The strange world of globalization going awry

How serious are the consequences of the fractured globalization (the pessimists would say it is deglobalization) the world has been witnessing these past years? To be sure, inflation, interest rates and geopolitical risks are significantly above the levels recorded before the Global Financial Crisis in 2008. Predictably, economic progress has slowed and become more erratic. In the 15-year period ending in 2022 the standard deviation (a measure of volatility) of the worldwide rate of per capita real GDP growth became 2.3 times higher than it was over the previous decade and a half.

However, another feature of the times is that dispersion among nations has also increased, which speaks of lower or sometimes inverse (negative) correlations. Data recently released by the United Nations Conference on Trade and Development (UNCTAD) provides valuable information about this phenomenon. When measured in terms of share of world’s GDP, the apex of long-term foreign direct investment (FDI) flows happened a while ago, in the early 2000s. Indeed, the present level is less than a third of that historical maximum (Chart I). As for global exports, a proxy for international trade, the story is somewhat less depressing: the all-time high occurred in 2008 and since then no clear trend has emerged.

The same metrics applied to Latin America shows a different picture (Chart II). FDI flows to the region are not in steep decline and the recovery after the pandemic crisis caused capital expenditures by non-residents last year to climb to a level close to the peak achieved in the early 2000s. More impressively, Latin American exports, which had hit an all-time high in 2021, grew again in 2022 and reached the maximum value of the time series. The correlation between Latin America and the world in terms of FDI flows during the 15-year period ending in 2008 was 77%, whereas for exports it was 92%. From 2008 to 2022, though, they fell sharply to 18% and 30%, respectively. Arguably, it is as if globalization was going awry in the rest of the globe but spared this geography or, perhaps more surprisingly, as if some sort of fractured globalization has indeed been favoring it.

In that context, there are structural factors that should lead to a decoupling of Latin American nationsfrom certain adverse global trends. A globalization going into reverse results, to a significant degree, from geopolitical fractures or a substantially higher possibility of them happening worldwide. Attempts to measure the threat, realization, and escalation of grim events such as wars, terrorism, and ethnic or religious massacres consistently show that countries like Brazil, Mexico, Chile, Colombia, Peru, or even Argentina and Venezuela, which have been under severe economic strain for quite a while, account for a tiny fraction of the perceived risk of major disruptions, both in short and longtime scales (Chart III)¹. Because higher geopolitical risks foreshadow lower capital expenditures and increased vulnerability of firms in more exposed industries, there is a high degree of confidence in the proposition that Latin America’s relatively benign performance on that area helps explain why foreign direct investment is trending higher there, but lower elsewhere.

In a world featuring fractured globalization or outright deglobalization, tangled supply-chains along with higher production and logistics costs are the norm, not the exception. Unsurprisingly, commodity price indices are rising faster than those of industrialized goods, therefore leading to non-trivial changes in international terms of trade. While the world is worse off now than it was a few years ago, not all geographies suffer the same fate. To be sure, advanced economies tend to be on the losing end since they are on average net importers of primary products, however very large emerging nations such as China and India are also in the same situation. On the other hand, in increasing order of exposure as a share of GDP in the 2020s, Latin America (5.8%), Sub-Saharan Africa (7%) and Middle East & North Africa (17%) are on the winning side due to their net export position.²

Terms of trade are, according to the classic definition, the ratio between unit export and import prices. Latin American nations typically export commodities and import industrialized goods; therefore, the recent global developments should cause the region to be relatively better off. While empirical evidence does not falsify this proposition (Chart IV), it warrants further investigation for the sake of precision. First, the status quo is not a first-best outcome, as terms of trade are still 10% below the peak recorded in 2011. Second, although they are 24% higher than the latest trough in 2016, they do not compensate for terrible domestic policies. In that context, Venezuela is, among the largest countries, the one that benefitted the most from the appreciation of its exports (which consist mostly of fossil fuels) versus its imports. Yet the estimated contraction of its real GDP in the period is 63%, which owes to macroeconomic disarray and the resulting decline in oil production, investment collapse, and hyperinflation. Third, some economies underwent structural changes that redefined their role in the international scene. Against this backdrop, Mexico is no longer a net commodity exporter (its exposure is worth -1.1% of GDP), having become a manufacturing platform with a focus on the consumer markets of Northern America. Consequently, the purchasing power of the goods it sells abroad has not increased compared to that of the goods it buys from the rest of the world.

Latin America’s superior performance amid deglobalization or fractured globalization forces is likely to persist. The governments in the region will continue playing with comparative advantages to maximize inflows of foreign direct investment and further increase their countries’ share in world trade.

¹ See, for instance, Caldara, D. and Iacoviello, M. (2022). “Measuring Geopolitical Risk” in American Economic Review, 112(4), pp. 1194-1225.

² Calculations over data from the World Trade Organization (WTO). For similar conclusions, see, for instance, Dehn, J. and Medeiros, G. (2021) “EM is no longer a commodity play”, The Emerging View, Ashmore, (February).

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