The Economics Of Globalisation: an Introduction

Paper for the 2005 Conference of the New Zealand Association of Economists, June 29-July 1: Christchurch.

Keywords: Globalisation & Trade; Growth & Innovation;


The Royal Society of New Zealand has awarded me a grant from the Marsden Fund to study globalisation. The study is a continuation of my earlier research program, especially that which is summarised in my book In Stormy Seas with its central message that the fate of New Zealand will be largely a consequence of what happens overseas, together with our ability to seize the opportunities and manage the problems those events create.

The ultimate output of the Marsden Research will be a book. This paper describes the proposed chapters of the book, and the intuitions of their underlying economics. The study is based on five primary principles.

1. Globalisation is the economic integration of economies – regional and national economies.
2. Globalisation began in the early nineteenth century, so the phenomenon is almost two centuries old. Since globalisation an historical phenomenon, focusing on just the last few decades throws away a rich source of insights.
3. Globalisation is caused by the falling cost of distance: transport costs, plus the costs of storage, security, timeliness, information, and intimacy. This gives a driver for the globalisation process. I have much more to say about this below.
4. Globalisation is not solely an economic phenomenon. It has political, social and cultural consequences.
5. The policy issue is not being for or against globalisation, but how to harness it to give desirable outcomes.The structure of the book is as follows:

The structure of the book is as follows:Part I develops the economic analytics using a minimum of mathematics. The bulk of this presentation describes Part I albeit at a more complex level of analysis than the book will.

The structure of the book is as follows:Part I develops the economic analytics using a minimum of mathematics. The bulk of this presentation describes Part I albeit at a more complex level of analysis than the book will.Once the economic underpinnings have been established, Part II of the book explores political and social consequences such as nationalism, sovereignty, policy convergence, cultural convergence, and diasporas.

The original Marsden submission said the study would focus on New Zealand in a globalising world. As the project developed I realised that would trap the research into a narrow framework. So the book is being written for an international audience as well as a New Zealand one. This does not mean New Zealand (and the Pacific) will be neglected. Leaving aside there will be some chapters devoted to New Zealand, many chapters draw on New Zealand material to supplement the themes. For instance, the opening chapter contrasts the colonial experiences of Hawaii and Samoa, but the experiences of the New Zealand Maori are also used.

The Underlying Economics

Underpinning this analysis are some recent major developments in international (and regional) trade theory, particularly with the addition of economies of scale. An excellent exposition is The Spatial Economy: Cities, Regions and International Trade by Mashia Fujita, Paul Krugman and Anthony J. Venables. (FKV) It an exciting development because the new theory gives a geographical dimension to economics which thus far as been largely missing While economics has some history (going back to Johann von Thunen in the nineteenth century) of a spacial dimension in the economy, it has been very limited. As Krugman observed, little attention is paid to the geographical clustering of economic activity. There is a rarity of maps in most economic texts while standard international theory is not greatly concerned whether the two countries have a common border or on opposite sides of the world. Now we can start thinking systematically about economic activity in spatial terms.

A second major influence is represented by Globalization in Historical Perspective: a National Bureau of Economic Research Conference Report, edited by Michael Bordo, Alan Taylor and Jeffrey Williamson. It summarises the enormously valuable research on the economic history of globalisation, enabling one to think of the analysis in a practical historic context.

Once the costs of distance are introduced, location becomes an explicitly vital element of economic behaviour, especially where there are economies of scale. Their interaction generates outcomes which seem to be quite different from the standard theory without costs of distance and only diminishing returns. This is frontier of economic theory stuff. If economists can get its analytics right and its intuitions understandable, it represents a major shift in the paradigm.

The new theory is quite difficult. Much of the mathematics seems intractable (that is, it is no analytic solution although the model can be explored by simulation), so results often rely on simulations, which may not give general conclusions. The underlying mathematics abandons one of the key assumptions that has informed much economic analysis – that (plant and industry) economies of scale are not important. Their introduction changes the shape of the mathematical spaces, and undermines the intuitions that go with them. There are new intuitions, but we are not sure they are robust to minor changes of assumptions.

The analysis is further complicated by factor mobility. Elementary trade theory assumes that factors are immobile. It is readily extended by incorporating mobility of some or all factors, although the transition is not easy to analyse. The real complication, however is to the political economy when labour is mobile, for that means votes as well as labour power is moving. Moreover not everyone benefits form an opening of trade – be it by reductions in border protection or the cost of distance – which complicates the political economy even further.

