Globalization in History

Lecture 13

Topics disccused in this lecture

• What is Globalization?• When did Globalization begin?• Which are the major forces behind

Globalization?• The economic consequences of Globalization:• on economic growth• on wage bargaining and income distribution• on labour standards

What is Globalization?

• G. is market integration on a world scale.

• And what does market integration mean?

• It means that markets operate according to’the law of one price’, LOOP.

• LOOP means that an identical good gets the same price in any market.

• Well, actually it is more complicated than that.

LOOP and transaction costs

• There are transport and other transaction costs involved in bringing a good for one market, say London, to another, say New York, therefore LOOP must be rephrased.

• LOOP means that the (absolute) price difference between an identical good sold in two markets must not exceed the transaction costs involved in bringing the good between the markets.

Implications

• If transport and transaction costs fall then there is price convergence.

• There are additional factors contributing to price convergence:

• increased market efficiency reduces excess trading profits

Domestic freight rates fall more than transatlantic

Globalization is price convergence

Source: United Kingdom and France (Paris) until 1903: British Parliamentary Papers, Second series of memoranda, statistical tables and charts: prepared in the Board of Trade with reference to various matters bearing on British and foreign trade and industrial conditions. London 1904. Gazette average for UK, quality not specified for France. 1904-1934 National Bureau of Economic Research Historical Database (1904-1934), http://www.nber.org/databases/macrohistory/contents/chapter04.html. 1960-1985 Economic Research Service, US Department of Agriculture. United States: (New York) 1800-49 Arthur Harrison Cole (1938), 1850-1900 Karl Gunnar Persson (2004). Main sources were New York Times and J.E. Beerbohm’s Evening Corn Trade News. (Chicago) 1840-1995 National Bureau of Economic Research Data base. http://www.nber.org/databases/macrohistory/contents/chapter04.html , C. Knick Harley (1980)

and increasing X/GDP ratio

30

20

10

1800 1850 1914 2000Inter war period

Trade/GDP ratioPercent

Globalization is increased capital mobility

Source: NBER (2003), Globalization in Historical Perspektive.

…and falling interest rate differentials

Source: NBER (2003), Globalization in Historical Perspektive.

Does Globalization promote wage convergence?

• We would expect wage convergence if migration is not restricted.Why?

• Because bargaining position of workers remaining in emigration-countries (Old world) will increase, while bargaining strength of workers in immigration nations(New world) will fall.

• In the 1870-1914 period migration was unrestricted in the Atlantic economy and there was wage convergence.

• Sharp fall in migration and little or no wage convergence in the Interwar period (1914-1945).

• World migration has been restricted after 1945 and migration does not contribute to wage convergence.

19th century mass migration

promotes wage convergence

19th century wage convergence

When did Globalization begin?

• The Mediterranean world was ’integrated’ already in the Roman era.

• Then followed a period of disintegration.

• There was ’regionalization’ rather than Globalization until transport costs fell and the speed of information transmission increased in the 19th century.

Two major phases of Globalization

• First phase from 1850 to 1914 when all markets were free from restrictions.

• Second phase starting after 1945, but… international mass migration was regulated as well as capital mobility (Bretton Woods) and trade was gradually liberalized. Still work in progress.

The forces generating Globalization

• There are two major forces in Globalization: political and technological.

• Liberal migration policy and trade policy in the mid 1850s were decisive in opening closed economies.

• Gold standard stimulated capital mobility and capital was chasing migrant labour.

• At about the same time railways lowered transport costs for land-locked regions and Ocean freight rates fell.

• The telegraph increased the speed of information transmission from weeks to hours: by early 1870s the whole world was ’wired’.

Domestic and international freight rates

Scource: 1850-1868 Persson 2004, 1869-1950 Mohammed and J.G. Williamson 2003 Table A3D 1950-1974 FAO Production Yearbook, vol. 21, 1967 and vol.24,1975

Information revolution speeds up price adjustment

Source: Based on ongoing work by M.Ejrnæs and K.G.Persson

Extent of trade determines speed of adjustment

The economic consequences of Globalization

Since Globalization implies openness we can expect it to stimulate the transmission of new goods and new technologies.

Trade will also increase the efficiency in the use of existing resources.

But how will R&D spending be affected in an increasingly competitive environment?

When theory is inconclusive, history might have the answer

Source: NBER (2003), Globalization in Historical Perspektive.

Wage bargaining in rich countries will be affected

• Globalization reduces the bargaining power of trade unions in rich countries.

• The demand curve for labour will be more elastic when there is ’unlimited’ supply of low wage workers in China and India.

• Domestic inflation in rich countries will be muted.

The demand curve is shifting counter-clockwise

Consequences of an upward shift in labour costs

• In a protected economy an increase in labour costs, the upward shift in the S curve will be passed over to consumers as higher inflation and only marginally as higher unemployment, from employment OL to OL’.

• In the global world that shift will generate more unemployment and less inflation, from employment OL to OL’’.

Will there be a race to the bottom in labour standards?

• Will the implication be that labour standards, that is working conditions, will be determined by economies with lowest standards?

• Historical experience from the first Globalization period suggests that there was a race towards the top, that is economies with decent standards inspired others to imitate.

• Such a ’demonstration effect’ is possible only if workers have access to information and the right to organize.

• But beware: labour standards are often used as an excuse by protectionists.

Openness and labour standards in 1913

Source: Huberman, M. and W. Lewchuk (2003), European economic integration and the labour compact, 1850–1913, European Review of Economic History, 7(1),p.29

Will there be a new Globalization backlash?

• In the US primaries both major democratic candidates are running on an anti-global ticket.

• Democrats are more protectionist and now control US Congress.

• Small nations, which are more dependent on trade, are normally more globally minded.

• Is that because they have better social safety nets when nations face global shocks?

A lesson from history

• There is nothing inevitable about Globalization.• In 1913 no-one could imagine the anti-

globalization forces ruling the world in the Interwar period with disastrous political and economic results.

• Globalization needs peace and absence of major shocks like the Great Depression.

• Globalization has winners and losers but the net gains are positive.

• To stop a backlash you may need to compensate the losers.

Farmers in New and Old world complained about low prices

• European late 19th century protectionism was a reaction to New World grain invasion.

• But why was there a farm protest movement in the US Midwest?

• Relative deprivation!

The paradox of rural discontent graphically speaking