When globalisation goes into reverse. Financial Times 2/2/2009

There are rock festivals and book festivals – and then there is the annual globalisation festival, otherwise known as the World Economic Forum in Davos.

For the past decade, the Davos meeting has brought together big business, high finance and top politics to promote and celebrate the integration of the global economy. Whatever their business rivalries or political differences, the Davos delegates all agreed that the road to peace and prosperity lay through more international trade and investment – globalisation, in short.

But this year the forum has had to confront a new phenomenon – deglobalisation. The world that Davos Man created is slipping into reverse. International trade and investment is falling and protectionist barriers are on the rise. Economies are shrinking and unemployment is growing.

The symptoms of deglobalisation are all around us. Last week, it was reported that global air cargo traffic in December 2008 was down 22.6 per cent compared with December 2007. Abhisit Vejjajiva, prime minister of Thailand, told the forum that tourist receipts in his country had fallen by about 20 per cent year-on-year, in line with the general decline in international travel (and stripping out the effects of the temporary closure of Bangkok airport). In the US and Europe, governments are scrambling to bail out not just banks but also car companies. But, as the European Union has long acknowledged, “state aid” to national industrial champions is a form of protectionism.

Then there is “financial mercantilism”, the talk of this year’s Davos. This is the growing pressure on banks and financial institutions to retreat from international business and concentrate on domestic markets. Trevor Manuel, South Africa’s finance minister, captured the fears of many when he warned that his country and other emerging markets were in danger of being crowded out of international capital markets and of “decoupling, derailment and abandonment”.

Financial protectionism is driven by the logic of the market and political pressure. Banks that have lost confidence and capital in the credit crunch are retreating to the home markets they know best. And because so many banks have been bailed out by national taxpayers, they are also coming under political pressure to lend at home rather than abroad.

At Davos, however, there was little sign that the global financial crisis has led to any rethinking of the assumptions underlying globalisation. True, it has become fashionable to bash bankers and to call for greater international supervision of the financial system. But the virtues of free-market principles and international economic integration remain largely unchallenged.

In some ways, this year’s Davos emphasised how universal these ideas now are. Twenty years after the end of the cold war, it is still faintly astonishing to find the Russian prime minister warning against a “blind belief” in the “over-arching power of the state” and the Chinese premier letting it be known he is rereading Adam Smith in a search for inspiration.

But while the ideas that underpinned globalisation remain firmly in place, events are moving in the opposite direction. Newspapers strewn around the Davos coffee rooms told not just of a fall in global trade but of strikes in France, “buy America” legislation in the US, social unrest in Russia and anti-foreigner protests in Britain. The pledges made at Davos to “complete the Doha round” of world trade talks have now been made and broken so often, that they have the same make-believe quality as a yearly resolution to join a gym and lose a stone in weight.

In fact, even as political leaders renewed their globalisation vows in Davos, their governments were often taking contradictory steps back home. Few exemplify this contradiction better than Gordon Brown, Britain’s prime minister, whose grasp of international economics and passionate calls for international co-operation made him one of this year’s Davos stars.

At the forum, Mr Brown warned gravely against “deglobalisation” and denounced trade and financial protectionism. But delegates in Davos wondered aloud how this was compatible with his government’s pressure on Britain’s bailed-out banks to give priority to domestic customers. Meanwhile back home, disgruntled workers were on the march, carrying posters emblazoned with Mr Brown’s own words: “British jobs for British workers.” It is not that Mr Brown is a hypocrite. If only it were that simple. It is rather that he and other leaders are being pulled in two directions. Intellectually, they are convinced of the need to keep markets open and trade and investment flowing. Politically, they are under pressure to respond to voters who are angry, frightened and demanding protection.

Recent developments suggest that angry citizens will take priority over abstract ideas. Davos Man is losing control of events. The financial crisis demonstrated that globalisation had created an economic system more complex and more dangerous than the delegates gathered in Davos had ever realised. The inability of international politicians and businessmen to stop the drift towards protectionism looks like the next stage in the demolition of the Davos consensus.

For the moment, ideas have not caught up with the shift in the real world. At this year’s globalisation festival, delegates sang the old songs about open markets and international integration. But they were no longer belted out with much conviction. Out in the wider world, more and more people are no longer listening.