The Costs of Distance

The costs of distance are more than transport costs, including storage, security, timeliness, information, and the loss of intimacy that separation causes.

Perhaps the best, if partial, attempt to measure them is the paper ‘Trade Costs’ by James Anderson and Eric von Wincoop, who calculated that the average American manufacture has a mark-up of 55% from the factory door to the final domestic retail price. The price of an export involves a 170% markup, or 74% more than the domestic sale. (The measures are multiplicative).

Such averages are but ‘gee whiz’ indicators that the costs of distance are substantial, varying greatly not only by destination but also by product. A classic example is the Barbie doll costing a $1 to make in Asia and selling for $10 in the US, a markup of 900%.

The study attributes about a third of the export trade costs to transport costs – divided between direct freight costs and the time value of goods in transit. The other two thirds of export trade costs are due to border related barriers – language barriers, currency barriers, information barriers, contracting costs and insecurity, and policy barriers (tariff and NTBs). Policy barriers contribute about a seventh of export trade costs, behind currency barriers, freight costs and the time value of goods in transit, and only slightly larger than information costs and language costs. Malcolm Purcell McLean, the pioneer of container ships, may have made a far larger contribution to international trade than any director general of GATT or the WTO.

Because trade costs are poorly measured, it is difficult to assess the degree to which the unit costs of distance have diminished and are diminishing. Aggregate costs may not be, because as unit costs decline more expensive destinations become profitable. The problem is nicely illustrated by observing that while today half of American shipments are by air, reducing the tax equivalent for its time costs from 32% to 9% over the 1950 to 1998 period, it is likely that many of the shipments would not have occurred had they not been airfreighted.

But if we can not measure the fall in the costs of distance precisely we can observe it schematically. In 1855 it took around three months to get from New Zealand to Britain, whether it were send a package and person or a message. Lets represent the time by a line across the page:


Today it takes only a month to get to Britain by ship. That’s because ships are faster, and they can go through the Panama Canal. That line now looks like:


But that is misleading in regard to people and light valuable goods. Once they went by ship to London too. Today they can fly to London in less than two days. Compared to the 1855 the world looks like:


Yet information can be sent in vast quantities almost instantaneously via the world wide web. On the same scale that time is represented by something smaller than the full stop which ends this sentence.

Australian historian, Geoffrey Blainey recognises in the latest (2002) edition of his famous book, that distance is no longer the tyranny it was once. However, as the trade costs paper reminds us, reports of its death are exaggerated.

Analysing the Costs of Distance

Anderson and von Wincoop value their trade costs as if they were tariffs. In principle that means we can use the theory of international trade as it applies to tariffs, to all costs of distance. (Recall that the costs of distance are sometimes called ‘natural protection’.) Some modifications are necessary, however.

Where the distance costs are very high, making trade prohibitive, the analysis is similar to that for a tariff which prohibits imports. However, where there are some imports, the analyses differ. Insofar as tariffs impact on the government’s revenue, whereas a fall in the cost of distance has little effect on the public revenue. On the other hand, a fall in the costs of distance releases resources which may be used for other purposes. Often tariff theory treats the revenue effect as minor: we could similarly assume that a reduction in the costs of distance releases only negligible resources. Another possibility is that the resources are supplied by third party and dont impact directly on the resources available to the country (or countries) under consideration

It is analytically important that the tariff rates – the costs of distance – vary by product. Here is a schematic list of some of the most important distinctions.

Information, where the costs by line are near zero relative to the cost of the product;

People and Light Valuable Goods shipped internationally (and continentally) by air,

Heavy Goods shipped or trucked (including rail) where typically the transport cost is high relative to the cost of the goods;

Intimacy, where face to face contact is necessary. This applies both to some business activities as well as to personal interactions.

The Turangawaewae – where one’s heart is, where one stands tall – which hardly moves at all

(Note that this list is incomplete. The New Zealand economy requires particular attention to the needs of fresh and frozen exports.)

Consequently, with the possible exception of some information transmission, costs of distance do not fall (near enough) to zero, and they fall at different rates. Thus the relevant analysis parallels a partial reduction in tariffs. Since the costs of distance do not fall uniformly by product (or by distance), the parallel analysis is with non-uniform partial tariff reductions. Regrettably their analytics are not simple as the total elimination of tariffs.

