If this is Globalisation 4.

0, what were the other

three?
Richard Baldwin 19 December 2018

On 5 November 2018, Klaus Schwab, founder and executive chairman of the World Economic
Forum, explained the theme of the 2019 meeting in Davos would be "Globalisation 4.0". He warned
that it "has only just begun, but we are already vastly underprepared for it.".
It was probably inevitable that the Davos buzzword bingo card would find room for 'Globalisation 4.0'
once we created 'Industry 4.0'. (And it's catching on. Globalisation 4.0 has already been
employed here, and here). The phrase raises two questions for international economists:
1. Is this fourth globalisation just a distinction without a difference?
2. What were the first three globalisations?
Is there really a difference?
Yes.

Future globalisation will be very different than the globalisations we know today or have known in the
past. It is also coming incredibly fast, and in ways few people expect.

I believe this strongly enough to have written a book on the theme, which handily will appear just in
time for the World Economic Forum meeting in January 2019. I believe it enough to have given
a TedX talk in 2018 to argue that, in future, globalisation will be radically different.

My reasoning: arbitrage drives globalisation. Whenever relative prices differ across countries, people
can make money with a two-way, buy-low sell-high arbitrage. For goods, we call this arbitrage 'trade'.
For centuries, technological limits meant that the arbitrage was mostly realised as trade. Globalisation
was created by goods crossing borders. This was the first unbundling – the geographic separation of
production and consumption.

From around 1990, information and communication technology (ICT) made a different type of
arbitrage possible. Now factories could cross borders as well as goods. ICT allowed G7 firms to
spread some stages of production to nearby developing nations while still keeping the whole
production process running smoothly and reliably. Vast wage differences made this manufacturing-
location arbitrage profitable. This was the second unbundling – the geographic separation of stages
of production.

This form of globalisation was especially disruptive in countries that had advanced economies but
backward social support systems, especially the US. Their firms sent lots of their firm-specific
knowhow along with the offshored factory jobs. In short, the monopoly that G7 factory workers had on
G7 manufacturing technology was broken. This changed the impact of globalisation. It created a
whole new reality in manufacturing competition, one where high-tech was combined with low wages.
This new combination disrupted the lives and communities of workers struggling to compete with high
wages and high tech (in developed economies) as well as those struggling to compete with low
wages and low tech (in developing economies that didn’t get the technology transfers).

Workers employed in goods-producing sectors were the most affected, since this second unbundling
mostly affected goods-producing sectors. Future globalisation – the third unbundling – will, I believe
be much more about the service sector.
Service sector wages are the greatest remaining global arbitrage opportunities. The going rate for
similar tasks can differ by a factor of 10 from one country to another. That’s a tempting arbitrage
opportunity but, until now, few firms could exploit it because it was technically too difficult to be
worthwhile. Historically, service and professional jobs required us to meet face-to-face and, until
recently, the state of technology made the cost of overcoming these barriers too high. But digital
technology (digitech) is now tearing down the barriers to wage arbitrage in the service sector.

Digitech is making it easier for people sitting in one country to do things in offices in another country.
In The Globotics Upheaval: Globalisation, Robotics and the Future of Work, I call it telemigration, but
it is really just international telecommuting. Some service sectors, such as web development,
commonly work this way already.

International freelancing platforms like Upwork.com, advanced telecommunications like telepresence,

and machine translation make this new form of globalisation – this new wage arbitrage – possible.

The long view of economic globalisation that I first wrote about a decade ago is that telemigration is
the 'third unbundling'. The first unbundling was trade, which exploded in the 1800s when there was a
steep fall in the cost of moving goods. The second unbundling came when technology created
geographic separation in manufacturing. Now we have another geographic separation, between
labour and labour services, using digitech.

That's three unbundlings, but since we are at globalisation 4.0, we have, apparently, sneaked in an
additional globalisation along the way. Where?

Globalisation 1.0, 2.0 and 3.0

I argue that trade-in-goods-based globalisation had two distinct phases. In 1999, Philippe Martin and I
wrote a paper titled, "Two Waves of Globalisation: Superficial Similarities, Fundamental Differences".
That distinction is the key to identifying the first three globalisations.

Globalisation 1.0 happened before WWI. Steam and other forms of mechanical power made reduced
the cost of transportation, and for the first time made it economical to consume goods made far away.
This globalisation happened despite almost no government support, because there was no global
governance – unless you count the British Navy as the UN, the Bank of England as the IMF, and
Britain’s free-trade stance as the WTO. Nor was there domestic policy to share the gains and pains of
more intense international arbitrage in goods.

