As the world transitions from ‘Deep Globalization to Deglobalization’, economic policies based on a ‘Doctrine of Local Content’ or ‘Local-Contentism’ take center stage. As a consequence, the global economy underperforms. This article examines the trajectory of Globalization over the past 25 years and what the world should look like in scenarios projected all the way to 2030. it reviews reviews the “Deep Globalization” made possible by the end of the Cold War and how the period was guided by the values of the market economy and representative democracy, the prominence of the U.S., the rise of Asia headed by Japan and the logic of regional economic and political integration. With the fall of Lehman Brothers in 2008 and the beginning of the “Great Recession”, the article then shows how we are now running a “risk of Deglobalization” - the West in check, U.S. in existential crisis, the emergence of China and a rebirth of the Nation-State as the dominant actor in the global scene. This dynamics is now marked by a logic of “everyone-one-for-himself” in which countries restructure their strategies into protectionistic and individualistic actions. ‘Brexit’ and the election of Donald Trump in the U.S. are clear examples of this trend. This piece also explores the example of Brazil and how “Deglobalization” measures in both trade and industrial policies have harmed that country’s economic potential. The text however identifies contemporary movements that are now gaining strength — especially the establishment of common patterns in production, trade and investment and the advent of a “New Age of Talent” — as drivers that should lead the world towards an era of “Reglobalization”. At such juncture, the text offers a prognosis of how nations — both “emerging” or “mature” will be impacted by new parameters of power, wealth and influence. The article concludes by arguing that Reglobalization can only resurface if countries move away from ‘Local-Contentism’ and closer to a productive interdependence turning out ‘Made in the World’ goods.
Introduction: the drivers of Globalization are in check
‘L’air du temps’ is how the French tradition in the social sciences generally characterises the ‘prevailing atmosphere’ of a given historical epoch. As 21st Century capitalism struggles to find a way out of the period of marked uncertainty inaugurated by the ‘Great Recession’ that broke out in September 2008, it is clear that Globalization as ‘l’air du temps’ is at a crossroads. ‘Brexit’ and the election of Donald Trump in the U.S are clear examples of the discontent with Globalization.
The dynamics of freer circulation of goods, capital and people has lost steam. Trade protectionism is on the rise. Multilateral institutions such as the International Monetary Fund, the World Bank and the World Trade Organization provide slow and often insufficient responses to contemporary challenges. There are indeed various forces of ‘Deglobalization’ operating around the world today.
Globalization as a concept should represent more than just the ever-expanding technological advances in transport and communications. It is instead about decreazing obstacles to international trade and investment, increazing global supply chains and improving macroeconomic coordination among the world’s top economic players, especially those member-countries of the G20. The Globalization of common and shared ways of experiencing the world help interdependence and interconnectedness – the basis for productivity gains on a global scale and the sustained expansion of the world economy over time.
All of these different drivers of Globalization now seem to be clearly in check, particularly the Globalization of values – the notion of a normative compass found in the 1990s idea that the principles of market economy and representative democracy as a system of government were the best parameters for the organization of societies across the globe.
Deep Globalization In the early 1990s, the interplay of different elements brought about an era of ‘Deep Globalization’ during which the global economy expanded vigorously. The demise of the Soviet Union and the subsequent ‘End of History’ seemed to allow for renewed international cooperation based upon the pillars – and promise – of democracy and free markets.
The U.S. seemed destined to remain a ‘hyperpower’ in the decades to follow: a new hegemon shaping a ‘new American Century’. With increased competition and cooperation with other economic powers notwithstanding, the U.S. would go on unchallenged as a geopolitical player and as the country to most vehemently embrace the principles of democracy and free markets.
The globe’s geoeconomic meridian, as far as manufacturing output was concerned, seemed to be shifting towards Asia – and this process was being led by Japan. Regional blocs appeared to be the up-and-coming economic actors – and the success of European integration was seen as paradigmatic. Both the rise of Asia – propelled by Japan and the so-called ‘Asian Tigers’ – and European integration were compatible with the interests of the United States as a hyperpower, since more democracy and free markets would only deepen Globalization.
Presently, these parameters seem to have shifted and comprise a scenario in which we observe:
1) ’Multiplatform’ conflicts and tensions (viral terrorism, across-the-board criticism of the West and its liberal political and economic order, cyber-vandalism). Instead of the ‘End of History’, the emergence of ‘multi-histories’.
2) The U.S. in serious doubt as to its role in global affairs as it weighs the impact of the Great Recession of 2008, the heavy legacy of the War on Terror and the costly military interventions in Iraq and Afghanistan. As a consequence, the U.S. seems more inclined to focus on its domestic issues and more reticent to play the part of leading global force for what it perceives as democracy and free markets.
