According to the IMF (International Monetary Fund) economic globalization (or globalisation in British English) "is a historical process, the result of human innovation and technological progress. It refers to the increasing integration of economies around the world, particularly through the movement of goods, services, and capital across borders. The term sometimes also refers to the movement of people (labour) and knowledge (technology) across international borders. There are also broader cultural, political, and environmental dimensions of globalization."
Besides the economic form, cultural and political globalization also exist.
The terms ‘globalize’ and ‘globalism’ were coined in a treatise published in 1944. The noun ‘globalization’ first appeared in Webster’s Dictionary in 1961. Google's Ngram has the term earlier than 1944.
It became popular in the 1980s and in 1983 Theodore Levitt of the Harvard Business School had an article in the Harvard Business Review entitled 'Globalization of markets.'
The first Industrial Revolution began in Great Britain in the mid-1700s and it dominated the early 1800s, which was a time of significant innovation.
The first modern globalization was in 1870-1914. The 19th century was one of stunning innovations in the West: Trains, Steamships reduced the average shipping time by more than 50%, Samuel Morse's electric telegraph, the transatlantic telegraph cable linking Valentia, Co. Kerry, Ireland with Newfoundland, Canada, Alexander Graham Bell's phone, the linking of the transcontinental railroad in the US, the opening of the Suez Canal, the light bulb, Nikola Tesla developed the electricity system, the internal combustion engine, and Louis Pasteur's process of pasteurization.
Check the level of Trade Openness in 2020, on this map
Mariko J. Klasing and Petros Milionis, economists at the University of Groningen, in the Netherlands, in a paper in 2013 produced estimates for 62 countries, representing 90% of world GDP, for the period from 1870 to 1949. They used purchasing power parities (PPP) for the measurement of prices in different countries.
The Trade Openness Index based on exports plus imports as a ratio of gross domestic product (GDP), in 1870 was almost 20%; in 1913 before the First World War, it was 30%.
A paper, 'Globalization, 1870–1914' Guillaume Daudin of University of Lille and OFCE, Matthias Morys University of Oxford and Kevin H. O’Rourke of Trinity College Dublin, noted that "Europe as a whole was a net exporter of manufactures and a net importer of primary products, although this masks important differences between regions. At one extreme lay the United Kingdom, massively dependent on imported food and raw materials paid for with exports of manufactures and services. The rest of Northwestern Europe had a similar but less extreme specialization. Eastern and Southern Europe, however, despite growing industrialization, still exported primary products and imported manufactures, net. The overall European deficit in commodity trade was partly balanced by net exports of services. To give an idea of their magnitude, the United Kingdom surplus in business services trade averaged over $800 million during 1911-13, as compared with a figure for total European exports of $11 billion in 1913."
A paper published in 1996 says "World trade was dominated by intra-European trade and Europe's trade with overseas areas; Europe accounted for 66.9% of total trade at the beginning of this period and 62% in 1913 with a corresponding small rise in the North American share (Kenwood and Lougheed, 1994, p. 80-81). Still, the fact is that trade in primary commodities continued to dominate world trade..."
"The evidence presented in this paper confirms the sceptical view of an altogether new globalizing world. However, in light of the profound social, political and economic changes that have characterized the short 20th century, the idea that we are simply recovering a trend of global economic integration broken by two world wars and a perverse era of state management is not convincing."
Several European countries introduced protectionist measures.
John Maynard Keynes, the renowned Depression-era British economist, wrote in his 1919 book 'The Economic Consequences of the Peace':
"After 1870 there was developed on a large scale an unprecedented situation, and the economic condition of Europe became during the next fifty years unstable and peculiar. The pressure of population on food, which had already been balanced by the accessibility of supplies from America, became for the first time in recorded history definitely reversed. As numbers increased, food was actually easier to secure.
..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,” Keynes wrote of the first great era of globalization before 1914, “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.”
1950-1973
The Trade Openness Index was 20% in 1950 — at the same level as in 1870.
