Farewell, Flat World

Lambert here: “A peaceful land, a quiet people. That has always been my rule. Make it yours.” –Roose Bolton to Ramsay Bolton

By Jean Pisani-Ferry, who holds the Tommaso Padoa Schioppa chair of the European University Institute in Florence and is a Senior Fellow at Bruegel, the European think tank. Cross-posted from Bruegel.

Fifty years ago, the conventional wisdom was that rich countries dominated poor countries, and it was widely assumed that the former would continue to get richer and the latter poorer, at least in relative terms. Economists like Gunnar Myrdal in Sweden, Andre Gunder Frank in the United States, and François Perroux in France warned of rising inequality among countries, the development of underdevelopment, and economic domination. Trade and foreign investment were regarded with suspicion.

History proved the conventional wisdom wrong. The single most important economic development of the last 50 years has been the catch-up in income of a significant group of poor countries. As Richard Baldwin of the Geneva Graduate Institute discusses explains in his illuminating book The Great Convergence, the main engines of catch-up growth have been international trade and the dramatic fall in the cost of moving ideas – what he calls the “second unbundling” (of technology and production). It was Tom Friedman of the New York Times who best summarized the essence of this new phase. The playing field, he claimed in 2005, is being leveled: The World is Flat.

This rather egalitarian picture of international economic relations did not apply only to knowledge, trade, and investment flows. Twenty years ago, most academics regarded floating exchange rates as another flattener: each country, big or small, could go its own monetary way, provided its domestic policy institutions were sound. The characteristic asymmetry of fixed exchange-rate systems was gone. Even capital flows were considered – if briefly – to be potential equalisers. The International Monetary Fund in 1997 envisaged making their liberalisation a goal for all.

In this world, the US could be viewed merely as a more advanced, bigger country. This was an exaggeration, to be sure. But US leaders themselves often tended to play down their country’s centrality and its correspondingly outsize responsibilities.

Things, however, have changed again: from intangible investments to digital networks to finance and exchange rates, there is a growing realisation that transformations in the global economy have re-established centrality. The world that emerges from them does no longer looks flat anymore. It looks spiky.

One reason for this is that in an increasingly digitalised economy, where a growing part of services are provided at zero marginal cost, value creation and value appropriation concentrate in the innovation centers and where intangible investments are made. This leaves less and less for the production facilities where tangible goods are made.

Digital networks also contribute to asymmetry. A few years ago, it was often assumed that the Internet would become a global point-to-point network without a center. In fact, it has evolved into a much more hierarchical hub-and-spoke system, largely for technical reasons: the hub-and-spoke structure is simply more efficient. But as the political scientists Henry Farrell and Abraham Newman pointed out in a fascinating recent paper, a network structure provides considerable leverage to whoever controls its nodes.

The same hub-and-spoke structure can be found in many fields. Finance is perhaps the clearest case. The global financial crisis revealed the centrality of Wall Street: defaults in a remote corner of the US credit market could contaminate the entire European banking system. It also highlighted the international banks’ addiction to the dollar, and the degree to which they had grown dependent on access to dollar liquidity. The swap lines extended by the Federal Reserve to selected partner central banks to help them cope with the corresponding demand for dollars were a vividly illustrated the hierarchical nature of the international monetary system.

This new reading of international interdependence has two major consequences. The first is that scholars have begun reassessing international economics in the light of growing asymmetry. Hélène Rey of the London Business School has debunked the prevailing view that floating exchange rates provided insulation from the consequences of the US monetary cycle. She claims that countries can protect themselves from destabilising capital inflows and outflows only by monitoring credit very closely or resorting to capital controls.

In a similar vein, Gita Gopinath, now the IMF’s chief economist, has emphasised how dependent most countries were on the US dollar exchange rate. Whereas the standard approach would make, say, the won-real exchange rate a prime determinant of trade between South Korea and Brazil, the reality is that because this trade is largely invoiced in dollars, the dollar exchange rate of the two countries’ currencies matters more than their bilateral exchange rate. Again, this result highlights the centrality of US monetary policy for all countries, big and small.

In this context, the distribution of gains from openness and participation in the global economy is increasingly skewed. More countries wonder what’s in it for them in a game that results in uneven distributive outcomes and a loss of macroeconomic and financial autonomy. True, protectionism remains a dangerous lunacy. But the case for openness has become harder to make.

