Presented to the Stout Research Centre ‘Research Roundup’ 17 October 2007
 

Keywords:  Globalisation & Trade; Growth & Innovation; History of Ideas, Methodology & Philosophy;
 

Invited to contribute to this Stout Centre Research Roundup, I was torn between telling you about the project I am working on, and the one which I have just completed with the publication of its book, Globalisation and the Wealth of Nations, which is just released. The current project is a history of New Zealand from an economic perspective, which this year is being funded by a Claude McCarthy Fellowship hosted at the Stout. It is work in progress. Perhaps you might invite me back next year to talk about it.
 

I am not proposing to work through the details of my just published book. You can read it for that. Instead, I thought it might be useful – especially in a research roundup – to describe the research and writing process. Too often we see only its end point – perhaps thinking the conclusions are obvious – and not see the blood, sweat and tears, the blind alleys and the roads to Damascus which got us to where it seems so obvious. If progress seems confusing – well, it is.
 

The Diminishing Costs of Distance
 

There were two key factors which made the study possible. The first was my recognition that globalisation was about the diminishing costs of distance. The awareness of the tyranny of distance – as Geoffrey Blainey’s seminal book is called – is an integral part of growing up in Australasia. The notion that tyranny is diminishing is obvious – Blainey makes the point in his most recent edition of his book. An extension of Blainey’s thesis will be found in Frances Cairncross’s The Death of Distance published in 1997, although an Australasian may agree with Mark Twain that reports of the death are exaggerated.
 

We knew all this long ago, but more recently it struck me that the costs of distance had analogies to tariffs, and could be analytically handled by the tariff theory of economics. Tariff theory is a subtle part of economic theory, which cannot just be summarised by the notion of ‘free trade – as it is called – is a good thing’. One of the problems I would like to get across today is that while there are popular views of what economics says, they are rarely based on an understanding of its complexities.
 

For instance, even if you believe the conditions favourable for free trade exist, you need not support a free trade area between two countries, because the economic theory shows that partial reductions in tariffs can damage an economy. This is important if we are thinking about the costs of distance. They are rarely entirely eliminated. A reduction in the costs of distance may not be beneficial to a country, although in my assessment– especially from an Australasian perspective – it is generally has been, creating opportunities that had not previously existed.
 

For example, the falling costs of the electronic transmission of information has meant that New Zealand has a niche in the overnight translation industry. Europeans lock up an agreement in their late afternoon, fire it down the line to New Zealand, go off for the evening, and when they start work the next morning they have multiple translations of the document.
 

So I use tariff theory in the fundamental chapter in the book with the example of refrigeration which reduced the cost of transporting fresh meat long distances from infinity to near zero. Chapter 3 wrote itself easily, not at all surprisingly given I first began understanding this issue over a third of a century ago. This globalisation study is a part of a research program conceived all those years ago which asks how small economies function and survive in the international economy. My current project is the another stage.
 

Once there was no common definition of globalisation. People could write entire books about the topic without defining what they meant. For example Thomas Friedman’s The World Is Flat never says what is meant by flatness, but just repeats examples and claims they illustrate the contention. In fact, as I’ll explain later, the world is not flat, if I understand him aright. But who can, if he does not give a definition?
 

I quickly struck on a definition of globalisation as the ‘integration of regional and national economies’. There is a minor difference between this definition and the standard one now used by economists: mine refers to regions as well as countries. Regions may seem irrelevant today, but their economic integrations preceded the integration of countries.
 

Chapter 4 illustrates that with the process of regional integration in early nineteenth century America . At the time of its formation, the US was a series of fragmented economies and societies which integrated with the arrival of the road, canal, rail and telegraph networks. The expression ‘United States of America’ was barely used in public discourse until about fifty years after the revolution.
 

The difference in the definition arises because economists such as Joseph Stiglitz and Stanley Fisher want to talk about globalisation today, whereas I am also concerned with the historical story. From the beginning I was aware that globalisation was a historical process – had to be if the introduction of refrigeration illustrated it. The book argues that globalisation is a couple of centuries old. At the beginning of the nineteenth century about 1 percent of the world’s output was exported. Today it is over 20 percent for goods alone – with service exports to be added.
 