What was called the Free World after World War II comprised the United States, Canada, nations in Western Europe and in Asia-Pacific: Japan, Australia and New Zealand. Both Spain and Portugal were governed by military dictatorships and a coup d'état was staged in Greece in 1967.
From the late 1940s, the dismantling of trade tariff barriers that were built up in the 1930s began while the Marshall Plan and the reconstruction of cities in Western Europe resulted in unprecedented economic growth. The period 1950-1973 was called "a golden age" of growth.
Six countries launched the European Economic Community (ECC) in 1958 and it now has 27 member countries as the European Union.
Geoffrey Jones of Harvard Business School has commented that "only the US dollar was available as a major convertible currency. Elsewhere exchange controls regulated capital movements. They were often the instruments used by governments to screen or monitor FDI flows. The worldwide controls over capital movements were related to balance of payments concerns and the system of fixed exchange rates established at Bretton Woods. It was not until 1958 that most European countries adopted nonresident convertibility, which permitted foreigners to move funds for current account purposes freely from one country to another. This was the key development in the establishment of a liberal and open international economy. It had an immediate impact on FDI flows, with an increase of US FDI into Europe. However, most developing countries continued to exercise tight controls over capital movements. Even most developed countries retained some exchange controls."
Western Europe achieved an unprecedented annual growth record of 4.6%.
The World Trade Organisation (WTO) has said "The world trade volume today is roughly 43 times the level recorded in the early days of the GATT (4300% growth from 1950 to 2021) — the General Agreement on Tariffs and Trade (GATT), signed in 1947 by 23 countries. In 1995, the GATT was absorbed into the WTO in 1995.
The WTO says world trade values today have ballooned by almost 347 times from 1950 levels.
1974-2021
In 1974 the Trade Openness Index was 30% — the same level as in 1913.;
World Bank data show that it was at 52% in 2020 (see chart on top).
In 1974 commodity inflation was a problem that had been developing since 1968.
The Arab oil producers quadrupled the price of oil and in 1975 consumer inflation in Britain and Ireland was above 20%.
From 1974-2021 the average per-person annual percentage GDP in constant US dollars was at 1.7% both in the United States and European Union.
The IMF forecast for advanced economies in 2027 is 1.7%; Emerging markets and developing economies will grow by 4.3% and the world will grow 3.2%.
In 1990/1991 on the collapse of the Soviet Empire, the Trade Openness Index was at 37%.
The Soviet Empire (USSR) under the Communist Party of the Soviet Union (CPSU) had been the longest-lasting one-party state in the world — a distinction now held by China.
In 2004 eight of Moscow's former vassal states in Eastern Europe joined the European Union. German reunification had already happened in 1990.
In the 1990s New York Times columnist Thomas Friedman proposed his “golden arches theory of conflict prevention.” This held that “no two countries that both have McDonald’s have ever fought a war against each other since they each got their McDonald’s.”
Putin upended that nostrum and Xi Jinping’s assertive China may show that over-reliance on supply chains from the country may also be risky.
In 1998 President Bill Clinton got the support of the G7 (Group of Seven industrialised countries: US; Japan; Germany; France; UK; Italy and Canada) to invite Russia to the group. A year later Boris Yeltsin, the Russian leader, chose Putin to crush a rebellion in Chechnya, in the North Caucasus region. In 1999, Putin ordered the complete destruction of the Chechen capital of Grozny.
The naive period of globalisation is over following the invasion of Ukraine by Putin, the Russian dictator. Adolf Hitler in 1938 had seized Austria and part of Czechslovakia. Hitler in 1939 made a secret agreement with Stain, the Soviet dictator, to wipe Poland off the map for the second time in 124 years and to create zones of control in Eastern Europe.
Putin claimed Ukraine never was a legitimate state.
Meanwhile, China, one of the biggest beneficiaries of globalization, uses trade to bully smaller nations. Recently the Chinese government has been accused of operating at least two undeclared "police stations" in the Netherlands, and likely also in other countries.
