Everyone is feeling the pressure. According to the latest global cost of living survey, prices in major cities around the world have risen by an average of 8.1% in local currency over the past year. One reason is Vladimir Putin’s war against Ukraine. Energy prices have soared by an average of 29% in Western Europe and 11% globally since last year, exacerbated by Russia’s invasion of Ukraine in February. Food prices have also risen. Both countries are major producers of cereals, oilseeds and fertilisers, and world food prices are now rising at their fastest rate this century. Another factor is the impact of China’s metal-19 restrictions on global supply chains, although popular frustration is growing. Overall, the survey, which compares the prices of more than 200 products and services in more than 170 cities, shows that the cost of living is rising at its fastest rate in at least 20 years.
How is it possible that the two most important commodities — wheat and oil — are globally dependent on Russia not attacking anyone?
Societal implication: small regions and cities need to learn fast. Only then will they be able to respond to the impact of global crises, which small regions feel the most. Cities will start to introduce their own cryptocurrencies to protect them from deglobalising fluctuations.
Marketing implication: brands will be more local and national. Megabrands need to embrace glocalisation both in marketing content and product development. Climate change causing transport disruption will place increasing demands on logistics and supply chains, and moving production to the point of sale will no longer just be a friendly gesture towards consumers and nature, but often an economic necessity.
Deglobalisation is defined by the European Parliament as moving towards a less interconnected world characterised by strong nation states, local solutions and border controls instead of global institutions, treaties and free movement. The recent rise of protectionism, problems with supply chains, the diminishing role of global institutions, geopolitical changes, technological competition and a decline in foreign investment, as well as energy and food crises, have been accompanied by events such as the Russian war in Ukraine, the COVID-19 pandemic, Brexit, authoritarianism in China and populism in the US and elsewhere. On the other hand, phenomena such as the coronavirus pandemic, international crime and climate change show that global cooperation is still relevant.
The persistent slowdown in world trade after the great financial crisis of 2008–2009 is evidence number one for the deglobalisation hypothesis. Between 1985 and 2008, the period of hyperglobalisation, the share of trade (exports plus imports) in goods and services in world GDP rose from 38% to 61%. However, in a sudden break, this share slowed down, reaching 56 per cent in 2019, before the disruption of the COVID-19 pandemic. Figure 1 shows the evolution of the world trade-to-GDP ratio and the differences between the three largest trading powers. Many attribute deglobalization, or what they perceive as deglobalization, to protectionism. Since 2017, the world has witnessed events such as Brexit, the withdrawal of the United States under President Trump from the Trans-Pacific Partnership, a trade war between China and the United States, the disabling of the World Trade Organization dispute settlement system, the disruption of global supply chains by pandemics, and many challenges to self-sufficiency. Trade sanctions imposed on Russia following its invasion of Ukraine have added further evidence that global economic integration is stalling or even reversing.
Opportunity for services, swan song for products
Increased protectionism was not the main cause of the sharp slowdown in world trade in goods after the financial crisis, as the prestigious think-tank Bruegel writes. This view was reached by analysts during and immediately after the 2008 crisis and remains true a decade later. Despite notable examples of protectionism, trade in goods remains largely free, perhaps freer than before the crisis. Yet uncertainty in trade policy has increased significantly in recent years.
In trade in services, barriers to globalisation remain high but are no higher than before; trade in services continues to grow, facilitated by technology. Deglobalisation has occurred in international capital flows; the cause has been the financial and macroeconomic consequences of the crisis, not protectionism. International migration is the biggest obstacle to globalisation and conditions are becoming more difficult. Despite frequent efforts to prevent the flow of technology across borders, it is almost certainly happening more easily than before the crisis, thanks to the spread of the internet.
The peak of globalisation is behind us. We have entered the era of “slowbalisation”
The volume of international trade has multiplied sixfold since the Industrial Revolution, as PII writes. And now it’s stagnating for the third year. Judging by trade flows, the fourth era of globalisation seems to have peaked in 2008. As the figure above shows, the ratio of world trade to GDP has declined since the Great Recession. In 2010, world trade rebounded from the 2009 surge, but has been weakening since then. We are now in the fifth historical period of what is sometimes called “slow mobilisation”.