The book acknowledges the case for the fifteenth century being the beginning of globalisation, with the great explorations and the arrival of printing (which substantially reduced the costs of information transmission). But the next few centuries are of less interest to the economist: distance costs were so high and trade was limited to products that could not be produced locally, so there was not much economic integration .
 

History can be sobering. We tend to treat the recent past – that which we grew up in – as ‘normal’ and subsequent changes as – usually – for the worse, providing a ‘nostalgic’ account of contemporary events. The point is that the ‘normalcy’ and the ‘nostalgia’ are different for our parents and our children, and indeed for any other generation. History provides a perspective.
 

For instance while there is considerable concern in my generation about the acceleration of globalisation from the ICT revolution, there is less among our children Their turn to be shocked is to come. However, as I argue in an article I wrote for an American literary magazine, Gutenberg’s printing revolution had more dramatic implications than the internet.
 

Funding
 

While the recognition that the role of falling costs of distance was key to the analysis, adequate resources were needed to make possible its investigation. The Royal Society of New Zealand awarded me a Marsden Grant to to spend three days a week for three years to 2006 doing this. Such a grant is liberating. As I have no regular base funding in the way an academic has, much of my publicly directed research has been done in the gaps when I am not earning a living as a consultant. The grant gave me a security – and, dare I say, an incentive – to progress the task in manner more fully than had I been ducking and diving between contracts.
 

So I here I was, with a theory and the funding for a study. Of course the inevitable happened. The research had a mind of its own, and it kept introducing new ideas. Three markedly changed the end product. The first was a change from a New Zealand perspective to a more international one.
 

Fulbright Fellowship
 

A consequence of the funding was that I could afford the time to travel overseas. Fulbright New Zealand awarded me a Fulbright Distinguished Visiting Fellowship. which allowed me to, as it were, take a sabbatical in the United States in 2004. Its impact was enormous.
 

My original intention had been to study globalisation’s impact in New Zealand. Indeed every page of the book implicitly or explicitly refers to New Zealand issues, but now the book roams over many other countries. While on my Fulbright that I concluded I should have a international perspective. I guess it is obvious enough. Globalisation in one country is hardly a sensible notion. But it took getting out of New Zealand for a longish period to clarify that.
 

But it was not just being away. Based in the US I engaged with the country, especially about the story of the founding of the United States. One Sunday I visited George Washington’s estate at Mount Vernon, an hour or so out of Washington. It has been lovingly reconstructed to the state it was in his day. I was struck by how different his farm was from the New Zealand ones I knew, how it was more a feudal farm than a modern one. And that confronted me the amazing story, of how the US transformed from essentially a feudal society at the time of the revolution, to the greatest industrial economy in the world in about a century and within the next century became a globalised power. Sure, I had read about the transformation before, but the seeing was believing.
 

As I have already said, the United States was far from united when it was founded, and the integration through falling costs of distance was evident as I proceeded with my studies. As I tried to get into the thinking of the era, I became aware that while the American constitution was progressive for its day, some of that thinking had been outdated by globalisation.
 

Today’s nation-state is a phenomenon which began in the nineteenth century, following the globalisation of regions. That is set out in Chapter 12 of the book – which benefited greatly from a two-week visit to Germany sponsored by the Federal Government of Germany and the Goethe Society. It shows that a nation-state as apparently robust as today’s Germany is a very recent development.
 

So when the founders of America thought about their political future, they did not have a picture of a world of nation-states as we know it today, but of a Europe of squabbling, impermanent, small states which were defined more by the ruler – “L’État, c’est moi” – than by the republic of men which the American founders envisaged. They allowed government power to be centralised in the federal government of the US, rather than the in states, although as a consequence they had to leave a lot of economic power with the decentralised market. (I told this story in my Fulbright lecture ‘From Feudal Society to Globalized Economic Power’.)
 