In 2014 Russia was ousted from the G8 after the annexation of the Ukrainian Crimean peninsula.
Germany, the top economy of the EU, developed a dependency on Russia for oil and gas. Chancellor Angela Merkel decided to ditch atomic energy in 2011, after the Fukushima nuclear disaster in Japan. Nuclear power accounted for 13.3% of the German electricity supply in 2021 and it was to be phased out in 2022. She had initially sought to extend to life of existing nuclear plants to as late as 2037.
China is Germany’s most important trading partner; total trade in 2021 amounted to €246.1bn ($240.8bn).
The Wall Street Journal recently reported "For almost two decades, China needed German industrial robots, factory equipment and vehicles to become the world’s foremost consumer goods manufacturer. German companies took double-digit sales growth to China for granted. For a few years early in the century, this helped Germany become the world’s largest exporter of goods, ahead of both China and the US. It also allowed Germany to hold on to its manufacturing jobs even as swaths of industry in the US and elsewhere migrated to China.
Now, Chinese companies are supplying wind turbines in France, buses in Norway, power grids in Poland and advanced industrial machinery across the world. In Sweden’s capital, a Chinese group recently secured a contract to dig three tunnels for the Stockholm metro.
In key segments of advanced manufacturing, including infrastructure equipment, China has closed the gap with German firms, said Karl Haeusgen, chairman of HAWE Hydraulik SE, which says it has seen more competition from China for its hydraulic valves and pumps used in wind turbines and machines."
As with energy dependence on Russia, Germany shouldn't rely on China either, in coming years.
Trading in ancient times
Trading of goods goes back to ancient times. In China Xi’an (Western Peace), then called Chang’an (Perpetual Peace) became the imperial capital for ten dynasties. The Qin Dynasty (221-206 BC) first unified the Chinese empire and left the legacy of the tomb complex containing more than 8,000 terracotta life-size statues spread over some 56 square kilometres. Chang’an became the starting point of the Silk Roads (also called Silk Route) trading system which developed during the Han Dynasty (206 BC-220 AD). Han emperor Wu Di (141-87 BC), sent the first Chinese missions to southeast Asia, central Asia and eventually even Rome.
The term Silk Road was coined in 1870 by German geographer Ferdinand van Richthofen, the uncle of the Red Baron, Manfred von Richthofen, a World War I German fighter pilot. According to UNESCO while 'Silk Road' is a relatively recent term, for the majority of their long history, these ancient roads had no particular name.
Just as the United States in modern times, has a goods deficit, the expensive silk paid for in gold and silver, creating a deficit in Rome. Trade restrictions on silk were common.
Senior FT trade writer Alan Beattie on the forces behind the surge and collapse of globalisation, from the Roman and Mongol empires to Donald Trump and Covid-19.
Roman emperor Tiberius, the second Roman emperor, following his stepfather, Augustus, reigned from 14 AD until 37, and he is reported to have complained that "ladies and their baubles are transferring our money to foreigners." He prohibited Romans from wearing silk. In one year, Rome reportedly paid 22,000 pounds of gold for silk shipments (Michael Loewe, 1971).
Prices and wages in 301 AD "are listed in denarii communes, which were not actually silver denarii as we usually think of when discussing ancient Roman coinage. Denarii communes, or d.c., were notational currency. What this means is, an exchange rate was given, telling how much of the currency in circulation at that time (nummi coins) it took to equal one d.c." Libra, the basic Roman unit of weight, after 268 BC was equivalent to about 5,076 English grains or equal to 0.722 pounds avoirdupois (0.329 kg).
Prices in libra (1 libra = 326 grams) were at 12,000 for white silk and 150,000 for purple silk. The latter was only at the direction of the emperor under the penalty of death.
