Misthinking Globalisation

Richard BaldwinGraduate Institute, Geneva &

University of Oxford

Conventional view of globalisation• Autarky to free trade, slowly.• Several ‘waves’, but single process.

1870–1990: Globalisation  Trade costs

1913

1921 1938

1950

1990

1011111212131314141515

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9 Averge trade cost

Global trade flow (rightscale)

1870–1990: Globalisation  Trade costs2.Rising tariffs

3.Falling tariffs & transport costs

1.Falling transport costs

Source: Gravity model based estimates of trade costs (Jacks, Meissner, Novy 2011).

Globalisation changed post‐1990

1990

1820, 22%

1900, 46%

1990, 66%

2012 47%

0%

10%

20%

30%

40%

50%

60%

70%

80%G7 world GDP share

What changed globalisation?• Follow the clues …

67%

11%

RoW

G7, 48%

10 gainers

27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Global GDP shares, 1960‐2012

Post‐1990:• G7 share loss goes to 10 

developing nations.• RoW see little change.

1990

Low

Lo-middle

Hi-Middle

1993

- 200 400 600 800

1,000 1,200 1,400 1,600

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2010

Millions under $2/day by national income class

People in poverty (under $2/day)

1980 – 1993 poverty:• Rising in Low and Low‐middle 

income nations.• Flat in High‐middle income nations.

1990

Low

Lo-middle

Hi-Middle

1993

- 200 400 600 800

1,000 1,200 1,400 1,600

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2010

Millions under $2/day by national income class

People in poverty (under $2/day)

Post 1993• Hi‐middle poverty plummets.

‐ 650 million fewer poor!• Others’ poverty keeps rising.

1990

Global manufacturing shares, 1970‐20101990, G7

65%

China, 3%

6 risers,

5%

RoW

0%

10%

20%

30%

40%

50%

60%

70%

80%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Wor

ld m

anuf

actu

ring

shar

e

Source: unstats.un.org; 6 risers = Korea, India, Indonesia, Thailand, Turkey, Poland

1990, G7

65%

3%

6 risers,

5%

RoW

47%

China, 18%

9%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1970

1975

1980

1985

1990

1995

2000

2005

2010

Wor

ld m

anuf

actu

ring

shar

e

Source: unstats.un.org; 6 risers = Korea, India, Indonesia, Thailand, Turkey, Poland

• 7 ‘losers’.• 7 ‘risers’.• RoW = little change.

Nature of trade: Vertical specialisation

Africa

G7

Asia ex Jpn

LatAm

0

0.5

1

1.5

2

2.5

3

3.5

419

6719

6919

7119

7319

7519

7719

7919

8119

8319

8519

8719

8919

9119

9319

9519

9719

9920

0120

0320

05

Vertical specialisation index

1990

Source: Amador and Cabral (2009). 

Germany-France

US-Mexico

Germany-PolandUS-

Mexico

Japan-Thailand

0%

10%

20%

30%

40%

50%

60%

70%

80%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

Intraindustry trade indices

Nature of trade changed: Intra‐industry trade (IIT)

1990

Trade & investment policiesDeveloping nations 

BITs signed

per year

(right scale)

World FDI ($ billion)

1988

0

500

1000

1500

2000

2500

0

50

100

150

200

250

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

South Asia

Sub-Saharan Africa

Middle East & North Africa

East Asia

US, Japan & EU0

5

10

15

20

25

30

35

40

45

50

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Applied tariffs (%)

What changed globalisation?

CluesClue #1: The change is:• Historic in size,• Global in reach, • Unevenly spread geographically.Clue #2: The change is:• Related to manufacturing & trade in intermediates.

Clue #3: Transformed developing nations’ views of trade & investment.