While in previous decades trade tended to grow faster than world production, this is no longer the case. Instead, trade growth has been abnormally weak in recent years. In fact, the volume of world trade actually declined in 2019, even though the world economy grew relatively steadily.
A number of factors were at work here. The growth of global value chains — the proliferation of supply networks across countries — has flattened. 5 The reform agenda has stalled around the world. Under President Xi Jinping, China has begun to turn inward through policies to promote the domestic development of leading industries (the Made in China 2025 initiative). China remains an export power, but the share of exports in its GDP has fallen from 31% in 2008 to just 17% in 2019, as Nicholas Lardy has noted. The United States under President Donald Trump has adopted an “America First” policy, moving away from trade liberalisation (withdrawal from the Transpacific Partnership) and towards protectionism. The Trump administration has imposed tariffs on steel and aluminium imports ostensibly on national security grounds, prompting retaliation and the extension of trade barriers elsewhere.
As international regional ties expanded and deepened, three main production and supply hubs stood out: Europe, Asia and North America. Together, they now produce 90% of the world’s goods. However, these regions are not equal. Europe and Asia have become much more integrated as regions than North America. Two thirds of EU trade and more than half of Asian trade remains within their regions, while in North America only 40% of trade takes place between the three countries. The rest of the world is even further behind, with trade with its neighbours not even reaching 15 per cent.
Because regionalization has given nations a competitive boost, it helps to partially explain the winners and losers from trade. And it has given Europe and Asia a head start over the US and North America.
Critics and advocates of globalisation are right that these trends are changing again. COVID-19 has accelerated a whole set of forces that are reshaping global trade linkages. Robots, automation and 3D printing increasingly mean that many businesses can do more with fewer workers, making cheap labour relatively less important.
Demographic changes are driving up costs in once low-wage countries, notably China, where more workers are now leaving the labour market than entering it. The value of time is also rising. As consumers expect faster deliveries, factories thousands of miles away can mean lost sales. Add to this the headaches caused by supply chain problems and increasingly frequent and extreme weather events, and long-distance manufacturing becomes relatively less profitable in many industries.
The Great Resignation
In its 2023 outlook, investment group BlackRock cited three long-term causes of production curtailment. One is an ageing population. Its effects have long been evident, but are now becoming more binding. Why? An ageing population means a shrinking workforce. A growing share of the U.S. population is age 65 and older, when most are leaving the workforce. This is one of the key reasons why the U.S. labor supply is currently unable to keep up with the demand for labor. Like students and stay-at-home parents, retirees are “out of the labor market.” This is largely why the proportion of the adult population that is inside the labor force — that is, working or looking for work — is still significantly lower than when the pandemic began. This proportion is also referred to as the participation rate (see orange line in the graph). The initial sharp decline was due to lock-in: many people who lost their jobs did not immediately look for another one because of concerns about health care or caregiving responsibilities. Some of this decline in the workforce has now subsided. But the yellow line shows that the portion that has not leveled off is almost entirely the result of aging — a growing proportion of the population of retirement age — and not the effect of a pandemic. Hence, we do not expect an improvement in the participation rate from here, and hence no substantial alleviation of the shortage of workers that contributes to inflation. Ageing is also bad news for future economic growth. The available labour force will expand much more slowly in the coming years than in the past. Economies will not be able to produce as much. And we don’t think an aging population will consume much less either, especially when we factor in the demand for health care. That means continued inflationary pressure as reduced productive capacity struggles to keep up with demand. We also see that rising government spending on care for the elderly is increasing the debt burden. Therefore, within equities, BlackRock recommends healthcare as a sector developing drugs and devices to help meet the needs of an aging population. Workforce participation rates have dropped dramatically in the pandemic as the economy has stalled.
