Listener:24 June, 2000.

Keywords: Globalisation & Trade;

I probably read a major article or a book on globalization every fortnight. One usually finishes thinking the authors do not know what they are talking about either. ‘Globalization’ means so many different things, even to the same writer, that one ends up in confusion. The best I can conclude is that massive technological changes are changing the potential economic geography of the world. Globalization is the financial, economic, social and political response. Different writers look at different facets of the whole, and miss the complexity of the totality.

So it was with much pleasure I read Globalization and History, by Kevin O’Rourke and Jeffrey Williamson. Combining historical evidence, statistics, and economic analysis, together with common sense, in an attractive and readable way, I imagine the book is already a part of quality economic history courses, Since the general reader may have to struggle through some deeper bits of trade theory – Rybcyzynski’s theorem can be as obscure as the spelling of its author’s name – let me summarize it.

The book is primarily about the nineteenth century ‘Atlantic Economy’ of Western Europe, North and South America, and Australasia (although New Zealand is barely mentioned). It argues that those countries experienced a globalization even greater than the current one. The precipitant was a technological revolution in transport, with railways, steamships, refrigeration, and telegraph substantially reducing the costs of moving products and people. This resulted a shifting of production to low-cost centres, a shifting of capital to high return centres, and a shifting of labour to high wage centres. The economic outcome is known as ‘convergence’. There were reductions in the differences of the price of the same product in different localities. There were reductions in differences in returns on capital between different localities. There were reductions in differences in real wages between different localities. There were reductions in the differences of per capita incomes of the countries involved. But economic growth was stimulated by the reduction in transaction (i.e. lower transport) costs, so even the richest countries continued to grow.

The second post-1950 wave of globalization has some contrasts. Today’s main technological precipitants are the conquering of the airways, the airwaves, and information access. Again transport costs are lowered but this time the impact is more on some service inputs and services sectors. One can use the internet to buy (i.e. purchase retail services from) in locations on the other side of the world. An important difference is that labour is not as mobile today. The book reports 60 million Europeans setting sail for the New World in the century after 1820 – about a sixth of the total population. In contrast migration is much more restricted today, although non-Europeans are proportionally more involved. The other big difference is that technology seems to be more mobile – easier to transfer.

Some effects of this nineteenth century globalization are predictable. Rich countries tended to grow more slowly (per capita) than the poor ‘Atlantic’ countries. Unskilled workers’ wages grew more slowly than skilled ones. However, there were complicated interactions, so the ceteris paribus (all other things being equal) assumptions of the previous few sentences did not always hold. For instance, capital flows could accelerate productivity growth, offsetting any relative depressing of wages. Sometimes there are so many things happening at once that the authors have to use complicated (computable general equilibrium) models. The message I took is that you cannot predict the specific effects of globalization, unless you take everything into account. It is not surprising that people who consider only some things, end up with such different predictions from those who consider only others.

The authors argue that the period from 1914 to 1950 saw a reversal of the nineteenth century globalization, which they attribute to political pressures resisting globalization’s distributional consequences. In particular, the increasing inequality as unskilled wages stagnated led to a discouraging of unskilled immigrants, and border protection for the industries in which the unskilled worked. Economists might ask whether there were better ways than protection to deal with rising inequality. For instance, taxes and benefits could be made more progressive. Upskilling also benefits the unskilled left behind, because there are now fewer of them. But border protection may be a cheaper way of reducing inequality. (It probably was in the first half of the twentieth century, because many of today’s policy instruments were not then available.)

The authors begin the most recent bout of globalization in 1950. We are in its sixth decade. Oh, that some researchers were to explore it as carefully as Rourke and Williamson have done for a century earlier. In the interim I form the most tentative conclusions, which are unlikely to please either side of the current debate.

Globalization is caused by changes in technology which can benefit humanity as a whole It causes a convergence of per capital incomes and wages, so that rich countries benefit less. This time the service sector is involved as well and some non-Atlantic economies are among the beneficiaries. However globalization may not greatly contribute to the welfare of the unskilled, either in poor countries unless there is substantial international migration again, or in rich countries.