I wont further pursue the analysis here, except to say that the relevant theory is far more complicated and far more subtle than the crude theories that underpin free trade. For instance, a reduction in the costs of distance between regions may result in a one region experiencing a reduction in its per capita income, together with factors flowing from it. This is additional to the standard conclusion that a shift to free trade may make some owners of particular factors of production worse off.

For instance, we know from the theory of partial trade arrangements that one of a pair of countries can actually be worse off as the result of some, but not all, tariff elimination. Thus a reduction in the cost of distance could make one economy worse off. This is not inevitable, but it can happen.

Such distributional matters are not trivial for those interested in the political economy of globalisation. We can see a parallels between workers demanding a protective tariff to prevent the loss of jobs because of offshoring of production as a result of falling costs of distance, and those demanding that the tariff be not reduced. However, it is possible that an entire country may be worse off. I shall report a Fujita-Krugman-Venables result which may be interpreted that way.

Third, elaborating the first point, and perhaps offsetting some of the caveats of the second, a fall in the costs of distance is a technological change which releases resources for other economic activities. The models I have been describing largely ignore economic growth, studying a world in which the production technologies (and labour and capital supply) are largely given, a reasonable research strategy given they wish to explore other analytic issues. But I want ro apply their insights to actual history, where there is economic growth. One source is from productivity changes when distance costs fall. Since I dont want to write the general theory of everything I am fudging this issue, treating the technological changes which drive growth as exogenous and largely outside the narrative.

I now proceed through the book in chapter sequence. (The chapter titles are in the appendix.)

Part I: The Economic Model

Chapter 1.1: The Significance of Location: Samoa and Hawaii

The opening chapter, sets a context for the book by contrasting the experience of Hawaii and Samoa, demonstrating the importance of location, and how effective location changes with technology, with cultural, political and social, as well as economic consequences.

Chapter 1.2: When Distance Changed: New Zealand Refrigeration

The introduction of refrigeration changes the effective cost of distance for meat and dairy products from prohibitive to negligible. The historical experience illustrates the standard theory of trade model, but goes on to explore the dynamic impacts on technology and on political and social development.

Chapter 1.3: Regional Integration and Plant Economies of Scale: Nineteenth Century America

The falling costs of distance – roads, canals, railroads and telegraph – integrated the isolated regions of early nineteenth century American contributing to the development of the most formidable economy in the world. (Other factors were technology, resources, and land an immigration). This chapter elaborates the previous chapter’s analysis by adding plant economies of scale, and shows how the falling costs of distance boosts growth.

The chapter goes on to criticise the Robert Fogel conclusion that the impact of the railroads on American economic growth was small. He focussed on agricultural production but the effects of reductions in the cost of distance are far more spectacular where there are economies of scale. The growth of the US manufacturing sector is one of the spectacular developments of the nineteenth century, and while falling costs of distance are not the only reason for this growth, it is clearly one of them.

Among the other functions of the chapter are

– to draw attention to the high degree of labour and capital mobility within the US (and from across the Atlantic). If the economy of any location surged, it could obtain the necessary factor inputs. Later chapters show that labour mobility is a key issue in globalisation.

– to explore the US as an early example of a possible globalised world, where factors of production are mobile, and whose localities (the states) have little economic and fiscal independence.

Chapter 1.4: Cities and Industry Economies of Scale: New York

This might seem a repeat of the previous chapter, albeit with greater detail when it describes how New York was an important harbour on the West Atlantic seaboard and how that dominance was reinforced by the Erie Canal which connected the Hudson River to the flourishing Mid-west via the Great Lakes. However the chapter also introduces industry economies of scale (agglomeration), in which as an industry increases in size in a location it experiences falling costs. Industry economies of scale are more analytically tractable than firm economies of scale, because the individual firms are numerous and competitive.

Agglomeration was a super-multiplier, which enhanced the initial superiority of New York’s location. The chapter explores whether such industry economies of scale are decisive, or whether they become exhausted, and congestion costs take over. Presaging a future theme, the issue of the cost and quality of future governance is also raised. An implication of such super-multipliers is that the location of economic growth may be path dependent which is explored later.