3) The rise of Asia led by China.
4) A slower – and less deep – pace in regional integration and the revival of the nation-state as the leading player in global economic relations. From ‘Deep Globalization’ to the ‘Risk of Deglobalization’ In short, over 20 years we have left a period of ‘Deep Globalization’. We have moved closer to the ‘risk of Deglobalization’. In this context, international relations (understood here as relations involving nation-states) have resurfaced powerfully. It is not necessarily a world of renewed nationalisms, but rather a global juncture in which nation-states are particularly selfish, individualistic, acting according to an ‘every-nation-for-itself’ mode.
As Deglobalization gains ground, a strong trend shows its face in the world economy. Against a backdrop of great uncertainty, countries increazingly adopt industrial and trade policies based on a ‘Doctrine of Local Content’; a notion we could call ‘Local-Contentism’.
Many confuse Local-Contentism with defensive trade measures erected against artificial exchange-rate stratagems that boost the attractiveness of a country’s exports. There are clear differences however between Local-Contentism and old-school protectionism. While the latter is essentially about import quotas and tariff barriers set up to protect what is ‘national’, the former idolises foreign direct investment and makes extensive use of government procurements as bait. After all, by its very definition, Local-Contentism is all about being ‘local’, not necessarily ‘national’.
From the U.S. to France, from Brazil to China, Local-Contentism can be easily identified in the way state-owned enterprises, official banks, municipalities, states, provinces and central Governments interpret and implement a country’s interests in the global economy. Today, Local-Contentism is one of the top parameters of how governments indirectly protect domestic companies from foreign competition, foster the creation of jobs and go about procurements.
The practice is becoming the most recurrent tool in bulking up a nation’s capacity to compete in world trade and attract investment. But it carries a heavy price tag. In Brazil, for example, since 2003 the Federal Government only allows Petrobras (the state-owned oil company) to buy oil tankers that have been built with at least 65% of local content. As a consequence of such requirements, Petrobras ends up paying a premium of 100% on top of the average international price for any large oil-transporting vessel. In Latin America, successful local-content policies enacted by Colombia and Chile, for example, have parted ways with traditional forms of xenophobic protectionism that plagued the region during much of the twentieth century. Going in the opposite direction, the economic translation of ‘Bolivarianism’, in countries like Venezuela or Bolivia for example, basically stands for the nationalization of industrial assets, as if wealth resided in posseszing physical facilities, not in people’s talents or knowledge-intensive processes.
Local-Contentism in the U.S. and Europe
But the recent move towards Local-Contentism is also visible on radar screens in the U.S. and Europe. Recent presidential campaigns in America and France were not centered on free markets or enhanced regional economic integration. They focused instead on the job creation side of Local-Contentism. We are experiencing far more than just ‘currency wars’. Exchange-rate tactics make for ancillary rather than decisive battles. The world has set the stage for the waging of ‘clashes for competitiveness’.
In recent years, the criticism against China´s hyper-competitiveness is a good example of how countries overlooked the importance of Local-Contentism. Throughout the past decade, ever-louder American and European voices were raised against the way China managed its exchange rate. They aimed at spreading the notion that an undervalued currency was the key to China’s capacity to compete.
But other factors have been more important in strengthening China’s sophisticated policies of Local-Contentism, which since 1978 have included:
- PPPs (public-private partnerships) as a springboard for exports and attracting foreign direct investment
- the (still) low cost of China’s domestic factors of production
- privileged access to the world’s most important buying markets (such as the United States granting China Most Favored Nation status in 1980 and Europe doing the same in 1985); and
- a vigorous business diplomacy, which reportedly results in two separate Chinese trade and investment missions visiting the U.S. and Europe every day.
Instead of examining how China became a champion of Local-Contentism, until recently the U.S and Europe looked for allies in their criticism of China’s currency in multilateral forums, hoping, for example, for Brazil’s endorsement. Yet it would be wrong to describe any growing criticism by Brazil of China’s economic policies as simply a way of ‘sharing the view of the US and Europe’. Brazil has major concerns of its own over how the rise of China contributes to the ‘deindustrialization’ of its economy. Nevertheless, Brazil has been able to partially offset its China-led deindustrialization by ‘reindustrializing’ through its own version of Local-Contentism.
One of the reasons Brazil has been able at one point to accumulate enough capital to foster local content is that China has overtaken the U.S. and European Union as Brazil’s top trading partner and major source of FDI (foreign direct investment). China’s appetite for agricultural and mineral commodities, where Brazil has competitive advantages, has automatically extended economic cooperation to other areas (logistics, infrastructure, aircraft and others).