Globalisation 1.0 made the fortunes of a nation’s most competitive citizens and companies. But it also
destroyed the fortunes of a nation’s least competitive citizens and companies. The bare-knuckled
economic system in which it took place (laissez-faire capitalism, imperialism, and various forms of
autocracy) meant that it did not end well. Two World Wars, the Great Depression, and the rise of
communism and fascism caused the deaths of hundreds of millions of people.

Capitalism’s face was softened with the New Deal in the US, and social-market democracy in other
rich economies. Communism also softened after Stalin and Mao. We can call this phase Globalisation
2.0.

It started after WWII. Trade in goods rose, but this time there were domestic policies to share the
pains and gains of globalisation and automation. The market was in charge of efficiency, and the
government was in charge of justice. Globalisation 2.0 saw the establishment of rule-driven
international governance based in international institutions like the UN and its specialised agencies
such as the Food and Agriculture Organisation and the International Labour Organisation, plus the
IMF, the World Bank, and the World Trade Organisation.
Globalisation 3.0 is what I have called the second unbundling, or the New Globalisation. Arvind
Subramanian called it hyperglobalisation, Gary Gereffi called it the global value chain revolution, and
Alan Blinder called it offshoring. All of these definitions had one common factor: factories were
crossing borders, bringing the knowhow of G7 firms to emerging economies. The monopoly that G7
factory workers had on advanced manufacturing technology was broken, creating a new world of
manufacturing that melded high tech and low wages.

Once more, globalisation disrupted the lives and communities of millions of working people. Both
high-wage, high-tech workers, and low-wage, low-tech workers struggled to compete. Workers in
goods-producing sectors were most affected.

And so Globalisation 4.0, in my view, is the third unbundling. It will happen when digitech allows
arbitrage of international wage differences without the physical movement of workers. Globalisation
1.0, 2.0 and 3.0 affected mostly people who made things for a living. For the first time, globalisation
will mostly affect the service sector. For the first time, hundreds of millions of workers in advanced
economies will be exposed to the challenges and opportunities of globalisation.

Low-wage, high-quality service competition from abroad is not their only competition. AI-driven
automation will also displace many workers in the service sector. If the blue-collar workers disrupted
by Globalisation 3.0 join hands with the white-collar workers who will be disrupted by Globalisation
4.0, it could lead to what I call the 'Globotics Upheaval'. This upheaval may already have started with
the gilets jaunes movement.

https://voxeu.org/content/if-globalisation-40-what-were-other-three

Globalisation 1.0 and 2.0 helped the G7.

Globalisation 3.0 helped India and China instead.
What will Globalisation 4.0 do?
Richard Baldwin 21 January 2019
Globalisation leapt forward in the late 19th century when steam power slashed the costs of moving
goods internationally. This ‘old globalisation’ came in two waves. Globalisation 1.0 started in 1820
and ended at the start of WWI, and Globalisation 2.0 began after WWII and ended around 1990.1 In
between, globalisation retreated.

Old globalisation was especially beneficial to today’s rich nations. The G7 (France, Germany, Italy,
Britain, US, Japan, and Canada) saw rapid growth of their exports, incomes, and industry compared
to today's poor nations. This led to what Kenneth Pomeranz, a historian, calls the Great Divergence.

The G7’s share of world GDP soared from one-fifth in 1820 to two-thirds in 1988. Its share of world
trade rose to more than 50% (Figure 1). Enormous differences in income between rich and poor
nations first emerged at this time.

Figure 1 Spot the difference: Globalisations 1.0 and 2.0 (blue) and 3.0 (red)
Note: Gross domestic product (GDP) is a measure of a country’s total economic output and income.
Source: Author’s elaboration of Maddison online data.

The impact of Globalisation 1.0 on the global distribution of industry was equally shocking, as Figure
2 shows. Britain was the first industrialiser. It maintained a massive lead until 1900, when it was
surpassed by the US. The other G7 nations took off in the mid-to-late 1800s. Since the emergence of
human civilisation, China, India-Pakistan and other ancient nations had been the leading industrial
powers. But as the G7 industrialised, these ancient nations de-industrialised.

Figure 2 Per capita industrialisation levels, 1750 to 1913

Source: Author’s elaboration of data from Bairoch (1982, Table 9).

