments should be in STEM (Science, Technology, Maths, and Engineering) education, which will support a more creative approach to problem-solving and development. Simply ensuring students complete school is unlikely to fill the skills gap as recent experience in the West has shown. Rather, a skills-oriented labor market as education policy will enable companies in emerging markets to contribute more advanced products and services, increase productivity, wages and ensure the distributional impact of globalization is less uneven.

As illustrated in the chart, out-of-school children of primary age have fallen dramatically since 1995. Nevertheless, as recent experience from populism shows, deindustrialization suggests that school completion rates are not always linked to higher levels of productivity. The new demands for the labor market following demographic changes, technological disruption and changing business models suggest urgent changes to education to address inequality within and among countries. Some advanced economies continue to report a skills gap in the labor market, with hiring for highly skilled roles becoming increasingly challenging for employers. Both the Confederation for British industry and the Riksbank (Swedish Central Bank) underscore this point. Some would retort that STEM education cannot solve all of societies problems, but it can vastly improve job security, whilst addressing regional inequities and facilitate the climate transition.

Globalization has improved countless lives, increased access to healthcare and education. Nevertheless, emerging markets must implement a more intentional approach to development in other to escape the never-ending development trap. This calls for emphasis for a more advanced education and labor market policy, which will not only ensure clean growth but also address inequality. China and Singapore are examples of how to make technocratic governments work, but India has leapfrogged in digital payments space with technology playing an indispensable role in its development. There is no one-size-fits-all approach to development, but rethinking education and the role of technology in development is a start.

References.

  1. The Wall Street Journal (2019). Battery storage cost reductions making solar, wind the generation technologies of choice. Available here.

2. PV Magazine (2019). South Korea on track to add a record amount of solar generation in 2019. Available here.

3. Quartz (2019). Major British brewer plans to green its operations in Africa with solar and biomass. Available here

I am an economist and contributor to Nkafu policy, a think tank. I cover global economic, fiscal and monetary policy with policy and asset price implications.

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