Path to a New World Order: Deglobalization via Demographics

Everyone likes to think they are a contrarian in some way, in an ironic twist reminiscent of the fact most rate themselves as above-average drivers. I am as guilty as anyone of this phenomenon, which is why I am be predisposed to agree with the authors of an intriguing new paper, available here. In brief, the authors’ argument is that aging demographics will lead to savings being lower than investment, which will contribute to rising real interest rates, inflation and wage growth, all the while inequality falls. You should read the paper for a full runthrough of their reasoning, but I couldn’t help but take their conclusions a few steps further.

Ever since Fukuyama declared “The End of History” many have been trying to poke holes in the theory that the current world order is truly that superior. Some say that rising inequality in developed nations (noted in the aforementioned paper) as well as Brexit, populist political movements and, most tellingly, Trump’s surprising victory, are all symptoms of backlash to the consequences of globalization.

You can’t turn back the clock, however much you may wish to. Current populist movements all succumb to the allure of nostalgia when they wish to have their cake and eat it too by enjoying all the benefits of globalization – relatively inexpensive cellphones, access to a massive diversity of inexpensive goods, etc. – without having to face the consequences of exporting many jobs.

But what if the clock moves even further forward, as a consequence of globalization? Globalization inadvertently helped exacerbate inequality, which in turn was further worsened by certain policy decisions, both monetary and fiscal. That doesn’t mean globalization is inherently bad – after all, doesn’t a white working-class man still enjoy a higher standard of living than a factory worker in Bangladesh, now? But as developed nations grew even richer and, eventually, the best-positioned nations to take advantage of globalization and ride the boom of being producer to unimaginably wealthy consumers, demographics began to change. Median ages crept older, as birth rates declined and immigration proved insufficient to stem the tide. Intriguingly, and as a result of one of the most ineptly cruel policy decisions of all time, even China faces a demographic shortfall due to its one child policy.

So as demographics shift, let’s presume that the conclusions put forth in the paper cited above are correct. Should labor become scarcer, its value will only rise. Consequently, technological advances that have been steadily if slowly progressing in the background that only further erode reliance on labor will become even more in demand. Increased automation of manufacturing processes will become even more widespread, rendered far more intelligent by the application of advanced artificial intelligence programs.

More importantly, they could well become localized. Why rely on overseas factories if it becomes cost-effective enough to make things domestically and reduce transportation costs? I am well aware that’s a significant supposition, and likely requires additional factors such as reduction in taxes, significant technological advances and perhaps even subsidies. But in many industries, I think many underestimate the extent to which they only rely on overseas labor simply because it is cheaper, currently. Once the intersection of human labor costs and labor-replacing machinery costs is reached, local production may well seem more reasonable. If the US was still the third-most prolific producer of cotton in 2016, for example, and a company such as Atlanta-based Sewbots can automate most clothing production, perhaps made in the USA won’t be as much of a signal of loftier prices.

Once centralized factors of production for many types of goods that once were located overseas are again located domestically, how much different will the status of globalization look? I’m not supposing trade will necessarily shrink by a massive amount – after all, natural resources are distributed inequally – as the flow of human capital and information via the Internet will continue, hopefully. But the world will lose one primary avenue of globalization, although as I said earlier, the clock can’t be turned back and cultural exportation and assimilation and, inevitably, ensuing backlash will continue.

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