"The Globalization of Markets" at 25: An Appraisal

The euro-area economy

Too good to last

A global slowdown, dearer oil, a strong euro and the credit crunch all start to bite

FOR a while, the euro-area economy seemed to make light of global gloom. Rising food and petrol prices crimped consumer spending, but firms in the euro area were contentedly working through order books fattened by resilient export demand. Perky business confidence, especially in Germany, helped drive the euro up, briefly over $1.60 in April.

New figures show that the first quarter was surprisingly strong. GDP rose at an annual rate of 2.8%, far stronger than in either America or Britain. Solidity in the north made up for fragility in the south. Spain's growth was only 1.2%, making this its weakest quarter for over a decade. But Germany's economy grew by 6%, as construction firms took advantage of warm weather. France managed a solid 2.4%.

Yet this could be a high-water mark for the euro-area economy. Businesses have suddenly become a lot glummer. A bellwether survey of German firms by Ifo, in Munich, showed confidence dropping in April to its lowest in more than two years. French business confidence, which had briefly flowered, wilted as well; and Italian firms have sunk further into gloom. The monthly survey of euro-area purchasing managers showed manufacturing industry in April inching ahead at its slowest pace since August 2005.

That firms are feeling less chipper is not so surprising. Much of industry's earlier ebullience was founded on export sales, which made the euro area vulnerable to a global downturn. The malign effects of the credit crunch are now clearly visible in the euro area's biggest foreign markets, Britain and America. Even Germany's export engine is spluttering: shipments fell in February and again in March. Firms are now complaining more vociferously that the euro's strength is hurting demand.

Equally worrying is the fragile state of consumer spending, a drag on the economy ever since the credit crunch began last summer. Retail sales fell again in March, the fourth drop in the past six months, leaving them 1.6% lower than a year earlier. Sales in Spain—until recently a spending hotspot—were over 5% down on last year. German households seem unable to fill the gap in demand left by exhausted Spanish consumers. Even France, where demand seemed sturdy, saw falling sales.

Slow retail trade partly reflects a lack of spending power (see article). Household disposable incomes in the euro area grew by 3.8% at the end of last year but much of this modest gain has been eaten up by rising fuel and food prices that have pushed inflation well above 3%. Though euro-area unemployment is stable, nervous firms are creating fewer jobs. In Spain and Ireland, worst hit by the credit crunch, joblessness is rising.

Rising raw-material prices are a headache for policymakers, as well as a tax on consumers. Inflation fell from 3.6% to 3.3% in April, but hopes of further falls have been dashed by the run-up in oil prices above $120 a barrel. Unless the price of crude falls back, euro-area inflation is likely to stay above 3%, well over the European Central Bank's (ECB) target range of below 2%. Until inflation falls decisively, the ECB will not cut interest rates.

Nor is inflation the only worry. Credit conditions are tightening. Bank loans to households are growing more slowly than a year ago. A recent survey by the ECB revealed that banks plan new limits on their loans. Warier bank lending has contributed to a cooling in property markets, notably in Spain where house-price inflation has dropped to a ten-year low and housing starts have nearly halved since a year ago.

The credit crunch has had a less dramatic impact across the euro area than in either Britain or America. Bank lending to firms is still buoyant, though this partly reflects substitution for wilting capital-market finance. But Spain is suffering. “The Spanish economy is the clearest victim of the credit crunch, just as it was the main beneficiary of the credit boom”, says Michael Hume at Lehman Brothers. Spain is weighty enough—and its slowdown sharp enough—to do much harm to the euro-area economy.

There is one small reprieve: the fresh signs of economic weakness have curbed the markets' enthusiasm for the euro, which has now dropped back to $1.55. Yet few believe that the dollar will swiftly regain further ground. Whatever the frailties of Europe's economies, America is in even worse shape. A high and rising oil price, although harmful to Europe's prospects, hurts America's more. The euro area uses less oil per head, exports more to cash-rich oil-producers and has a healthier trade balance than America—all factors that favour its currency over the dollar. The ECB has a strict remit to keep inflation in check, so rising commodity prices are likely to keep interest rates high, lending further support to the euro.

A souring economy may just soften the ECB's hard line against inflation. At the start of the year, traders were betting that the central bank would start to cut interest rates by the middle of the year. Steadily rising inflation seems to have put paid to hopes of lower rates, at least for the rest of the year. The implacable ECB is one reason why tax cuts are on the political agenda. The new Italian government is talking of them. In Germany, the grand coalition is split between those who want to consolidate the fiscal position and those who want to cut taxes. Spain has announced a fiscal stimulus of 1% of GDP.

