Step back to go forward on global growth

As 2015 dawns the prospect looms of another year of disappointing global growth. Broken growth models litter the economic landscape. Divergent central bank policies suggest it is every country for itself as competition for market share intensifies.

None of this bodes well for global growth or the process of globalisation itself — a process policy makers and investors alike accept as an article of faith. Yet globalisation is under threat as the financial sector retrenches, global trade growth slows, extreme weather upends supply chains and privacy fears balkanise the internet.

We face a world of pinched political aspirations and partisan disputes, of policy gridlock and geopolitical competition. Companies and countries compete on price for their share of a fixed pie. At the country level, price equals currency value; beggar thy neighbour policies loom.

This competitive pricing logic is on display within commodity markets. The iron ore and oil markets have witnessed price collapses as dominant players expand production into weak demand to maintain or increase market share. 2015 tail risk (deflation) starts here should this pricing policy migrate into the manufactured goods space, perhaps via Chinese devaluation.

There is a possible way forward: the Tri-Polar World 2.0. For globalisation to advance it first needs to take a step back — to regional integration centred on the Americas, Europe and Asia. In turn, regional integration can act as an economic growth stimulant. First some history. Tri-Polar World 1.0 originated some 20 years ago with the North American Free Trade Agreement (Nafta). This model incorporated the US as a consuming country, Canada as a natural resource provider and Mexico as a low-cost manufacturing base. Europe’s response combined the euro currency, western Europe as consumer, Russia as energy provider and eastern Europe as low-cost producer. Regional integration in Asia has been less clear cut but has increasingly been centred on China’s rise and Southeast Asia’s integration.

Today, the outlines of Tri-Polar World 2.0 have become visible. The Americas, Europe and Asia remain as the three regional poles. Africa knocks on the door as a possible fourth while the Middle East plays a swing role between Asia and Africa via its energy, capital and logistics capabilities. Model 2.0 incorporates three new and specific attributes that reinforce this regional construct. These are each region’s capacity to become self-financing, self-producing and self-consuming.

Self-financing means each region’s growing ability to finance itself through wealth creation, expanded savings pools and the development of regional capital markets. European examples include the development of a regional corporate bond market and the European Central Bank’s new role of regional bank regulator. Within the Americas, pension fund growth stimulates regional capital market integration. In Asia, the development of a renminbi zone is becoming reality, as is the development of a regional corporate bond market.

Self-producing refers to the rise of advanced manufacturing techniques including robotics, cloud manufacturing and 3D printing. These techniques are upending the global supply chain and reversing the traditional multinational search for low-cost labour. Today’s world is all about ecommerce, mass customisation and producing where the demand is.

Self-consuming is the Tri-Polar World’s third unique attribute. Driven by wealth generation, urbanisation and service sector expansion, regional consumption capacity growth reinforces the self-producing attribute. Each region’s ability to self consume leverages trade, reduces beggar thy neighbour risk and creates a virtuous circle with the first two attributes.

These three trends reinforce the power of proximity evident in the movement of goods, capital, energy and information. Regional integration can drive growth via infrastructure funded by the cheapest capital in modern history. Astute policy makers will seize the opportunity.

The Tri-Polar World 2.0 can create new growth models and refresh the globalisation process. Power is leaching away from both the nation state and the post second world war global entities — we need to be proactive in thinking about where it coalesces.