Added initiatives to this mutual good can be seen in Brazil’s moves towards recognizing China as a ‘market economy’ in exchange for Chinese support for Brazil’s bid to become a permanent member of the UN Security Council and in China’s opening up to Brazilian exports of beef and poultry. Brazilian manufacturers who worry deeply about a ‘flood’ of Chinese goods into the Brazilian market would doubtless appreciate the government taking action in the form of quotas and other import restrictions. However, they are less critical of China’s exchange rate policies and more vocal in denouncing Brazil’s outdated and non-competitive labor and fiscal laws, shortage of domestic infrastructure and high interest rates, which hurt Brazil’s domestic and international competitiveness more than the overvalued real or China’s cheap renminbi.
Consequently, China and Brazil have implemented different approaches to the notion of Local-Contentism. China has used it as the domestic platform from which it would be able to compete in global markets. Brazil applied it as if promoting a second generation of import substitution industrialization.
If, on the one hand, Local-Contentism is a pillar upon which China built its current economic might, on the other it is also one of the concepts countries are now implementing to fight China’s hyper-competitiveness. As a consequence, we may see fewer ‘Made in the World’ goods coming from ‘network-corporations’ that in the heyday of Globalization combined worldwide logistics, supply chains and talent pools to achieve productivity gains, and more of these processes taking place simultaneously in a single country.
Even China, which based its prosperity on a ‘trading nation’ strategy, has to model its Local-Contentism not so much on the way it sells to the world, but rather on how China buys from the world. Major contracts by China’s government, corporations and consumers as buyers will have to support activities carried out locally, generating local jobs and taxes.
BRICs and the Global Economy
On a broader scope, we can essentially argue that the original idea of the BRICs (Brazil, Russia, India and China) that emerged over the past fifteen years is one that pertains to how the future is going to be built. These nations have reached the status of economic powerhouses because for the past three decades they have been able to adapt successfully to the changing contours of the global economy, and especially by becoming local content hubs.
That is to say, in a world where the generation of jobs is key to economic success, they have been able to pursue alternative strategies so that their economies have always been busy in providing local content. And if local content remains an essential part of BRICs’ industrial policies only up to the point where their corporations are able to compete on a leveled playing field, then the BRICs’ vocation as global growth engines will definitely be confirmed. If BRICs are indeed able to translate their local content policies into springboards for knowledge and innovation, they will certainly become some of the world’s most dynamic, prosperous and influential group of nations.
But it is equally important to observe that although Local-Contentism can benefit one nation or another for a number of years, the global economy will pay a heavy price for the loss of efficiency it entails. That is why many governments today are trying to build a road back to ‘Reglobalization’ either through the launch of ambitious initiatives such as that of TTIP (Transatlantic Trade and Investment Partnership), involving the U.S. and the European Union, or the TPP (Trans-Pacific Partnership) negotiated by Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the U.S., and Vietnam.
Even if these two initiatives now look unlikely as a result or Donald Trump’s election in the U.S., trade agreements in the future will no doubt increazingly encompass standards (common ways of approaching issues such as labour and environmental legislations, intellectual property rights and rules surrounding government procurement). A successful outcome of the Doha Round of the World Trade Organization (WTO) would also help industrial and trade policies around the world move away from Local-Contentism and closer to interdependence. But such a positive scenario for the WTO, which depends on harmonizing the interests of more than 150 nations, seems highly unlikely at the present juncture.
More broadly, if instead of playing a part in a country’s catching up strategy, Local-Contentism becomes an across-the-board philosophy for our times, it could easily be transformed into protectionism pure and simple – and as a consequence we can only expect ever-growing economic imbalances. Local-contentism would thus become the very ‘l’air du temps’ of a lengthy, unwelcome era of Deglobalization.
Brazil - Deglobalization at work in industrial policy
Brazil is a very good example of deglobalization “avant la lettre“. In 2016, as Brazil faces two and a half years of a severe recession, it is clear that the country is experiencing a more troubling halt, in line with its historical pattern of boom and bust.
When Brazil was indeed experiencing robust economic growth ten years ago, that was the result of a benign confluence of Brazil’s competitive advantages in biofuels, banking, mining, offshore oil, and especially the expected benefits of its vast deep-water “pre-salt” reserves. Brazil was expected to turn out more than 6m barrels of crude a day by 2020. To reach that goal Petrobras planned to spend over $1tn in coming years in pre-salt projects.