The economic news for the euro area seems unlikely to get better. Julian Callow, at Barclays Capital, reckons that GDP may not grow at all in the second quarter, as special factors that previously bumped up growth in Germany unwind. Figures next week may well show that Italy's economy has been flirting with recession. The worst of the credit crunch may be in the past, but there are tougher times ahead for the euro-area economy.

Mercifully, free trade has escaped a US onslaught

Fears of a protectionist backlash by economic nationalists have proved unfounded on both sides of the Atlantic

Those of us who support globalisation, who celebrate the way it has raised living standards and reduced poverty around the world, are forever worrying that there may soon be a backlash, a revival of protectionism and economic nationalism. We mutter angrily whenever politicians make nationalist noises. With Barack Obama emerging victorious as the Democratic candidate for America's November election, the muttering is going to resume - for against all his virtues, one of his vices is that he has been talking tough about trade. But on current evidence the muttering will be misplaced. The surprise is how nice he has been about trade, not how nasty.

A year ago, the prime candidate for a protectionist backlash was the fount of globalisation itself, the United States. If anyone had said then that in the midst of the American presidential election the country would be suffering a recession caused by a financial crisis, most economists would have predicted a big upsurge in protectionism during the campaign. It is time to admit that this hasn't happened. America is not becoming isolationist. In fact, globalisation is not under any serious threat at all, from either side of the Atlantic.

How can a free trader such as me make such a complacent statement? Don't I know that during the Democratic party's amazingly long and dramatic primary contest, both Obama and Hillary Clinton have made speeches attacking trade deals? Didn't I notice that the US Congress recently rejected a proposed bilateral trade deal with Colombia, and that other trade arrangements, including one with South Korea, also look under threat. Yes, I do and I did - and this is all to be regretted and criticised. But it is still not a serious threat to globalisation.

One piece of good news is Obama has won, and his anti-trade rhetoric has been less strident than his opponent's. But the main reason for optimism is that virtually all the presidential candidates' anti-trade language has been directed at America's neighbours, Mexico and Canada. Very little has been directed at the country with which America has by far its largest bilateral trade deficit: China. That is a big surprise.

Of course, this could change. If unemployment were to rise sharply in the next few months, the pressure to make promises to protect jobs from "unfair" Chinese competition might increase. John McCain, the Republican candidate, is a firm advocate of free trade, so Obama might choose to sound protectionist in order to emphasise the difference between them. But that is unlikely; since McCain is a clear, lifelong free trader, Obama needs to sound only a little critical on trade to differentiate himself. That way, he will retain the maximum freedom of manoeuvre when he becomes (as he hopes) the next president. It seems much likelier that the economic debate between McCain and Obama will focus on issues such as healthcare, inequality and taxes, rather than trade.

The real arena for anti-globalisation rhetoric will be the Congressional elections, especially those held in areas that have lost a lot of manufacturing jobs. Given that the Democratic party is likely to increase its domination of Congress in these elections, and that the Democrats have in recent decades been more protectionist than the Republicans, that could be worrying for trade advocates. Yet, as the current session of Congress (under Democratic leadership) has shown, what that is likely to mean is only that new trade liberalisation deals will be blocked.

The lack of further progress, whether on bilateral trade or the World Trade Organisation's Doha round of talks, is disappointing. But it does not imply any reversal in the gains that have already been made: the WTO itself makes such a reversal much harder than in the past, however much the political climate in the US shifts against trade. So progress will be suspended, for a few years, just as happened during the mid-1980s. Globalisation survived then and will survive now.

All this is a far cry from 1999, when crowds of anti-globalisation protesters disrupted the WTO meeting in Seattle, or 2001, when the same occurred at the G8 summit in Genoa. Such protests still occur, but are now much smaller and weaker. Politicians can still be found in Europe who complain about globalisation, notably Italy's new finance minister, Giulio Tremonti, in his book Fear and Hope, published in the run-up to Italy's general election in April. President Nicolas Sarkozy of France has also railed against foreign takeovers of French firms. But so what? Given that today many more cross-border takeovers occur than would have been considered politically possible 10, 20 or 30 years ago, the world can live with a bit of nationalist rhetoric and even a few blocked mergers.

Economic nationalism is regrettable and should be criticised whenever and wherever it occurs. But what has been heard so far, on either side of the Atlantic, seems weak and unlikely to have much impact. With the world economy slowing and America entering a recession, you would expect economic nationalism, the language of fear, to get louder. But it will need to add a lot more decibels before it becomes any sort of true threat to globalisation.