It’s FDI

It’s ‘hyper‐globalisation’

It’s FDI

It’s vertical specialisation

It’s ‘Emerging Markets’

It’s the East Asian ‘miracle’ It’s 

capital flows

Buzzwords in lieu of analysis

It’s FDI

It’s ‘hyper‐globalisation’

It’s FDI

It’s vertical specialisation

It’s ‘Emerging Markets’

It’s the East Asian ‘miracle’ It’s 

capital flows

Elephant = international movement of firm‐specific know‐how.“GVC revolution”Know‐how becomes:1) Firm‐specific, not nation‐specific.2) Rapidly combined with South

labour – but only in a few developing nations.

We need a new narrative for globalisationGlobalisation as 2 processes, not 1

Globalisation: 3 cascading constraints 

High HighHigh

Stage BStage A

Stage C

1stunbundling=

Stage B

Stage A Stage C

2ndunbundling=

Pre‐globalised world

=

Low LowHigh

ICT revolution

LowHigh High

Steam revolution

Distance still matters 

Regionalization of supply chainsHypothesis: people still expensive to move. • “Face‐2‐face” and “Face‐2‐

machine” constraints.

Economy  Period of +7% growth  GDP/pop at start GDP/pop in 2005 

Botswana  1960–2005  210 3,800

Brazil  1950–1980  960 4,000

China  1961–2005  105 1,400

Hong Kong, China*  1960–1997  3,100 29,900

Indonesia  1966–1997  200 900

Japan*  1950–1983  3,500 39,600

Korea, Rep. of*  1960–2001  1,100 13,200

Malaysia  1967–1997  790 4,400

Malta*  1963–1994  1,100 9,600

Oman  1960–1999  950 9,000

Singapore*  1967–2002  2,200 25,400

Taiwan, China*  1965–2002  1,500 16,400

Thailand  1960–1997  330 2,400

Misthinking industrialisation: Spence growth commission (2008)

Misthinking globalisation = misthinking economics

• 1st unbundling thinking:

• 2nd unbundling thinking:– Globalisation changes technology in some developing nations.

– Know‐how flows directly in ‘global value chains’ & indirectly via intermediates.

[ , ]Jpn Jpn Jpn JpnY A F L K

Economics of 2nd unbundling• 2 ways of recombination hi‐tech & low‐wages: 

– Direct: North know‐how moves to South labour • (offshoring).

– Indirect: North know‐how moves to South in components. 

• (trade in parts & components).

NB: Comparative advantage becomes a multi‐country concept.

1st unbundling: 

SSDSDN

P’

Quantities World trade Quantities

euros euros euros

P’-T

TSNXS

MD

1st unbundling: Trade costs fall North industrialises; South de‐industrialises

SSDSDN

P’

Quantities World trade Quantities

euros euros euros

P’-T

TSNXS

MD

PFT PFT

S produces less & imports more

N produces & exports more

2nd UB  Direct recombination of North tech with South labour

SSDSDN

Quantities World trade Quantities

euros euros euros

SNXS

MDMD’

S’S XS’

P2UB P2UB

PFT PFT

S exports

N exports

Quantity,parts

DY

SZ

DZ

euros euros

MCZ

Quantity,final goodsQY=QZ

SY WZP

PY

MZ

Trade in parts can switch comparative advantage

QY

South South

S’Z

PYP

X’ZQ’

Y

Basic economic difference• 1st unbundling globalisation: 

– Exploit comparative advantage by producing more at home & exporting.

• 2nd unbundling globalisation:– “Sources of comparative advantage” move internationally.

Rethinking impact of globalisation• The death of production functions?

• Globalisation works with a finer degree of resolution.– Need IO work to track its impact.

• Old, bold approaches need more detail.• Open up the blackbox of production functions.

[ , ]Jpn Jpn Jpn JpnY A F L K

Key difference for policy• 1st unbundling = UB

– Slow, predictable, controllable (tariff cuts).– By sector and skill‐group.

• 2nd unbundling = 2UB– Sudden, individual, unpredictable.– Globalisation with a ‘finer degree of resolution’.

GVC revolution:Policy rethinks necessary

1. Social & education policy.2. Industrial policy.3. Urban policy.4. Trade policy & Global trade governance.

#5: Development policy• Traditional industrialisation = build a supply chain (e.g. Korea).