The Romans thought silk was grown on trees and it took centuries to understand how it was grown. In 552 AD, Emperor Justinian sent two monks on a mission to Asia, returning to Byzantium (the Eastern Roman Empire) with silkworm eggs hidden inside their bamboo walking sticks. This was one of the earliest known examples of industrial espionage. However, the monks brought basic knowledge of silk production to the west, but they didn’t bring Chinese techniques of turning the cocoon into a fibre.
The fall of the Western Roman Empire in 476 AD meant that a powerful centre had disintegrated. Jan de Vries (b. 1937), the Dutch economic historian, in 1984 noted that urbanisation fell from 5% in Western Europe during the Roman Empire, to zero by 1000 AD. Excluding Muslim Spain and the Emirate of Sicily, there were only 4 cities/ towns that had populations of over 10,000 inhabitants and they were all in Italy (Amalfi; Naples; Rome and Florence). By 1800 the number of Western European cities with a population of over 10,000 had grown to 364.
The population of Rome — the once capital of the mighty Roman Empire — fell from less than 500,000 in the early years of the first millennium to about 30,000 in 1000 AD, over 500 years after the Western Empire collapsed.
From the 1500s European powers and their Western offshoots brought new foods from strange lands they had conquered. Plunder, slavery and extermination were common for more than four hundred years, in effect into the early 20th century.
Check the links below to my related stories.
Discussion
In constant dollars without a Purchasing Power Parity (PPP) adjustment the result per person would be: US $61,2880 - $25,800 (1971); EU $32,755 - $13,283 (1971); China $11,188 - $283 (1971); Russia $10,220 - $8106 (1989).
Branko Milanovic formerly of the World Bank: Inequality in the age of globalization
Chris Giles, economics editor of the Financial Times commented on Milanovic: "A reshuffle of living standards is also happening further up. The poorest Italian families were in the top 30 per cent of the world’s income distribution in 1988, but now only just make it into the top half. Importantly, the middle classes in all rich countries have not slipped down the global rankings. The top of the rankings has shown great stability, with G7 (US; Japan; Germany; France: UK; Italy; Canada) households accounting for roughly two-thirds of the global top 5% both in 2008 and 2018. This new research requires us to modify our thinking about globalisation. With Chinese and East Asian incomes now above the world median, further improvements in average living standards will increase global inequality rather than reduce it unless there are also income gains in rural India and Africa — a much harder ask given the past economic performance of these areas."
PPP is explained by the IMF regarding weights but data for big countries like China and India can be partial. For example, the World Bank in 2019 estimated that inequality in China measured by a Gini Coefficient was 38.1%. However, the rate can be up to 55.5% (Oxfam). There are also measures from NBS (national statistics office) and China CFPS (access this link).
In May 2022 then-Chinese premier, Li Keqiang, said that 40% of Chinese people earn an average of ¥1,000 RMB (around $150) a month (measured at the exchange rate, not at PPP). He said “Our country is a developing country with a big population. The per capita annual disposable income in China is 30,000 RMB. But there are still some 600mn people earning a medium or low income, or even less. Their monthly income is barely 1,000 RMB. It’s not even enough to rent a room in a medium Chinese city. And because of Covid-19, many families have encountered difficulties.” Li was referring to rural poverty and not poverty in cities.
Even though international trade has expanded significantly, more than 100 countries depend on commodity exports according to the UN agency, United Nations Conference on Trade and Development (UNCTAD). It says heavy dependence on commodities (60%+ of merchandise exports) has increased globally, leaving about two-thirds of developing countries vulnerable to economic shocks such as sharp commodity price fluctuations.
Russia, and Angola — the biggest oil producer in Africa — are just two kleptocracies where insiders take advantage of natural resources.
South America has 12 states (plus French Guiana, which has a population of 294,000) and all 12 have a level of commodity dependence greater than 60% while for three-quarters of them, the share of commodity exports in merchandise exports exceeds 80%.
The Lowy Institute of Australia says "Chinese economic growth can be expected to decelerate sharply to roughly 3% by 2030 and 2% by 2040, compared to the pre-Covid trend of a little over 6%."
