It’s the Global Economy, Stupid

The folly of policies that ignore the growing interconnectedness of the world's markets
illustration of world map with finance
“We are so inextricably linked across the international system that what happens in the world affects us on a day-to-day basis,” says Bhaskar Chakravorti. Illustration: DepositPhotos
May 9, 2012

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Volvo is owned by the Chinese. Jaguar was bought by an Indian company. Apple, easily one of the most admired American companies, sees its profits growing most in Asia, not the United States. The sixth largest economy in the world? It’s Brazil.

These are all signs that if you want to assess the prospects for the U.S. economy, it’s probably wise to pay attention to the global economy, which is undergoing unprecedented transformation, says Bhaskar Chakravorti, senior associate dean for international business and executive director of the Institute for Business in the Global Context at the Fletcher School.

“The mantra of Bill Clinton’s presidential campaign was ‘It’s the economy, stupid.’ For the campaign that is unfolding this year, I would now change that to ‘It’s the global economy, stupid,’ ” Chakravorti says. “Since the Clinton era, the effects of globalization have become central to the prospects for the U.S. economy.”

Current campaign rhetoric that reduces the U.S. economy’s future to an “us against the world” equation is wrong and misleading. Rick Santorum, for example, told Forbes just before Super Tuesday: “I want to beat China. I want to go to war with China and make America the most attractive place in the world to do business.” In fact, the growth of most major U.S. companies is dependent on expanding their markets in China and elsewhere internationally, Chakravorti says.

“Emerging markets have become real players because of their thriving economies and the purchasing power of their increasingly affluent middle class,” says Bhaskar Chakravorti. Photo: Alonso Nichols“We are so inextricably linked across the international system that what happens in the world affects us on a day-to-day basis,” he says.

The U.S. is beholden to foreign markets because that’s where the growth—and therefore future profits—are. In China and India, he notes, the economic growth rate is between 6 and over 9 percent annually, compared to just around 2 percent in the United States. Expanding into new markets is the surest road to economic recovery—increasing the demand for goods and hence a company’s production and profits.

“Emerging markets have become real players because of their thriving economies and the purchasing power of their increasingly affluent middle class—they see what goods are being bought in developed countries, and they want them also,” Chakravorti says. “These are no longer just places to get cheap labor.”

Maneuvering in international markets is a complex chess game that U.S. companies are still learning how to play. Most major American companies have targeted large emerging economies such as Brazil, India and especially China, Chakravorti says, but that strategy sometimes has its own complications.

Consider what Kraft Foods did when its Oreo cookie sales flattened domestically: it looked to China. But it had no idea if people there liked Oreos or how to market them. So Kraft bought the British company Cadbury, in part to benefit from its knowledge of and long history of success in international markets, Chakravorti says.

“Do they eat cheese in China? Or, to consider a very different example, how does an urban family wash its clothes in Brazil? Kraft and Proctor & Gamble need to know and will acquire or forge new multinational alliances with firms that can give them the answers, inform their innovation strategies and spur their positive growth,” Chakravorti says.

There’s a downside to those close international connections, though. A case in point, he says, is how a slowdown in China’s economic growth caused a recent drop in U.S. and Euro-zone commodity markets. In April China raised fuel prices; Chinese automobile manufacturers missed their annual forecasts, and their steel production slowed, according to Canada’s Financial Post. That contributed to the fear that China’s overall annual growth rate would slip to 8.59 percent, less than last year’s 9.2 percent, according to Bloomberg News.

“Their slowdown is the world’s slowdown, and is our slowdown,” Chakravorti says, “because so many companies staked their future on China’s fast-growing economy.”

Buying Spree

There’s also a flip side to American investment in developing countries. Chakravorti calls it “inverted globalization,” when the new economic giants from the emerging markets buy up companies in the developed world to increase their own profits.

India’s largest automobile company, Tata Motors, acquired Britain’s Jaguar and Land Rover in 2008. These luxury vehicles are now in demand with the new affluent classes, especially in China, but also in Brazil and India, he says. Ironically, Tata also produces the world’s cheapest car, the Nano, selling for $2,300—so they have the high and low ends of world auto markets, he says.

“India’s Tata Group also purchased South Korea’s second-largest truck maker, Daewoo, in 2004, as well as the U.K.’s Tetley Group and the Anglo-Dutch steelmaker Corus, and here in Boston, we know Tata as the owners of the downtown Taj Hotel,” Chakravorti says. “But corporate acquisitions aren’t the only form of such inversions in the globalization process. CIC, the Chinese sovereign wealth fund, invests in U.S. Treasury bonds and in numerous Western companies.”

But the issues go beyond just who owns what, and involve the complicated relationships among companies entering emerging markets. For example, General Electric wants to form a joint venture with Chengdu Locomotive & Rolling Stock Works, a company owned by China South Locomotive and Rolling Stock Corp., to manufacture propulsion systems, sub assemblies and parts for diesel locomotives in China. But the Chinese government demands that all components for GE products be made by Chinese suppliers.

So GE must transfer knowledge and technology to these suppliers so they can make components that meet GE standards, Chakravorti says. Over time, these suppliers, armed with this knowledge, aspire to move up the food chain. The result: GE will be training those who ultimately could become their competitors, all just to gain access to the Chinese market.

Where Our Future Lies

How do we in America know where to invest or when jobs will return to the United States? Looking at current trends, while keeping in mind the global economy, is a good start.

“If we want a robust, sustainable economic recovery, we had better closely observe global developments and set economic policy in line with our need to win customers and profits in the globe’s fast-growth markets. This is where our future lies,” Chakravorti says. “When certain markets go into recession or some form of an economic or political crisis, they can deliver unanticipated shocks to the U.S. economy. New digital communications technologies have increased our connectedness, and crises get transmitted globally in a way that is unprecedented.”

Unsteady political and policy stewardship either in the U.S. or elsewhere in the world will weigh on the world economies, too. Continued news about leadership challenges and slippage of economic growth in China and India, for example, could mean job loss, reduced buying power and population relocations in search of jobs, which could end up destabilizing those countries’ economies and political climates, he says.

A significant outcome of globalization—of the usual or the inverted kind—is that business executives might be playing as critical a role as diplomats and generals as the major drivers of international relations. In addition, technology advances mean ordinary individuals have more sway. Consider, for example, how social media helped fuel the Arab Spring, the Anna Hazare movement in India, the Bo Xilai gossip in China or the Occupy movements in the U.S. and elsewhere, he says.

“This is all a new reality that changes economic and political dynamics as we have known them,” Chakravorti says. “I hope the political dialogue leading up to our presidential elections recognizes these crucial intersections and takes them seriously.”

Gail Bambrick can be reached at gail.bambrick@tufts.edu.