Globalisation 1.0 drove northern industrialisation and southern de-industrialisation. This is not as
widely known as it should be, but it has long been recognised. As Simon Kuznets wrote in 1965:

“Before the 19th century and perhaps not much before it, some presently underdeveloped
countries, notably China and parts of India, were believed by Europeans to be more highly
developed than Europe” (Kuznets 1965:20, cited in Baldwin and Martin 1999).2
The new globalisation: Globalisation 3.0
Globalisation leaped forward again in the late 20th century when information and communication
technologies (ICT) radically lowered the cost of moving ideas internationally. This ‘new globalisation’,
or Globalisation 3.0, had dramatically different effects on world income (GDP) shares, as can be seen
from Figure 1. In just 20 years, the G7 share of world GDP plummeted to 50%, and its share of trade
to 32%. This trend, which might be called the 'Great Convergence', is surely the dominant economic
fact of the last 20 or 30 years.

What happened to the landscape of global manufacturing? Figure 3 shows that the G7 nations lost
share gradually between 1970 and 1990, followed by an accelerated decline from 1990. To where did
manufacturing go? Just six developing nations – which we might call the ‘Rapidly Industrialising 6’, or
I6 for short – accounted for almost all of it. The I6 are China, Korea, India, Poland, Indonesia and
Thailand. China stands out. It gained almost 16 percentage points of world manufacturing in just 20
years.

Figure 3 Most of the G7’s share loss in manufacturing went to just seven rapidly industrialising
nations

Source: UNSTAT.org.
To understand why globalisation today acts differently to its effect in the 20th century, we need a
broader framework for thinking about globalisation and the things that drive it. This was the theme of
my 2016 book, The Great Convergence: Information Technology and the New Globalisation.

This framework also helps us think about the effect that Globalisation 4.0 will have.
Three cascading constraints of globalisation
Economic globalisation can be defined as all the things that happen when:

 goods,
 ideas,
 people,
 services, and
 capital

move from one nation to another. Globalisation matters because these flows affect our jobs, salaries,
income distributions, and so on. (Many more things cross borders, but these are the main flows we
are interested in when we analyse economic globalisation.)

But this list is too long. We should simplify to clarify. As Karl Popper said: “Science may be described
as the art of systematic over-simplification.” So if we want to understand how the flows affect
economies and people, it is useful to narrow the list.

Capital is quite different from the other flows and so we set it aside. When services cross borders,
they are either ideas (say, architectural plans) or embedded in goods (say, diamonds that have been
skilfully cut in India). This means we can lump services in with either ideas and goods. this leaves us
with three flows: goods, ideas, and people.

The next natural question is, what drives globalisation? The answer is equally simple. Globalisation is
driven by arbitrage.

Arbitrage drives globalisation

When a good is relatively cheap in Germany compared to China, then other goods are relatively
cheap in China compared to Germany. It's a logical inevitability. For example, if good 1 is relatively
cheap compared to good 2 in Germany, then good 2 must be relatively cheap compared to good 1 in
China.

When companies exploit price differences – buying low and selling high – we get international trade.
Companies buy what is relatively cheap in Germany and sell it in China and buy what is relatively
cheap in China and sell it in Germany. Trade is driven by a two-way buy-low, sell-high arbitrage. This
is not a new idea – David Ricardo was writing about it in 1817. There is also arbitrage in ideas and
people. As we saw, arbitrage of knowhow was particularly important in Globalisation 3.0.

The arbitrage of the three flows is limited by three costs.

Globalisation has been driven by reductions in the costs of moving goods, ideas and people, because
when these costs fall, so does the cost of separating production and consumption geographically.
But, to understand globalisation, we need to distinguish the costs of separation for each. Since the
early 19th century, all three have fallen, but not at the same time. Shipping costs fell dramatically 150
years before communication costs did. Face-to-face interactions remain costly, even today. This
shaped how globalisation evolved.
To understand this, we can be guided in a gallop through the history of trade by a thought framework
that I call the 'three cascading constraints' (3CC) view of globalisation.

The 3CC history of globalisation

When transportation involved wind power by sea, and animal power by land, almost nothing could be
shipped at a profit over a long distance. The high cost of moving goods, people and ideas created
three constraints that bound together the production and consumption of goods. Therefore, apart from
elite goods and essential raw materials, most things that people consumed were made within walking
distance of their homes. We know from books and paintings that royalty and the rich could enjoy
goods made far away, but most people lived in villages. For the rest, consumption meant locally
made food, shelter, and clothing.

This isolation meant that the world economy was little more than a patchwork of village-level
economies. The extreme separation of production hindered innovation, because small-scale
production meant innovation was worth little to the innovator, and their dispersion meant that it was
difficult for innovation to spread quickly. Modern growth, in other words, was stymied until
Globalisation 1.0 took off.

