Countries can pull up the drawbridge – but capital will pull them down again

All over the world, governments are putting up fences on their borders. History teaches us that they’ll come down again soon enough, says Dr Pippa Malmgren.


The Berlin Wall: it was great to see it knocked down but now the world is building many more

When we pull walls down, GDP goes up. When we erect walls, GDP goes down. It seems simple enough. But are markets properly discounting the many new walls that are now being constructed to inhibit the free movement of human beings, capital and goods in the future?

After all, the fall of the Berlin Wall in 1989 was a massive boon it permitted billions of people to cross over from eastern Europe and from China and Russia into the flow of the world economy. As communism gave way to capitalism, workers in emerging markets created the opportunity for trillions of dollars to be invested globally. Capital poured across borders. The world economy became more fluid and we saw an ever-freer movement of capital, people and goods across borders.

Today we see quite the reverse. More new physical walls are being built in Europe, and elsewhere, than existed even during the Cold War. More controls are being placed on the movement of people than we have seen since that time. Governments are increasingly restricting the free movement of money as well. Trade seems under threat from protectionism and the desire to keep jobs at home instead of encouraging competition. As a result, global trade is no longer growing anywhere near as rapidly as it once was (see chart below).

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Building physical barriers

It seems deeply ironic that the man who kicked off the destruction of the Berlin Wall, Gnter Schabowski, former head of the Communist Party in East Germany, died only weeks ago, on 1 November. One wonders what he made of the many announcements by various nations of their intentions to build new walls.

For example, Hungary has just completed a 110-mile long, four-metre high razor wire wall some 500 metres away from the Serbian border. It plans to do the same on its borders with Austria and Slovenia. Austria is building a border fence with Slovenia. Slovenia wants a wall on its border with Croatia. Germany, France and many other European Union members have announced their intention to tighten border controls even inside the Schengen Treaty area.

And that's not enough for some. German supporters of the anti-immigrant Pegida movement have established a "human wall" on the Czech border to stop migrants from entering. Bulgaria is building a 6.5-mile wall on the Turkish border. Ukraine intends to build a 1,200-mile long wall against the Russian border. Estonia wants a 70-mile wall with Russia too. Poland is building a 124-mile wall of high watchtowers around the Russian enclave of Kaliningrad.

The French are reinforcing the wall at Calais. And it's not just Europe. America is unable to secure the border with Mexico even after drafting in the National Guard to assist with the effort. US presidential candidates such as Donald Trump and Ted Cruz threaten to build a wall along the Mexican border. The joke is that they need not worry if Trump or Cruz are elected, the Mexicans will build the wall themselves.

Walls are going up across the Middle East too. Saudi is trying to contain the threat from Islamic State (IS) by building a 600-mile long fence along the Iraqi border with 78 watchtowers, radars, underground sensors, military response stations and twin chain-link razor wire fences. The Saudis are already working on a 1,118-mile long wall that aims to shield the kingdom from threats in Yemen. Turkey is constructing a 45-kilometre long wall on its Syrian border. Morocco has recently been building a five-yard high razor-wire fence around the Spanish enclaves of Melilla and Ceuta.

The many walls that divide communities within countries are relevant too. Slovakia is building new walls that segregate the Roma communities from everyone else. These are similar to the walls in France and other EU countries, designed to keep Muslim communities separate from the rest of the population. In places like Brussels there aren't any walls, but everyone knows where the boundaries are the Molenbeek district has been home to a number of the radicalised and, putting it plainly, it's a no-go zone for the general public and difficult even for the police. Britain, by contrast, has never tried to segregate immigrants.

These walls are not the only obstacles. Governments everywhere are erecting barriers to the free movement of people and capital. America has long insisted on educating the world's best minds, then thrown up barriers that effectively deny them the chance to stay and work. Britain, by contrast, is a major exporter of education and importer of the educated.

...and invisible ones too

New, invisible barriers are being put in place too. It is nigh on impossible for an immigrant to open a bank account anywhere in the industrialised world, no matter how much money they have. Transferring money abroad, even for those who pass the "know your client" tests, is increasingly difficult. Governments are condoning capital controls more and more.

The World Bank, the International Monetary Fund (IMF) and the EU specifically endorsed capital controls in the case of the Cypriot and Greek debt problems. The fact that terrorists are using cryptocurrencies will only exacerbate the hostility of governments towards money transfers and increase efforts to dominate electronic money.

Of course, there are good reasons to want to hunker down. Terrorist attacks in Paris, Beirut, Mali, and Nigeria, and the discovery of caches of weapons in Belgium, are reason enough to tighten border controls. The disintegration of the 1916 Sykes-Picot Treaty borders in the Middle East is producing a wave of immigrants that is overwhelming nations who are already suffering from debt and budget deficits. Only months ago, Greece threw open its detention centres for illegal immigrants because it could not pay anyone to guard them. This punched a hole in the border of the EU.

Perhaps it is little wonder that voters are increasingly suspicious of anything that impinges on sovereignty. Some 53% of the British public now backs Brexit, according to a recent poll. The Catalonians want a new "national" currency. Most potential new members of the eurozone now say: "maybe later". People want to be walled off from outside influence. Add all of these things up, and we can see a wall of obstacles to the free movement of goods, people and capital. Does this mean the world economy is about to crash or cease to exist? No. But it does mean that investors have to think very differently about how they put capital to work.

What it means for investors

Instead of betting on centralisation, people need to think about a return to sovereign rights. Would a Brexit really diminish British economic performance and wealth? Or might departure from the ever-more regulated EU actually enhance British competitiveness? The fact is, the EU is at an economic standstill and they might still buy British goods anyway (see our cover story in the last issue).

Meanwhile, defence spending in Europe had collapsed over the last 25 years, after the end of the Cold War. Now this is reversing. Nations including Britain, France and the Baltic countries are increasing defence spending rapidly. Every nation will be throwing more money at security. All of this will make the ethics of defence-sector investing a very hot topic.

And what will all this mean for the consumer? Already we see some interesting trends. People may choose to stay in more than go out. Famous chefs in Britain and across the continent are holding small dinner parties in private homes. This may be just the kind of thing people will flock to it might be bad news for restaurants, but it might also bring new life to old neighbourhoods. So walls may not mean less consumption just a different kind of consumption. Amazon recently filed a patent for 3D-printing trucks that will pitch up at your door and make whatever you need, from an extension cord to a replacement door handle. People will just shop inside the walls of their own home more.

Walls don't usually work or last. Hadrian's Wall didn't stop the Scots. The Great Wall of China didn't stop the Mongols or the British. The Berlin Wall too was overwhelmed by the tide of history. In the end, capital finds away to flow to wherever the profitsare, on either side of walls. But, fornow, it looks like money will flow, asit usually does, to the side of wallsthat permits the greatest freedomof movement, whether that be a movement of people or capital or goods. In comparison with everywhere else, Britain is looking pretty good in spite of, or even because of, the new walls.

Dr Pippa Malmgren (@DrPippaM) is a former US presidential adviser, and best-selling author of Signals (Grosvenor House Publishing, £17) and Geopolitics for Investors (CFA Institute Research Foundation House Publishing, £8.95).

Dr Pippa Malmgren (@DrPippaM) is a former US presidential adviser, and best-selling author of Signals and Geopolitics for Investors.