Globalization in Historical Perspective (A)

Haggard / Naughton

IR/PS

September 2005

I. When did “Globalization” begin?

One obvious candidate for a starting point is back around 1492, at the beginning of European expansion.

The Portuguese, and then the Spanish, ventured further out into the oceans than anyone had gone before; They founded new island colonies in the Atlantic, became sugar plantations.

The Portuguese steadily explored down the coast of Africa, rounding the Cape of Good Hope (1487); and reaching India (1497).

And of course Columbus came to the Americas.

By the 1500s, the whole world was linked by maritime trade routes

A Final Link in a Global Chain: The Manila Galleon, Annual Sailings,

beginning in 1571

A Direct Link Between the New World and Asia

“When the Portuguese -- going east -- met the Spanish, coming from the West, in the Moluccas (the Spice Islands) in 1521, the globe was united.” -C.R. Boxer

Bringing New World Silver to Asia, especially to China. Expansion of the (silver) money supply fueled commercialization and economic growth in late Ming China. Regionally, silver, silk, and ceramics were traded among China, Japan, and Manila (through Macau).

Europeans took over--but also linked together--existing commercial networks based on trading cities. Trade was flourishing before the Europeans arrived, and it expanded under initial European impact. Europeans built new Coastal Enclave cities (Bombay, Manila, Macau), and also took over existing trading cities, stringing them together to make their own Seaborne Empires: First Portuguese, then Dutch.

Dutch Sea-borne Empire

Dutch Quarter in Nagasaki (isolated from the main economy)

Do these important changes add up to Globalization?

Use the multi-part definition of globalization from Professor Haggard’s lecture Thursday…..

1. Increased flows across national borders.

2a. Market integration leads to convergence in prices. Changes in relative wages and incomes.

2b. Reallocation of domestic and global economic activity.

3. Firms and institutions that crossed national boundaries.

A. Horizons expanded figuratively and literally. The sense of discovery fed directly into the Renaissance in Europe and, indirectly, into the Scientific Revolution of the 1600s. New “technologies” (food crops) diffused widely.

B. Devastation of the indigenous population of the Americas. Europeans with superior military technologies imported devastating new diseases.

C. To replace the decimated indigenous population, the slave trade transported 15-20 million black Africans to work in mines and plantation agriculture in the Americas.

Overall this was not yet a process of globalization. Its historical

importance is elsewhere:

The nature of global power changed dramatically.

• The oceans, instead of being barriers, became the main highways. Coastal areas were most open to outside influence and economic stimulus.

• From this time forward, the nations that controlled the sea routes were the dominant economic and political powers. Later globalization would unfold under the aegis of a hegemonic power.

• Iberian dominance was followed by Dutch control. The English seized hegemony from the Dutch and kept it for 200 years, until it was passed to the US.

• The Islamic civilization of the Middle East lost its pivotal position in land-based trade routes.

Ethnic and religious distribution today reflects the former

centrality of Islamic societies in pre-modern trade routes.

Moreover, this period of global dynamism did not lead directly to today’s international economy.

The expanding international economy of the 1500s did not last. Global economic exchanges receded in the 1600s, and the world economy slowed down, perhaps due to global climate change (the “Little Ice Age” of the 1600s).

As the global economy lost speed, several regions dropped out of the new networks. In East Asia, Japan closed its doors, Tokugawa seclusion decree, 1635.

True Globalization had to Wait for the Industrial Revolution (IR)

• During the 1700s, more than 50% of world industrial output had been produced in China and India. Mainly handicraft.

• The First Industrial Revolution in England, 1780-1820, changed this: Cotton Textiles, Coal and Iron. Industrial production became concentrated in Europe.

• A Second Wave of Innovation after 1840 brought Steel, Railroads, and practical Steam Engines.

The IR in the UK provided the basis for a truly global economy

• By the mid-1800s, the UK, with 2.5% of world population, produced a third of world manufacturing output.

• This created the basis for British dominance of the global order. Not only a British Empire that went far beyond earlier sea-borne empires, but also informal British hegemony over the world economy.

• Meanwhile, the IR gradually spread to a few countries in continental Europe and to the US.

British Empire “ruled the waves” but also extended its power inland

After about 1870, a new wave of massive technological change

rapidly pushed down the cost of international trade:

• Ocean freight rates declined about 70% between mid-1800s and 1914.

• Suez Canal, 1869; Railroads span continents. Utah 1869.

• Telegraph linked all parts of the world.

From about 1870, the emergence of an international economy with all

the characteristics of Globalization.• Increasing trade in staple goods, not just

luxuries.• Integration of markets:

– Example: Rice from Rangoon to Europe, transport costs drop from 74% of selling price to 18%. Similar reductions for Wheat shipped from Chicago. Result: Integrated market: one world price for grain.

• Large international capital flows.• Mass migration on a global scale; wages

affected by migration flows.• Emergence of trans-national corporations.

