The Next Phase of GlobalisationShujitzu Global Forum, april 16th 2016
Good afternoon Ladies and Gentlemen. Thank you for taking time from your busy schedules to be here, and for your support to Shujitsu Gakuen.
It is a great honour for me to attend this Shujitsu Glocal Forum. I look forward to a very stimulating discussion.
Globalisation has become one of the dominating features of economic and business life over the past 70 years since our world wars were thankfully replaced by peace after 1945. It has passed through many different phases during that time.
My plan today is to offer a short history of that globalization, trying to describe those different phases. Then I will offer my thoughts about what the new, current phase of globalization is likely to bring. Finally, I will say a few words about the approach that company managers might want to use in dealing with new phase, and with the risks and opportunities it promises to bring.
This is not the first era of globalization. The great British economist John Maynard Keynes, later Lord Keynes, wrote of how in the period before 1914, globalization of trade and the free movement of people and ideas had taken hold. He said:
What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914!... The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth…and reasonably expect their early delivery upon his doorstep; he could at the same moment…adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages... He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality…But, most important of all, he regarded this state of affairs as normal, certain, and permanent...
I am sorry for Keynes’s slightly complex and elaborate English. But he meant simply that before 1914 it was easy to trade, to invest abroad, all over the world, and to travel freely. And people thought this globalization would never end.
That is a lesson to all of us today. Globalisation can end, it can change direction for many decades. For that pre-1914 phase came to end thanks to war, thanks to the conflict, chiefly in Europe, of 1914-18, which ended with some empires collapsing and with many countries, all over the world, raising barriers to trade between each other. The Great Depression of the 1930s raised those barriers even higher.
However peace in 1945 brought in a new phase. It created a big increase in the number of democracies among the industrialised countries of the world, a newly stable and more liberalized financial system, and the beginning of an effort to re-create the open, fairly free trading system that the world had lost.
Post-1945 globalisation began, I would say, as an economic trend driven by falling trade barriers between North America and Europe, by the very large flow of capital investment from the USA to Western Europe in the “Marshall Plan” of reconstruction, and by the creation in 1957 of the European Economic Community.
By the 1960s, globalization extended to Japan, with Japan’s membership of the General Agreement on Tariffs and Trade in 1955, and thanks to the big rise in Japanese exports resulting from Japan’s reconstruction and high-growth period. This benefited also from the fixed exchange rate of the Yen under the Bretton Woods currency regime that had been established after 1945.
In 1962 the British magazine The Economist, for which many years later I had the honour of working as its editor, recommended to its readers that they should “Consider Japan”. That was the title of a major report written by its then deputy editor, Norman Macrae. Readers should pay attention to Japanese industrial and management success, he said, and should also expect that Japanese success very soon to reach into European and American markets through export competition.
One might say that the 1964 Tokyo Olympic Games was one major symbol of this phase of globalization, and in many ways it was a perfect symbol of reconnection, of technological change, and of Japan’s re-emergence as a modern industrial, urban and trading nation.
Europeans however would say that the most significant symbol of this phase of globalization was the arrival in Western Europe of American multinational corporations, building factories and sales operations, buying European companies, and establishing trans-national structures that were more competitive and more modern than those of equivalent European companies, which were still principally national in nature and structure.
Jean-Jacques Servan-Schreiber, a French business writer, who later entered politics, wrote a famous book in 1967 describing this as “Le Defi Americain”, the American Challenge. It was a challenge he thought that Europe was in danger of losing.
The City of London might add that a significant feature was the arrival of American-style finance and especially dollar-based banking and securities operations. This was known as the “Eurodollar” market, with dollars deposited in and traded in Europe, partly to avoid US restrictions and taxes. Globalised finance was on its way.
By 1970, globalization represented principally a three-way process connecting together North America, Western Europe and Japan, through trade and a growing amount of overseas investment. That economic reality, combined with the political importance of the alliances connecting the US, Europe and Japan, encouraged the US billionaire David Rockefeller to create “The Trilateral Commission” a body linking top thinkers and policy-makers in Japan, Western Europe and the US that still exists today.
The 1970s brought a new phase of globalization, thanks to the Nixon shock and oil shocks that were so notorious in Japan. The Nixon shock brought to an end the Bretton Woods currency regime and replaced it with floating exchange rates, soon accompanied by the removal of controls on capital movements between countries that was led by Britain in 1979.
That end to currency stability gave a new encouragement to international companies to invest overseas rather than exporting, in order to cope better with such exchange-rate volatility. The true age of the multinational, with factories and operations in many countries, had begun.
The oil shock transferred huge amounts of wealth to oil-producing countries, mainly in the Arab world, generating a new business of international banking whose goal was to recycle that wealth in the form of international loans.
And, in the same decade, communications satellites initiated a new era of globalization being promoted and facilitated by information and communication technology. It was significant for my own company, The Economist, which was able in 1979 to launch its first locally printed edition of the magazine in the USA, thanks to being able to transmit the content via satellite to a printing plant in Virginia, from which it could serve the US market on a more timely basis.
At that time, the worldwide weekly sales of The Economist were less than 200,000 copies. Now, nearly 40 years later, worldwide sales are 1.6 million copies. The Economist became a symbol of globalization, while also of course being a magazine devoted essentially to the topic of globalization.
The 1980s, as all of you will know, was a phase of globalization that in the media and in academia was dominated by talk of a contest between America and Japan. Encouraged by the bubble economy and by the rising value of the Yen, especially after the Plaza Accord of 1985 between America, Japan and the other leading industrialised nations, Japanese companies became big overseas investors, buying Columbia Pictures in Hollywood, Rockefeller Centre in New York, Firestone tyres, and many other assets.
