Globalisation: Uncertainty amid 'creative destruction'
By Nayan Chanda, For The Straits Times
THE volatility of modern globalisation is a cause of growing anxiety among wage earners the world over. The days of lifetime employment are mostly over, contracts are growing ever shorter and the number of 'temp' staff is rising.
Since capital is increasingly mobile, investment is moving to countries where absolute returns are higher, regardless of the consequences for immobile workers. Millions of US blue-collar jobs, for instance, have disappeared as factories have been moved to China and South- east Asia, where wages are lower.
The relocation fattened the corporate bottom line as Western-designed, low- priced made-in-China goods have invaded shopping malls. Low prices at Tesco and Wal-Mart helped middle-class wage earners cope with their falling real income, but the uncertainty about the future continues to haunt workers. The anxiety is even more acute in the US where, unlike in Europe, retrenchment often entails the loss of health care benefits.
Economists argued that this 'creative destruction' was an inevitable part of economic growth and innovation, which would in the end create new jobs and benefit society as a whole. But as China, India and other developing countries have brought in hundreds of millions of new workers into the global workforce, many Western economists, who once championed globalisation, are no longer so sure of themselves. They fear that the industrial prowess of the emerging economies poses a serious challenge to the welfare of workers in the West.
This backlash, in turn, threatens the hallowed principle of free trade. A serious debate is under way in the European Union and the United States as to how workers who fall victim to creative destruction should be helped. Should governments come to the aid of companies which are unable to cope with global competition or have collapsed because of mismanagement and misfortune? The answer on that score used to be clear: Bailouts create moral hazard and only encourage reckless behaviour.
During the 1997 Asian financial crisis, companies were allowed to go under in accordance with this principle, in the process throwing tens of millions of people out of jobs and toppling governments. The US Treasury and the International Monetary Fund sternly lectured Asia about crony capitalism and exhorted them to build transparent models of good governance.
That was then. The Enron, Tyco, Global Crossing and Worldcom scandals since then have shown that corruption and greed are not uniquely Asian attributes. Barely a year after the Asian crisis, the US government bailed out Long-Term Capital Management, claiming that its collapse would have sent shockwaves throughout the world.
After the bull run of the past decade, the exceptions seem to have become the rule. 'Wall Street got drunk,' said President George W. Bush, and the resultant sub-prime mortgage crisis now threatens three million American homeowners with foreclosure.
But before drawing up regulations to prevent such catastrophes in future, the US government has to get into full rescue mode. And this time, the object of the bailout is the health of the American economy as well as that of the world.
The fallout from the sub-prime crisis has now engulfed the giant government- sponsored mortgage lenders Fannie Mae and Freddie Mac, which together own or guarantee US$6 trillion (S$8.4 trillion) of mortgages, roughly half of all US home mortgages.
The failure of these institutions would not only have devastating consequences for the US economy - leading to the collapse of many other banks and businesses and leaving millions out of work - but would seriously affect foreign investors who have sunk some US$1.5 trillion into these institutions. When one out of 10 American mortgages is guaranteed by foreign investors, enabling Americans to keep their homes is as much a concern of Washington as it is of Beijing or Tokyo.
Not surprisingly, there is no more talk of moral hazard. But unless rules are put in place to sober up Wall Street, the next crisis won't be far off.
The author is director of publications at the Yale Centre for the Study of Globalisation and editor of YaleGlobal Online.