Globalization in History

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Globalization in History

• Lecture 11(Chapter 12)

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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

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What is Globalization?

• G. is market integration on a world scale.
• And what does market integration mean?
• It means that markets operate according tothe
  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.

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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.

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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

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Domestic freight rates fell more than
transatlantic
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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/content
s/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.
Beerbohms Evening Corn Trade News. (Chicago)
1840-1995 National Bureau of Economic Research
Data base. http//www.nber.org/databases/macrohist
ory/contents/chapter04.html , C. Knick Harley
(1980)
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and increasing X/GDP ratio
Trade/GDP ratio Percent
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Globalization is increased capital mobility

• Source NBER (2003), Globalization in Historical
  Perspective.

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and falling interest rate differentials

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

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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 strongly to
  wage convergence.

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19th century mass migration
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19th century wage convergence
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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.

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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) until
  the 1980s and trade was gradually liberalized.
• Still work in progress.

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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.

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Information revolution speeds up price adjustment

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

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Extent of trade determines speed of adjustment
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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 RD spending be affected in an
  increasingly competitive environment?

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When theory is inconclusive, history might have
the answer

• Source NBER (2003), Globalization in Historical
  Perspective.

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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.

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The demand curve is shifting counter-clockwise



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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.

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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. Not true of China today.
• But beware labour standards are often used as an
  excuse by protectionists.

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Openness and labour standards in 1913
Source Huberman, M. and W. Lewchuk (2003),
European economic integration and the labour
compact, 18501913, European Review of Economic
History, 7(1),p.29
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Will there be a new Globalization backlash?

• In the US democratic candidates usually adopt 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
  Scandinavia.
• Is that because they have better social safety
  nets when nations face global shocks?

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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.

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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!

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The paradox of rural discontent graphically
speaking
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Conclusion

• Two periods of globalization,
• Beware of globalization backlash there are
  winners and losers within nations.
• Stiff competition reduces price setting power
  also for big firms and reduce bargaining power of
  trade unions.
• Fear of a race towards the bottom not suppported
  by 150 years of globalization.