By 2011, The company’s yearly capital spending of $45bn far exceeded NASA’s annual budget at the height of the Space Race (in current dollars). Petrobras was also the main force behind the remaking of Brazil’s naval industry. From 2012 to 2022, the company was supposed to buy more than 250 large oil tankers at an average price of $125m each – and 65 per cent of its components would have to be “Made in Brazil”.
That says a lot about the country’s growth model. Brazil experienced the quiet rebirth of policies formulated by Raul Prebisch (1901-1986), the Argentine economist, and Celso Furtado (1920-2004), Brazil’s leading advocate of Dependency Theory. We may call this renaissance “Import Substitution Industrialization 2.0″ or ISI 2.0 — such policies form the bedrock of Deglobalization “Brazil style”.
From the early 1950s, Brazil used import substitution to change the DNA of a country historically attached to agriculture and mining. Its most spectacular periods of growth in the 20th Century – President Juscelino Kubitschek’s “50 Years in 5” (1956-61) and the “Brazilian Miracle” (1967-73) – were largely the result of ISI. It produced annual growth rates in excess of 10 per cent and indeed converted Brazil into a large industrial economy targeted at a vibrant domestic market. However, inarticulate exchange-rate policies, a lack of vertical industrial integration and unfavourable international junctures have made inflation and foreign debt the “twin sisters” of ISI.
ISI 2.0 could be easily identified in the way state-owned enterprises, official banks, municipalities, states and the Federal Government interpreted and implemented Brazil’s interests in the global economy. Today, ISI 2.0 is the parameter of how government in Brazil protects domestic companies from foreign competition, fosters local content and goes about procurements.
Prebisch and Furtado – the patron-saints of policy-makers at BNDES (Brazil’s powerful government-owned development bank) and the economic departments in Brasília during the Lula-Rousseff years (2003-2016) – argued that only those countries performing massive indigenous industrialization could become “cyclical centres” of the global economy and therefore endogenously trigger their own development.
Present day ISI 2.0 in Brazil presented has two faces. It continued to apply high import taxes and other barriers to protect national groups and foster Brazil’s chosen industrial priorities (semiconductors, software, electronics, automobiles and others). As the country’s currency was clearly overvalued for a long period of time, its trade deficit in manufactured goods would be even larger if it were not for tariff shields – which contribute to the outrageous prices paid by Brazilian consumers for many foreign goods.
Much like its 1950s prototype, ISI 2.0 is clearly “nationalistic”. It nonetheless updates the concept of “economic nationalism”. Rather than merely sheltering Brazilian entrepreneurs, ISI 2.0 calls for the “Brazilianization” of companies wishing to harness the potential of Brazil’s domestic market. An entire set of incentives is put to the service of those who decide to create jobs in Brazil. Its most powerful tool was the robust policy of government procurement which had found expression in the Lula-Dilma administrations (of Luiz Inácio Lula da Silva, president from 2003 to 2010, and Dilma Rousseff, president from January 2011 to May 2016).
Brazil operated under what we could call “the pre-salt hedge”. According to this notion, multiplier effects of new oil discoveries for those who decided to invest in Brazil would be so huge during the next 30 years that they would “anchor” the decision to set up long-term operations in the country. That is why in 2011 for example, in spite of the global crisis, Brazil received $65bn in foreign direct investment, 5 per cent of the world’s total.
Was all this good news for Brazil? No. It became an underperformer among the Brics and other EMs as it continued to sweep urgently-needed labour, tax and political reforms under the carpet. And Brazil’s ISI 2.0 is inherently vulnerable. It relies on heavy, non-stop flows of FDI pouring in over many years. For all this to work smoothly, ISI 2.0 must generate shorter learning cycles to boost rapid and voluminous productivity gains – conspicuously absent in Brazil.
Making matters worse is the fact that over the past quarter century Brazil has failed to implement a strategic project for power or prosperity. During the Lula-Rousseff years, it confused the concept of such a project with the so-called “PAC” (the Portuguese-language acronym for Brazil’s Growth Acceleration Programme, centred on updating the country’s poor physical infrastructure). Welcome as it was, although poorly executed in practice, the PAC was not about building the future. It is the search for lost time: ports, airports, paved roads – the past catching up with the present.
Brazil’s comparative advantages of today (bioenergy, mining, oil, pre-salt and so on) should have been put to the objective of fostering the knowledge-based competitive advantages of tomorrow. This will be a long road for a country that directs less than 1 per cent of its GDP to research and development.
The future for Brazil lies in making its companies tech-intensive in various industries and becoming further interdependent with the world economy. Deglobalization policies did not work in Brazil and therefore offered a very little contribution to the challenge of transforming its creative people into a society of entrepreneurship and innovation.
