Globalization in Historical Perspective (Continued

Haggard / Naughton IR/PS September 2006

Crisis: First World War
• The Global System of 1870-1914 was shattered by World War I. The European countries at the core of the global system threw themselves into a devastating war, 1914-1919, thinking it would be brief and decisive.

Casualties were enormous.
Killed or wounded in WWI: • France: Eleven percent (11%) of the total population. • Great Britain: Eight percent (8%). • Germany: Nine percent (9%) • The United States--which only entered the land war in strength in 1918--one-third of one percent (0.37%).

• The UK was no longer the dominant political or military power in the world system. International Regime: • The victors tried to create a viable new international order after WWI.Period 2: Interwar Retreat From Globalization. . Economically weakened. The League of Nations created was weak. and the US did not join.1914-1945 A. it lost the ability to provide capital or markets to other economies. but they failed.

But… • The US became the largest and most important economy. . and Japan each rose in relative strength. but it was unwilling (and perhaps unable) to provide leadership in the world economy.New Powers Were Rising.‖ Conflict intensified. and each adopted ―innovative but aggressive and nationalistic approaches to their economies that largely rejected globalization. • Germany. Russia.

Social expenditures rose and governments tried to balance competing economic objectives (instead of purely adhering to the gold standard ―rules of the game. become developed and thus equal? • In Europe. new demands were made on political systems. why not in the colony? If economic growth is possible. colonialism was largely discredited. governments became more democratic.In each country. why shouldn’t colonies grow. If democracy is part of civilization in the core.‖) . • In developing countries. and were called upon to provide economic security to their citizens.

Major Problems Emerged in Each of the Main Economic Arenas 1. 2. 3. . proved to be unstable. International financial flows. and protectionism increased. The international monetary regime—the gold standard—could not be reconstructed on a sound basis. Trade growth slowed. based on US lending.

US raised tariffs 1922 and again 1930 (SmootHawley). Trade: Slow Growth and Increased Protectionism • • • In an effort to protect new industries. • • . while Europeans sought to regain their lost competitive position. Reinforced by new nationalism. Shrinking markets and trade worldwide. The Soviet Union dumped agricultural exports to fund forced draft industrialization. new nations emerge in Eastern Europe. etc.B. latecomers raised tariffs. showing that the US was not willing to be the guarantor of open markets that the UK had been before the war.


in terms of gold. But the result was that the currency (the Pound) was systematically ―over-valued‖ for trade purposes.‖ and insure the debtors repaid at full value.D. Monetary Regime: Back to the Gold Standard? • During WWI. – Despite wartime inflation and the weakening of its economy. the UK returned to the gold standard by setting the British Pound at the same value. . everyone tried to return to the gold standard. as before the war. but most countries never achieved stable exchange rates. so the purpose of the gold standard was defeated. After the War. contributing to the long-term weakness of the British economy. most countries went off the gold standard (they ―suspended convertibility‖). • UK: The Single Most Important Case. That was supposed to demonstrated that the Pound was ―sound‖ and ―stable.


• U.S. Capital Flows: Financial Fragility • Germany was saddled with huge war reparations payments to France and other countries. When German banks failed. with Germany one of the biggest borrowers.C. the system was shown to be extremely fragile. . so that Germany could make payments to France. Emerged as Largest International Lender. • Indefinite chain of payments? The US lent to Germany.

• The Stock Market in the US. then in the US). then Collapsed. and were made worse by bad monetary policy.The Great Depression: The System Collapsed • Fragile Banking Systems Led to Financial disorder and uncertainty (first Austria & Germany. . • The existing problems of exchange rate misalignment got worse. • National governments struggled to deal with plunging markets and declining trade. having undergone a remarkable bubble.

and leading to another round of economic decline.Downward Spiral International lending came to a halt. . and exchange rates were very uncertain— Without an international payments system. exports declined— Overall economies shrank and unemployment soared— Countries tried to protect their weakened economies by devaluing their currencies and increasing tariffs (protectionism)— Thus reducing trade even more.

. It also created an unprecedented opportunity for the victors to rebuild a set of global institutions. this time including the European colonial empires.Crisis: Great Depression Bred Fascism and War The prolonged crisis and war completely destroyed the foundations of the old world order.

19451975 The US took the lead. in creating a new global political and economic order after WWII. • The Cold War rivalry between the US and the Soviet Union • The dominance of US economic power. . of the Inter-war Period. North America produced 45% of world industrial output in 1953. The new system included a set of intentionally designed international institutions with explicit rules. norms. and memberships. which peaked at this time. with the support and acquiescence of the UK. Intentional effort to avoid the mistakes. and draw the lessons. Shaped by: • The urgent need to avoid falling back into economic disorder and Depression.Period 3: Postwar Growth and National Reconstruction.