Chapter 1.5: When Services Become Tradeables: Bangalore

Economists have traditionally divided the economy into the primary, secondary, and tertiary sectors. The justification is long forgotten, but geographically, the primary sector – farming, fishing, forestry and mining – had to be close to the resources it processes, while the tertiary sector – services – had to be near to its customers. Secondary industries – manufacturing – have more locational choice, which is why much policy has been directed towards influencing where they are established.

This categorisation was never perfect. Tourism is in the service sector, but it brings its customers to its location. Some other service activities – such as the education of foreign students and health services for foreigners – also bring the customer to them.

In recent years, as telecommunications costs have collapsed, other parts of the service industry no longer need be located near the customer, although outsourcing is not confined to services. (An early example was the purchasing of components for assembly, with just-in-time production a further refinement, again made easier as distance costs decline.) However the most public concerns have been the outsourcing of services, particularly their offshoring where the supplier is ‘overseas’. The book explores the off shore phenomenon in Bangalore.

Such offshoring is not a new phenomenon, but a variation of the relocation of manufacturing which has been going on for a couple of centuries. Perhaps the new political difference is that professional workers are more affected. The chapter looks at the particular circumstances which has made the offshoring of particular services to Bangalore attractive, and contrasts the different circumstances which has offshored manufacturing to China and other parts of East Asia. It concludes by speculating the extent to which other services can also be offshored.

Chapter 1.6: The Indeterminancy of Location: Finland’s Nokia:

Why should Nokia, the world’s largest mobile phone company, be located in Finland? Journalists offer post hoc explanations, but the introduction of economies of scale and low distance costa opens the possibility that some industries simply occur in particular locations as the result of accidents of history and path dependence. (The chapter also cites Fisher and Paykel, as another example for there is no obvious reason why New Zealand should be good at whiteware.)

The indeterminancy of location is an uncomfortable analytic conclusion, deriving from the complexity of the mathematical spaces which underpin the analytics, for they are no longer purely convex. Ultimately the models outcomes may be the consequences of chaotic processes.

However they do explain another recent development in economics, the role of competitive advantage. Comparative advantage generates deterministic locations. But suppose accidence and path dependence locates an industry in a particular place. How does it maintain its predominance, when other businesses and locations can replicate its production processes? In a changing industry, dominance can be maintained by the first mover if it continues to innovate ahead of its rivals. That is the core of competitive advantage.

Chapter 1.7: Intra-Industry Trade: To be decided (the motor vehicle industry?)

Intra-industry trade (IIT) occurs when two economies export and import the same product. Whereas it hardly existed internationally in 1950, it is now thought that about a quarter of the international trade in goods is of this form. (The other quarters are oil, primary commodities, and other manufactures).

While not initially intuitive, IIT is a consequence of falling costs of distance once there is a degree product differentiation. This chapter will be a good place to make Robert Reich’s point that the nationality of products are becoming ambiguous. He uses cars, which also being visible to the reader, are probably the best example (not to mention the substantial learned literature on the industry).

Chapter 1.8: Multinationals: To be decided (McDonalds?)

A chapter on multi-nationals follows. McDonalds has the merit that globalisation has been described ‘McDonaldization’, although the recent struggles of the company suggest the equation is too simple.

The final chapters of Part I examine the international mobility of the factors of production (other than land). They are not yet in draft form so the exposition here is very tentative.

Chapter 1.9: Labour Mobility: Mexico and The United States

Labour mobility is explored initially at the Mexican-US border, where there is one of the greatest cross-border income differentials. It leads to consideration of one of the central ideas of international trade theory – that trade flows are an alternative to labour flows, via the North American Free Trade Area. But the greater purpose of the chapter is to contrast the much higher labour mobility in the nineteenth century with the more restricted mobility today, because of the restrictions applied by nation states, The chapter discusses why they were introduced in the early twentieth century, and how this contributed to the period of stagnation of globalisation up to 1950.

Chapter 1.10: Foreign Investment: To be decided

The content and illustration of the chapter on foreign investment has yet to be decided. Obviously it will distinguish between foreign direct investment and short term financial flows. (How to tie it into the multinational chapter? Hmm.

Chapter 1.11: Technology Transfer: To be decided (Japan?)

