The First Global Economy

Misconceptions about the present

The service sector

The media phenomenon

Strange bedfellows

Non-economic issues



Is "globalization" exaggerated?

Erik Rauch

The world economy was, to an extent never seen before, truly global. It was linked together by new technologies that made it possible to ship products cheaply from one side of the globe to the other, to communicate virtually instantaneously over huge distances. But it was also, more importantly, linked together by the almost universal, if sometimes grudging, acceptance of a common economic ideology: the belief that free markets, with secure property rights, were the only way to achieve economic progress; and in particular that a nation hoping to make its way forward needed to welcome foreign trade and foreign investors with open arms. And this shared ideology did indeed lead to unprecedented transfers of Western capital and technology to emerging economies - transfers facilitated by the fact that everyone knew that any country that strayed from the path would be punished by financial crisis, and would soon be obliged to accept the harsh austerity prescribed by teams of Western technocrats.

The year, of course, was 1913.
   -- Paul Krugman, The Trouble with History

The First Global Economy

International trade has certainly increased in recent decades, but its extent is not unprecedented compared to the last 150 years, and in some ways earlier times actually exceeded ours in their degree of economic integration. It seems that economic history is quickly forgotten. Consider that in 1993, the United States spent about the same share of its income on imports as it did in 1890. As a share of world output, international trade is not much bigger than 100 years ago.  

Here are more numbers, on exports:

Exports of Merchandise as a Percentage of Gross Domestic Product

Year Western Developed Countries United States Western Europe Japan

1890 11.7 6.7 14.9 5.1
1913 12.9 6.4 18.3 12.6
1929 9.8 5.0 14.5 13.6
1938 6.2 3.7 7.1 13.0
1950 7.8 3.8 13.4 6.8
1970 10.2 4.0 17.4 9.7
1992 14.3 7.5 21.7 8.8

Source: Paul Bairoch, “Globalization Myths and Realities: One Century of External Trade and Foreign Investment,” in States Against Markets: The Limits of Globalization,Robert Boyer and Daniel Drache, ed. (London: Routledge, 1996), Table 7.4, p. 179, quoted in Selling Globalization.

That's right. Japan is significantly less "global" today than in 1913 or 1938. Western Europe, the US, and the developed countries as a whole, have only recently overtaken their 1913 level.

John Maynard Keynes illustrated the old global economy:

What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914.... The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages.... He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality... and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself most greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent.
    -- The Economic Consequences of the Peace (1920)

Note another way that this era surpassed our own in integration: there was something like a single global currency. Your dollar - precious metal - was good almost anywhere, and there was no such thing as exchange rate fluctuations.

So the real era of globalization was the nineteenth century:

Most historians of the international economy date the emergence of a truly global economy to the Forties -- the 1840s, when railroads and steamships reduced transport costs to the point where large-scale shipments of bulk commodities became possible. International trade quickly surged. By the mid-19th century, the leading economy of the day, Great Britain, was exporting more than a third of its GDP -- three times as much as the U.S. exports today. Britain eventually invested about 40% of its savings overseas every year.
            -- Competitiveness: Does it Matter?

Capital markets are another factor in economic integration. The volume of capital flows is much greater today. However, the speed of money is not even much faster today then it was following the invention of the telegraph. And,

Technology has brought big changes in moving information around. But, while we have increased the volume and complexity of our international transactions, we have not increased our ability to transfer real resources, and that is what capital markets are supposed to do.
           -- A Global Economy Is Not the Wave of the Future

Another facet of capital markets:

Investment and savings were [a century ago] coordinated on a global level, with the result that a surplus of investment in one area or state (that is, a balance of payments current account deficit) could be smoothly financed by the export of surplus savings from another area. Even in the highly integrated 1980s and 1990s, such transfers were much more difficult and raised many more political eyebrows than in the golden age that preceded the First World War.

           -- Harold James, International Monetary Cooperation Since Bretton Woods

Misconceptions about the present

Michael Veseth has written of how international trade is very different from "simple images of hamburger stands and soda pop cans":

Popular globalization metaphors suggest that multinational corporations are footloose, free-floating, monopolistic market creatures that are beyond any government's control. But my analysis of Boeing suggested just the opposite. State policies seemed to be so important in the aircraft and defense markets that Boeing essentially had to become a state in order to deal with the states. I was especially impressed with Boeing's "foreign policy," which embodied a realist philosophy worth of Henry Kissinger. The Boeing example undermined the simple story that states don't matter in the face of global capitalism.

