World economy: Is the pendulum swinging back?

World economy: Is the pendulum swinging back?

Around the time we entered the new millennium, humanity moved from information intensification into a new economic age: the age of creation intensification. In the innovation economy, the key competitive advantage of individuals, companies and countries alike is creation -- the ability to use existing and newly emerging theories, know-how and technologies to create novel, original and meaningful value.

In the coming two or three decades, creativity and innovation will be the key drivers of business success and economic prosperity. That is, provided the innovation pendulum that drives or impairs the free flow of goods, people, ideas and capital isn't swinging back.

The pendulum: Some time ago, we discussed in this column the timing, direction and impact of change. We learned that change typically unfolds in one of four directional movements: linear change, cyclical change (or the wave), the spiral, and finally the pendulum.

The pendulum describes a directional movement where forces of change swing back and forth between two extreme poles in fairly regular time intervals. In many countries, political change follows the movement of a pendulum. For example, in the United States, political power regularly swings back and forth between two parties promoting more liberal (Democrat) and conservative (Republican) policies. But how about economic change?

Economic change seems to follow a pendulum movement too. Here, the international movement of ideas, goods, people and capital is the decisive factor as the pendulum swings back and forth between the poles of free movement and trade versus protectionism and nationalistic trade policies. How has the pendulum swung back and forth over the past two centuries?

The period from 1850 to 1914 was an era of globalisation, with international trade playing a major role in economic activities of leading European countries. It also featured outstanding intellectual activity and groundbreaking discoveries (such as Einstein's theory of relativity in 1905) that inspired new businesses in new industries based on the likes of chemistry or electricity.

The outbreak of World War I was a major discontinuity that made the pendulum swing back, and the period between 1914 and 1949 was one of deglobalisation. Nationalistic parties and autocratic leaders took power in many countries and protected their local economies by regulating and limiting the free movement of goods, people, ideas and capital. Protectionism and cold-hearted pursuit of national interests led to the Great Depression and culminated in World War II.

After the deglobalised period of two world wars destroyed millions of people and crippled some nations, the pendulum swung back again. The period 1950 to 2008 was a fresh phase of globalisation, driven by trade and foreign investment by thousands of multinational companies, supported by multilateral and regional trade agreements that reduced tariffs and non-tariff trade barriers.

Meanwhile, technological innovations (such as computerisation and the internet) and transport advances (such as container ships) reduced costs of international trade and communication. This new flood of prosperity and progress also doubled the number of countries that embraced the concepts of human rights and democracy.

The financial crisis of 2008, some experts argue, has made the pendulum swing back to usher in a new phase of deglobalisation. Many countries have seen (again) the rise of reactionary leaders who won elections based on protectionist, populist policies or took power by military force. So, is the pendulum swinging back? And will this lead to a new outbreak of trade wars -- or even real wars -- that will limit prosperity and competition?

Protectionist and nationalistic policies temporarily secure the interests of the old establishment and secure jobs in old industries through tariffs, non-tariff trade barriers, and unfavourable investment regulations or immigration policies. They temporarily prolong the lives of corporate dinosaurs and some old jobs, but at a high cost.

Such policies cut off local markets and consumers from access to superior goods, cutting-edge technologies, revolutionary ideas, foreign direct and capital investment, and the brightest global talents. But eventually, the pendulum will swing back, markets will open again, and corporate dinosaurs will face the fate of creative destruction.

In contrast, policies promoting the free international flow of goods, people, ideas and capital lead to new waves of technological innovation, new ventures, new investments and new prosperity. They create new jobs in new industries that will drive economies and create prosperity for future decades. They attract some of the smartest minds that think the boldest ideas and have the energy and talent to turn them into reality. Innovation and economic growth flourish in times and environments where ideas, goods, people and capital flow freely.

But does economic development really follow a pendulum movement? It can be argued that movements of "globalisation versus deglobalisation" and "economic freedom versus protectionism" follow a more hopeful pattern: the spiral.

That is, while moving back and forth, we also make regular upward leaps as we learn from past mistakes, and we also produce new waves of innovations and technologies that create more prosperity and progress for ever more people.

So, we may temporarily move back in the coming years, but let's hope that in the long run, humanity will continue to move up on the global prosperity spiral.


Dr Detlef Reis is the founding director and chief ideator of Thinkergy Ltd (www.Thinkergy.com), an innovation company in Asia. He is also an assistant professor at the Institute for Knowledge & Innovation-Southeast Asia (IKI-SEA), Bangkok University, and an adjunct associate professor at the Hong Kong Baptist University. He can be reached at dr.d@thinkergy.com

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