The content of the technology chapter has also yet to be settled. The general view is that technology is highly internationally mobile, but the particular choice of technology is affected by factor proportions, the quality of the human capital, and managerial skill. There is a cross-national study of nineteenth cotton mills which illustrates this point. However the book really needs a a twentieth century illustration. I have yet to identify a suitable example, although Japanese post-war economic growth looks promising. In particular it might explore the degree to which the Japanese stagnation of the 1990s is a consequence of industry moving offshore to the Asian Tigers, because of the ease of transferability of technology to lower cost countries.

Chapter 1.12: The Convergence Club: (Argentina and an Asian Tiger)

Baumol has observed that countries which are high income at one point in time, tend to remain high income thereafter. Thus almost all the high income countries of a century ago still belong to this ‘convergence’ club.

Top membership has been relatively stable. In 1900 it consisted of North America, Western and Northern Europe, Japan Australasia, and the Southern American Cone. A century later they remained its members, except for Argentina, Chile and Uruguay. Perhaps a few from South-East Asia and East-Central Europe have joined, or are will join soon.

(The convergence puzzle is reinforced by the contrast with business. Very few companies which were top a century ago, or even a quarter of a century ago, even exist today. Economists are comfortable with this high business turnover. Why dont countries experience a similar turbulence in their ranking?)

It is relatively easy to offer an explanation why the characteristics which give good economic performance in one time will persist and so the economy will continue to grow at a rate similar to other high performance economies. Postwar revivals, suggest that these factores are important.

However the explanation seems to rule out the exceptions where countries leave ‘the club’. This needs to be explored.

There is much work to do on this chapter, including on definition and measurement, and how it relates to the phenomenon discussed in the final chapters.

Part II: The Consequences

Part II explores the consequences of the economic processes described in the first Part, including the policy responses which modify them.

Chapter 2.1: Nationalism: Germany

The nation-state, indirectly as an economy and directly as a controller of the border, appeared throughout Part I. However it is a relatively recent phenomenon, no more than a couple of centuries old. The chapter illustrates this by reference to Germany which did not exist as a state in 1805 and two hundred years later has many of the state’s ‘traditional’ functions subordinated to the European Union. The chapter argues that nation states are a response to the falling costs of distance, which made smaller communities aware of being a part of larger communities. The response was imperfect, as the ambiguous boundaries of Germany show. The chapter concludes that the nature of the state is changing, but points out that while the German state may not last long, German culture is much older and is likely to persist beyond the demise of any state.

Chapter 2.2: Is Cultural Convergence Inevitable?: Canada and the United States

This chapter explores the degree to which globalisation causes all cultures to converge to a single one, a matter of some public anxiety, although there is a confusion arising from a nostalgia which blames all cultural change on the forces of globalisation. The US-Canada border is the world’s greatest cross-trade border, so we can explore to what extent the two countries are culturally converging. (The question is complicated by the internal Canada issue of Quebec, although the US is also not a single culture but combination of regional ones.)

Chapter 2.3:Diasporas: To be decided (Samoa and ?):

This chapter turns the previous chapter’s argument the other way round, by asking whether a nation can exist outside a place, for an implication of the falling cost of distance is that the location of ‘citizens’ may become less important. The illustrations have not been chosen. Samoa is a possibility, with over half of Samoans living outside the Republic of Samoa and a local economy being very dependent upon its diaspora’s remittances. But an example of a diaspora from a more economically sustainable nation state is also needed.

Chapter 2.4: The Meaning of Sovereignty: The Globalisation of Time

By describing the development of international calender and time standards, the chapter introduces the distinction between de facto and de jure sovereignty, which it applies to economic agreements such as the Multilateral Agreement on Investment.

Chapter 2.5: Is Policy Convergence Inevitable?: Health Care

‘Policy convergence’ occurs as countries adopt the same policies. Thus countries are finding their ability to assist domestic industry increasingly limited. However is convergence a feature also of social policies? This chapter shows how a standard public health policy – taxation of alcohol to reduce harm – is being limited in the EU because of the requirement of the free flows of goods.

Chapter 2.6: International Trade: Agriculture

On the other hand, in some areas ther eis considerable policy convergence. I would like to illustrate this with international trade. Depends a bit on the Doha Round outcome I suppose.

Chapter 2.7: A Race to the Bottom?: The Social Market Economy

The social market economies of the original members of the European Unions are under considerable pressures as a result of the enlargement of the EU, both because of the low cost new economies and the invasion of cheaper labour from them. Are social market economies viable under globalisation or are all economies forced into individualistic modes of regulation?

