New Zealand Economic Papers, Vol 38(2) December 2004, p.299-306.
Keywords: Globalisation & Trade;
The public, which has firm, uninformed, and confused views on globalisation, would be astonished as to what the scholars think about the topic, although perhaps less surprised as to what they do not (yet) know.
First, there is the question of definition. A short one is “(economic) globalisation is the closer integration of nations” (to which I would add “and regions” because internal integration is so similar to, but preceded, international integration).
There is an ambiguity in this scholars’ definition. ‘Globalisation’ may refer to the process of globalisation, or it may refer to the degree of globalisation. The distinction can be important, especially when different periods are compared, as we shall see.
The economic focus tends to be on trade, migration, capital flows and technology transfer, together with changes in the international order, and tends to exclude such related phenomenon as transmission of diseases, the consequences on the environment, culture and languages, and political arrangements. To add them may involve moving outside economists’ expertise. An even more serious omission may be the role of military force in the shaping of the world economy.
Second, economic scholarship does not see globalisation as a recent phenomenon. There is some disagreement as to whether it begins as early as the first European explorations in the fifteenth century, but the consensus sees globalisation beginning in the early nineteenth century (say 1820) when international trade begins to shift from absolute advantage (gold for spices) to comparative advantage, where countries import products they could make themselves. There is a widely held view that the nineteenth century globalisation was more vigorous than the late twentieth century globalisation, because migration was much stronger. The process of globalisation was stagnant – even reversed – in the first half of the twentieth century, even though the level was in some respects higher than in the nineteenth century. (Note that there is debate as to whether the stagnation began in 1914 or up to thirty years earlier.)
This pattern of globalisation is illustrated by that all international trade was 1.0 percent of World GDP rising to 9.0 percent in 1929, but falling to 5.5 percent in 1950. In 1998 it was 17.2 percent, and is – no doubt – higher today. However, while other indicators – say of capital and labour flows – have the same general pattern, the timing of the turnarounds differ.
Third, and this is less explicit in the literature, globalisation is treated as a consequence of the falling costs of distance. This need not surprise us: regionalisation occurs when the connections between regions improve; trade based on comparative advantage is going to be negligible when the costs of transporting the goods are high. Behind this is the economic scholars’ approach in which the effects of an exogenous change are modelled. Exogeneity in modelling can be an artifice – arguably some transport cost falls have been responses to globalisation. Even so, it is useful to be able to separate various influences, rather than have one great muddle of everything, as is common in many popular books.
These three themes are admirably elaborated in Globalization in Historical Perspective, which is based on eleven papers presented at an NBER conference in 2001. Most of the papers are gems, in which two distinguished economists survey the literature, followed by an equally distinguished discussant. Thus they offer every economist the opportunity to catch up with the economic scholarship of an important and rapidly developing area of interest..
To be provocative, I start with the seventh chapter “Globalisation in History: A Geographical Perceptive” by Nicholas Craft and Anthony Venables (both London School of Economics). That the book puts it so late reflects the tendency of economists to ignore the spatial. Economies are treated as columns in a tabulation rather than places on a map. Yet globalisation is essentially about the changes to the spatial allocation of economic activity (and its related growth).
The chapter tells a spectacular story. In 1750, over half of the world’s industrial output was located in China and India. By 1850, over half was produced in North America and Western Europe, a situation which broadly pertains to this day. A similar, although not quite as spectacular, story applies for GDP, although the Maddison database only goes back to 1820. In contrast, the population story shows much more stable patterns.
The chapter then sets out a model based on falling transport costs and location theory to describe the phenomenon. (See Fujita, Krugman and Venables (2000) for greater elaboration of the underlying models.) It argues increasing returns are a major source in the divergent patterns of trade, concluding that as the costs of distance fall, agglomeration effects are crucial. ‘[I]n the twenty-first century these are likely to revolve much more around complexities of information and pools of skilled labour than the costs of transporting manufactured goods’. Discussant Richard Baldwin (Graduate Institute of International Studies, Geneva) ) remarks that the biggest missed opportunity in this paper concerns a ‘grand unifying theory of globalization and geography’. But we are well on the way.
The opening chapter of the book is “Commodity Market Integration: 1500-2000” by Ronald Findlay (Columbia University) and Kevin O’Rourke (Trinity College, Dublin), which sets out in detail the changing patterns of world trade, often using price information when quantity information is not available. Trade grew only slowly during the 300 years to 1800 and the price gaps between markets were large and poorly correlated, indicating that not only was the cost of transport high, but there were high margins for uncertainty. Discussant Douglas Irwin (Dartmouth College) describes the review as ‘near-exhaustive’ but chides it for confining attention to intercontinental trade. He is quite right of course, but the extension to more localised trade would easily have trebled the paper length. Similarly it would have been useful – albeit requiring a further doubling of the paper – to have had more on non-commodity merchandise (and also services).