The cost of moving goods was the first of the three to fall dramatically. From the early 19th century,
steam power and transport technologies improved in a process that helped create, and was helped
by, the Industrial Revolution.

With cheaper international shipping, more people bought goods from far away. Kevin O’Rourke and
Jeff Williamson, two economists of the history of trade, date this to 1820. But while shipping got
cheaper, the cost of moving ideas and people fell much less. This unbalanced reduction in arbitrage
costs triggered a sequence of changes that had a huge effect on the global economy:

 As markets expanded globally, industry clustered locally. These clusters were in today’s developed
nations. Today’s developing nations de-industrialised.
 Northern industrialisation triggered northern innovation, which stimulated northern growth. But ideas
were costly to move, and so northern innovations stayed in the north. The result was a vast imbalance in
knowledge-per-worker ratios between the global north and the global south. The localisation of
innovation also meant that growth took-off later in today’s poor nations, and was slower afterwards.
 The growth differences between north and south generated the colossal, north-south income asymmetry
that we still see today.

Globalisation accelerated again around 1990, when the ICT revolution radically lowered the cost of
moving ideas. Globalisation’s second unbundling – the geographic separation of each manufacturing
stage, organised in 'global value chains' (GVCs) – became feasible when the ICT revolution made it
possible to organise complex activities at distance. The north-south wage gap inherited from the first
unbundling made this offshoring profitable.

Nature abhors a vacuum, economies abhor imbalances. It became cheaper to move ideas, and so
this inevitably triggered massive north-to-south flows of knowhow, which reconfigured the world
economy as shown by the red lines in Figure 1. This new-style globalisation – where high-tech moved
to places where there was low-wage labour – turned the first unbundling on its head. It de-
industrialised the north and industrialised the south. Growth slowed in the north and accelerated in
the south.

In short, it produced the Great Convergence.

The knowledge that is moving north to south mostly belongs to firms based in the G7. Firms in the G7
have invested in GVCs to ensure that they profit from the new ICT-enabled possibilities. The 21st-
century contours of knowledge are increasingly defined by the geography of the GVCs, rather than
the geography of nations.

The 3CC view of globalisation argues that this outcome depends on the cost of moving people, not
goods or ideas. Aeroplane fares have fallen, but the time-cost of travel has continued to rise because
we need to factor in the salaries of managers and technicians. Since it is still expensive to move
people around – and international production networks still need people to move among facilities –
most advanced manufacturing still occurs in nations that are close to the G7 industrial powerhouses,
especially Germany, Japan and the US. India is an exception, but this is because India has engaged
in international production networks for which face-to-face contact is less important.

The industrialisation impact of the second unbundling was hyper-concentrated, but the Great
Convergence is much broader because of the knock-on effects of the rapid industrialisation of the I6.
About half of the world's population lives in the I6, so rapid income growth has triggered a boom in
demand for raw materials. This, in turn, triggered the ‘commodity super-cycle’ that led to growth take-
offs in commodity-exporting nations. In other words, the second unbundling (Globalisation 3.0) drove
growth in many developing nations that were untouched directly by GVCs.

I have summarised the 3CC narrative in Figure 4. It's clear that a third unbundling becomes possible
if face-to-face costs plummet. And that, in my view, is what Globalisation 4.0 is all about.

Figure 4 The 3CC view of globalisation

Future globalisation will be in things that we do
Globalisation is, I believe, in for a radical new transformation. This will happen if the cost of face-to-
face interaction falls as much as the cost of moving ideas has in the recent past. This will allow a third
unbundling. This will be the unbundling of service workers and service work, or to put it differently, it
makes it possible to separate labour services geographically from the labourers.

Arbitrage of goods and ideas will continue, but there will be a new, disruptive aspect called 'tele-
migration'. People will sit in one nation, while working in offices in another nation.

There is a simple driving force for this arbitrage. Salaries and wages for this type of work are much
higher in rich nations. Hundreds of millions, maybe billions, of people in poor nations would like to
earn those wages. Today that is not technically possible, because there is a high face-to-face cost,
and we still need in-person interactions in many service and professional jobs. If digital technology
relaxes this third constraint on the global arbitrage of wage-rate differences, as I think this will, it
would be a big change.

If digital technology allows people in poor nations to offer their labour services in advanced
economies without actually having to be there, a lot of people in advanced economies could lose their
jobs. The necessary technology is already on the way. This is the topic of my new book, The
Globotics Upheaval: Globalisation, Robotics and the Future of Work.
A third unbundling
The service sector in G7 nations has been shielded from globalisation because most services require
face-to-face contact. Times are changing.