The second major consequence of an un-flattened world is geopolitical: a more asymmetric global economic system undermines multilateralism and leads to a battle for control of the nodes of international networks. Farrell and Newman tellingly speak of “weaponised interdependence”: the mutation of efficient economic structures into power-enhancing ones.

US President Donald Trump’s ruthless use of the centrality of his country’s financial system and the dollar to force economic partners to abide by his unilateral sanctions on Iran has forced the world to recognise the political price of asymmetric economic interdependence. In response, China (and perhaps Europe) will fight to establish their own networks and secure control of their nodes. Again, multilateralism could be the victim of this battle.

A new world is emerging, in which it will be much harder to separate economics from geopolitics. It’s not the world according to Myrdal, Frank, and Perroux, and it’s not Tom Friedman’s flat world, either. It’s the world according to Game of Thrones.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

30 comments

  1. Synoia

    A new world is emerging, in which it will be much harder to separate economics from geopolitics.

    Really? Why was Economics was originally named “Political Economy?”

    Reply
    1. Lee

      My first thought as well. Iron thrones be damned, what is being contested is control over resources and the peasants who know what to do with them.

      Reply
    2. vlade

      Politics is a continuation of economy by other means (well, you can write it the other way around too, TBH).

      Reply
    3. Summer

      It made me do a face palm. Somebody thought they had separated economics from geopolitics or power…or at least they wanted people to believe that and the jig is up.

      Reply
  2. fdr-fan

    This paragraph is thought-provoking:

    “One reason for this is that in an increasingly digitalised economy, where a growing part of services are provided at zero marginal cost, value creation and value appropriation concentrate in the innovation centers and where intangible investments are made. This leaves less and less for the production facilities where tangible goods are made.”

    It depends on what you mean by value.

    If value is dollars in someone’s Cayman Islands tax-free account, then value is concentrated in NYC and SF.

    But if we follow Natural Law (Marx or Mohammed) and define value as labor, then this is exactly wrong. A Natural Law economy tries to maximize paid and useful work, because people are made to be useful.

    The digital world steadily eliminates useful work, and steadily crams down the wages for the little work that remains. Real value is avalanching toward zero, while Cayman value is zooming to infinity.

    Reply
    1. Carolinian

      He’s talking more about the whims of the stock market and of our intellectual property laws. For example the marginal cost for Microsoft to issue another copy of “Windows” is zero. Even their revised iterations of the OS were largely a rehash of the previous software. Selling this at high prices worked out well for a long time but now the software can practically be had for free because competitors like Linux and Android are themselves free. So digital services with their low marginal cost depend on a shaky government edifice (patent enforcement, lack of antitrust) to prop up their value. Making real stuff still requires real labor and even many proposed robot jobs–driving cars, drone deliveries, automated factories and warehouses–are looking dubious. Dean Baker has said that the actual investment in automation during the last decades has slowed–perhaps because expensive and complicated robots may have trouble competing with clever if poorly paid humans. And poorly paid is the current reality due to population increases and political trends and perhaps, yes, automation.

      And even if the masters of the universe could eliminate labor they would then have nobody to buy their products. The super yacht market is rather small.

      Reply
  3. Joe Well

    >>US President Donald Trump’s ruthless use of the centrality of his country’s financial system and the dollar to force economic partners to abide by his unilateral sanctions on Iran has forced the world to recognise the political price of asymmetric economic interdependence.

    Why is Iran such a high priority for so many US elites?

    Reply
    1. Lee

      Just spit-balling here: The Iranian leadership, with good cause, wants to diminish or eliminate the U.S. grip on the region and this subversive, potentially destabilizing sentiment resonates among the citizenry of various Middle Eastern countries. There is at present no other powerful leadership group that is so adamantly unwilling to compromise with the U.S. The potential loss of U.S. control over Middle East oil being at the root of it. The Saudis et al have it, and Israel is a forward operating base for protecting it. The Saudi royal family rightly fear an Iran-inspired popular uprising against them and Israel fears the loss of lands granted to them by their invisible friend as related in a popular fairy tale.

      This is hardly definitive and I’m sure others could elaborate.

      Reply
      1. workingclasshero

        Iran is arelatively large country with a semi independant foreign policy and banking,/ financial system,and they want to control their own resources independant of western dictates about opening up their system to the neo liberal system.i’m sure this is obvious to most people at this kind of web site and is overly simplistic but i sense sometimes some people are shocked about the conflict with iran and don’t get that basic dynamic of this conflict.