The following chapter, “International Migration and the Integration of Labour Markets” by Barry Chiswick (University of Illinois at Chicago) and Tim Hatton, (now Australian National University), deals with one of the most troubling areas in globalisation. Today migration is proportionally small compared to the mass flows in the 300 years before 1914, so we do not have to worry so much about a factor of production changes national social welfare functions when it changes jurisdictions. Moreover, while some choose to migrate, others are forced: slavery, convicts and refugees from political repression and war. Moreover in contrast to those on goods and capital, there have been, and are, significant policy-induced barriers to migration.
The survey’s main message is that, even so, migration is quite responsive to economic incentives. Intriguingly today’s main migration flows are from poor countries to rich ones rather than those from Europe to America and other frontier societies which dominated the nineteenth century. Unlike for goods and capital, the nineteenth century globalisation of labour markets, albeit then confined largely to Europeans, has not been repeated in the late part of the twentieth century, when flows were regulated by national policies, discriminating heavily against the unskilled, so the (poor) origin nations losing skilled labour suffer. Discussant Riccardo Faini (University of Brescia, Italy) concludes ‘there is still a long way to go to the globalization of labour markets.’
Chapter 3 “Globalisation and Capital Markets” by Maurice Obstfeld (University of California-Berkeley) and Alan Taylor (University of California-Davis) makes up the third leg of the standard goods-labour-capital analysis. It does not work as well as the earlier chapters because added to the survey element is some new research. Moreover it mixes together financial flows with direct foreign investment, and while they can be closely related, it is useful to separate them. (The final four chapters focus on financial flows.)
There was a high level of international capital mobility in the nineteenth century, much less in the first half of the twentieth and then a return to high capital mobility thereafter, the so-called ‘U-shaped pattern’, although the chapter suggests that capital may have flowed more easily to poor countries in the first boom than the more recent one. The authors propose that this was a consequence of the ‘macroeconomic policy trilemma for open economies’ where it is not possible to maintain the three policy goals of full freedom of cross-border capital movements, a fixed exchange rate, and an independent monetary policy oriented towards domestic objectives. At different times there were different national policy responses, although there is no discussion on how these responses were related to trade policy and migration policy, even though they experienced a similar U (albeit in the case of migration with a weak post-1950 upside). Moreover, discussant Richard Portes (London Business School) argues there is a wide variety of alternatives to the authors’ fundamental hypothesis’, so the chapter needs to be treated more as work-in-progress rather than a survey.
Part II, the next four chapters (including the already mentioned one on geography), is meant to be about outcomes, but Chapter 6 is about technology, and belongs better to Part I which uses the standard model of trade. Gregory Clark and Rob Feenstra (both University of California-Davis) ponder on the ‘Technology and the Great Divergence’. As in the case of the chapter on capital, this contains both reviews and existing work. It uncomfortably reflects the state of economist’s understanding of technology (and the production function). Robert Solow’s measurement of what is called today ‘Total Factor Productivity’ was a forward step, but his TFP – the coefficient of ignorance (Balogh and Streeten 1963) – is an unexplained residual which fifty of years of research has hardly progressed to an empirically causal process. It is a way of summarising data rather than providing causal stories. Economists are torn between the quantitatively measurable but tautological TFP, and more qualitative accounts such as the Schumpeterian one of William Baumol (2002).
Clarke and Feenstra meet the challenge with the following story. What explains the differences between the incomes of nations is neither capital scarcity, for they assume capital is largely mobile, nor technology, which they argue is easier to copy than create. Rather than differences in the access to technology, they argue there are substantial differences in the use of technology between rich and poor countries, providing some micro-evidence from railways and international trade patterns to support their assessment. But, as those who have done technology or productivity comparisons between two rich countries know well, it is a difficult hypothesis to verify. Moreover, what causes these differences? Discussant Joel Mokyr (Northwestern University) calls the answer the ‘mysterious’ ‘Factor C’ (after Clark) but is it managerial ability, human capital, or the institutional arrangements which Mokyr puts some emphasis on?
In the fourth chapter in the book, Steve Dowrick (Australian National University) and Bradford DeLong (University of California-Berkeley) bring together the five chapters on geography, trade, labour and capital flows, and technology in “Globalization and Convergence”. They propose a convergence club, ‘the set of economies where the forces of technology transfer, increased international trade and investment, and the spread of education were powerful enough to drive productivity levels and industrial structures to (or at least towards) the industrial core.’ (Note this definition does not mention managerial ability nor institutional arrangements.)
One of the club’s features is that membership is not eternal: the authors identify over a dozen members that in it there in the interwar period but are no longer. They conclude that ‘globalization of the economy does not necessarily imply global convergence’, and that ‘at the end of the twentieth century the growth benefits of opening up appear substantially lower than in the twentieth century’s third quarter … there is little reason to be confident that opening doors to the world economy will guarantee a place at the high table’. Discussant Charles Jones (University of California-Berkeley) extends the argument by observing in the late twentieth century there was much less income divergence between the open economies than between the closed economies: perhaps all open economies resemble one another, but each closed economy is closed in its own way.