I could not but compare the European Union which was created a couple of centuries later. Although we think of Europe as older than the US, the EU’s constitutional arrangements are more recent and hence more modern, because they take into account the existence of the nation-state which developed in the nineteenth century.
 

My Fulbright experience led me to see two models of world governance. One was a federated world as envisaged by the America’s founding fathers, in which states would have little power: the other was the European Union where nation-states maintained considerable power over the central government – a bit like the confederation that preceded the US constitution.
 

We can argue over which would be the better form of world governance, but the political realities are that the European Union model of powerful nation-states is likely to be with us for some time. Ironically a key reason is that the United States of America, which provides the other model, is as unwilling to give up its sovereignty to a federal world government as the European nation-states are proving to be in regard to a centralised European Union.
 

With that insight, I looked at supra-national economic institutions such as the WTO, the IMF and Multinationals (in chapters 17 to 19) and concluded that they reflect much more a confederated world of powerful nation-states than a federated one. The reason many New Zealanders do not realise this, is that we are small nation-state with little power. But that does not mean that large ones and confederations of small states are powerless.
 

The Fulbright experience resolved a problem about the importance of the Pacific. Earlier I had gone to Samoa. Every Pacific specialist had told me that I must include the Pacific Islands in any study of globalisation, although they became less definite when I asked them how. I went to Samoa to see for myself, and came away as bereft of ideas as those who had told me to go. It was a pleasant enough visit, but nevertheless a blind research alley.
 

Coming back from my second Fulbright stint, I stopped over in Hawaii and I saw a globalisation story. When the costs of distance were high, Samoa was the centre of the Pacific if not the universe as it still likes to claim, and Hawaii was on the obscure fringe. Came the European sailing vessel and the importance of the locations were reversed. That lesson opens up the book proper, a particularly powerful story since they are both Polynesian societies. I doubt it is the story the Pacific specialists envisaged, but to look forward, it has also helped me think through the second chapter of my current study, which is about the Pacific Island economies from whence the ancestors of the Maori came.
 

My final example of the impact of the Fulbright trip on my thinking requires a bit of economic modelling which was the second major way the research program was changed.
 

Economies of Scale
 

The majority of public economic discussion makes assumptions which economists have wrestled with, not always agreed upon, and which may even be probably wrong. There is a view, sometimes attributed to Mark Twain that ‘economics is common sense made difficult’. I shant be surprised if some think that Globalisation and the Wealth of Nations is obvious common sense, but it wasnt before I wrote it, nor before they read it. I know because I have seen how long it takes to get across some of the profound implications that the study: I know because I have wrestled with deep treacherous theoretical problems. I am a bit hesitant to discuss them further because I may lose this audience On the other hand you deserve some explanation. So here goes.
 

Earlier I mentioned trade theory, and the results which commonly are used to justify ‘free trade’. What is not generally understood is that the prescriptions assume certain mathematical structures which need not be true in the real world. I am not going through the mathematics, but an example of the problem is economies of scale, and the average costs (sometimes called unit costs) fall as output increases. We often assume is that the scale effects are not practically important: sometimes they are.
 

Economists do not have a rigorous theory of the behaviour of firms with economies of scale. However there is one case about which we can say a lot: where the economies of scale apply to an industry rather than an individual firm. In such cases firms cluster together because that slower all their costs. The cost lowering is shared between all firms, so industry economies of scale – of agglomeration – is analytically tractable.
 

I shall not go through the analysis but its conclusion is that because of agglomeration effects exist we have cities. Despite the diseconomies of scale – such as traffic jams – which cities experience, agglomeration economies are so powerful that we have huge – high productivity – conurbations of ten and more million people clustered together.
 

Earlier I said that Thomas Friedman’s notion that the world was flat was wrong. If it was flat, such conurbations would not exist. In fact the world is rather lumpy: Tokyo, New York, Seoul, Djakarta … (Notice that this is a list of towns, not countries.)
 

I was aware of this economic literature before I began the Marsden project. It is about two decades old but nicely summarised and consolidated in a book The Spatial Economy by Masahisa Fujita, Paul Krugman and Tony Venables. On rereading it, with more time and so more closely – the pages are covered with mathematics – I realised that it would have to markedly modify the underlying model I was using.
 