"The Globalization of Markets" at 25: An Appraisal

Let me test your mastery of the social sciences once again by posing this question:

Which academic discipline popularized the concept of "globalization"?
(a) Economics
(b) Political Science
(c) Marketing
(d) Geography

The answer, surprising as it may be to some, is (c). When you visit this blog, you will undoubtedly notice that I feature a lot of marketing-related books concerning new product development, services marketing, etc. on my virtual bookshelf. Once in a while, people do ask me what exactly these books have to do with international political economy in general or globalization in particular. In my mission to wipe out ignorance--as one of my mentors said an educator's duties should be (she takes teaching very seriously)--I feature a classic article that still defines a lot of the globalization literature. Theodore Levitt may be more familiar to you as the the guy who coined the phrase "marketing myopia." In that memorable article, he said companies should look beyond what their current products were to determine the broader benefits they conferred to their clients. For instance, an oil company is not merely in the oil business but the energy business, and an automaker is not merely in the car business but the transportation business.

Yet, Levitt's other memorable work is not as closely identified with him, strangely enough. This is perhaps due to the term "globalization" spreading far beyond the realms of marketing. In 1983, he dropped another bombshell on an unsuspecting world (which also appeared in the Harvard Business Review) entitled "The Globalization of Markets" (this linked version is a reprint). Although some had used the term "globalization" prior to 1983 and certainly the phenomenon of globalization was already well underway before then, it was the HBR article that set the stage for today's endless debates about globalization. In a prior post, I wrote about the three waves of globalization thought. The first is the hyperglobalization or "B-school" thesis that sees the all-conquering effects of market-driven globalization a la Kenichi Ohmae. Of course, "The Globalization of Markets" falls under this category as a granddaddy of the genre. It is interesting that both corporate elites and ardent new millennium collectivists who foam at the mouth over the very mention of the term subscribe to the same idea of globalization as all-conquering.

Aside from the world not being flat at all--especially for migration--one of the things which hasn't really been panned out is the notion of a singular "global market" as Levitt forecast. Sayeth he: “Different cultural preferences, national tastes and standards, and business institutions are vestiges of the past." This, of course, is hardly the case. World homogenization is not nearly as complete as that. While technology has eroded some of these peculiarities, differences in culture, income, and political economy still thwart many efforts to create a "global market." Moreover, it always seemed curious to me that the guy who wrote about "marketing myopia" would also put forward rather short-sighted ideas repeating the hoary lines that "there is no such thing as society" in the words of Margaret Thatcher and that "the end of history" is nigh in the words of Francis Fukuyama.

The debate rages on about globalization, overwrought as it may be, as we sit in the pumpkin patch awaiting the unity of the world under a single market entity. Until that time comes (probably never), we can ponder Levitt's original thoughts on the matter as well as a rejoinder by his erstwhile colleagues at Harvard on the occasion of the article's 20th anniversary in 2003. While some of his ideas about it fell flat, there is no doubting that the idea of globalization has indeed been globalized care of Theodore Levitt.

Welcome It: The Hispanicization of the USA

It should be absolutely no surprise to anyone that I am favourably disposed to this Wall Street Journal article which discusses demographic trends in the USA. That I adopt a pro-immigration stance is no mystery. However, this latest article should give even those who are critics of immigration a pause. Based on US Census Bureau statistics, Hispanics are by now the largest minority group in the country and are gaining ground very quickly, indeed. While immigration accounted for a lion's share of the increasing Hispanic population in the 1990s, this has since given way to births among Hispanics in the current decade. I have always suspected anti-immigrant sentiment as barely concealed racism of the Tancredo/Dobbs/Buchanan variety. It should be interesting to see how the followers of those famous uniculturalists react to this latest demographic trend. Hispanic-Americans are as American as anyone else.

Donald Terry of the Inter-American Development Bank puts things this way: "If you are pro-economic growth, you must be pro-immigration and pro-Hispanic, because we don't have the workers." The population replacement rate is 2.1, while the current fertility rate for a Caucasian woman is just 1.8. However, the rate for a Hispanic woman is 2.8. Do the math. Although the country is currently in economic doldrums, it is arguable that the USA has more favourable prospects than other developed countries in demographic terms, especially those in Europe. Don't even bother to mention Japan. Pragmatic Americans will deal with this emerging reality with equanimity. Certainly, it is necessary to integrate growing Hispanic communities by ensuring, for instance, that they don't become too self-contained and avoid becoming conversant in English. In any event, welcome to the future of the United States:

Hispanics now account for more than 15% of the U.S. population, and their surge is largely the result of births among people already in the country, according to new Census Bureau data. In an annual report, the Census said there are 45.5 million Hispanics in the U.S., up from 35.7 million in 2000, when they made up 12.6% of the population. It said growth among Hispanics was responsible for half of the U.S. population gains between 2000 and 2007.

