The End of Western Globalia?
Since the 1970’s, international trade has continuously been promoted by leaders of developed countries and economic agents.
Several theoretical frameworks have been put forward to explain the benefits of a free trade environment, from Adam Smith’s concept of absolute advantages to more recent firm-based theories. However, the reality is much more nuanced, especially after China’s entry into the WTO in 2001, and questions arise as to the sustainability of the current model.
While the development of free trade activity could be regarded as a sound intellectual victory for Western capitalism, such trend has paradoxically weakened several countries in Europe and America.
The first side effect of economic globalism in the West has been the retreat of manufacturing in several economies like the United States, with durable unemployment issues as a result. Beyond social impacts, Canadian author Vaclav Smil argued that a manufacturing decline is structurally problematic as it affects the ability of a country to innovate on the long run [1].
The second reason to be skeptical about international trade is the multiplication of structural imbalances in the global economy, with unstainable surpluses and deficits everywhere. An economy displaying a growing trade deficit is getting poorer with respect to foreign economies, leading to a financial and/or social crisis in the end. To understand that, it is necessary to imagine a country whose currency is backed by something tangible (e.g. gold). In that case, a deficit means that the country owes metals to the rest of the world. Of course, current account deficits can be offset by financial inflows, but as there’s no free lunch in economics, that should not be seen as a long-term solution.
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ATHENS – Western capitalism has few sacred cows left. It is time to question one of them: the independence of central banks from elected governments.
Setting aside the political controversy, central bank independence is predicated on an economic axiom: that money and debt (or credit) are strictly separable. Debt – for example, a government or corporate bond that is bought and sold for a price that is a function of inflation and default risk – can be traded domestically. Money, on the other hand, cannot default and is a means, rather than an object, of exchange (the currency market notwithstanding).
But this axiom no longer holds. With the rise of financialization, commercial banks have become increasingly reliant on one another for short-term loans, mostly backed by government bonds, to finance their daily operations. This liquidity acquires familiar properties: used as a means of exchange and as a store of value, it becomes a form of money.
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