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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. |
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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.
"Competitiveness"
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.
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