In the 1990s, a flood of Hispanic immigrants explained most of the group's population rise. That has changed in recent years. Between 2006 and 2007, about 62% of the increase in Hispanics came from births. "The Hispanic population has taken on a momentum of its own," said Kenneth Johnson, senior demographer at the University of New Hampshire's Carsey Institute. "If you close the borders tomorrow, there is still going to be a large Hispanic increase."

Hispanics increasingly are venturing beyond their traditional centers of population and moving to the Southeast and the Midwest, in search of better opportunities and a lower cost of living. The new numbers help show why presidential candidates have courted Hispanics aggressively in this campaign and run advertisements in Spanish. Hillary Clinton's popularity among Hispanic voters helped her win primaries in Texas and California. Both victories were key to her survival in the race for the Democratic nomination. "Latinos will become increasingly important because of their sheer numbers," said Daranee Petsod of Grantmakers Concerned with Immigrants and Refugees, an advocacy group.

Growth in spending by Hispanics is likely to outstrip that of the general population in coming years. Hispanics control more disposable income than any other minority group. The figure stands at $860 billion a year and is expected to hit $1.3 trillion by 2012, according to Jeffrey Humphreys, who monitors Hispanic demographic and economic trends at the University of Georgia's Selig Center. In recent years, consumer-goods companies such as Procter & Gamble and other businesses have invested significantly more advertising dollars to reach Hispanics, both in Spanish and English.

Between 2000 and 2007, 16 states -- among them West Virginia, Illinois and New Jersey -- saw their white population decline, according to the new Census data. Over the same period, whites accounted for a majority of population growth in only 11 states. About two-thirds of Americans are non-Hispanic white, while about 12% are non-Hispanic black, according to the Census Bureau.

Hispanic families tend to have more children. The population is also younger on average, so the large number of births isn't balanced out by deaths. Between July 2000 and 2007, there were 8.4 Hispanic births for every death. African-Americans had 2.4 births per death. The ratio for whites was 1.6.

As Americans age and the baby boom generation retires, Hispanics may help buttress the economy and the Social Security system. The average white woman in the U.S. has 1.8 children, which is under the replacement rate of 2.1 necessary to maintain a stable population. Hispanic women, meanwhile, give birth on average to 2.8 children.

According to the Pew Research Center, whites are projected to make up only 45% of the working-age population in 2050, down from 68% in 2005. The center projects that the share of Hispanics in the working-age population will rise to 31% from 14%. The ratio of senior citizens to working-age people age 25 to 64 will grow to 411 seniors per 1,000 working-age people in 2030 from 250 per 1,000 in 2010, according to Dowell Myers, a demographer at the University of Southern California.

"If you are pro-economic growth, you must be pro-immigration and pro-Hispanic, because we don't have the workers," says Donald Terry, a senior official at the Inter-American Development Bank in Washington.

Many immigrants are bypassing traditional gateway states in the Southwest, while many U.S.-born Hispanics have left states like California. "They are finding it more difficult to find work at the cost of living that's needed in some of the initial gateways" like California and Arizona, says William Frey, a demographer at the Brookings Institution, a Washington think tank. There are shifts within the gateway states, as well.

Hispanics have also settled in small towns, to take jobs in such industries as meatpacking, textiles and construction. The children of Latin American immigrants are helping offset a decline or slower growth in the school-age population in states such as Georgia and Iowa. In Minnesota, the Hispanic population grew 166% during the 1990s, almost three times the rate for the country overall.

Many of these Hispanic communities are now growing swiftly even without taking immigration into account. "The base population of Hispanics already here is so large that it is virtually impossible for immigration to play as important a role in population growth as it has historically," said Mr. Humphreys of the University of Georgia.

The spreading out of Hispanic workers is causing changes in communities across the country, and some stresses. Communities must address language difficulties and educational needs of Hispanic students, who have historically scored lower on standardized tests than other students and recorded higher dropout rates.

Hispanics have been flocking to Hilton Head Island, S.C., since the mid-1990s in search of jobs. In 2006, officials there decided to offer bonuses of $150 a month to town employees who speak Spanish. "Day-to-day realities dictated that we improve our communication with the Hispanic population," said Hilton Head's human resources director, Nancy Gasen. The town also has offered Spanish classes to public-safety officials, including firefighters and emergency dispatchers, as well as other employees who deal with Spanish speakers.

In Crete, Neb., the public-school system now offers about 14 adult English classes that meet year-round, with 158 students and a waiting list of around 50. When the adult English classes started in 1990, the program had five students that were taught by volunteers.