Economies of scale are important when costs of distance change. If the costs are high, the supplied market is likely to be limited, and so output is limited, unit costs of production are high and there are many small production plants. As costs of distance fall, a plant can reach a greater market, its unit costs fall, and the number of plants decrease and concentrate in fewer locations. That is the story I tell in Chapter 4. That concentration usually occurs in conurbations.
 

When I was thinking about globalisation with a New Zealand perspective, I planned to write about Auckland. The Fulbright experience changed the illustration of agglomeration to New York, which is arguably the world’s greatest global city, and certainly the best documented.
 

Ironically, having discarded Auckland as the chapter illustration, I found myself through a particular government board I am on, being involved in the developing of policy on Auckland. It will be for others to say what influence I had, but as a result of the Marsden Fellowship, the Fulbright, award, and the decision to focus on New York, I had a better understanding of the issues involved with regard to Auckland: any influence I have will be of better quality.
 

Increasing returns had an even more dramatic impact on the study, but before explaining that, I need to talk about the structure of the book, which itself became tangled up with the title .
 

The Title of the Book
 

At an early stage in the study I decided my main focus would be to write a book rather than a report, or a series of journal articles. I always have a lot of difficulties with the structure of any book I write, but it is not my fault. It is the complexity of the subjects I am writing about.
 

Take something as simple as the title. I started off with titles like Diminishing Distance which was more accurate than the ‘death of distance’, but not as strong, and Distance Looks Our Way, which was thought to be too New Zealand and too obscure to work. My working title became The Globalisation of Nations, which remains my preferred title, but was abandoned because we found that few got the resonances with Adam Smith’s The Wealth of Nations. To get it across, the final title became Globalisation and the Wealth of Nations.
 

At least one reviewer took the reference to Adam Smith was evidence that this book was written from a conservative perspective. In fact in his day Smith was a radical recognising that the political economy was changing and there was need for a changes to respond to it, thereby challenging the incumbent establishment. After his death the interpretation of Smith was toned down so his writings would not be censored. Eventually he became a saint of the conservatives. But as the book points out, just as Karl Marx said he was no Marxist, Smith would not today join an Adam Smith club.
 

There were two specific reasons why I chose to connect with Smith. First he is usually credited with being the first economist to pay attention to the welfare of all people in the state – of the nation-state. I wanted to make it clear that I was writing about such entities and was dealing with the problem of whether they would survive in a global regime.
 

The second reason was in the way that Smith saw the economic growth process. What I am going to say now is obvious – after one has been told – but was radical in his day, and even remains radical today because as obvious as it is, the implications are not widely understood.
 

Smith’s driver of economic growth is specialisation and its benefits from the economies of scale. That is not the entire story as we understand it today – Chapter 20 sets out recent developments in growth theory – but it is an important part of the story. Once an individual or firm specialises, it becomes necessary to trade its products for others. As trade gets complex it cannot depend on barter (which subsistence economies do on the margin). There is a need for a medium of exchange – for money.
 

(That is all very obvious, but its subtlety is revealed by an issue which is bothering me in my economic history project. The pre-European Maori was in a subsistence economy with some barter of specialised products. How did Maori culture in a relatively short time – probably a generation – shift to a market, monetary economy? )
 

Smith’s insight underpins my book. Once we seek the benefits of specialisation and increasing returns, we must trade. That is particularly true for a small economy such as New Zealand, but it is also true for every region in the world. Were New York to become self-sufficient in food it would forgo the advantages it currently experiences from agglomeration. So we are forced to trade inter-regionally and internationally. My book is a meditation on that fate.
 

Smith did not pay much attention to globalisation for in his day the costs of distance were so great that there was little international trade. Smith was not a free trader. It is necessary to edit his statements on the invisible hand to hide that fact; he became a customs officer after he wrote his most famous book. The modern theory of international trade begins with David Ricardo, half a century later as globalisation takes off. Attributing it to Smith is an anachronism which ideologues accept because scholarship is not their priority. Despite them I am happy to recognise Adam Smith’s insights.
 

