April 2022
By Steve Weber and Arik Ben-Zvi
BlackRock CEO Larry Fink’s annual letter to shareholders in late March declared that the Russian invasion of Ukraine and the unprecedented economic sanctions that have cut Russia off from large swathes of the global economy are the last nails in the coffin of late 20th and early 21st century globalization.
Fink eloquently captured the zeitgeist of the moment, but not its deep and unfortunate irony. Along with the humanitarian and other tragedies taking place within Ukraine, it would be a significant tragedy for humanity overall were business and government leaders in the West to allow Russia’s actions to finally kill off globalization. And an ironic tragedy, because autarkic and authoritarian governments will certainly be more comfortable in a de-globalizing world economy. We’d all be less wealthy. And it would be even harder to deal with planetary issues like climate change and preparation for future pandemics.
We can all hope that Russia will fail in its attempt to undermine Ukraine’s sovereignty. But let’s not inadvertently allow Russia to lose the battle in Ukraine yet win the larger war against an open, prosperous, environmentally sustainable, liberalizing world economy.
Business leaders are in the best position right now to stop that larger victory from happening, and in doing so possibly reverse a set of trends that have been incrementally undermining globalization now for more than a decade.
Must Ukraine Be The End?
Globalization was on the defensive long before Russia invaded Ukraine. Increasing mobility of people, goods, money, and ideas in the last several decades has brought many positives but also severe tensions and dislocations which, at least until recently, the prophets and proponents of liberalization were reticent to address directly.
In the US, it took the populist revolt and the election of 2016 to raise sufficient awareness that people and communities who lose from liberalization aren’t automatically compensated with some of the surplus wealth that globalization creates; this must be engineered by policy. Globalization cheerleaders oversold the promise of political liberalization as an equally automatic consequence of economic liberalization, and not only for the case of China (where the oversimplified equation most visibly failed). And it took time to understand how the new era of machine learning as a leading edge technology in the global economy would incentivize companies and countries to try to ‘enclose’ data flows and re-introduce vertical integration in order to capture the positive feedback loops that power competitive advantage in AI.
On top of these realizations came Covid 19, an unprecedented shock that in sectors as diverse as personal protective equipment and semiconductor manufacturing led to catastrophic thinking about the need to ‘bring supply chains back home.’ It’s easy to understand the primordial emotions behind that impulse — there’s something intuitive about believing a factory inside your own country must be a more secure source of supply than a factory anywhere else — but the economics are somewhere between naive and nonsensical. Supply chains, like other complex systems, are at greater risk when there is a single point of failure anywhere, which means that diversification of supply chains to many physical locations in many different parts of the world is a far more robust recipe for stability.
Geographic diversification of supply chains is also more competitive, cheaper, and consistent with global growth objectives than the impulses of economic nationalism will ever be. As the acute Covid crisis fades into memory, so most likely will some of these emotional over-reactions. And minus the war in Ukraine, there was reason to hope that a gradual reconfiguration of globalization was taking shape, to make it more sustainable, less naively ‘automatic’ by assumption, and more cognizant of what policies are needed to shape increased mobility in ways that respect some of the fears of real people living in vulnerable communities.
But suddenly there is war in Ukraine, which has produced a more radical ‘end of globalization’ thesis with three main points. First, that the sine qua non of meaningful autonomy and sovereignty — the integrity of physical territory — remains at risk from foreign military action. Put simply, humanity is not yet removed from the long history of kinetic war, military coercion, and physical occupation that has characterized international relations essentially forever.
Second, that a country can be cut off from global flows of money, people, and goods (possibly even ideas) more quickly and more profoundly than almost anyone thought possible even a few months ago. The US in particular has been ramping up its use of economic sanctions for decades now, but Russia is a much larger and more globalized target than was Iran or Syria. Action like suspending major Russian banks from SWIFT were seen as de facto out of bounds. Until it happened.
Third, that the increasingly visible coercive power wrapped up in the US dollar as the primary global reserve currency is certain now to drive a more concerted backlash, which will lead toward a more fractured global financial system as just about everyone (including today’s US allies) look for ways to reduce their reliance on — and thus vulnerability to — the power of the US dollar and the American institutions that control the levers of access and exchange in dollars. There’s a lively debate about what it takes (and how long it takes) to undermine the power of a global reserve currency, but a great deal of agreement on the observation that the incentives to try to move in that direction have been amplified for many countries in the last few months.