Glocalisation hits small towns fastest
Global problems usually require international solutions. But we are not getting enough of that — whether we look at the failure of the covid-19 pandemic or the ever-increasing climate change. Yet it is clear that it is small regions and communities that are most rapidly affected by these changes. And this is confirmed by the findings of the Centre for Strategic and International Studies.
Over the past year, Economy Disrupted has invited a diverse group of elected officials from cities, states, and territories across the United States. Although the ten mayors, governors, and lieutenant governors they spoke with came from different parties and areas, they all shared a deep commitment to addressing the local impacts of global change. Unlike the frequent partisan gridlock in Washington, the solutions these local, state, and territorial leaders proposed are pragmatic, innovative, and consensus-oriented.
Here are some of the key lessons learned from the second season of Economy Disrupted in the three thematic areas we discussed on the show:Technology, climate change and labour market changes.
Mayors and governors see technology as key to the future economic growth of their communities. From the new innovation district described by Mayor David Holt of Oklahoma City to the new university technology centers highlighted by Mayor Paige Cognetti of Scranton, Pennsylvania, leaders in suburbs are investing in innovation as the future drivers of their economies. But barriers to regional technology transformation remain. As California Lieutenant Governor Eleni Kounalakis said, “We have whole areas in our state that are ready for economic development, but they need to have access to Internet connectivity.” Phoenix Mayor Kate Gallego noted that “the first thing I hear about when companies are looking to hire here is the ability to hire the right technology talent.”
The adverse impacts of climate change are already being felt by local, state and territorial leaders. Guam Governor Lou Leon Guerrero shared, “The greatest evidence of climate change is our coral reefs. We are trying to protect our coral reefs as much as we can.” Leaders at the subnational level see the impacts of climate change on the front lines in their communities, but they also see opportunities to leverage the ecological transition for economic growth. As Mayor Nan Whaley of Dayton, Ohio, explained, “Climate change leads to job creation. We need to make solar panels, wind turbines and electric cars.”
For mayors and governors, jobs remain an ongoing challenge and opportunity. As described by New Hampshire Governor Christopher T. Sununu, mayors and governors have focused primarily on addressing job loss and displacement during the pandemic. An important intervention that helped mitigate overall job losses was the use of federal funds under the Paycheck Protection Program, supplemented by other state and local assistance. As the United States emerges from the Covid-19 pandemic, changes in the way and place of work are poised to affect local communities. Fort Worth, Texas, Mayor Mattie Parker captured the spirit that is shaping local leaders across the country when she said that small and mid-sized cities in the heartland can offer a new home to telecommuters and businesses moving from high-priced big cities and coastal areas.
Local Cryptocurrencies and Radical Localism
In the bucolic Berkshire Mountains of western Massachusetts, a new experiment is taking place that has implications for where and how cryptocurrencies and blockchain-based technology could make their way into everyday life. At the Berkshire Food Co-Op in Great Barrington, Massachusetts, you can see which local farm grew your produce, pick up an organic cup made from bioplastic, and pay for everything from this year’s harvest with cryptocurrency.
That currency is not the carbon-intensive Bitcoin or many private cryptocurrencies backed by venture capitalists. Instead, the cooperative is partnering with a pioneer of the farm-to-table movement to use a technology often associated with unfettered global capitalism for a different goal: radical localism.
The launch of the Digital Berkshares cryptocurrency this spring marks the latest step in a decades-long effort to foster a self-sustaining economy in the Berkshire Mountains, a favorite haven for the wealthy and educated residents of the Northeast.
As globalisation progressed, this independence remained elusive. Now, however, as the rise of blockchain spurs a broad rethinking of money and a broad push for deglobalization gathers momentum, proponents of this effort have found a new opportunity.
To exploit it, they enlisted the help of early pioneers such as a ukulele factory, a travelling clown and a prominent local scientist. But proponents of the currency insist it is more than a quirky pet project. They argue that the same technology that has launched thousands of get-rich-quick schemes can also help rural America slowly get richer.