           Globaloney: Or How Nearly Everyone Manages to Misunderstand Globalization

Veseth goes on to narrate the merger of the  Boeing with McDonnell Douglas, another aerospace giant. The two firms, wholly American, ended up being forced to make significant concessions to the regulators of the European Union in order to proceed with their merger. This shows how economic integration can actually increase the power of regulators. There is the danger of a "race to the bottom," but there is also the possibility of a "race to the top."

The service sector

In the last year or two, there has been an obsession in the media with the export of service sector jobs such as programming jobs and call centers. However, consider all the non-manufacturing workers that you have an economic interaction with in the course of a day, directly or indirectly.
The person who cuts your hair. A food worker who assembled your sandwich. A call center worker. A police officer directing traffic. The person who processed your auto insurance claim. The person who cleaned the restroom at the restaurant you ate at. How many of these jobs could be exported? A small percentage.

Paul Krugman estimates that 90% of the value of the U.S. economy has nothing whatsoever to do with international trade, and this is not likely to ever change dramatically, until your restroom can be cleaned from Hyderabad and your sandwich can be assembled in Jakarta.

Consider what this number means: in principle, if international trade were to disappear, the U.S. GDP would decrease by 10%. If that sounds like a lot, consider that GDP was 10% lower than it is today only 5 years ago.  

The media phenomenon

So there really was a "new global economy" -- in the nineteenth century.  Then why is everyone talking about it as if it began sometime in the 1980's? The numbers are striking:

Mentions of "globalization" or "global economy" in Business Week
(be sure to scroll to the right).

Mentions of "new global economy" in Business Week
There is not a single mention in 2001 or 2002 (up to 8/1).

(2002 figures predicted based on first 7 months; data gathered from NEXIS)

The media phenomenon of the supposedly "new global economy" has all the hallmarks of a fad - a phenomenon only tenuously grounded in reality, but whose growth feeds on itself.

Strange bedfellows

But besides sheer novelty (to those who have forgotten history), what could cause the growth of the fad? As Michael Veseth points out, "there is something very appealing about arguments that begin, 'Because we live in a world of irresistible global market forces …' and then ends with whatever conclusion you like." Krugman offers the following:

There is ... an odd sort of tacit agreement between the left and the right to pretend that exotic global forces are at work even when the real action is prosaically domestic.

Many on the right use the rhetoric of globalization to argue that business can no longer be expected to meet any social obligations. For example, it has become standard for opponents of environmental regulations to raise the banner of  "competitiveness" and to warn that anything that raises costs for American businesses will price our goods out of world markets.

           -- We Are Not the World

On the other side, the "exotic global forces" make for a glamorous enemy. Such a simple story is a barrier to the real understanding needed to prevent actual abuses. By simplifying and misrepresenting economic developments in this way, many would-be reformers ignore the benefits of international trade to the poor, and thus misdirect their efforts against international trade in general, rather than its abuses. And all the alarmist talk about the vast power of international markets over government regulation may end up being counterproductive, as that is precisely what those who want corporations to be excused from social obligations want everyone to think. By painting the unrestrained power of multinational corporations as an unprecedented menace, the opponents of those corporations may be doing them a favor.

Michael Veseth provides one example: The shoe manufacturer Nike, when relocating its headquarters, was able to extract concessions from local governments, allowing it to evade responsibilities, in part because of its image as a "footloose global firm", even though there was nothing global about its relocation decision (its alternatives were a few Western states in the US, and these were, in fact, mere bargaining chips).

The specter of "international competition" is used to justify all sorts of policies, from sensible to harmful. Even Paul Krugman, author of many debunking articles quoted here, has admitted to invoking "globalization" as a justification for policy changes when it was not relevant. In the end, this is only harmful, since it distorts the information that policy decisions are made on. It ends up encouraging harmful policies while good policies could be justified using more solid reasons.

All this leads to a pernicious development:

The overheated oratory poses a more subtle risk. It encourages fatalism, a sense that we cannot come to grips with our problems because they are bigger than we are.

So the fad is not harmless, it is dangerous. It allows those in power - in both government and business - to evade responsibility by claiming that "global markets made us do it." The real story - that there is nothing new about today's level of economic integration - shows that all arguments that we cannot take on domestic problems because of competition, and that social programs and regulations that "harm international competitiveness" should be rolled back, are nonsense.