Where Does Global Business Stand
Where is the voice of global business on these issues? It’s understandable that during the acute phase of the Ukraine crisis, many business leaders have had to focus fully on the question of their own firms’ operations, sales, assets, investments, and in some cases employees in Russia. But it’s now time to collectively raise heads up and speak to the bigger picture.
We believe that business leaders, while acknowledging the reality of Ukraine, need quickly to redouble their commitment to a modern globalization trajectory in the wake of the war. It’s time to boldly make the argument for an open global economy that gets back on track toward gradually reducing barriers to trade and finance in ways that respect human beings and the imperative of environmental sustainability.
Here’s why.
First, economic scope and scale simply depend on it. There are very few countries in today’s world that are large and diverse enough to run a plausible modern economy based on anything close to nationalist autarky — the US, China, possibly the EU if it maintains internal openness, and perhaps India over time. These countries would be poorer as they close their borders to anything but the most irreplaceable flows, but they could probably make it work. Yet for the rest of the world — many billions of people — that choice isn’t realistically available. To force smaller and less developed countries into imposed self-reliance, or into a low-tier club of less advanced technologies, lesser scale, reduced resilience to shocks and so on, would be inhumane.
And ethics aside, it’s fanciful to imagine that the self-reliant countries and regions could sustain what would then be an even greater gradient of wealth and prosperity than exists today between themselves and the poor world that they would have helped to create. It’s a recipe for terrorism and every other imaginable means of disrupting an untenable global disequilibrium.
Second, progress on today’s ESG goals depend on it. The environmental aspect is self-explanatory – for much of the world’s population coal and dirty biomass would be fuel for the foreseeable future, and carbon emissions don’t respect borders – national or otherwise. The same is ultimately true of social and governance objectives because the relationships that globalization creates are relationships of influence as well as of markets and technology. To give up that influence might make it easier to meet a narrow swathe of ESG goals in particular national settings, but it cedes too much of the world to leaders, firms, and governments that — because they are less wealthy and would have less surplus to invest — will almost certainly place ESG objectives on a much lower priority.
And finally, because innovation depends on it. An innovation ecosystem prospers with demand signals from a big and diverse global market that expresses hard to meet or unfamiliar desires and preferences. And the supply of innovation depends equally on a big and diverse population of people who are the source of new ideas. To put up barriers that limit access to both supply and demand is a recipe for narrow innovation, at best. More likely, it’s a recipe for secular slowdown in innovation and by implication, in overall growth and welfare. The world can’t afford it.
Scope, scale, ESG, and innovation — all of these should lie at the center of a globalizing economy in the present decade. The point is to move beyond the simplistic, narrow, and short-sighted notion that globalization was all about outsourcing work to where it could be done most cheaply. And to move back toward Sam Palmisano’s more visionary concept of the globally integrated enterprise which situates work where it can be done best. Politicians and governments are not today in a strong position or clearly incentivized to make that argument. CEOs have to take the lead.
Playbook for A Better Path
Here’s how it can be done. CEOs should seize every opportunity and create new ones where possible, to talk up the benefits of ‘openness’.
This is more than just a rhetorical re-branding of globalization. Openness is a mindset that includes and goes beyond an economic policy stance. And it is right now — in the midst of a European war, fears of global recession, and continuing anxiety at how quickly a connected world can spread a virus — the kind of counterintuitive mindset that the world needs to hear more about from business leaders on a consistent basis.
In practice there are a number of different ways to make the case for openness, starting with the acknowledgement of what was most importantly missing in the 2000s. There will always be winners and losers from progressive steps toward greater openness, and it is almost never the case that losers are automatically made whole without conscious intention and action. Populist sentiments along with anti-trade and anti-immigration fears should never be dismissed as reactionary, racist, or irrational (even if some may have elements of these) because — at their root — all three can be a reflection of lived experience for people whose short term fortunes are compromised.