• After 2nd unbundling, industrialisation = join a supply chain (e.g. Thailand).

• Some key points:– Industrialisation is easier but less significant.– 2nd unbundling killed import substitution.

• North tech + South labour unbeatable.

00.10.20.30.40.50.60.7

- 10,000 20,000 30,000 40,000 50,000Per capita GDP (2000 $s)

Importing to export: Rising then falling with incomeHolmes‐Lopez‐Gonzales curve

Development paths changed

END• Thank you for listening.• Please continue developing Int’l IO tables and the like.– World of 2nd unbundling needs finer ganularity!

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“Research‐based policy analysis and commentary by leading economists”

Extra slides for Q&A

1UB

z, sectors

w/w*

A(z)

zx

e

EU exports EU imports

Foreign goods in Home

Home goods in Foreign

Non‐tradedzm

Job destruction

Job creation

Non‐traded

Globalisation’s impact is:1. Slow & controlled.‐ Mainly tariff 

liberalisation2. Predictable.‐ ‘Sunset’ sectors like 

those already lost.‐ ‘Sunrise’ sectors like 

those already exporting.

3. Globalisation’s impact felt at level of sectors & skill groups.

Postwar tariff liberalisation

39

2nd unbundling: Industrialisation easier, but less meaningful

wage

VMPLA

Social Value Marginal Product of Labour in Manufacturing

LLM

M

A

SVMPLM (ISI)

L’M

U

2UB: External economies with GVC

L’M

U’

Supply‐chain trade by industry

0% 10% 20% 30%

Non-metallic…Mining

Basic metals &…Wood & related

Rubber & PlasticsPaper & related

Chemicals &…Fuels

Ag & relatedElect & Opt'l equip

Textiles & relatedTransport equipMachinery, nec

Leather &…Manufacturing,…Food & related

All services

Totalworldexportshares '09

0% 20% 40% 60% 80%

Non-metallic…Mining

Basic metals &…Wood & related

Rubber & PlasticsPaper & related

Chemicals &…Fuels

Ag & relatedElect & Opt'l equip

Textiles & relatedTransport equipMachinery, nec

Leather &…Manufacturing,…Food & related

All services

Worldfinalshare, '09

Worldfinalshare, '95

I2P '09 UK

Ger

man

y

Fran

ce

Itlay

NL

Bel

gium

Aus

tria

Pola

nd

Cze

ch

Den

mar

k

Spai

n

Portu

gal

Finl

and

Gre

ece

Irela

nd

Turk

ey

Swed

en

Bra

zil

Rus

sia

Indi

a

Indo

nesi

a

Aus

tralia

Taip

ei

Chi

na

Japa

n

Kor

ea

US

Mex

ico

Can

ada

RoW

UK 0% 0% 0% 0% 1%Germany 0% 1% 0% 0% 0% 1% 0% 2%France 0% 1%Itlay 1%NL 1% 0% 0%Belgium 0%AustriaPolandCzechDenmark 0%Spain 0%PortugalFinlandGreeceIreland 0%Turkey 0%Sweden 0%Brazil 0%Russia 1%India 0%Indonesia 0%Australia 1% 0%Taipei 1% 0%China 1% 0% 1% 1% 2% 4%Japan 1% 0% 0% 2%Korea 1% 1%US 0% 0% 0% 1% 0% 1% 1% 4%Mexico 1%Canada 2%RoW 1% 1% 1% 1% 1% 0% 0% 0% 1% 0% 0% 0% 4% 2% 1% 3%

I2P trade: Bilateral intermediate imports as % of global flows, 2009

Factory Europe

Factory Asia

FactoNorA

2nd unbundling: Differences for policymaking

• Misthinking globalisation = misthinking policy.2nd unbundling:1. Less predictable.

– Globalisation changes national comparative advantage.

2. More sudden.– Not controlled by tariff cutting.

3. More individual.– Not by sectors or skill‐groups.