THOSE who believe that globalization harms the poor and fouls up the business environment can no longer be brushed aside. Of late (and embarrassing its defenders), globalization of trade has been implicated in some costly economic breakdowns e.g. over-heating of the Chinese economy, record breaking oil price surge, rapidly rising unemployment in the West and in many developing countries, and signs of yet another recession breaking loose. Together these developments cast a shadow on the cliché that ‘unimpeded trade flows’ are necessarily good.

Precious little is generally understood about the fallacies hiding behind fancy macroeconomic theories. Given the rise of volatility in all markets, politicians have been pushed farther into the back seat. Economies are now managed by textbook-oriented economists whom politicians entrust the job of putting things right. The expectation is unrealistic because economic theories postulated in controlled environments can’t resolve problems rooted in harsh ground realities. The tendency to fudge economic indicators to suit convoluted policies makes things worse.

Economics relies heavily on the cliché that “given wider opportunities people are better, not worse off” and the weightiest argument advanced by pro-globalization economists is “how can nations be worse off if they get choices they didn’t have before?” But this overly simplistic (or self-serving) argument doesn’t answer for the many choices nations made through out the past three decades, that they later came to regret.

What globalists overlook is that besides expanding the reach of opportunity, globalization of trade results in a lot that is disruptive. Demands (growing louder each day) from the US and EU – both ardent advocates of free trade – for limiting import of Chinese goods should leave none in doubt that unimpeded trade flow is not a blessing because it has dire repercussions for domestic economies of the recipient countries, in this case US and EU.

Experts are silent about the fact that China’s domination of world markets of all sizes and shades was not so much an indication of the enormous cost advantages it suddenly seemed to enjoy as of the fact that is was under-pricing its goods at a sizeable cost to itself. It will take time for facts to surface about whether Chinese policy makers were aware of this reality, or was the initiative driven simply by the desire to beat competition of every sort, including in the friendly developing countries.

While even domestic trade remains risk-prone, foreign trade can be many times more risky. Worse still, ill-effects of foreign trade expand geometrically in proportion to sellers’ ignorance about buyers in distant markets and the volatile exchange rates on which hang the fates of both buyers and sellers. Yet, politicians believe in the ‘export promotion’ cliché not realizing that domestic market stability is their raison d’etre for being in office.

Politicians and their advisers are a long way from understanding how policy initiatives may be undertaken and how far they may be stretched, let alone putting any such understanding into practice. There is no consensus on the right approach to foreign trade any more than there is to stabilizing domestic markets: there is plenty of activity but, for the most part, without logic.

Policy initiatives are stretched until their ill effects show up e.g. energy shortages in China that forced widespread load-shedding in its otherwise booming industrial sector. Or the periodic forced lowering of interest rates to spur domestic demand until it leads to excessive consumer indebtedness, negative equities and loan defaults. US economy completes this cycle every five years. Its close ally and devout follower South Korea is now getting used to these cycles. Pakistan, which experimented with consumer lending recently, will soon follow suit.

Take, for instance, the sanctity bestowed upon limiting budgetary deficit, irrespective of the havoc it will play with long term prospects of an economy. Pakistan proposes to cut the deficit down to 3.5 per cent of its GDP to stand in line with (as yet) powerful Western economies. How flawed is this desire is portrayed by the shocking revelations made in the latest census of schools in Sindh.

The truth about another cliché – prudent management of domestic economy – is borne out by asset market crashes while lengthy rounds of blame games are played. These disasters cause distress in the financial services sector, and trigger near systemic failure. With government help and safety nets out of fashion (a manifestation of ‘prudent’ governance) these shake-ups bring down out put and incomes and magnify the economic distress.

Given the present profile of market volatility, asset prices are no more than bets on a distant and uncertain future. To complicate matters, ill-informed investors tend to deal with uncertainty in ways that further aggravate the problem. If information about the value of the underlying asset is obscure or unavailable, they are preoccupied with the views of other (mostly reckless) investors, which often degenerate into crowd hysteria.

Usually, the views of self-styled experts (remember market analysts’ wild predictions prior to the last KSE crash?) are taken seriously even when flatly contradicted by available facts. Such aberrations are often sanctified by being labelled as ‘schools of thought’ or by the deceptive cover provided by the developing trends of ‘the new economy’. Delusions of this sort are apt to discourage prudence as indeed they do after every market crash until the next.

These developments lead to familiar consequences: calamity manifested by bankruptcies, currency crises, capital flight, bank failures, sovereign debt defaults, etc. And the harm is not confined to those making the mistakes, or to the financial services sector. These collapses have an unmatched capacity for snow-balling across the domestic economy. But effects of miscalculations by governments in powerful economies are felt worldwide. In foreign trade, the scope for getting things wrong and the punishment that follows, is awesome.

Crises that hit Latin America in the 1980s (remember the MBA loans?), Mexico in 1994, or East Asia in 1997-98 caused recessions that wiped out the growth achieved over decades. Mexico, Brazil and Argentina are even now struggling with a severe recession. Financial distress remains a dominant feature of Japan’s ongoing economic crisis, of Europe’s seemingly endless economic slowdown and of the factors that will impede US economic recovery for nearly a decade.

Threat of a new financial collapse looms large as US, EU and Japanese economies show signs of contraction afresh. Should this amplify, the damage will be widespread. The first signs thereof are now apparent as US and EU brace for levying quotas on imports from China. For the present they are focused on textile made-ups but soon there will be demands for curbs on import of steel products, to be followed by curbs on electrical goods imports.

Economies excessively dependent on exports e.g. Singapore face bigger risks. The uncertainties facing them have to be measured not just in the distances from foreign markets but in terms of differences in language, business culture and legal environment. Put together, these factors induce the tendency to rely on buyers’ judgments rather than one’s own. It also increases the scope of risk that may be disguised, accidentally or otherwise.

Besides foreign trade markets, the global capital market symbolizes a treacherous aid to economic growth. This market poses a bigger threat – it could worsen instability caused even by purely domestic finance. Yet, capital flows are liberalized beyond prudent limits. All these are signs that politicians are losing their grip on the affairs of the state. They are relying dangerously on clichés invented by economists.

What is obviously not seen is that, given the track record of supposedly the world’s best managed economies, these clichés have lost their gloss. It is time to disregard them and get back to the basics – repair their domestic economies before pinning their hopes on ‘export-led growth’.