Deglobalization: Don’t Forget the Losers
by robert looney
bob looney teaches economics at the Naval Postgraduate School in California.
Published January 23, 2023
It used to be a no-brainer to counsel small, emerging economies on the best way forward: just follow the export-oriented strategy adopted by the East Asia Tigers—South Korea, Taiwan, Hong Kong and Singapore. Armenia, the little republic east of Turkey and south of Georgia, enthusiastically climbed on board after becoming independent of the USSR in 1991, encouraging privatization and implementing free-market reforms. And from 1994 through 2007, the strategy worked wonders. GDP grew at an astonishing average annual rate of 9.4 percent, giving the country a middle-income living standard and leading the World Bank to dub Armenia the Caucasian Tiger in 2006.
Then the 2008-9 global financial crisis hit, and this nascent tiger developed a decided limp: from 2008 to 2021 GDP growth slipped to 2.6 percent per year. The lingering effects of the financial crisis can’t fully explain this slowdown. Indeed, some observers contend that the primary culprit was the reversal of global economic integration.
According to the IMF, the rate of growth in trade worldwide declined from an average of 7.3 percent (1994 to 2007) to 5.6 percent (2010 to 2015) to 2.5 percent (2016 to 2021). The comparable numbers for Armenia are 13.2 percent, 11.7 percent and 4.0 percent, respectively.
But it’s not that straightforward. While the deceleration of trade growth explains part of the story, other dimensions of economic integration (or lack thereof) matter, too. Indeed, a more useful definition of deglobalization focuses on non-quantifiable factors. In the words of a Chatham House explainer, deglobalization constitutes “the movement toward a less connected world characterized by powerful nation-states, local solutions and border controls rather than global institutions, treaties and free movement."
A host of unwelcome developments support this definition. There’s the U.S.-China trade war, the rise of populism in America and the EU, Russia’s invasion of Ukraine and related sanctions that prolonged and extended Covid-19’s disruption of supply chains. Overall, the trend is toward greater national self-sufficiency and reduced corporate risk exposure, compounded by the effects of competing US, Chinese, EU and Russian spheres of influence on trade patterns.
In the United States, the Biden administration promotes the “friend-shoring” of supply chains, domestic content requirements for electric cars and federal infrastructure projects and subsidies for domestic production of tech components such as semiconductors. China is pushing self-reliance in critical technologies and agriculture while trying to establish a viable alternative to Washington’s dollar-based SWIFT financial clearing system called the Cross-border Interbank Payment System.
European leaders, for their part, are also working toward semiconductor self-sufficiency, as well as investing in local mining of lithium and other materials that could soon be bottlenecks in the transition to renewable energy. Meanwhile, Russia’s military adventures in Eastern Europe and the Middle East along with the creation of OPEC+ (which coordinates Russian oil sales with OPEC’s), is forcing countries worldwide to reevaluate their reliance on international supplies of energy, critical metals and food.
It’s worth remembering that countries like Armenia, which were bypassed in the great wave of global economic integration, need foreign markets and capital now as much as South Korea, Taiwan and Singapore needed them in the 1980s.
Armenia Faces Deglobalization
This is all bad news for Armenia. On deglobalization’s playing field, small developing economies like Armenia’s are especially vulnerable because they depend on international trade to compensate for both a lack of scale economies in domestic markets and limited diversity in domestic natural resources. Armenia’s case is further complicated by its geographic isolation and high dependence on Russia for trade, investment and remittances from Armenians working abroad.
Armenia’s narrow range of primary exports includes pig iron, wrought copper, nonferrous metals, gold, diamonds and foodstuffs. As of 2020, these were largely exported to Russia, Switzerland, China, Bulgaria and (go figure) Iraq. However, increased concern over supply-chain vulnerabilities and the sustainability of merchandise trade with countries other than Russia is problematic.
Armenia’s long border with Turkey — and its shortest, cheapest path to Western Europe — has been closed since the collapse of the Soviet Union, while its border with Azerbaijan has been closed since the 1993 warover real estate with ethnically Turkish Azerbaijan. Armenia’s sole remaining overland trading route of any consequence runs through Georgia to Russia, which has been actively aiding in the ongoing fight against Azerbaijan. This places more-or-less democratic Armenia in an awkward place of geopolitical dependence on Putin’s Russia.
In deglobalization’s cold economic environment with its politicization of trade, high-tech services are one area that appears to hold some promise for returning Armenia’s trade growth to a higher trajectory. While data on the global growth of service exports is sketchy, most experts agree that services, particularly those delivered over the internet, have been growing considerably faster than merchandise. In the decade before the pandemic, global trade in commercial services grew at an average annual rate of 4.7 percent with remote access services such as online education, finance and medicine leading the way.
Although Armenia is not currently training significant numbers of highly computer-literate graduates, the country gained more than 40,000 mostly young, skilled Russian nationals between the start of the Ukraine invasion and the end of September 2022. Using their own capital, Russian expatriates have set up over 1,200 new companies in Armenia since March — many of them in the IT sector.
To support these new companies, Armenia recently announced the construction of new techno parks and industrial zones. The country is attempting to lure more Russian companies with promises of first-class infrastructure, tax breaks, logistics ties and assistance in locating new markets. Unfortunately, it is unclear how any of this will be funded.
As with exports and growth, Armenia’s inflows of foreign direct investment have declined from an average of 5.4 percent of GDP (1995 to 2007) to 4.2 percent (2010 to 2015) to 2.0 percent (2016 to 2021). Much of the recent decline stems from a drop in Russian contributions, which are likely to decline more as Russia attempts to restructure its economy to offset Western sanctions. FDI from Europe and U.S. is equally problematic. Armenia’s accession to the Russian-dominated Eurasian Economic Union in 2015, and the fact that Russia has 10,000 troops stationed in Armenia to aid in the ongoing war with Azerbiajan, means risk-averse Western investors are likely to steer clear.
Armenia is far from the only country whose options for growth have been reduced after being sucked into a regional power’s sphere of influence. In Asia, Laos and Cambodia, along with Nepal, Pakistan, the Maldives and Bangladesh are increasingly in the thrall of China, as are Ecuador and Bolivia in South America. Russia’s sphere of influence includes Venezuela, Cuba and Nicaragua in Latin America, as well as Syria, Belarus and Myanmar.
It’s become fashionable to emphasize the dark sides of globalization ranging from the ugly backlash to immigration to dependence on China for everything from rare earth minerals to iPhones. But it’s worth remembering that countries like Armenia, which were bypassed in the great wave of global economic integration, need foreign markets and capital now as much as South Korea, Taiwan and Singapore needed them in the 1980s.