We can assert with a surprising degree of confidence:

Globalization didn’t begin in 1492, and it didn’t begin in the 1980s or 1990s, either. Instead, it began after about 1870, when the world was first knit together into integrated markets.

II. Patterns of Globalization

Change of perspective.

Use some quantitative indicators: How can we measure the trans-national flows we have used in our definition of globalization?

How can we make comparisons across periods? How can we normalize data?

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WW I WW IIFirst Wave

Inter-WarPost-War

Current Wave

Four Periods of Globalization, 1870-Present

1. First Wave of Globalization, 1870-1914.2. War and the Inter-War Retreat from

Globalization, 1914-1945.3. Postwar Growth and National Economic

Reconstruction, 1945-1975.4. Current Wave of Globalization, 1975-Present

Each period reflects a distinctive way of organizing international transactions. The current system can be best understood in the context of these past systems.

For Each Period, We Look At:A. International Context, Framework of

Cooperation.

B. Trade

C. Investment

D. Money (International Finance)

E. Growth and Well-being Topics B-E are sections in the syllabus; for now, we

won’t give them equal weight, but instead select elements to tell a story.

A. What kind of international regime prevailed in the 1870-1914 period?

1. There were no international institutions.2. Competing colonial systems developed

under informal British hegemony. Contracts were enforced by gunboats.

3. The last period of expansion of European colonialism—the “scramble for Africa”—occurred during this period. The US took the Philippines and Cuba.

B. Trade Growth in the First Wave, 1870-1914

• Trade grew rapidly, about 3.5% per year, much faster than GDP at that time.

• Two-thirds of trade was in raw materials: food, agricultural raw materials, and minerals. One third was manufactures.

• European core exported manufactures and imported raw materials.

• Trade was based on “comparative advantage.”

In many different economies, the stimulus of trade during this “First

Period” began a process of development for the first time.

• Honduras became a “banana republic” providing the bulk of world banana exports from US-owned plantations.

• Malaysia became a tin and rubber exporter.• Brazil became a huge coffee exporter (over 50%

of exports).• Burma was the world’s largest rice exporter.

C. Capital Flows Became Large

• UK was the “banker to the world.”• Massive outflows of capital, proportionately large

than those of any country today. From rich countries to poor countries: simple and logical.

• Much capital went to purchase government bonds, often used for the construction of infrastructure, such as railroads.– UK outflows: 69% infrastructure; 4% manufacturing.

35% of the total was for government bonds;

• The US was the largest borrower, but also became a large supplier of capital by the end.

Multinational Corporations Emerged, along with Foreign Direct

Investment (FDI)• Multinational financial institutions, often British,

emerged: Barings, Rothschilds.• Large international manufacturing and mining

enterprises developed, as firms sought to capture the economic advantages derived from new technologies.

• European individuals set up individual businesses around the globe, which often had loose and informal links to home businesses. A close substitute to establishing direct “cross-border control,” which is often difficult.

Mass Migration

“People moved. They did not need passports….Between 1871 and 1915, 36 million people left Europe….The great streams of capital, trade and migration were linked. Without the capital flows, it would have been impossible to construct the infrastructure—the railways, the cities—for the new immigrations.”

–Harold James

At least 15 million people left China and India, mainly for plantations in Southeast Asia, Africa and the Caribbean.

D. The Gold Standard• International payments were based on gold.

The world went on the gold standard during the 1870s. (Britain was on gold before this.)

• Currencies had a fixed gold value, and countries retained reserves in the form of gold.

• If a country had a payments deficit, gold flowed out. The money supply shrank, prices declined. Adjustment was automatic.

• Countries had little autonomy to set their own monetary or macroeconomic policies. Everybody had to play by the “rules of the game.”

E. Growth• Rapid growth spread from the UK to

Germany, France, Belgium in Europe, and to most of the countries of new settlement (US, Canada, Australia, Argentina).

• Indeed, these newly industrializing powers seem not only to catch up with the UK, but in many respects seem poised to overtake.

US Economic Growth• The US industrialized rapidly behind high tariff

walls. The ‘manufacturing belt’ of the North East produced what was probably the highest GDP per person in the world.

• US encouraged massive immigration, cities grew rapidly.

• High incomes and large size gave incomparable market size advantage.

• Result: US developed lead in new scale-intensive industries: steel, chemicals, machinery, electricity.

• But US involvement in world trade was modest, due to its huge size and relative self-sufficiency.

“In 1914, the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, and reasonably expect their early delivery upon his doorstep; he could at the same moment [invest] his wealth in the natural resources and enterprises of any quarter of the world, and share in their prospective fruits and advantages; he could secure cheap and comfortable transit to any country or climate without passport or other formality. But, most important of all, he regarded this state of affairs as normal, certain, and permanent.”

--John Maynard Keynes, 1920