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Globalisation cuts both ways

The Financial Times

By Stefan Wagstyl

For politicians, globalisation has run into serious trouble, with questions raised about everything from its role in the world economic crisis to its alleged contribution to environmental degradation and rising income inequality.

But for business people, the forces driving globalisation are as strong as ever, with countries and companies daily taking decisions that strengthen the bonds of commercial and financial interdependence.

World trade has this year recovered to the record levels of the pre-crisis boom; investment flows from the developed world into emerging economies are back above $1,000bn a year – short of the 2007 record of $1,200bn but higher than any year before that, according to the International Institute of Finance, the bankers’ body.

The future of the emerging economies and their impact on the rest of the world are the focus of the World Economic Forum’s regular annual New Champions meeting (the “summer Davos”) which begins today in Dalian, China.

“If you look at the numbers, globalisation still looks very exciting, but at the margins some politicians want to pull back,” says Maarten-Jan Bakkum, global emerging markets strategist at Netherlands-based ING Investment Management. “You can’t make the case yet that there’s enough protectionism to interfere with global trade and investment. But it could come.”

Governments in much of the developed world face huge difficulties pulling their nations out of the economic mire. These challenges have triggered debates about the pre-crisis years, including globalisation and its impact on the poor, who saw their jobs disappear to the emerging world while the rich grew richer.

Writing in the FT last month, Jeffrey Sachs, the US economist, said: “Globalisation has raised very serious adjustment challenges for the high-income world, and most high-income countries, notably the US, have failed to meet those challenges.”

But, despite all the soul-searching, most of globalisation’s critics are looking at reform, not revolution. As Mr Sachs also wrote: “I am not calling for a reversal of globalisation or declaring it a failure ... I am calling, rather, for its proper management.”

Most of the emerging world takes little comfort from the economic difficulties of the US and Europe and stagnation in Japan. Developing countries were hit hard by the 2008-09 recession and would be hit hard again if there were another developed world contraction.

But emerging market policymakers see that their economies are mostly in far better shape than those of the developed world – often thanks to serious restructuring, as in eastern Europe after 1989-91 and much of Asia after 1998.

Little wonder that these countries take pride in their growing wealth and spending power – and cannot resist a little schadenfreude. When Russian state television this summer aired a fictional documentary called The End of the Dollar Epoch, thousands thought it was real and rushed out to sell their greenbacks.

The immediate future of the globalisation debate depends much on the economies of the rich world. The loudest demands for a brake on globalisation – in the form of protectionist moves to safeguard carmaking and other industries – came in the depths of the 2009 recession. Another contraction in the US and/or Europe would lead to similar calls.

The economic outlook has deteriorated markedly since the early summer, with growth forecasts dropping in the US and Europe and worries multiplying about Washington’s debt and the eurozone’s financial turmoil.

The Organisation for Economic Co-operation and Development last week became the latest institution to revise its outlook and forecast a second-half slowdown in the rich world, with a 50:50 chance of a contraction in the last three months of 2011.

This month, the International Monetary Fund is widely expected to cut its 2011 predictions from the current forecast of 2.2 per cent annual growth for the developed world and 6.6 per cent for emerging markets.

As well as making the policymakers sweat, the likely slowdown in the developed countries’ economies will make life much more difficult for companies, as the sharp sell-off in global financial markets this summer has signalled.

Among the first to sense trouble are carmakers, since consumers can easily delay purchases. Volvo, the Swedish carmaker owned by China’s Geely, last month warned that the “unstable economic climate” would be likely to cause greater volatility in consumer confidence, exchange rates and raw material prices, which could in turn have an impact on its profits.

But with the wide gap between growth rates in developed and emerging markets, the effects of the slowdown will be uneven, as they were in 2009.

Multinationals based in the US, Europe and Japan, fighting recession or near-recession at home, will struggle to compete with emerging market rivals based in economies that are forecast to grow much faster.

Hans-Paul Bürkner, president and chief executive of the Boston Consulting Group, says: “For companies in the developed markets, there’s a real danger that if you talk in terms of 3, 4, or 5 per cent growth then in 10 years’ time you will be marginalised be­cause you will find that the companies from emerging markets have taken over.”

Successful developed-world multinationals have been grappling with these challenges for a decade – and some have succeeded by prioritising emerging economies and ensuring that they respond quickly and directly to changes in these fast-moving markets.

For example, Diageo, the UK-based drinks group, last month raised its medium-term growth targets because weakness in Europe has been offset by rising emerging markets sales. Reporting results for the year to June, Diageo saw sales of Johnnie Walker whisky rise 20 per cent in Brazil, for example.

Philips, the Dutch electronics maker, is boosting its investment in healthcare in Indonesia and other emerging Asian economies – spending money despite a sluggish performance for the group as a whole this year.

Emerging market companies also face challenges, particularly as they move from their home countries into the developed world. They may benefit from rapid domestic growth and, often, accessible finance, but may lack management skills.

Mr Bürkner says: “It’s not easy for emerging market companies when they come to Europe or North America or Japan. Coming from a market that’s growing at 30 or 40 per cent a year, it’s difficult to adjust.”

Corporate globalisation is punctuated by headline-making deals, and these have not been in short supply this year, despite the economic uncertainty. For example, Nestlé, the Swiss foods group, this summer agreed to pay $1.7bn for control of Chinese sweets maker Hsu Fu Chi.

The transactions flow both ways, as emerging market companies buy businesses both in the rich world and in other emerging markets, with the Chinese leading the way: the largest Chinese overseas deal so far this year was state oil group Cnooc paying $2.1bn for Opti, a Canadian oil sand producer.

Rupert Hume-Kendall, chairman for global capital markets at Bank of America Merrill Lynch, the US investment bank, says emerging market companies are certain to see opportunities in the developed world’s likely slowdown. “We will surely start to see an uptick in M&A involving Bric industrial groups, as they start to take advantage of undervaluation in western markets.”

Emerging market groups are making their presence felt in the ranks of the world’s largest companies. In the June 2011 FT 500 list of top corporations by capitalisation, China was in fourth place behind the US, the UK and Japan with 27 companies, not counting the 18 in Hong Kong, which would have put it in second place. By contrast in pre-crisis 2007, China was equal eighth, with eight companies in the top 500 (plus nine from Hong Kong).

Other big emerging market companies are also climbing the rankings, with India putting 14 groups into the 2011 top 500 (up from eight in 2007), Brazil 12 (seven), and Russia 11 (nine).

Size does not necessarily mean quality, in either the developed or emerging world. But emerging market groups are establishing themselves as world leaders in specific sectors. Just five years ago, the top global wireless telecommunications equipment makers were all western. Today, two of the top five are Chinese: Huawei Technologies and ZTE.

Almost whatever happens to the world economy, over the next few years the list of world-beating emerging market companies will surely grow longer.

Post-Crisis World Institute