The IMF in a regional report on East Asia - Pacific published in October said "Growth in China is projected to moderate from 8.1% in 2021 to 3.2% in 202 — its second-lowest level since 1977 — and remain below 5% for the following five years, and this is expected to generate spillovers globally, especially in Asia.
Intraregional trade has grown significantly in the past decade to more than half of total Asian trade. Chinese demand absorbs one-quarter of the region’s exports, with 20% absorbed by final demand and 5% re-exported.
Similarly, the recent slowdown in the property sector may lead to regional spillovers, as value-added absorbed by China’s final demand for real estate averages about 0.6% of GDP."
1) A decoupling from the West would likely follow an invasion of Taiwan. However, Chinese president Xi has a housing crisis on his hands and real estate-related activities account for more than 25% of China's GDP.
2) The US dollar is still king and is up 16% in 2022 against a basket of currencies. This of course raises the cost of imports for countries.
3) Last month the Biden administration announced new rules banning people and firms in China from several advanced technologies of US origin, and from products made using them.
The list includes chips used for artificial intelligence (AI), software to design advanced chips and the machine tools to manufacture them. The US government has to authorise exceptions. Individuals breaking the sanctions risk being cut off from American tech themselves. China has not yet retaliated, such as imposing a ban on rare earths, that are used in tech products.
China has in the past put restrictions on exports but the US accounts for only 9% of global demand for rare earths that go into the manufacturing process.Angola, Australia, Malaysia, Japan and the US are working on increasing the production of rare earth but China is set to continue enjoying an 80% share of the global refining of the vital metals.
Asia serves as the production hub for between 75% and 80% of global chip manufacturing – mainly from companies based in Taiwan, South Korea, mainland China, and Japan, according to the Semiconductor Industry Association. According to Goldman Sachs production costs are significantly more expensive (44% higher) to build and run a new fab (fabrication plant) in the US than in Taiwan.
4) The decline in world GDP after the 2008 financial crisis has been attributed to declines in mining and fuels together with a fall in manufacturing goods.
5) According to the German Economic Institute, German businesses invested a record €10bn in China in the first half of this year alone. However, Germany’s machinery business association, the VDMA, listed problems for its companies: "subsidies to domestic competitors, standard-setting that discriminated against foreign firms, as well as the continuing issue of intellectual property theft."
An Ifo’s (another economics institute) recent survey, found that nearly half the German manufacturers that receive significant inputs from China plan to reduce their Chinese imports. When asked why 79% cite “diversification of supply chains and the avoidance of dependencies”
Robert Habeck, a Green Party politician who became economy and energy minister, and vice-chancellor of Germany in 2021, has barred the sale of Dortmund-based Elmos’s semiconductor plant to China-owned Silex Microsystems, according to the Financial Times on November 9, 2022.
Habeck said the state should have an interest in ensuring companies involved in Germany’s critical infrastructure — including ports, telecoms, energy and the health sector — “remained as far as possible in European hands.”
He added that his ministry was “some way off” from drafting laws that would further tighten rules covering Chinese investment.
Silex — is a Swedish subsidiary of China’s Sai Microelectronics.
6) In October Emmanuel Macron called for a "Buy European Act" to protect carmakers on the Continent to counter competition from China and in response to the United States' own controversial scheme to incentivize domestic production.
In an interview on TV channel France 2, the French president said the European Union is “too open” on the topic of state subsidies for electric cars as it seeks to accelerate its transition to greener energy sources.
“We need a Buy European Act like the Americans, we need to reserve [our subsidies] for our European manufacturers,” Macron said. “You have China that is protecting its industry, the U.S. that is protecting its industry and Europe that is an open house."
7) The OECD (2018) estimated that Multinational Firms (MNCs) account for half of global exports, nearly a third of world GDP (28%), and about a fourth of global employment.