Brazil - Deglobalization at work in trade policy
But Brazil’s strategy for growth over the past fifteen years favoured more than just consumption over investment, and more than ad-hoc fiscal incentives for companies and sectors blessed by the country’s “local-content” industrial policy.
At its core, Brazil’s economic strategy has been the expression of an approach that is mostly insular and which prioritises its domestic market over a more incisive interaction with the global economy.From an international relations perspective, this approach reveals a great deal about Brazil’s lack of a sophisticated project in terms of both influence and prosperity. Brazil embraced Deglobalization in trade.
Present-day Brazil, where significant economic expansion has been at bay for more than five years, is the result of a political economy of ideological preferences, with a strong accent on political affinities and less attention to economic pragmatism.
Globally, Brazil’s political discourse has sounded much louder over the past decade than its cross-border economic achievements. Its idea of its global reputation is intertwined primarily with bringing the United Nations system up-to-date. Becoming a permanent member of its Security Council. Strengthening ties among Latin American countries. Praizing the benefits of South-South cooperation. In short, a foreign policy permeated by “good intentions” and “balanced” relations with the world’s top players.
But the fact is recent attempts by Brazil to build strategic political partnerships that could bring economic benefits, such as with China or France, have been unilateral in most cases. Brazil’s bilateral trade with China has increased tenfold in the past decade. But that has been mostly driven by dramatic growth in China’s infrastructure and in its consumer market, and its consequent voracious appetite for the mineral and agricultural commodities in which Brazil has clear comparative advantages. The result? One tonne of Brazilian exports to China is worth about $200. One tonne of Chinese exports to Brazil is worth more than $2,000.
Brazil’s interests in Africa are overshadowed by the expanding outreach of Chinese corporations. UN reform is nowhere near the horizon. And the various geometries fostered by Brazil in Latin America, either uzing Mercosur, the Union of South American Nations or the Community of Latin American and Caribbean States, yield plenty of speeches on how the world should be made more equitable and few if any tangible economic results.
Brazil’s global agenda has prioritised its political objectives – modulated by the ideological preferences of the day – over economic initiatives that might have included more bilateral free trade agreements. Since Mercosur was created in the early 1990s, Brazil has only concluded three FTAs (with Egypt, Israel and Palestine), while Mexico, since NAFTA, has put more than 40 FTAs in place. Brazil’s ideological biases of the past decade – coupled with the finest breed of protectionism-prone conservatives in the US – have helped put the idea of a Free Trade Area of the Americas to rest.
The low priority Brazil has put on its foreign economic goals has prevented a more aggressive stance in trade and investment promotion. Brazil should have strengthened and expanded its ambitous APEX – a trade and investment promotion agency founded during the Fernando Henrique Cardoso administration in the 1990s – which now consists of a few dozen officials based mostly in Brasília.
Brazil should decide whether it wants trade to be a driver of its economic development. Its economic relations with its Latin American cousins, given their small scale as buying markets, represent a low ceiling. Meanwhile, the more dynamic economies of Latin America – Colombia, Peru, Chile and Mexico – are reconfiguring their strategies and joining forces in an FTA of their own, one that will entertain an open trade dialogue with the US.
As for further access to Europe’s markets, Brazil’s negotiating position is rendered less mobile by the limits imposed under its membership of Mercosur. The diametrically opposed views of the Mercosur and European Union countries – especially when it comes to agriculture – prevent negotiations from advancing to other areas. Were Brazil to make its local-content requirements more flexible, particularly in areas related to infrastructure, transport and logistics, a new phase in Brazil’s economic relations with Europe could be launched. But that would be going against Brazil’s current industrial policy mantra.
When it comes to the Brics, Brazil certainly revels in China’s demand for its low value-added exports. But Brazilian industry lacks the stamina to face China’s hypercompetitiveness – so no FTA in sight here. Russia and India have great potential as trading partners. But they lack the complementarities in both geography and natural resources that are conducive to forming economic blocs.
The Brics will coordinate common positions in economic and political forums. They will certainly trade more among themselves. They may even come up with preferential credit lines to be offered by the Brics Bank, to help finance infrastructure projects. But given the scale of the items in which their interests do not converge, the Brics will never form an FTA, much less a vertical, deeply-integrated economic zone.
As a consequence, Brazil, especially in comparative terms, keeps a low profile in global economic statistics. The country’s share of international trade is only about 1 per cent. The sum of all its imports and exports represents 18 per cent of Brazil’s GDP. Its share of world GDP, at 2.9 per cent, is unchanged since 2002. By repeatedly avoiding to shun interaction with the most important markets of the world, Brazil was only rendered a less relevant, “blocless” economic player.