In Chapter 5, Peter Lindert (University of California-Davis) and Jeffrey Williamson (Harvard University) ask “Does Globalization Make the More World Unequal”. Since at least the times of Karl Marx there has been a tendency to assume that capitalist growth makes the economy more unequal, and the poor poorer. Perhaps one hundred years ago, it became evident that this was not necessarily happening in the industrialised countries, so the increasing inequality hypothesis was reinterpreted as applying to between countries. Unfortunately the notion of inequality is not a simple one: formally there are situations where economists are unable to say unequivocally that one of two income distributions is more unequal than the other. Given that data is almost always incomplete and inaccurate, the opportunities for vigorous debate without reaching conclusion seem unlimited.
Yet the authors provide some relatively convincing answers. World income inequality has risen since 1820 (and probably since the sixteenth century), although there is some dispute as whether the trend has continued in recent years, probably arising from the ambiguities in the measures of inequality. But most of the increased world inequality took the form of a rise in income gaps between nations, not a rise of within-country inequality. They observe that large integrated economies – the US and Japan, and perhaps soon the European Union – have less internal inequality than the world as a whole, suggesting that integration per se (and by extension perhaps the integration which comes from globalisation) may not be a source of inequality. Note however these examples of integration involve no restrictions on labour mobility. Discussant Lant Prichett (Harvard University) admires the ‘masterful review’ and poses five puzzles which arise from the paper. One is whether we should worry about inequality. On a slightly narrower focus I would ask that suppose globalisation were to increase inequality but at the same time to increase the incomes of all people. Is such globalisation a good or bad thing? (A Rawlesian criteria would say ‘good’.) After reading this book, one concludes that notion that globalisation is a zero sum game is a deeply flawed assumption, although of course some people suffer.
Space precludes individually reviewing the last four chapters on financial institutions, regimes and crises except to say that the emphasis on this topic – while omitting others mentioned below – seems imbalanced, perhaps reflecting the economics profession rather than the inherent importance of each issue. Even so those interested will again find a set of useful specialist surveys. The contributions from the panel which ended the conference is thin in contrast to the rich diet before.
There are a number of important questions which economic historians can address, but which the book hardly touches on. First, is the tendency to take the nation-state for granted, whereas they appear to be creatures of globalisation and regionalisation. As Alberto Alesina and Enrico Spoloare (2003) have pointed out, the boundaries between nations are not fixed in the long run, while the activities of the nation-state have evolved (e.g. Lindert 2004). Nor should economists turn their back so firmly, as this book seems to, on the scholarly discourse about empires and colonies.
Second, given the break in globalisation in the first half of the twentieth century, there is a need to synthesise the separate discussions in the chapters into a comprehensive account. It probably revolves around the creation of integrated nation states in the late nineteenth century leading to particular policy responses. The bigger question becomes why they changed their mind in the 1950s?
And, third, there is surprisingly little in the book about supra-national institutions such as the IMF and the WTO (or Pax Britannica in the nineteenth century). There are parallels here with the creation of domestic economic regulatory institutions a hundred years ago, as nation-states bedded in.
The issues are inter-related. Even so, here are topics for the next conference, which will be a cracker if it is a good as the one this book reports.
What is the popular response to all this? Many of its concerns are not addressed, in part because they are not central concerns of economists, although perhaps some should be: environmental degradation, loss of nation-state sovereignty, policy convergence, resource depletion. Some concerns economists think so normal they tend not to mention. But they are acute to those involved. The exemplar is the loss of jobs as industries locate elsewhere.
Moreover, perhaps we are in a new phase of globalisation. We may have moved from the comparative advantage of inter-industry trade to the competitive advantage of intra-industry trade, although of course the old ways continue – there is still considerable absolute advantage trade. The ICT revolution has also reduced the cost of transporting information so that chunks of the service industry are even more relocatable as manufacturing. Curiously, much of the antagonism to today’s globalisation is about the multilateral regulation of international economic intercourse. Treating Pax America as if it is parallel to nineteenth century Pax Britannica ignores the growing multilateral institutions, not wholly subservient to the US. Finally, perhaps, as a 2004 paper by Paul Samuelson shows is theoretically possible, some of the winners of the last 200 years may be losers in the near future. One is struck for instance, how Jagdish Bhagwati In Defense of Globalization focuses on North-South relations, and ignores some of the particularly North concerns.
There is a need for economists to engage in the popular debate. Bhagwati’s book is a fine example. But economist’s contributions must be underpinned by the painstaking analytical and statistical work that Globalization in Historical Perspective brings so excellently together and makes so accessible to its profession.
Alesina, A. & E. Spoloare (2003) The Size of Nations (MIT Press).
Baumol, W.J (2002) The Free-Market Innovation Machine: Analyzing the Growth Miracle of Capitalism (Princeton University Press)
Bhagwati, J. (2004) In Defense of Globalization, Cambridge University Press.
Balogh, T. & P.P. Streeten (1963) “The Coefficient of Ignorance”, Bulletin of the Oxford University Institute of Economic and Statistics, May 1963, p.99-107.
Fujita, M., P. Krugman & A.J. Venables (2000) The Spatial Economy: Cities, Regions and International Trade (MIT Press)
Lindert, P. (2004) Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge University Press)
Samuleson, P. (2004) “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization”Journal of Economic Perspectives Vol. 18, No. 3, Summer 2004