The third unbundling is unfolding before our eyes. It is all about processing and transmitting
information. Laws of physics governing goods do not govern data. The explosive growth of digital
technology creates the possibility of remote intelligence (RI). Digital technology is tearing down the
barriers to arbitrage in labour services.

Firms already hire remote knowledge workers abroad at lower wages. As more companies in rich
nations source labour this way, the matchmaking network will grow. Many companies in the US and
Europe seem unaware of the possibilities, or maybe they are hesitant to explore what the
consequences may be. But once a firm’s competitors start using low-cost foreign labour, competition
will accelerate the process.

Talented foreign workers will increasingly use digital platforms like Upwork.com, looking for work, and
companies that use them will join the platforms, looking for remote workers. My guess is that tipping-
point economics will define the progress of global outsourcing of services. Once people begin to trust
these platforms – as they have rapidly come to trust internet services like Airbnb and Uber – it will
snowball into something very big, very fast.

Impact on developing nations

The comparative advantage of most developing nations comes from labour that is, quality-adjusted,
still cheap. Mostly, the only way they exploit it is to use their labour to make a thing, and then ship
that thing across borders. Since manufacturing is subject to large agglomeration economies, and
requires that manufacturers get many things right, only a handful of developing nations can really
transform their economies based on manufactured exports alone. Most that have succeeded have
done so by joining the supply chains that were clustered in G7 nations.

Tele-migration will allow people with skills in developing nations to export their services directly. This
may allow the emerging market miracle to continue, but also to spread to many nations that until now
have only been able to export commodities.

An accelerating process
The first two globalisations helped the G7 nations and hindered the developing nations – at least in a
relative sense. Until 1990, most rich nations grew faster than most poor nations. This is because it
was easy to ship goods, but difficult to ship knowhow.

Offshoring manufacturing fostered innovation and rising competitiveness in the G7 nations, but the
opposite in developing nations. Coordinating complex activities was too expensive, and so the
knowledge stayed in the G7, despite the very large imbalances. The ICT revolution opened a way for
G7 firms to arbitrage the big differences in knowhow-to-labour ratios that were responsible for wage
differences.

Now digital technology is allowing people and companies to arbitrage large relative price differences
in wages. This will be an enormous export opportunity for developing nations – especially ones, like
India and China, that have fast internet in urban areas and millions of workers with recognisable skills
that companies and people in rich countries would like to buy. Tele-migration will also be an export
opportunity for many in the rich nations since competition in services is not always won by the
cheapest. Quality and reliability still matter.

Will the Great Convergence continue? Will the G7’s share of world GDP continue to decline, and
India’s and China’s continue to rise? The answer to both questions is yes. The nature of future
globalisation will great accelerate the process.

References
Baldwin, R (2016), The Great Convergence: Information Technology and the New
Globalization, Belknap Press of Harvard University Press.
Baldwin, R (2019), The Globotics Upheaval: Globalisation, Robotics and the Future of Work, Oxford
University Press.
Baldwin, R, P Martin and G Ottaviano (2001), "Global Income Divergence, Trade, and
Industrialization: The Geography of Growth Take-Offs", Journal of Economic Growth 6(1): 5-37.
Braudel, F (1984), Civilisation and Capitalism, 15th-18th Century: The Perspective of the World. vol 3,
Harper and Row.
Chaudhuri, K N (1966), "India’s Foreign Trade and the Cessation of the East India Company’s
Trading Activities, 1828-40", Economic History Review 19(2): 345-63.
Kuznets, S (1965), Economic Growth and Structure, Selected Essays, Heinemann.
Endnotes
[1] We could probably describe pre-modern globalisation – the opening of the Silk Road in 200 BCE,
the golden age of Islam (8th to 14th centuries), or the European age of discovery (15th to 17th
centuries) – as beta globalisation, or maybe Globalisation 0.0. It was very different, because it had a
negligible impact on the living standards of the masses.

[2] Braudel (1984) and Chaudhuri (1966) show that, during the 18th century, the Indian cotton textile
industry was the global leader in terms of quality, production and exports. 18th-century India and
China also produced the world’s highest-quality silk and porcelain. Before the 18th century, these
manufactured goods were exported to Europe in exchange for silver, as European manufactures
were uncompetitive in the East (Barraclough 1978). Clearly, the civilisations that invented gunpowder,
paper and aids for oceanic navigation were by no means primitive societies, waiting for Europe to
industrialise.

https://voxeu.org/content/globalisation-10-and-20-helped-g7-globalisation-30-helped-india-and-china-instead-what-
will-globalisation-40-do

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