        Reply
    2. Underdog Revolutions

      Because Iran successfully booted out the CIA and CIA-imposed regime out of their country and succesfully remained independent since then. US elites never forgave them for it. Same reason they hate and punish Cuba, another country that poses no threat to anyone but its own citizens.

      Reply
    3. Peter Moritz

      Why is Iran such a high priority for so many US elites?

      Iran was after WW2 a client state of both the US and the UK, the latter installing the Shah as a ruler. Iran was important for the US and the UK through its oil resources and its border with the USSR.
      Mossadegh, by nationalising the oil supply until, played against the status and he was overthrown in a MI/CIA sponsored coup in 1953, leaving the Shah as the sole ruler in Iran till the revolution of 1979 when Iran came under theocratic rule and basically diminished the power the US had throughout the years of the Shah’s rule. The US was also shown to be quite powerless – short of an invasion – to deal with the hostage crisis in the US embassy, which was finally after more than a year resolved with the help of Canada.

      Iran is still a major player when it comes to oil, but contrary to the Shah years quite hostile to the aspirations of Israel to become the “western” power in the middle east. The enmity clearest showed up when Israel and the USA supplied Saddam Hussein with intelligence and Germany and France with the capability to produce chemical weapons during the Iraq/Iran war.

      Here is a more indepth look:
      https://lobelog.com/the-real-causes-of-americas-troubled-relations-with-iran/

      This U.S. approach towards Iran has been the result of its lack of an intrinsic interest in the country. The same was true of Britain. The late Sir Denis Right, the UK’s ambassador to Iran in the 1960s, put it best by writing that Britain never considered Iran of sufficient value to colonize it. But it found Iran useful as a buffer against the competing great power, the Russian Empire. Thus, British policy towards Iran was to keep it moribund but not dead, at least not as long as the Russian threat persisted.

      America essentially followed the old British approach towards Iran: keep it semi-alive so that it can put up enough resistance to the USSR until America’s more important and intrinsic interests, such as those in the Persian Gulf, were safeguarded. But Washington never wanted to turn Iran into a strong ally that one day might be capable of challenging America.

      By changing the international balance of power and removing the risk of Soviet penetration, the USSR’s fall eliminated Iran’s value to the United States even as a buffer state. In fact, the fundamental shift to a US approach based on the principle of no compromise, can be traced to 1987, when Gorbachev’s reforms began. Since then, the United States has refused to accept any solution to the Iran problem that has not involved the country’s absolute capitulation. For instance, in 2003, Iran offered to put all the outstanding issues between the two countries on the table for negotiations, but the US refused.

      Reply
    4. ChiGal in Carolina

      because Iran refuses to be a second-class citizen in its own neighborhood. Theirs is an ancient culture whose legacy to the world is enormous, their history is the stuff of legend, and they are the geopolitical power player in the region, not to mention the most powerful Shia Muslim nation.

      Reply
  4. a different chris

    >the distribution of gains from openness and participation in the global economy is increasingly skewed. …. True, protectionism remains a dangerous lunacy.

    Well “openness and participation” is looking like lunacy to the Deplorables for exactly the reason given, so what is actually on offer here?

    Reply
    1. Lee

      With useful physical labor being off-shored, first world citizens should all be made shareholders in the new scheme. We shall all then become dividend collecting layabouts buying stuff made by people we do not know, see, or care about. If they object we simply have the military mount a punitive expedition until they get whipped back into shape. Sort of like now but with a somewhat larger, more inclusive shareholder base. It will be wonderful!

      Reply
      1. CenterOfGravity

        Are you sayin’ the lefty Social Wealth Fund concept is really just another way of replicating the same old bougie program of domination and suppression?

        Check out Matt Bruenig’s concept below. The likelihood that endlessly pursuing wealthy tax dodgers will be a fruitless and lost effort feels like a particularly persuasive argument for a SWF: https://www.peoplespolicyproject.org/projects/social-wealth-fund/

        Reply
        1. Lee

          I’m saying that it can be and historically, and that there are and have been multi-national systems of super exploitation of peripheral, primarily resource exporting populations, relative to a more broadly distributed prosperity for “higher” skilled populations of the center. This has been a common perspective within anti-imperialist movements. The argument is not without merit. Is this a “contradiction among the people” where various sectors of a larger labor movement can renegotiate terms, or is it some more intransigent, deeply antagonistic relationship is a crucial question. The exportation of manufacturing to the periphery is disrupting the political status-quo as represented by the center’s centrism, political sentiments are breaking away to the left and right and where they’ll land nobody knows.