A. The main authors were Harry Dexter White and John Maynard Keynes from the US and UK respectively. – International Monetary Fund (IMF) – World Bank (International Bank for Reconstruction and Development. where the agreements were hammered out in 1944. IBRD) . International Regime: A1. Multilateral Institutions: • Most important economically are the ―Bretton Woods institutions‖ • named for the town in New Hampshire.

Other Multilateral Institutions 1. but was rejected by the US Congress. . In its place. A proposal for an ―International Trade Organization‖ was agreed at Bretton Woods. a General Agreement on Tariffs and Trade (GATT) was improvised. The regional development banks. which later evolved into the World Trade Organization (WTO). The United Nations and its panoply of associated institutions. 3. 2.

Global Rivalry Between the US and the USSR Strategy of ―Containment‖ and Cold War. shifted policies to accommodate renewed conservative ascendancy and rapid growth in Japan. US adopted the Marshall Plan to rebuild Europe. .1B. Reconstruction of Germany and Japan was seen as a component of broader strategy of containment of the Soviet Union.

macroeconomic management.1C. and social security were seen as basic jobs that governments must perform. . This international system was built on the assumption that national governments would play a stronger role in managing their economies. Development strategies.

– Governments can foster industrial growth. • Developing Countries kept tariffs. raise investment. . – Government coordination needed to prevent chaos. – Agriculture and raw materials have declining prices. and discouraged agriculture. to carry out Import Substitution Industrialization (ISI).Interventionist Governments • Were following ―Lessons‖ of Inter-war Period. • Most countries restricted capital movements. no future. ISI protected manufacturing. accelerate growth. but raised the cost of capital goods. • Developed Countries protected agriculture.

and China drastically reduced their involvement with the world system. but traded with each other.‖ • USSR. . Eastern Europe. • Some of the countries following ISI (Import Substituting Industrialization) significantly reduced their involvement in world trade.1D. Many Countries ―Dropped Out.




This is the period with the most rapid growth in international trade of all four periods of globalization. . Trade: Accelerated and Led Economic Growth Economic stability led to a strong revival of international trade. notwithstanding the interventionist management of many national governments.B.

Growth of World Trade and Output. 1950-2000 10 9 8 7 6 5 4 3 2 1 0 Trade Output 1950-1963 1963-1973 1973-1990 1990-2000 .

but less open to trade in agriculture. Developing countries (following policies charter in the preceding maps) became less open to trade in manufactures. . and Japan became more open to trade in manufactures.Developed Country vs. Europe. an increasing share of trade during this period was in manufactures. Developing Country Dynamics • Developed Countries—North America. and among the rich countries. • Partly as a result.

.―Intra-Industry Trade‖ • An increasing share of trade during this period was among countries that are similar in factor endowments. US and Germany selling each other automobiles and industrial machinery. • Rich countries—with abundant capital endowments—exchanging similar products with each other. E.g. • Not well explained by the theory of comparative advantage..

• With one big exception: Limits on migration remain strict.But there was also steady. gradual movement toward liberalization. • Capital controls among the developed nations were steadily reduced. • Non-tariff barriers were reduced even more. . • Successive trade rounds lowered tariffs. International labor mobility declined almost to zero.


It was later dwarfed by developments in the 1980s and 1990s. Foreign Direct Investment and Multi-national Corporations FDI grew and multi-national corporations expanded their reach during the 1950s and 1960s.C. this growth was from a very low base immediately after WWII. However. . It was carried out predominantly of US firms.

They were supposed to be stable. • Called a ―Gold-exchange standard. would provide short-term financing to countries to allow them to maintain exchange rate stability. in which most currencies were fixed relative to the dollar. but could be adjusted occasionally when necessary.‖ it was effectively a US dollar standard. • The IMF. as lender of last resort.D. International Monetary Regime • Bretton Woods designed a new system of FIXED exchange rates. .

it put the system under great strain. most countries imposed tight controls on capital movements. In the 1970s. . international capital flows remained relatively small throughout this period.Capital Flows In the immediate post-war period. Partly as a result. when capital flows began to grow. These controls were only gradually relaxed during the 1950s and 1960s.

. as Europe began to catch up to the US in per capita GDP. • There existed a large stock of accumulated technological and organizational innovation--much of it in the US--on which other nations could draw.E. • Trade among developed countries grew rapidly. Growth Accelerated • Both Domestic Economies and Foreign Trade grew rapidly.

compared to most other developed countries. if anything. . the US gained in relative position.Other Developed Countries Tended to Catch up with the US in Period 3 Phase Three Phase Four Europe During Phase 4. Relative Positions did not change much.