The Structure of the Book
 

When I was using the title The Globalisation of Nations, I had the neat structure of a the book in two halves, the first of which was the economics of globalisation and the second was on the political economy of nations. Even so, the chapter order within them proved a problem. If I remember aright, I inverted chapters six (on competitive advantage) and seven (on offshoring) at a very late stage – always a dangerous thing to do, because of cross-referencing and expository sequence. (Thankyou David Green for the editing.)
 

Chapter sequence is always complicated in my kind of book. I dont have the luxury of the historian or biographer who begins at the beginning, follows thorough chronological sequence, and ends at the end. Nor is there a purely logical sequence. The model I am using has feedbacks, so something needed in one chapter may not be explained until later. It’s a bit like those simultaneous equations which lead many people to give up mathematics. (Of course they can often be solved, but the resulting solutions may be unintelligible to almost everyone.)
 

It can be the same for explaining a theory, which is why I bolted onto the front the introductory chapter setting out the overall analysis. Hopefully it will give the reader some comfort that the loose ends which inevitably arise in early chapters will be tied in by the end.
 

In fact, the final structure of the book has nothing of the planned elegance of the two equal balanced parts. It ended up in four parts in an economy, politics, economy, politics pattern with the parts of unequal length. Why?
 

The Bifurcation Model
 

Earlier I said that there were three major impacts which modified the plan originally submitted to the Marsden Fund. Two were that I gave the study a more international perspective than I initially planned and the introduction of economies of scale skewed the study’s theoretical underpinnings. I have yet to explain the third. It was empirical.
 

Angus Maddison has published an extremely valuable data base, The World Economy: A Millennium Perspective, which provides population and output estimates for the world economy going back two thousand years. It was always going to be integral to the study, but Robert Wade, a New Zealander who holds the chair of development studies at the LSE, pointed out that the distribution of countries by their average income is peculiar. There are two clusters – I call them ‘clubs’ – a Rich Club of countries and a Poor Club. But there are remarkably few middle income countries between them: those that are, can be explained as special cases: oil producers, located close to Rich Countries, or transitioning through from being a poor to a rich country. The only exception difficult to explain is Mauritius.
 

Bi-modality” is unusual. As Chapter 26 explains social processes do not generally produce two clusters and little between them. Then I remembered that in the Fujita, Krugman and Venables book there was an account of the world which gave the two cluster outcome we see in practice.
 

The model is not easy to understand, but at its core is the existence of economies of scale which lead to a bifurcation of development paths – a high road for the Rich Club and a low road for the Poor Club. With one exception which I shall explain shortly, there is no place in the model for those in the middle. (A small coincidence is that I worked with Peter Elkan on a version of the model in the 1960s. However we were concerned only with a single – small – country, and did not pick up that when two countries traded these bifurcation paths occurred. I mention this as an illustration that a blind alley in one generation may provide a useful route in a second.)
 

The primary reason for the bifurcation is economies of scale. Just as it causes some economic activity in a country to concentrate in a few conurbations, it causes industrial economic activity to occur in only a few countries, with the remainder as the suppliers of food and other resources.
 

I have not time to set out the full workings of the model, but – Eureka! – it is driven by falling costs of distance. When costs are high, everyone has industries which supply the locals. As the costs of distance fall, some businesses expand out, supplying increasingly larger areas at the expense of their local industries. The displaced become suppliers of food, and the limited land means the farmers are poorer than in highly industrialised economies.
 

When a decade ago I conceived the importance of the costs of distance falling, I had no idea that it was part of an explanation of why countries cluster into the rich and the poor. I knew there were these clusters – economists regularly distinguish between ‘developed’ and ‘developing’ countries, as they call them – although until Robert Wade pointed it out, I was unaware of the dearth of countries between.
 