Most CEOs have experience of this kind of resistance to change in their own organizations, and that is why they commit effort and resources to change management programs the best of which treat people’s fears with respect, not derision, and help position short term losers from change for medium and long term gain. Societal openness obviously is more than just a change management problem, but the philosophy behind those programs is exactly the kind of thinking and communications approach that business leaders can bring to the political landscape in a serious and respectful manner. Liberal economists and politicians would benefit from listening to what CEOs know about this challenge.
Business leaders also need to explain clearly and repeatedly why resilience to shocks depends on openness and diversification of supply chains, not autarky and self-reliance. This is an easy argument to make from an intellectual standpoint and a hard one to make from a political standpoint right now, at least in the US where the core of the Democratic Party and at least the Trump-wing of the Republican Party find it attractive to push ‘Americanization’. Yet if we don’t step forward with arguments for openness and diversification right now — in an economy with robust growth and sub 4% unemployment — when will we do it? The politics will only get harder if the next several years bring slower growth, possible recession, and higher unemployment. As well as additional acute shocks, since Covid and Ukraine are unlikely to be the last of the decade.
If the trajectory continues in the direction it just now seem to be heading in Ukraine, there will soon be another window of opportunity for openness, which will mean pivoting to a narrative about the upside surprises and opportunities the war creates. It may seem heartless on the face of it to suggest this, but there’s no contradiction between honoring the horrific events and the sacrifices of the Ukrainian people and learning what we can (and must) from the war. One of the learnings, hopefully, will simply be this: while there are still countries in the modern world that will attempt 20th century-style kinetic war and hostile occupation of another’s territory, their mission of anachronistic coercion is only becoming harder over time. If Ukraine largely holds off the worst, limits Russian gains, and sets itself up for de facto victory over time, then we’ll have an incredibly compelling example in front of us of how Russian efforts at autarky (Putin’s strategy post-Crimea) lost out to cooperation among countries that remain committed — if less strongly so than a decade ago — to openness.
Put simply, openness, not autarky, is what made Ukraine and its de facto allies capable of fighting back. Why retreat in the wake of that experience?
Finally, business leaders need to address the 2022 wave of inflation, but talk about it as an opportunity for openness not a threat. Inflation in 2022 is a story of how excess demand is not being met by adequate supply. There’s no point in simply pointing to pandemic fiscal and monetary stimulus, or blaming supply chain disruptions — since both are part of what is causing the disequilibria that we need to address. What’s agreed is the need to re-establish an equilibrium that relieves pressure on prices.
But businesses shouldn’t be focusing on how to reduce demand in order to do that, as monetary authorities like the Fed will do when they raise interest rates and shrink the balance sheet. Business should focus relentlessly on how to increase supply — which is another way of saying, boost productivity.
Inflation is a great opportunity to champion productivity, which means clearing away organizational, cognitive, regulatory, and other barriers to developing and deploying technologies that can boost productivity right now. One of the big lessons of the pandemic has been that we have many relevant technologies in hand already, we just have to be pushed to get over our inertia and resistance to experimentation in order to use them. The poster child example of course is modern video-conference software and how it enabled an instantaneous shift to remote work in March 2020. We could have experimented with this 5 years ago — but we didn’t, because inertia made it easier not to.
Inertia is the enemy of productivity and thus the best friend of inflation. Let’s not let the end of the acute phase of the pandemic (if, as we all hope, that’s in sight) allow inertia to creep back into our relationships with experimentation and productivity.
2022 is far too late to keep beating up on an earlier decade’s cartoon discourse about globalization. We know there is no flat world, no democratic peace law of international politics, and so on. Clickbait political economy with no theoretical or empirical basis sold books, then aged quickly and badly. The lesson to take from this is to be intellectually modest and not over-extend toward end-of-history style exaggerated claims. A global business and economic environment tilting towards openness will not solve for every problem we face whether it be in the realm of human rights, democracy, or beyond. But the advantages of greater openness are real and profound, and the world is going to need to seize those advantages in the next decade as we work through the hangover from Covid, Ukraine, and a new era of great power competition. If we do this, we can position ourselves better for the next acute shock. Business leaders need to step up and make the argument for openness first, loudly, and in anticipation of politicians — who might just follow along once the path is laid out for them.