Perspective: How insular aspirations are taking their toll on growth

Globalisation is receding as protectionism and trade wars undermine growth, while the lingering effects of a fiscal and sovereign debt crisis are fuelling resentment against immigration in Europe. Writes Dr. Hippolyte Fofack.

The power of globalisation as an engine for peace and prosperity is increasingly challenged, especially as more countries move away from the rules-based framework that has governed international trade for decades and resort to trade wars to address structural current account deficits. Whether one assesses it from the standpoint of global political integration and stability, or from the standpoint of global trade and capital flows, globalisation is receding. The increase in the free movement of goods, services, capital, and labour witnessed during the third wave of globalisation, which started in the 1980s and culminated in the rise of global value chains, is no longer happening in a uniform manner.

Insular aspirations are taking a toll on global growth and trade. First, creeping protectionism and outright trade wars are exacerbating global volatility and uncertainty. This is undermining the growth momentum and synchronised global expansion that emerged after the deceleration triggered by the end of the commodity super-cycle in 2014. Despite the slight recovery witnessed last year, global trade is still significantly below the high of $37.8 trillion recorded before the end of the commodity super-cycle when resilient global demand sustained a strong rally in commodity markets. Likewise, African trade – which rebounded in 2017, growing by more than 10% to $820bn after contracting by more than 12% the year before – is still significantly below the historical record achieved by the region in 2011, when its total trade (both extra- and intra-African) exceeded the threshold of $1 trillion.

Flows of foreign direct investment (FDI), which is highly correlated with trade, also have diminished because of the headwinds of increased global volatility. Global FDI fell by 23% to $1.43 trillion in 2017. In line with global trends, FDI flows to Africa continued their downward slide. This happened even though the region has been a historical laggard in the global distribution of FDI, consistently receiving the least of any region, including other developing regions. In 2017, FDI flows to Africa fell by 21% to $42bn, compared with $476bn for Asia and $151 for Latin America and Caribbean. The headwinds of global volatility are also affecting the trajectory of global growth. The earlier 2018 IMF’s global growth forecast called for strong and broad-based growth; the latest revision lowers growth projections not only in the Euro area, but also in a few leading emerging market economies.  

Perhaps the downward revision reflects the increasing uncertainty associated with trade wars and their inherent risk of disrupting supply chains. Most recent indicators on the dynamics of trade and growth suggest that these developments are shifting the balance of risks further to the downside, and in the process, affecting investment decisions and prompting either a reversal in capital flows, or a reduction in capital inflows to developing economies. In the medium term, the normalisation of monetary policy that is steadily bringing the era of accommodative financial conditions to an end could further exacerbate these risks, especially as interest rate spreads between emerging market debt and US treasuries become less attractive for investors.

To these short-term economic costs and downside risks, one must add the medium and long-term consequences associated with ongoing efforts to speedily unwind the process of globalisation. The growing popularity of nationalist political parties is undermining the ability of governments to deliver on the difficult reforms necessary to expand industrial output and boost global growth. Yet these reforms are very important for the expansion of employment opportunities, especially within the Eurozone, where the lingering effects of a fiscal and sovereign debt crisis have sustained high unemployment rates, resulting in income and secular stagnation that are perhaps fueling the resentment against immigrants.

Under pressure from the influx of refugees, the foundation of the European Union (EU) which has been underpinned by four freedoms, including labour and capital as economic inputs into the production of goods and services as economic outputs is being challenged. The commitment to open borders and the free movement of people within the EU borders is no longer accepted by all countries. A growing number of member countries no longer feel bound by the Schengen Agreement and its four freedoms, collectively and under the EU umbrella they are seriously exploring the option of outsourcing the integration of new immigrants to non-EU states willing to accept financial aid and other forms of incentives even if these states are not recognised as safe third countries for refugees.

Nigeria and Turkey have been considered as potential candidates for that outsourcing option, with the latter expected to receive about $3bn dollars annually from the EU as a key incentive under the EU immigrants’ diversion scheme. Similarly, a readmission agreement under negotiation between Nigeria and the EU will enable EU member countries to deport Nigerian emigrants back to their country, in exchange for EU economic aid. As the most populous country in Africa, Nigeria is potentially the single largest source of emigrants undertaking the perilous journey of crossing the Mediterranean Sea in search of better opportunities in Europe.

While the ongoing outsourcing of government responsibility and accountability under the EU immigrant diversion plan may stem the inflow of people, it is at best a stopgap measure and not a solution to stagnant wage and unemployment challenges. The long-term and more sustainable solution may lie in the implementation of structural reforms to raise productivity, improve policy coordination at the global level, and promote global demand and trade which, time and time again, have been the leading drivers of growth and an effective path to integrating countries into the global economy.

Dr. Hippolyte Fofack is the Chief Economist of the African Export-Import Bank.