Globalization in Retreat

The global economy is undergoing a massive structural transformation. Bruce Greenwald, the Robert Heilbrunn Professor of Finance and Asset Management and director of the Heilbrunn Center for Graham & Dodd Investing, explains the coming death of manufacturing and the return of the local.

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From Roman times — when we have the first good global data on standards of living — until really 1800, 1820, there is no net increase in human standards of living. Throughout that whole period, the vast majority of the human race is essentially expensive livestock: eat only staples, live with their animals, have one suit of clothes that comes off and on in layers over the seasons, biological entertainment, no real medical care, no travel, no nothing. And there’s a small elite that lives what we think of as a normal human life: the aristocrats, the well-off merchants, and so on.

From 1820 on, what happens first in Northern Europe, then obviously in Europe as a whole, then in the British dominions and the United States, is that the world changes, and everybody by, say, 1950, lives better than the aristocrats did in 1800. And that is an extraordinary achievement, and it's not a scientific achievement, it is a managerial achievement.

The real shock is going to be that globalization is going to be in retreat for a number of reasons. If you look at the world before 1920, 1914, it is a world of commodity production. It's food in historically unprecedented quantities; it's natural resources; it's wool; it's things like that. What happens is that we get so efficient at that, that trade in that just disappears because everybody can grow enough food on their own. So, you see globalization in retreat as you move out of those simple commodities that can be traded into local manufacturers with locally customized features.

The same thing is going to happen again, because what’s happening is manufacturing is dying in the same way that agriculture died. You’ve got very high rates of productivity growth and relatively low rates of demand growth, which means that labor — which is the fundamental cost of almost everything — is gonna come out of it.

But it's actually worse than that, because, as the robots make everything, the advantage of cheap labor, which is what you’re seeing now in Asia, goes away. So, when General Motors got in trouble in 1980, they had 360,000 workers in North America. This time when they got in trouble, they had 30,000 workers in North America, and they produce half as many cars still. Once that happens, exactly what’s happening in the auto industry occurs, which is nobody needs to import cars because transportation costs aren't going down that much, that it is all about making cars locally. And you're seeing that now in the United States and in the border areas of Mexico and Canada.

We used to spend nine percent of our income on clothing: six percent was making clothing, and three percent was dry cleaning and laundry. Today, we spend six percent of our income on clothing: three percent is dry cleaning and laundry, and only three percent is making the clothing. So, as manufacturing becomes less and less important, it's all about services, and you don't send your dry cleaning out to China. It's all about locally produced and consumed services.

So for all those reasons, globalization is actually an early 21st century phenomenon, and by the middle of the century, it's going to be in great retreat, and it's really going to be all about tourism and where you want to retire.

I think fifty years from now, if we continue to do what we've done over the last several centuries — and in the last twenty years, of course, what's happened is that 800 million to a billion people in Asia have attained that standard of living. But if we continue to do it, it will be a standard of living not based on a five-day work week, but based on a three-day work week.

And if we go on and on, it will not be demanding, physical jobs, it will be increasingly, sort of, jobs of human interaction and supervision — in education, in healthcare, in housing — that people really like to do. So, I think that that engine, which has, over the last 150 years, worked this extraordinary transition in society, should continue to do so.

About the researcher

Bruce Greenwald

Professor Bruce C. N. Greenwald holds the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School and is the academic Director...

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