Globalization is stuck between Labor markets /Tax havens and Terrorists

The middle class in UK revolted against EU -seamless borders and trade and in US the victory of Trump is a big blow to Globalizers. He is unenthusiastic about Davos. The rise of Le Pen in France and Geert Wilders in Holland represent back to national sovereignty. Le Pen recently said in Koblenz “nation state” is back”, says the author.

Throughout the seventies and eighties, it was globalization [The G word] of manufacturing facilities that is Product Markets. The anecdotal evidence often told in many a business school classrooms used to be like this. The doors of the Ford car are made in Barcelona and the seat cushions near Budapest and gearbox in the suburbs of Paris and music system in Osaka and the assembly is done at Shanghai and the car is sold in Thailand. So, what is American about it? It is transnational and the geographical boundaries are crumbling and think global and act local we were told, and the term “glocal” came into existence. This was the ultimate in the process of global integration of economic activities through integration of manufacturing facilities to reduce cost, take advantage of pool of skilled resources available in the emerging markets. It also argued about “standardization “of live styles -mostly the American standards- in terms of Jeans, processed food and cola drinks.

Then the nineties saw the globalization of Financial Markets. You want to set up a facility in Chennai then you can think of raising funds from New York stock exchange or European Banks if the project is found to be attractive. Funds were looking for markets and “geographical diversification” became the buzzword. The pension funds were one of the largest investors running into nearly 18 trillion USD and at least 15 to 20 % of this was in non-domestic markets. The Funds started searching for markets instead of markets trying to attract funds. The life expectancy in the Europe and US increased significantly and the pension funds were to earn for longer period since old people have to be provided for. Then came the idea of consumption led growth and greed as the norm. On May 18, 1986 Ivan Boesky gave the commencement address at the University of California at Berkeley’s business school. “I think greed is healthy,” he told his wildly enthusiastic audience. “You can be greedy and still feel good about yourself.” A few months later Boesky was indicted on the charges that would land him in Southern California’s Lompoc Federal Prison, also known as Club Fed West.

The melt down of 2008 has impacted the idea of globalization. Suddenly countries which are supposed to be de-coupled from the global markets are considered smart. Not only that -The US congress included a “buy American” clause in the USD 787 billion stimulus package-2009- particularly mandating the use of U.S funded projects, it was clear that protectionism has trumped globalization. As a response, China has a “buy Chinese” clause in its stimulus package. So, the whole game is unravelling on the G front.

Interestingly, some US experts are suggesting a new grouping of G-2 to guide the world-This G-2 will have US and China as members. China has sold billions of Toxic Toys [chemical laced] to the USA and USA in turn has sold billions of its Toxic Treasury Bills to China. Hence there is a Mexican standoff between the two in Globalization sphere. Interestingly except India nobody is talking About the G-word in the Financial or Product sphere. Now Post-Trump victory Davos “Experts” wanting China to lead Globalization. Irony died multiple times!!

But the third and most important dimension of globalization is in the context of the Labor Markets to allow free flow of human beings to carry out brown collar work in the west.

There is aspecterhaunting the West. It is the specter of uncleared garbage, clogged drains and overflowing sewerages. It cannot be outsourced so easily as that of white collar work since the latter has significant content of software portion while as brown collar work still has requirements for human beings at locations. In the fifties and the sixties, millions of the Turks and Kurds and Iraqis went to Germany when that economy was booming and they were/ are called guest workers. The Algerians and Moroccans went to France and continue to be a significant minority in France and also active in their Soccer teams. More than a million Mexicans in USA are called “undocumented”-euphemism for “illegal”. These workers in France / Germany / USA etc. were mainly in the blue and brown collar jobs more so in the lower skill categories like cleaning restrooms and restaurants / meat cutting / grape picking/domestic help/ road laying/ garbage processing/plumbing/ handyman jobs; babysitting etc. The Demographic decline of Europe needed outside labor. Then came the economic slump in the early 2000 and these European countries have erected fences and reject visas etc. for third world labor.

The mass migration due to civil war in Yemen and Syria has added to the issue. If financial markets want a borderless world so be it for the labor markets but it is not acceptable by the West since they treat G as a one way street. Hence the presence of the “minutemen” in Arizona who will shoot illegals and rhetoric by Obama about Bangalore taking away the jobs from Buffalo and Trump talking about a wall and Brexit to split EU.

No truly global “world order’ has ever existed. What passes for order in our time was devised in Western Europe nearly four centuries ago, at a peace conference in the German region of Westphalia, conducted in 1648 after the thirty years’ war. Nearly a quarter of the population of Central Europe died from combat, disease, or starvation. The exhausted participants met to define a set of arrangements for the world. The principle of the sovereignty of states and the principle of non-intervention of one state in the internal affairs of another state

Interesting, all these are questioned by contemporary leaders of West and radical Islam.

Tony Blair the then Prime Minister of UK in his famous Chicago Address -1999-suggests”The most pressing foreign policy problem we face is to identify the circumstances in which we should get actively involved in other people’s conflicts. Non -interference has long been considered an important principle of international order….

“But the principle of non-interference must be qualified in important respects”. The NATO intervention in Kosovo and Afghanistan as well as US intervention in Iraq provide recent examples of breakdown of idea of Westphalia.

Interestingly, Radical Islam also consider that the world order based on Westphalian consensus will collapse. “In the aftermath of the 11 March 2004 Madrid attacks, Lewis ‘Atiyyatullah, who claims to represent the terrorist network Al-Qaeda, declared that “the international system built up by the West since the Treaty of Westphalia will collapse; and a new international system will rise under the leadership of a mighty Islamic state.”

The spread of ISIS across countries and activities of Boko Haram based in Nigeria in Kenya and Chad re-emphasis this point. Radical Islam do not accept territorial boundaries since it works for a global regime for global Ummah. The talk about Caliphate indicates that they are trans-border organizations.

On the other side, we find global corporations transcending sovereignty in search of global profits. For this they use tax havens as a tool. Tax havens-numbering more than 70 jurisdictions-facilitate bank facilities with zero taxes and no-disclosure of the names and in many cases anonymous trusts holding accounts on behalf of beneficiary. In the case of Bahamas one building seems to have had tens of thousands of companies registered there.

USA is literally waging war with major Giants like Amazon/Google/Microsoft etc. for not paying adequate taxes in USA in spite of being US based companies. Most of these companies have moved their profits to other Tax Havens.

A simple method of trade mis-invoicing by global companies using tax-havens have impacted developing countries nearly 730Billion USD in 2012 says Global Financial integrity. There is an increasing clamor in USA and EU about closing down these tax havens.

So,Globalization is stuck between Labor markets /Tax havens and Terrorists.

The middle class in UK revolted against EU -seamless borders and trade and in US the victory of Trump is a big blow to Globalizers. He is unenthusiastic about Davos. The rise of Le Pen in France and Geert Wilders in Holland represent back to national sovereignty. Le Pen recently said in Koblenz “nation state” is back.

In this, the traditional division of Left and right have lost its meaning. In BREXIT, we saw left supporting EU and part of right opposing it. Now, the new divisions are Globalizers versus Nation states both from left and right.

(The author is a professor of Finance at IIT, Bengaluru).