The crossroads of Deglobalization and its effects on China and Brazil
The evolving global scenario may cause the development strategies of China and Brazil to embark on new paths. China should reduce its emphasis on exports as an engine for growth. It should seek to lower the high ceiling of domestic savings, encouraging its consumers to buy more. Beijing-style Keynesianism will, however, continue to boost investment in what is already quite robust and competitive infrastructure.
Brazil – as its currency, the real, further depreciates – may increase its emphasis on exports. The question then is directed to the ability of its organizational structure to deal with foreign trade and attract productive investment. This is a big change for Brazil, which has traditionally looked to its domestic market as a driver of growth. This was praised as largely responsible for the way Brazil brushed off the “Great Recession” that broke out in September 2008. The economy’s impressive 7.5 per cent growth in 2010 led some analysts to conclude that internationalization of Brazil’s economy would be a mistake.
But that is not true. China and South Korea also faced the crisis with comparative success – and both boast more that 50 per cent of their GDP related to international trade. Many believe the slim participation of Brazil in world trade (less than 1 per cent of everything bought and sold worldwide) and of international trade in Brazil’s economy (export + imports make up only about 18 per cent of GDP) is the result of protectionism in rich countries; and that this “injustice” may only be corrected through negotiations of the “government-to-government” type, like those carried out between the European Union and Mercosur, or at the World Trade Organization.
Undoubtedly, “government-to-government” negotiations are very important. Industries in which Brazil presents clear competitive advantages, such as biofuels, agriculture and many others are being held back by unfair trade rules. But in many trade talks Brazil now seems to be lozing the moral high ground. Its local-content rules and seasonal import tax hikes are increazingly seen by its partners as disguised – and often flagrant – forms of protectionism.
However, there are decisions – that are Brazil’s alone to take – which are more relevant than the outcome of those slow-paced negotiations. For example: Does Brazil see trade as one of its main roads towards a larger role in the global economy? Does Brazil want foreign trade surpluses to become a means of building up domestic savings and, therefore, the resources needed for investment?
If the answers to these questions are affirmative, asymmetries in international trade should not represent a “paralyzing excuse” for inaction in Brazil’s trade promotion efforts. Multilateral “government-to-government” agreements were not the main reason why some emerging economies expanded exponentially over the past 30 years.
South Korea, China and Chile have increased their national incomes dramatically without placing multilateral agreements at the centre of their economic and business strategies. Concentrating on the pursuit of a “happy ending” for multilateral negotiations makes Brazilians lose focus. Brazil must replace simplistic notions such as “overseas markets might be of interest to Brazil if protectionist barriers were lifted” by questions like “what is our trade promotion strategy in a world where trade rules remain unfair?”
In a currency environment that could facilitate Brazilian exports higher value added goods, it is high time to redefine how Brazil approaches foreign trade. Formulating, negotiating and promoting trade policies, as well as resolving disputes, is extremely complex. Brazil needs more people, more coordination and more focus if it wants to increase its share of global trade.
In this context, it is key to promote coordination at the top and enlargement at the bottom.
Today, responsibility for trade and investment strategies is scattered throughout a myriad of ministries. More of Brazil’s states and cities should undertake trade and investment promotion. If it were a country, the state of São Paulo would be South America’s second largest economy. But it doesn’t have the network of people and offices it needs to promote itself abroad.
And Brazil should make better use of its embassies and consulates around the world. They should become true “showcases” of the best Brazil has to offer. They could also be “antennae” of scientific and technological opportunities, especially as Brazil implements programs such as “Science without Frontiers” and the theme of innovation seems to have definitely registered on Brazil’s radar screen.
Recent decades show us that countries that sought internationalization have been more successful than those tied to their domestic markets. Brazil must learn that lesson.
Alongside multilateral negotiations, Brazil must enact urgent labour, social security and tax reforms. In addition, however, there is a quartet of priorities:
* facilitating domestic legislation for export-oriented firms;
* improving the country’s logistics infrastructure;
* training specialized human resources in the public and private sectors for trade promotion and attracting foreign direct investment; and
* strengthening the international presence of small and mid-sized enterprises through the establishment of export consortia.
These initiatives focused on a project for prosperity are much more important for Brazilian society than the uncertain entry of Brazil into the exclusive clubs of the multilateral system, such as the UN Security Council. It is therefore essential that the new competitive level of the Brazilian currency is accompanied by an updated and more robust structure for Brazil’s business objectives. These are much-needed – and yet basic – steps towards a new global competitiveness for Brazil.