What that really represented was the fact that the 1980s was a decade of increasingly free flows of capital around the world. In truth, British companies were equally big purchasers of foreign assets as were the Japanese. And there was another truth that few people realized at the time: this was that the real change taking place during the 1980s was the emergence of China as a market economy.
The bursting of Japan’s bubble in 1990-92 eventually clarified the real role of Japanese capital in the new phase of globalization. But it was the combination of the fall of the Berlin Wall, the collapse of the Soviet Union, and the start of liberal economic reform in India that provided the more meaningful signal of the new phase of globalization.
Globalisation during the 1990s was characterized by two huge forces: the growth in economy, trade and investment of newly emerging countries, led by China, which provided new markets, new companies and new competitors; and secondly the rise of the World Wide Web.
Information technology of all kinds helped fuel globalization. But it was the World Wide Web that really changed the character of globalization, by making information and transactions more transparent and less costly for companies and people of all nationalities and all locations.
It has never been true to say, as the New York Times columnist Tom Friedman wrote in his bestselling book in 2005, that “The World is Flat”. In fact, the world was full of many mountains, valleys and oceans that kept businesses apart and shaped their opportunities. But it was certainly true that Information Technology had made the world feel a great deal smaller.
It felt, in fact, more like the world before 1914 that John Maynard Keynes wrote about, in which inhabitants of London, or Tokyo, or Bangalore, or Mexico City, could sit in bed sipping tea and use their computer to buy or sell products all over the planet.
Which brings us to 2016, to the world of smart-phones and wifi.
But that world is also a world of Donald Trump, the presidential candidate who wants to build walls between countries. It is a world of civil wars in the Middle East and North Africa which are sending millions of migrants moving into Europe. It is a world in which, in 10 weeks’ time, voters in my country, Britain, have the choice in a referendum on whether to stay in or leave the European Union, which has been one of the major institutions of globalization. If Britain votes to leave, it could begin a process of disintegration of the EU.
It is a world, too, in which some of the fundamental rules of international behaviour, which were set up in the United Nations Charter of 1945, and in subsequent international law, are being challenged. They are being challenged by Russia, which acted in 2014 to annex the Crimea region of Ukraine, using force, and which sent troops into Ukraine to support other rebel groups in Eastern Ukraine. They are being challenged by China through its territorial claims in the South China and East China Sea. Both Russia and China were signatories of the UN Charter in 1945. And of course international law is being challenged by the fighters of Islamic State who are trying to win and hold enough territory in Syria, Iraq and Libya to form a new country or countries of their own.
And, in economic terms, it is a world in which the planet’s biggest economies are all suffering from slow growth, still battling to recover from the global financial crisis of 2008 – which was a true product of globalization.
In fact, it would be fair to say that the 2008 financial crisis was a true product of a connected world, but it was a case in which the extent and complexity of connections, between financial institutions, became a source of danger and severe damage, rather than one of opportunity or growth. Lehman Brothers, the investment bank whose collapse in September 2008 caused the worst period of the financial crisis, was a fairly small institution by global standards, but it turned out to be highly connected to many much larger institutions, all over the globe. And its collapse destroyed confidence in many financial connections between other banks and institutions.
This should teach us a clear and simple lessons: connectivity is growing, but that connectivity can be either good or bad. Rather like technology, connectivity is neutral.
Eight years on from that crisis of connectivity, the advanced liberal economies of Europe, America and Japan are still struggling to recover from the consequences of the crisis. Moreover, those biggest, richest economies are all battling with longer term forces that look likely to dominate the next few decades:
· Ageing demographies, which are raising the average age of all our countries
· Fast technological change, in which the combination of automation and artificial intelligence is raising fears of the loss of millions of middle-skilled, middle class jobs
· Climate change, which is raising effective energy costs for all kinds of businesses, all over the world
· Inequality of income and wealth within our societies, which is causing a backlash against the openness to trade, capital flows and technology that have been fundamental to globalization.
So what should businesses expect, and what can they do? The next phase of globalization promises to be a phase that combines high political risks and some reversals in openness, heavy burdens for demography and climate, but also a still rapid pace of technological change.
Of course, as with any speculation about the future, it is very difficult to answer this question with clarity and certainty. We can just propose some principles.
First, international businesses need to make clear plans to respond to political risk, to the chance that drastic political changes could damage investments or trade. The particular plans will depend on the location of overseas business. But certainly, to assume that the status quo will continue and that business can remain below the political radar will not be wise.
Second, business will need to work hard to ensure that their companies are prepared for rapid technological change. We live in a knowledge-based society and economy. Automation and artificial intelligence will make knowledge even more important in the future. So every company will need to invest well in human capital, in having the best people and giving them the training and development they need.
I think that this will in particular mean that the best companies will invest heavily in recruiting and training good female executives. To ignore half of the adult population, which is increasingly the best educated half, would be a big mistake.
And the best companies will work to steadily internationalise their executives, so that they can be connected to the best ideas globally, and stay in tune with changing technologies and practices. Even if globalization goes into reverse politically, the pressure of technological change will mean that companies need to be highly international in their thinking and knowledge.
Third, companies need to change their thinking about retirement ages and the true definition of working age. Seniority structures will have to be adjusted to cope with ageing societies. Many skilled executives and employees will be in their 60s and 70s. Companies need to think hard about how to use them productively.
It will not be an easy phase of globalization. I look forward to the discussion. Thank you for listening, ladies and gentlemen.