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US President Donald Trump receives a letter presented to him by Chinese Vice-Premier Liu He in the Oval Office of the White House on October 11. Photo: AP
Opinion
The View
by Dan Steinbock
The View
by Dan Steinbock

As a financial crisis looms and refugee crises worsen, the world seems to have forgotten the lessons of 1945

  • Global growth is unlikely to recover soon, given not only the US-China trade war but also geopolitical tensions
  • Around the world, the number of forcibly displaced people has hit a record high
Dan Steinbock
Dan Steinbock
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In its new report, the International Monetary Fund forecasts global growth in 2019 of 3 per cent, the lowest since the global financial crisis of 2008-9. This is largely due to the US-China tariff war, which has contributed to a projected slowdown in the United States and China.

The IMF expects growth to pick up to 3.4 per cent in 2020. That, however, is predicated on improvements in a number of emerging economies in Latin America, the Middle East and Europe, which, in turn, would require a trade recovery. Thanks to the global slowdown, world growth prospects now hover at 2008-9 levels.

At the peak of globalisation, the Baltic Dry Index (BDI) was often used as a barometer for international commodity trade. The index soared to a record high, 11,793 points, in May 2008. But as the crisis spread in the advanced West, it plunged 94 per cent to 663 points.

Last February, the BDI sank to 595 points. In September, optimistic speculation drove the index up to 2,500. Now it’s back to around 1,900, about 85 per cent below its peak. Unfortunately, broader measures of global economic engagement are equally dire.

Global economic integration is usually measured in world trade, investment and migration. Before the 2008 crisis, world investment soared to almost US$2 trillion. Before the Donald Trump presidency, the UN predicted that global foreign direct investment would resume growth in 2017 and surpass US$1.8 trillion in 2018.

At the time, I said the improvement was unlikely and world investment would either continue to stagnate or worse. This has proved true. In 2018, global foreign direct investment slid 13 per cent to US$1.3 trillion, the third consecutive annual decline.

The contraction was heralded by US multinationals repatriating earnings from abroad to exploit the Trump tax reform. As a result, foreign direct investment in advanced economies fell to levels last seen in 2004. Geopolitics and trade tensions virtually ensure that risk and uncertainty will weigh on foreign direct investment this year and beyond.

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In 2018, the US remained the largest recipient of FDI, followed by China, Hong Kong and Singapore. However, given the tariff war and widening divisions in the US, investors are scrutinising investments in the US. China is suffering a US neo-containment policy. Singapore has barely avoided a technical recession. In Hong Kong, continued instability could undermine economic prospects in the foreseeable future.

In 2017, world merchandise trade recorded its strongest growth in six years. According to the World Trade Organisation, the ratio of trade growth to GDP growth was rebounding.

At the time, I suggested the WTO was too optimistic. As the trade war materialised in 2018 and trade outlooks were downgraded, I was proved right.

In spring, the WTO expected global trade to “continue to face strong headwinds in 2019 and 2020” because of trade tensions and economic uncertainty. But it also expected trade growth to rebound to 3 per cent in 2020.

Unfortunately, the WTO seems to be underestimating the possibility of continued trade conflict and the simple reality that by 2020, the Pentagon hopes to transfer 60 per cent of its warships to the Asia-Pacific. In the absence of countervailing forces, these trends will ensure elevated geopolitical tensions and undermined economic prospects.

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While the international media tends to dwell on refugee crises in Europe and Latin America – near the US border – the burden of global displacement falls disproportionately on emerging and developing economies. According to the UN Refugee Agency, almost 71 million people had been displaced at the close of 2018; this included 13.6 million people newly displaced that year because of conflict or persecution.

Overwhelmingly it is developing countries that are most affected, thanks to destabilisation, violent conflict and regime change. At the end of 2018, Syrians were the largest forcibly displaced population (13 million), followed by Colombians (8 million), Congolese (5.4 million) and Afghans (5.1 million). The number of globally displaced people has hit a record high, though there has not been a world war since 1945.

In 2008-9, the crisis was contained by adopting large fiscal stimulus packages and ultra-low rates. Now, a decade after the crisis, central banks’ rates remain ultra-low, whereas soaring debt levels limit new fiscal injections. In the next crisis, there will be no lifeboats or only leaking ones.

After 1945, reason prevailed as the international community opted for accelerated world trade, investment, even migration. After three decades of misguided policies and tens of millions of war dead, the world finally recognised that other alternatives were prohibitive. Perhaps we have forgotten the lessons.

Dr Dan Steinbock is an internationally recognised strategist of the multipolar world and the founder of Difference Group. He has served at the India, China and America Institute (US), the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see www.differencegroup.net

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