• Japan’s economy grew 10. • Economies that grew most rapidly were those that expanded exports most rapidly. faster than any economy had ever grown before. Korea and Taiwan followed Japan’s spectacular take-off.• Almost all economies experienced growth acceleration (the US less dramatically).4% per year from 1950 through 1972. .

– New technologies were on the horizon. . World Wars and Depressions were over.A Kind of Golden Age • As of 1973. Colonialism had been eliminated. The ―secrets‖ of policy stability and growth emulation seemed to have been discovered. • But…. there were many reasons to be highly optimistic about the remainder of the century: – – – – Rapid growth had been widespread for over 20 years.

Complex Crisis: Early 1970s to 1980 Much less serious than previous war-related crises. but still prolonged disorder. From 1971 onward. . the breakdown of the Bretton Woods system of fixed exchange rates led steadily to a new system of floating exchange rates. Arguably: Begins With Economics (or with Vietnam) Steady increase in capital flows eroded previous system of national financial controls.

Early in 1973.‖ US suspends convertibility of gold. • Abrupt August 1971 ―Nixon shock. Just temporary. • Exchange rates re-aligned (Dollar devalued). • Other countries accumulated large dollar reserves. but it’s not enough. imposes temporary 10% import surcharge. • US developed persistent trade deficits.Bretton Woods system of fixed exchange rates broke down. the main currencies began ―floating‖ against the dollar. Weakness of the US dollar led to short-term capital flows out of US. but it has lasted for 30 years… .

Followed by First Oil Crisis 1973 • OPEC triples oil prices (reflecting underlying disequilibrium in that market). • Followed by very significant slowdown in global economic growth. .

Capital Markets Adjust. Global liquid Capital Flows increase dramatically. But are able to maintain growth. • Developing countries. Apparently • Huge accumulations of dollars ―offshore‖ by petroleum exporters: growth of Eurodollar market. • These dollars are lent to clients worldwide at very attractive (cheap) interest rates. particularly Mexico and Brazil. . pile up large external debt.

1978-79 • Just as the first oil shock was triggered by Middle East political events. 1979 • And then. Ayatollah Komeini to power.A Second Oil Shock. Dec. Ramadan War). Soviet Union invades Afghanistan. – 1978 Collapse of Shah’s regime in Iran (formerly US ally). . 11. so was the second: – 1973 October War (Yom Kippur War. 24. 1979. Feb.

biggest arms customer.) • US adopted much tougher contractionary economic policies. and eventually pushing oil prices back down. the Iraq-Iran War. slowing world growth. which became US biggest oil supplier. 1980-1988 bled both those countries dry. . and chief supporter of the proxy war in Afghanistan.Complex US Response • Tightened relationship with Saudi Arabia. (Meanwhile. pushing up world interest rates. contributing to an exhausted peace.

. • Widespread crisis and default led to the ―lost decade‖ of the 1980s in Latin America in particular.Which ultimately led to a developing country debt crisis. and interest rates soared. many developing countries were unable to repay their debts. Countries following ISI strategies seem to do worse. • When the world economy slowed in the early 1980s.

and led to a new orthodoxy.• Many developing countries moved away from ISI strategies and accepted advice to open further to international trade and investment. the ―Washington Consensus. . • Different levels of economic performance during this debt crisis tended to discredit previous development models (especially ISI).‖ which called for less government intervention and a more open international system.

2. c. 1980-present A. leadership succession in Russia. July 1980 in Poland. 3.Period 4: Current Wave of Globalization. etc. begins long march to market economy. December 1978. as the Communist Bloc Crumbled. . Solidarity Labor Union directly challenges Communist Party. Early ’80s. International Context: Cold War began to fade. China launches economic reforms. 1. recognition that Afghanistan is disaster.

intellectual property rights and legal systems.By 1990 Communism had collapsed. Bretton Woods institutions began to push harder for liberalization. Leading to a new phase of US dominance. and for deeper integration. . Under US prodding. even though its share of world output is far less than in 1950. Rules began to extend into areas previously considered domestic: investment. services.

SIPRI .000 40.000 Number of Warheads 60. Nuclear Notebook.Global Nuclear Arsenal.000 20. 1945-2004 80.000 0 1945 1955 1965 1975 1985 1995 2005 Source: Norris and Kristensen.