          Reply
  5. Ignacio

    Do not forget mentioning how the tax system has been gamed to increase rent extraction and inequality.

    Reply
  6. samhill

    Why is Iran such a high priority for so many US elites?

    I was just reading this John Helmer below, like Pepe Escobar I’m not sure who’s buttering his bread but it’s all food for thought and fresh cooked blinis are tastier than the Twinkies from the western msm, and this thought came to mind: Iran is the perfect test ground for the US to determine Russian weapons and tactical capabilities in a major war context in 2019. That alone might make it worth it to the Pentagon, why they seem so enthusiastic to take the empire of chaos to unforseen heights (depts?). Somewhat like the Spanish Civil War was a testing ground for the weapons of WW2.

    http://johnhelmer.org/against-the-blitz-wolf-russian-reinforcements-for-irans-defence-in-war-against-all/

    Reply
    1. Synoia

      Speculation:

      1. Becuse it has a lot of non US controlled Oil.
      2. Because it is Central on the eastern end of the silk road.
      3. Becuse it does not kiss the US Ring bearers hand at every opportunity, and the US is determined to make it an example not to be followed.

      Reply
      1. John k

        But consider Saudi us relations… who is kissing who’s ring?
        Or consider Israeli us relations… ditto.
        We’re a thuggish whore whose favors are easily bought; bring dollars or votes. Or kiss the ring.

        Reply
  7. Susan the other`

    An environmental insight here. The world stands devastated. It has reached its carrying capacity for thoughtless humans. From here on in we have to take the consequences of our actions into account. So when it is said, as above, that the dollar exchange rate is more important than the other bilateral exchange rates, I think that is no longer the reality. There is only a small amount of global economic synergy that operates without subsidy. The vast majority is subsidized. And the dollar is just one currency. And, unfortunately, the United States does not control the sun and the wind (well we’ve got Trump), or the ice and snow. Let alone the oceans. The big question going forward is, Can the US maintain its artificial economy? Based on what?

    Reply
    1. Old Jake

      That is a factor that seems ignored by the philosophers who are the subjects of the headline posting. It is a great oversight, a shoe which has been released and is now impacting the floor. “The best laid schemes o’ mice an’ men”

      Reply
    2. DHG

      No, and the entire world wide system is about to be destroyed forever and that includes all political, false religions and the commercial systems currently run by Satan. Gods Kingdom will then take over and clean up the mess. Humans loyal to God will live forever on this Earth in Paradise conditions, they will not be allowed to completely destroy it.

      Reply
  8. Which is worse - bankers or terrorists

    The trick is to drive the marginal cost of housing down to zero. How do you do that?

    I guess it is automation with massive deflation transportation cost and efficiency to make everything lower density and therefore reduce housing cost.

    Reply
    1. Adam Eran

      What? Part of the cost of housing is the cost to maintain infrastructure. Infrastructure for compact development costs roughly half of sprawl infrastructure maintenance..

      Reply
  9. Sound of the Suburbs

    A multi-polar world became a uni-polar world with the fall of the Berlin Wall and Francis Fukuyama said it was the end of history.

    The Americans had other ideas and set about creating another rival as fast as they possibly could, China.

    China went from almost nothing to become a global super power.

    The Americans have realised they have messed up big time and China will soon take over the US as the world’s largest economy.

    Beijing has taken over support for the Washington consensus as they have thirty years experience telling them how well it works for them.

    The Washington consensus is now known as the Beijing consensus.

    Reply
  10. chuck roast

    Whhooooo…who knew!

    The worst job I ever had was cutting fish. Only the cat loved me. However, it was value-added productive labor, if not well paying. My recommendation would be that this credentialed, hyphenated university “chair” guy attempt to find some similar gainful employment, because this is the weakest tea I’ve read at NC in a while. Maybe his second best option would be to quiz some curious freshman about the now ancient and apparently ignored concept of neo-colonialism.

    Please, someone, unseat this guy!

    Reply

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