Chapter 2.8: The Role of Borders: The Implications of Migration

I have not written this chapter yet so I dont know what it will conclude, but it seems likely there will be policy convergence in some areas, partial policy differences in others, and more freedom in others. But what are the dividing lines?

However, I am increasingly thinking that labour mobility is key to many of the politico-economic policy issues which globalisation rases. Which needs naturally on to the next chapter.

Chapter 2.9: Kinds of Nations

By considering whether New Zealand should join Australia, the United States ofr the European Union – or stay outside – we can explore different sorts of options for nations in a globalised world. There will be supplementary examples including Canada and Norway, and probably some consideration of micro-states in the Pacific.

Chapter 2.10: It’s Not Easy Being Small: New Zealand

The Size of Nations by Alberto Alesina and Enrico Spoloare argues that middle sized countries (New Zealand would be on the lower end of the group) tend to have a better economic performance than larger economies, because they are simpler to govern. Much of the research on economic growth focuses on the market sector ignoring the public sector, while there is a strong ideological strain which dismisses the public sector as a source of poor economic performance. This theory suggests that the public sector is important, and that the less heterogeneous the population the more efficient it is.

Middle sized countries face a tradeoff of a more efficient public sector with less access to economies of scale in market production. The resolution is specialisation in production, with international trade converting the production into a more general mix of consumption. The paradox, lurking throughout the book, is that smaller nation-states may be able to survive, but only by abandoning some sovereignty by participating in international trade.

The chapter may have also to look at sub-states, regions of nations which have greater autonomy – possibly illustrated by Scotland and Quebec.

The Book’s Conclusions

Chapter 4.1: The Pattern of World Development

This chapter brings together the analysis of Part I with economic history to reach what may be its most stunning conclusion. I sketch it here, on the understanding that what I have to say may be substantially revised as the research progresses.

I start off with two long term well established trends. The first arises from the sharp divergences in income and productivity in the world today. We might expect their distribution to be clumped in the middle with a few extremes at the top and bottom. Instead it is U shaped: a lot of people and countries are at the bottom, more – albeit fewer – at the top, but very few in the middle.

(Despite all the angst, New Zealand is – and always has been – a member of the top club. Its production relativity has almost certainly sunk in the post-war era, but it is still probably close to the mean, allowing for measurement error. The claim that New Zealand could join the third world is rhetoric, although a rhetoric which could become a reality were we to follow it.)

The reality is that those countries which were poor a hundred years ago, are typically still poor, unlike the era before globalisation, when the relative differences between the top and bottom income countries were tiny in comparison to what they are today. We might have expected economics forces – international trade, international migration, international investment and technology transfer – to have diminished the differences. They have not. Why?

The second long term trend is that the shifts in the pattern of geographical distribution of manufacturing since 1750. As the following table shows before globalisation began two countries, India and China produced more than half of the world’s manufactures. Almost two hundred years later their contribution was insignificant. The stark contrast is with the far greater stability of world population shares.

Manufacturing Output (By World Share: Percent) 1750-1938

Year India China Rest of
1750 24.2 32.8 15.7 27.0
1800 19.7 33.3 14.7 32.3
1830 17.6 29.8 13.3 39.5
1880 2.8 12.5 5.6 79.1
1913 1.4 3.6 2.5 92.5
1938 2.4 3.1 1.7 92.8

Source: Simmons (1985), p.600.

It would be easy to dismiss the change as a consequence of the transformation from handcrafts industry to factory production. But we have already seen in earlier chapters, the location of manufacturing type activities may be driven by accidents and time dependence. Recall that manufacturing is important because unlike primary production it need not be located near a resource base, nor unlike (traditional) services need it be located near its customers.

I am now going to apply the Fujita, Krugman and Venables model to historical experience, pushing it beyond its analytic limits. FKV caution against too bold an interpretation of their work, but economists are equally as bold at applying the rigorous neo-classical model to historical experience.

Their simplest model describes what happens as the costs of distance falls to the manufacturing (relocatable industry with economies of scale) in two identical countries. Initially, the two economies have the same level of manufacturing, but as trade costs decrease, the share of manufacturing goes through a critical point (as in catastrophe theory) and suddenly one country (arbitrarily) ends up with all the manufacturing, and the other with none.