Re-Emerging Markets and the Coming of Reglobalization
The concept of “emerging markets” came up years ago as a driver of the future of the world. Demographics, territorial scale, low production costs, easy access to commodities – all were signs of impending change in the geo-economic axis. Countries such as Brazil, Russia, India and China became the world’s “engines of growth”. Export-driven growth in China; a “transition economy” for Russia’s market; outsourcing and technological innovation in India; and “import substitution 2.0” in Brazil kept these economies booming – and social tensions quelled. These economies successfully adapted both to Deep Globalization, which gained steam with the end of the Cold War, and to the Deglobalization logic of “every-nation-for-itself” that has influenced international behaviour since the 2008 crisis.
This context brought about a naïve expectation: the BRICs were destined, slowly but surely, to lead a process of convergence between emerging economies and the development pattern of advanced economies. In the event of cyclical crises, however, we would see a much desired “decoupling” – the inflexibility of developed markets would make it tougher for them to weather crises, whereas emerging markets would dynamically overcome them. But in the past few years, those pro-convergence drivers seem to have changed course. The honeymoon with emerging markets has apparently come to an end. Emerging economies have been slowing down. In contrast, the U.S. seemed to be recovering. Although sluggishly, Europe is coming out of its recession.
This, of course, has had an impact on the outlook for the direction of international capital flows. The supposed “end of the affair” with emerging markets has led many to jump to superficial conclusions: no more talk of convergence or decoupling, but instead a return to the old “north-south” economic hierarchy. ‘Brexit’ and the Trump election have nonetheless rebalanced global risk and uncertainty risk back to mature economies.
In reality, performance in the coming years will be judged less by what we today label either “advanced” or “emerging” economies and more by a country’s ability to abandon the short-term temptations of Deglobalization and competitively shape up to a “Reglobalization” now in the making.
Reglobalization, the new age in world affairs we are stepping into, does not promote the verticalization of cross-border dynamics of regional economic, political and legal integration. Regional entitites will not take precedence over nations as the main actors in global affairs. It will not bring about a far-reaching communion of different world views. It will not come under a new global compact stitched together at the United Nations or the World Trade Organization. Reglobalization will be more “superficial” than the idealised “End of History” world order we might have experienced at some point since the Cold War. It will be mostly focused on trade, investment and the strengthening of global production networks.
It will also be more selective – and therefore emerge as the result of the proliferation of multiple free trade agreements at bilateral level and between some of the most powerful economic regions of the world. This is what may come out of the current negotiations involving the U.S. and Europe – the TTIP – and the similar dynamics observed in the TPP. It is also the case of the FTAP (Free Trade Area of the Asia-Pacific) proposed by China.
China’s success or failure in turning itself into a consumption-led economy producing high value-added goods will be central to how Reglobalization takes shape. There will be little room for the kind of Asian “neomercantilism” practiced by China since Deng Xiaoping stipulated that the colour of the cat doesn’t matter, so long as it catches the mouse. Reglobalization will offer less of a privileged platform for regional cooperation projects forged out of the ideological predilection for autarkic neo-developmentalism advocated by countries like Venezuela under “Chavismo” or Argentina and Brazil under populist administrations.
Reglobalization and the ‘New Age of Talent’
Another factor in determing Reglobalization will also be the measure of how well nations adapt to the rise of a “New Age Of Talent”. Indeed, the emergence of ‘Talentism’ as a key factor in the global economy is revolutionizing traditional notions of power, prosperity and prestige. The relative weight of any country in international relations can be traditionally measured at three levels: its dissuasive strength in terms of defense forces; the prosperity of its citizens and companies; and its influence as projected through intangible values. As far as all of these are concerned, innovation is the key. And innovation is something that is produced by elites.
This has been well explained from the time of the pioneering Schumpeter up until Acemoglu and Robinson and their essential book Why Nations Fail. Those who turn their backs on the knowledge, business, and policy-making elites that can bring about innovation become increazingly irrelevant nations. The outcome is diminished traditional power, a low degree of technological density in the economy, and a limited soft power projection. The only way forward is to encourage elites to adopt one of two types of innovation strategies: either creative destruction or creative adaptation.
The former means that the economy is in a permanent state of ‘evolutionary chaos.’ Innovators are the only ones to survive in a context of constant mutation. The replacement of typewriters by computers is a typical example of creative destruction. Argentina used to be a wealthy country at the beginning of the 20th century thanks to agriculture and livestock. Its elite was well educated but little disposed to innovation. As a result, it entered the 21st century relatively poor. Meanwhile, the United States has been progreszing since the 19th century thanks to its radically innovative elite. It became the wealthiest and most powerful nation in the world.