You might think the explanation was consistent with the Marxist analysis that rich countries developed on the back of poor countries. Well yes and no. ‘Yes’, in that the rich countries could not have developed this way without the existence of poorer countries. They are interdependent, and the fruits of economic growth are shared unequally. But ‘no’. Poor countries get a share of the economic prosperity. Real incomes of Africa – the poorest continent– have risen by three times in the last two centuries and are now higher than the real incomes of Western Europe and North America when globalisation began. The Marxist prediction of the immiseration of the poor is not evident in the data.
 

These insights markedly changed the end of the book, which is why the structural change. I had to split the first half of the book, about globalisation and economic development into two – a Part I and a Part III which naturally led into the Part IV on the future. I then insert Part II, originally in the second half, between them, so that the second half of the book was securely based on the existence of nations-states.
 

The Future of Globalisation?
 

The bifurcation model of Fujita, Krugman and Venables makes some seemingly surprising predictions.
 

One prediction is that as the costs of distance continue to fall, the wages in poor countries will eventually undercut the rich countries’ costs and with distance costs no longer being a kind of protective tariff, enable poor countries to make industrial goods, and the two development paths will come together again. The qualitative model does not tell us how low the distance costs have to be, but it suggests that one day – perhaps centuries off – there will be greater equality of average incomes between nations. (Given this story involves capitalist economic development, it shows the model is not essentially a Marxist one.)
 

A second prediction is that this combining of the Rich and Poor Clubs is not likely to happen in a single instance. Rather one by one, poor countries will peel away from the Poor Club, pass rapidly through the middle income range and join the Rich Clubs, whose relative income falls as a result.
 

And that is what has happened. Finland and Japan did so slowly through the twentieth century and Ireland, Korea, Spain and Taiwan somewhat more quickly in its latter decades. One might argue that other parts of East Asia (especially in China) and parts of India are beginning to go through the transition. You will also find that, consistent with the model’s prediction, that despite substantial productivity gains, median wages in the US have been stagnant since the Asian Tigers took off.
 

The third surprising prediction is that the price of food and resources will rise relative to industrial goods. We can illustrate the mechanism as follows. Chinese workers leave their land to work in factories producing products offshored from the US and sold there. The price of what they produce falls compared to the US production price. At the same time China produces relatively less food, while its rising prosperity raises the industrial workers’ demand for food, so the price of food rises.
 

Again this has been happening. The terms of trade between industrial goods on the one hand and food and similar commodities has been rising since the early 1990s. The current dairy price bonanza is an extreme example, in which additional conditions of drought in key supplying areas and the switch to bio-fuels are exacerbating an uptrend in relative food prices. This contrasts to the bulk of the twentieth century, in which relative food prices tended to fall – to, one can add, New Zealand’s economic detriment.
 

The consequential future scenario is sketched out at the end of the book (but not in as much detail as I understand a year later). Having identified this phenomenon I had to alter the structure of the book in order to provide a different ending from what I had originally expected.
 

Conclusions
 

You may ask more about the future prognosis. One answer is to read the book, since we have run out of time.
 

A second answer is that ‘yes’, I know more now than is in the book for in the year since it has been written I have had more time to think about and elaborate the underlying model and investigate the empirical evidence. But I am afraid such work has had to be unfunded part-time. An extension of the funding of the research project was turned down: funds are limited and it was not a priority. As a result I have had to switch to other, I hope better funded projects.
 

Which is a pity. I have made good progress but there is more to work through. The bifurcation model I have used is obviously useful, but it is a simplification of reality. It does not deal with, for instance, the effects of peak oil which appears to reinforce some of the model’s conclusions but breaks up the simplicity of the model’s regional patterns.
 

However, this but illustrates a key point of this presentation on the challenge of writing my globalisation book: I was extraordinarily lucky to get the Marsden funding and make such progress. Of course the work should be progressed. Because I am committed to research I dont give policy the priority which is common in Wellington – it confuses the clarity of the analysis. But I can see that the analysis has long term implications for New Zealand’s future, and that it probably has major policy implications.
 

Sadly, the extension of the model is likely to occur offshore. New Zealand economics does not have the funding, the innovativeness nor the institutions to do the job. But we do have my book Globalisation and the Wealth of Nations.

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