The former country is better off. In the formal model the labour force qualities are identical but after the bifurcation workers in one gets paid more than the other, because of the higher productivity of manufacturing and the restriction on labour migration between the countries. In effect, the costs of distance enable the prosperous workers to capture the rents from the economies of scale. (Note the importance of labour mobility – or a lack of it – again.)

At this point we honour Joan Robinson, by observing that while we have (almost) described the phenomenon as occurring through time, the modelling actually makes static comparisons. Through time there will be transition dynamics, which are very complicated and not captured by the modelling. But if Robinson and FKV will allow us, we might describe the beginning and end of the nineteenth century as reflecting two sides of the bifurcation, albeit one involving more economies of different sizes, and many more sectors of production. We can see the economic forces which generated this branching in the examples of the growth on New York and Nokia.

However, as the costs of distance continue to fall, the model behaviour the bifurcation suddenly snaps back, to equal shares of manufacturing for the two countries. The intuition is that when costs of distance are near zero, manufacturing settles to where the population is, and where there are lower wages.

The FKV model involves constant technologies (falling costs of distance aside). Adding technological change will generate a pattern where the economies which dominate manufacturing will grow far more quickly than those which are left behind. One might speculate that it is not impossible that, under some realistic conditions, incomes in the loser economy may stagnate or even decline. Paul Samuelson’s recent paper on offshoring shows that this can happen in the standard model, via terms of trade shifts.

This sounds suspiciously like what may be happening in South and East Asia. Perhaps the economic dominance of the developed core is but a transition in the history of the world economy. A multiple country variable size economy FKV model may have many bifurcations. The accelerated growth we see among some East Asian economies in the last two decades may be an example of this shifting from one branch of the overall bifurcation to another. (Can the bifurcation go the other way? FKV dont identify a mechanism but the practical experiences of the southern cone countries suggest ‘yes’.)

We cannot be sure how long it will take to return to the end solution of manufacturing shares more closely reflecting population share. Given that it took one hundred years to create the developed core , it seems likely that it will take at least a hundred years to end it. The latter transition may take even longer. Today’s core economies have accumulated advantages in physical, social and human capital, but they need not persist forever, while the core’s capital and technologies are likely to flow to the new centre’s of economic activity. Note that while in recent years good government has been seen as a prerequisite for high economic performance, the history of the last two centuries shows that some economies which experienced considerable economic turbulence – including war and civil war – nevertheless performed very well by standard economic measures

And of course, some other factors may slow down or reverse the process. There may be an minimum to how low distance costs can go. Perhaps costs will rise with higher fuel costs or the needs for security against terrorism. Path dependent theories of growth precipitated by exogenous events leave open many possibilities. It will be our descendants, four and more generations on, who may be able to be more definitive. Certainly this chapter will be speculative, but it is a speculation constrained by the disciplines of models.

Chapter 4.2: Gainers and Losers

I am not sure what will be in this chapter. It may be subsumed in, or a continuation of, the previous one. There is a vigorous debate about the extent to which recent globalisation has resulted in increasing or decreasing poverty and income inequality. The factual differences in the dispute appear to rest upon what is going on in China and how to interpret it. I am happy to let the dispute evolve further before I write it up, particularly as it assumes of the Chinese income and production statistics are reliable, even though nobody with any expertise seems to trust them.

Chapter 4.3: Distance Looks Our Way

It is premature to guess what will be in the final chapter. Nor am I yet sure of the book’s policy implications. Anyone with a policy agenda can use the available analysis on globalisation to support theirs. My approach, as always, is to push the analysis as far as I can, before coming to policy conclusions, if any.

This Paper’s Conclusions

The purpose of this paper has been to describe the Marsden funded project on globalisation, and to give a flavour of its underlying analysis and tentative conclusions .It has covered a lot of material. Rather than try to summarise it all, let me reaffirm the five principles with which the paper opened and which have formed a context in which the paper has the analysis has been presented.

I am most fortunate to have the opportunity to pursue the project which is both intellectually challenging and relevant to the future of New Zealand and the World.

Ultimately, the cheerful conclusion may be that size need not be a handicap to New Zealand (and any distance handicap is diminishing). But there are other international forces shaping how New Zealand will evolve. Hopefully the book will help us better understand how to respond to them.

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