The Congressional Research Office (CRO) said in April 2022, "Most US Direct Investment Abroad (USDIA), ...is in developed economies that are similar to the United States, and most production by foreign affiliates is consumed where it is produced and is part of a strategy to access markets abroad. Foreign affiliates on average sell most of their output in the country in which they are located or to neighbouring countries; about 10% of foreign affiliate sales are to their US parent companies. Economists generally attribute the decline of manufacturing jobs to broader factors, including economic recessions and improvements in productivity (e.g., technology) that have allowed the sector to produce more with fewer workers."
MNCs took advantage of low costs in emerging markets and millions of people escaped extreme poverty. The garment industry in Bangladesh hires about 4mn people and the average worker earns less in a month than a US worker gets in a day.
Consumer inflation fell to low levels in advanced countries.
US MNCs also took advantage of tax evasion and in 2021 the US Treasury named Bermuda, the Caymans, Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland as the top 7 corporate tax havens. Their share of US multinational corporations' foreign profits had risen from almost 30% in 2000 to over 60% in 2019.
Far-right parties have got public support from some voters in progressive countries. Sweden's new government is supported by a far-right party.
20% of Sweden's population was born outside the union; Belgium is nearly 20%; Germany is 18.2%; Ireland 17.6%, and Switzerland (which is not in the union) is at 29%.
Sweden had a large influx of migrants from outside the EU in the last decade.
Ireland has avoided extremists as there is a consensus that American firms are crucial for the economy.
9) Inequality between countries has fallen but it has risen within countries.
Pay rises in many advanced countries have been anaemic since the financial crisis of 2008 while sectors such as tech and finance coupled with the already well-off have, thrived.
The decline of manufacturing jobs has mainly been replaced with poorly paid service work. The gig economy, whether in the US, Europe or Asia involves working arrangements that are closer to “gigs” than traditional kinds of jobs
Bloomberg has said "the bottom 50% of Americans account for just 1.2% of the country's total wealth. The top 1% controls about 35% — a share that has mostly trended upward over the past four decades. And with recession fears growing, stocks sliding and the housing market cooling, 2022 has been difficult for many Americans."
10) “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades,” Larry Fink wrote in March 2022 in his annual letter to shareholders of BlackRock which oversees $10tn as the world’s largest asset manager.
While the immediate result had been Russia’s total isolation from capital markets, Fink said “companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries.”
China has refused to allow an independent investigation of the origin of Covid-19.
There have been about 6.6mn deaths worldwide. When Australia called for an independent inquiry, China imposed economic sanctions.
The World Health Organisation (WHO) was allowed to engage in a tightly controlled fact-finding trip to China in January 2021.
The share of global GDP for dictatorships has risen from about 10% of global GDP in 2000 to 30% today, with China accounting for half of it. Russia accounts for 2% of global GDP with a smaller share than Canada.
China and Russia are among police states and in October Edward Luce, the Financial Times' US national editor, who previously was the FT's correspondent in India, commented, "Its politics is becoming ever more neo-fascist as time goes on, which takes explicit aim at India’s core strength — secular pluralism. And its current account looks shaky in a world of galloping energy and food prices."
During the pandemic, both China and India put restrictions on medical exports.
With a Cold War between the United States and China beginning, it is likely that over time American firms will reduce their activities in China.
Related
The economic rise of the Western World
Slavery and myth of American exceptionalism
European Globalization 500 years ago: Savonarola & Machiavelli
Ireland’s Faustian Bargain with hyper- globalization
The human cost of the Western diet and European colonialism
First Modern Economy: Myths on tulips & most valuable firm in history
Two-thirds of developing countries dependent on commodities
Communist Party of China @ 100 - High inequality and high poverty
Deaths of 60 million people in Americas in the 1500s and global climate change
Ireland among 7 big tax havens as US seeks global minimum corporate tax of 21%
Social protection + health spending in Europe and Asia
44% of US workers in low-paid jobs with a median hourly pay of $10