B. Trade
• Trade has continued to lead economic (GDP) Growth. • Surprisingly, the growth of trade has slowed down somewhat, but so has GDP growth. • New patterns of trade have emerged:
– Developing countries have increased their share. – Trade increasingly involves manufactured goods, while raw materials have declined in relative importance. – Trade and Foreign Direct Investment are increasingly closely linked.

Percent of GDP








1960 1962



1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Exports of Goods and Services

Low Income Middle Income

Growth of World Trade and Output, 1950-2000
10 9 8 7 6 5 4 3 2 1 0

Trade Output





Mexico. Although 80% of developing country manufactured exports come from eight countries. Singapore. Taiwan. Korea. . Indonesia. 2% agricultural raw materials.Composition of Trade • Trade in manufactured goods is growing very rapidly. • Developing countries have emerged as major exporters of all categories of industrial products. Thailand. • Share of primary products in merchandise exports has dropped to 18% by 1999 (8% food. 8% minerals [including fuel]). Malaysia. which are still gaining share: – China.

• Not well explained by traditional comparative advantage. although these are the laborintensive steps in production process. . Assembly in Developing Country factories depends on these.A New Pattern of Trade • Chains linking different stages of the production process. • Developed Country components account for about 30% of their exports. • Trade growth is closely linked to growth of foreign direct investment (FDI).

• For developed countries. Investor must exercise some control for investment to be direct.‖ (M&A). 3. M&A peaked at over $1 trillion in 2000. In developing countries. . Rapid Growth of FDI and International Capital Flows • FDI includes both ―greenfield‖ FDI (new factories) and ―mergers and acquisitions. M&A dominates. 94% of this was in developed countries.5% in Latin America. most FDI is greenfield. 2% in Asia.C.

Billion US Dollars IB 1.200 200 400 600 800 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 World FDI Inflows Developed Countries Developing Countries .000 1.

sales and marketing throughout global networks.. supply. 69% of world output in 1996. 80% in 1999.Much Stronger Role of MultiNational Corporations Goes with Larger FDI Greatly Increased Role of Multi-national Corporations. Consolidation and increasing Concentration in many industries. Direct coordination of production. pharmaceuticals. banks. Same patterns in tires. E. . Automobiles: Top 10 MNCs.g.

D. • This system has gradually spread to many developing countries. . and are determined by supply and demand. International Monetary Regime • System of floating exchange rates became established for large developed countries. although many still peg their currencies to their most important developed country economic partner. Relative currency values fluctuate.

• Very different from the ―Bretton Woods‖ system. . • The world has become much more liquid during the most recent period of globalization. • Floating exchange rates are related to the much greater size of international capital flows. more than $1 trillion per day. • Long-term portfolio investments—stocks and bonds—have also grown dramatically. and are now enormous. • Short-term capital flows have grown rapidly since 1973.

• International ―best practice‖ institutions have spread. growth has actually slowed. Growth has not Accelerated. • Investment and trade have increased dramatically.E. • But actually. • Policy liberalization has occurred. • Technology ―catch up‖ should occur. . • So we would expect growth to accelerate. Despite Globalization. outside Asia.

0% 2.0% 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 .0% 0.5% 0.0% 1.0% 3.5% 2.5% 3.Growth of World GDP per capita growth (7-year trailing moving average) 4.5% 1.

0% 2.4% -0.6% 2.4% 1.6% 3.5% 3.7% 2.7% 1.4% 1.5% 5.Regional Growth of GNP per capita.8% 0.9% 4.9% 6.2% .8% 1.8% 1. 1961-2000 (Percent Per Year) Developed Countries East Asia (excl.2% 3. Japan) Latin America South Asia World 1960s 1970s 1980s 1990s 4.7% 3.4% 1.4% 2.

. percent of leading country (US): – Asia: 12% – Latin America 22% But Large Changes in the Distribution of Global Output and Income have Occurred. real GDP per capita as percent of that of the leading country (UK): – Asia: 18% – Latin America 23% • In 1996.Catch-up Has Not Occurred • In 1870.

Key Issues of Current Period • Unfulfilled promise of globalization: why has growth slowed? • Do the global institutions still work? Do the core countries still have sufficient commitment to those institutions to make further progress? • Is the global financial system adequate and stable? • What is the role of national political systems in this globalized environment? Can democratic countries shape the type of political and economic system they want? .

Key Issues. • Can the global system find a place for all the ―new-comers‖? Can the system adapt to the huge influx of inexpensive labor? • Can the system work to alleviate global poverty? • Is the system stable? How effectively can it absorb the new economic and political challenges since 2000? Is the ―Washington consensus‖ still applicable? • Are there viable challengers to the USdominated global order? . Cont.

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