“We’re not in a three-year or five-year project,” Susan Witt told Politico in an interview, overseeing Berkshares, which as co-founder of the Schumacher Center for the New Economy has been trying to break the dollar’s monopoly on U.S. money since the 1980s. “It’s more of a 50-year project.”
How can global brands be more national?
In the last five years we have seen a trend of nationalism that is still evolving, and we need to rethink how this will affect not only the work we produce, but also our industry and its future.
The basic principles of branding, consistency, frequency and emotional attachment play well with globalisation. Multinational brands and their creative teams can create a one-size-fits-all solution that can be easily distributed for maximum frequency and accessibility. There are common global insights that are used to emotionally connect consumers to brands; however, like global supply chains, nationalism is starting to disrupt this system, making things much more difficult for global brands to manage.
Add to this the ever-evolving ecosystem of communication channels and the shift towards an experiential way of communicating with consumers, and brands are faced with some complex challenges that present their creative partners with a problem — how best to solve these dilemmas? The answer is glocalisation, writes The Drum.
Glocalisation is the adaptation of global and international products to the local conditions in which they are used and sold. The term was coined in 1980 by sociologist Roland Robertson in the Harvard Business Review, who wrote that glocalisation means “the simultaneity — the presence — of both universalising and particularising tendencies”.
In the context of a specific product or service, this means adapting globally sold products and services to local markets. A global product or service, i.e. something that everyone needs and can use, can be adapted to fit local laws, customs or consumer preferences.
When I heard that Ikea was expanding and setting up branches in India, I wondered how Ikea would “adapt” to the economic and psychological situation of growing economies like India, writes Sinduja Ramanujam in his report. For instance, Ikea boasts of the ease of furniture assembly that works in countries like the United States because labour is expensive there. But India is a country of about 1.5 billion people and labour is cheap. The situation is not much different when you take Ikea’s fantastic food offerings. How would it “adapt” to a country like India?
It worked and it works really well. All this can be attributed to glocalization. Glocalisation is about thinking about the changes in the company both globally and locally and making sure you take into account the amount of each that should be used in the strategy. It’s about how you can leverage both the universal phenomenon that’s happening around the world and local trends to create a unique offering just for that market. It takes into account the social, political and economic condition before devising a strategy.
How did Ikea take the concept and put it into practice? Ikea didn’t just take Billy bookcases and Hemnes chests of drawers to attract the masses. It has perfectly combined the belan, pressure cookers and Idli makers that are a staple in all Indian homes to show how they can all be kept side by side in one home. It was an excellent display of Indo-Western culture.
Using teak, mahogany or mindi. Teak and mahogany are generally associated with luxury and quality material in India. Ikea has extensively studied households that have come up with the use of teak and mahogany in their furniture to make it more “Indian”. Not only that, by offering this material in addition to other types of wood, it has also introduced a range of products that is appealing to people with different tastes.
Furniture for everyday living with various uses. Indians as a whole are well known for entertaining and family gatherings. We prefer to invite people to our homes for meetings rather than meeting them for dinner out at a restaurant. Ikea has combined two amazing ideas here — they have designed folding furniture for when guests come over, but at the same time you can fold it back to fit into a small space (I’m talking about sofa beds here). Ikea has also invested in locally sourced materials for cushions, wood and also textiles. This has not only created employment opportunities for many artisans, but also a trusted network in which the multinational conglomerate wants to establish long-term relationships with local people.
Assembly and delivery possible. Indians are not very DIY oriented when it comes to assembling furniture. This is mainly due to the availability of cheap labour. Ikea has invested even more space in its warehouses to offer assembly services directly at the point of purchase. It offers assembly and delivery of furniture within a day for a small extra charge, and that’s a huge win considering they can choose the furniture they like and also have it assembled. One of the reasons why they don’t pre-assemble furniture is so that they can have more inventory in unassembled form, but another angle is to also give the end user the choice of whether they want to make the furniture themselves, which is usually the more cost-effective option, or they can always choose to have it assembled in-house.