The second option – creative adaptation – means to do the same as the leader does, but adding a degree of innovation in terms of labor costs, logistics, and efficiency. This is the model that was adopted by Asian elites. The performance of South Korean companies in television, smartphones, and auto-making are typical examples of creative adaptation, as well as the great Chinese takeoff achieved since 1978. The trouble is that in a lot of countries, companies, and elites get used to an environment that favors import substitution or agro-export models. In this context, ‘adaptation’ leads to obsolescence and conservatism.
Creative destruction-style innovation is not related to genius-like inspiration, even though it may seem to be the case at first glance. It requires visionary elites that are passionately committed to their country. Functional elites are those that can therefore mix patriotism and strategic planning, something quite difficult to achieve. Having a large contingent of students coming out of high schools or technical institutes is not enough.
Education should be both a civic requirement and an opportunity for all. In the meantime, however, innovation cannot be measured in terms of hours of schooling, but by what is actually being done with the teaching that has been received, in concrete and innovative terms. In this regard, innovation is produced by elites and elites, are the product of innovation. Innovative elites lead their countries to a combination of ‘four virtuous founding elements’ of creative destruction: angel investment, knowledge, entrepreneurship, and business environments that are conducive to innovation.
Reglobalization and the pursuit of talent
The perception that global competition among elites for talent will unfold is not exactly new. Talent, however, was once seen as synonymous with having a vocation. It was about developing one’s ‘natural’ abilities. We therefore idolized individuals who were ‘experts,’ companies with ‘core businesses’ and countries focuzing on their ‘comparative advantages.’
In 2008, Malcolm Gladwell popularized in Outliers, his best-selling book on the DNA of success, the notion of the ‘10,000-hour rule.’ Talent and success would thus emerge from the devotion of that amount of time to specific activities, such as playing the cello or programming computers. And, of course, the sooner you start, the better. According to such a theory, talents of the stature of Yo-Yo Ma and Bill Gates emerged.
But in the new geoeconomic cycle we are stepping into, the benchmark is ‘post-specialization.’ Eight years ago, cloud computing, tablets, and their application ecosystem were incipient. Today, they allow for a shortcut in economic history. It is as if we could compress the 10,000-hour rule into something more agile. New technologies catalyze talent. So people, companies, and nations must be multifunctional and complex. It is all about engineers who can write well; sociologists who are comfortable with quantitative methods; agribusiness companies concerned with design; oil-producing countries turning into ‘hubs’ of entertainment.
There are already metrics to outline this new ‘Age of Talent.’ Harvard University has come up with an ‘Atlas of Economic Complexity.’ In such a study, we understand that more important than the number of class hours a student has been exposed to is what he can pragmatically accomplish with what he has learned.
Indeed, Klaus Schwab, founder of the Davos Forum, identifies ‘talentism’ as the successor to capitalism. Imagination and the ability to innovate – not weapons, natural resources, or capital – would be the drivers of what he calls the ‘Age of Adaptation.’ Along these lines, education can also be seen as one of the differentials between the dynamism of Asia and the rest of the developing world.
According to these new paradigms, education has to interact with a pro-market environment, ample access to venture capital, and entrepreneurship. So the coming competition goes beyond just ‘knowledge,’ and is therefore a function of ‘institutional ecosystems’ more or less able to provide innovation – and therefore prosperity and power.
The key element of innovation is high quality human capital, a rare resource called talent. To a certain extent, the great global race of the 21st century is therefore nothing but a major competition among elites.
Thus, those we once called “emerging markets” may very well stagnate. But the same is also true of “advanced economies” who set aside the imperatives of hard work and constant reinvention – and revel in expensive, ill-budgeted welfare states.
Opportunities will decline for those countries that, having integrated themselves into a trade bloc or regional economic and political community, flirt with the luxury of fiscal irresponsibility and the granting of unsustainable labour and social security benefits without gains in productivity to support their economies. Mediterranean Europe – with the severe adjustment that it has been undergoing for a few years now – obviously comes to mind.
Whether this or that country might have at one point been called “developed” or “emerging”, they will greatly gain by letting go of the certainty that either their “advanced status” or their “rise” are inevitable. In the global race for competitiveness and development, nothing is automatic or ever-lasting.
Reglobalization will belong to those countries that create business-friendly ecosystems, well-established and transparent market rules and steadfast connections to transnational economic networks. Those countries, regardless of their past on one or other side of the old north-south economic geography, will be the true “re-emerging markets” of the years to come.
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