The continuing power of states

A corollary of the conventional globalization story is that increasing integration is causing nation-states to lose their power to regulate and control what happens in their borders. Veseth contrasts this with reality:

It is amazing that people seriously think the nation-state is doomed by the slow advance of globalization. To think this, it seems to me, one must be blind both to the current world, where national power persists and prevails, and to history, where the forces of globalization and nation building often have coincided. Many regulatory aspects of national policy are certainly complicated by the expansion of global resource pools and the industries that draw from them. The state’s role in this changing environment is certainly changed but is not especially lessened.

In a supreme irony, even the idea that economic integration is making states less relevant is itself not new; a version of it was found in the book The Great Illusion by Norman Angell, in 1911.

Non-economic issues

Though economic misconceptions seem to be responsible for much of the distortion in policy debate, the debate on "globalization" also focuses on non-economic issues. It is true that things have been radically changed by a globe-spanning network which has grown at lightning speed, allowing individual people and businesses on any part of the planet to send information instantaneously to each other, overcoming national borders and changing the way we work and get our information.

That network - the telegraph network - was born in the 1840's and, by the end of the nineteenth century, wired the globe, cutting the time to communicate across distances by two or three orders of magnitude. The Internet, by comparison, is a mere refinement. (See Tom Standage's book The Victorian Internet: The Remarkable Story of the Telegraph and the Nineteenth Century's On-Line Pioneers).

People also tend to forget how conneced the world of political ideas was 100 years ago too. Fascism, communism, anarchism - these ideas all spread rapidly across borders.


But isn't it self-evident, at least, that countries whose economic performance fails to keep up with their "competitors" will suffer negative consequences? No, it isn't:

First, imagine a world in which productivity in all countries, including the United States, rises at 1 percent per year. What would be the trend in our standard of living? Most people have no difficulty in agreeing that living standards in all countries will rise by 1 percent annually.

Now suppose that productivity growth in the rest of the world rises to 3 percent, while it stays at 1 percent here. Now what is the trend in our living standards? Many people automatically assume that our living standards will stagnate or even decline, because we will have trouble competing. But they're wrong.

The right answer is that our real income will still grow at about 1 percent per year. After all, why do we care about productivity growth abroad? It matters only if it affects the quantity of imported goods we receive per unit of goods that we export, that is, the price of our exports relative to the price of our imports (known as our terms of trade). And productivity growth abroad need not hurt our terms of trade -- it is equally likely to improve them. There are several ways to see this. One is to note that while growth abroad increases the competition we face, it also expands our overseas markets. Another is to realize that when foreign firms whose products compete with our exports become more productive, those who provide us with imports generally also become more productive. Yet another way to see the point is to realize that faster productivity growth in foreign industries that compete with our exports will generally be reflected in higher wage growth as well, which can more than wipe out any relative cost gain. (These are all different ways of looking at the same story.)

In principle, then, the fact that our productivity growth lags behind growth abroad need not pose a problem. What about in practice? The actual U.S. terms of trade (excluding oil and farm products, which are subject to erratic movements) declined 15 percent from 1970 to 1980, and a further 2 percent from 1980 to 1991. These are very small numbers: since non-oil imports are only 7 percent of GDP, the drag on the U.S. standard of living was less than 1/10 of one percent per year during the 1970s, less than 1/50 of one percent per year after 1980.

In practice, then, the trend in U.S. living standards is determined by our own rate of productivity growth -- full stop. International competition has nothing to do with it.

If that's the case, however, what does it mean when people talk about U.S. "competitiveness"?

The answer, sadly, is that it almost always means that they don't know what they are talking about.
  --The Age of Diminished Expectations: U.S. Economic Policy in the 1990s

See also:

Competitiveness - a Dangerous Obsession by Paul Krugman

Competitiveness: Does it Matter? by Paul Krugman

A Global Economy Is Not the Wave of the Future by Paul Krugman

We Are Not the Worldby Paul Krugman

How Much Do National Borders Matter? by John F. Helliwell. 

Selling Globalization"argues that the instability of global financial markets makes it impossible for globalization to be as complete, as powerful, and as encompassing as people seem to think. All globalization is built on a foundation of global finance, but this foundation is unstable. It cannot support the elaborate global structures that many people think they see."

Globalism: The New Market Ideology by Manfred B. Steger argues that a simple repackaging of old laissez-faire ideas has become a "new market ideology".

Globalization in Question: The International Economy and the Possibilities of Governance

The Cult of Impotence: Selling the Myth of Powerlessness in the Global Economy by Linda McQuaig.

Postscript: An interesting counter-development has become apparent in the media in recent months, about how the recent media phenomenon has exaggerated reality, such as a recent Newsweek article. However, the article misses the point, citing recent phenomena such as a slight dip in international trade this year, rather than a historical view.