A SHORT HISTORY OF GLOBAL MARKET INTEGRATTION IN 2Oth CENTURY

The 20th century started on January 1, 1901 and ended on on December 31, 2000. This 10th and final
century of the second millennium saw the fast rate of global market integration.

19th Century: A Prelude

 Saw considerable improvements in global market integration, and the formation of the truly
world economy due to technological advancement.
 The marine steam engine and railroad locomotive revolutionized world transport from 1830s
onward. The world post were connected to each other by steamships, and from the ports the
railroad ran inland, generating a new and faster world transport network.
 Electric telegraph, whose line regularly ran along the new railroad networks. Telegraph systems
were installed in the most countries, including the major market of British and India, until 1854.
 1866, the first transatlantic cable was laid by steamship. The ensuring international information
network was vital in communicating details of prices and price movements, dropping the cost of
closing deals and transactions.
 1869, the opening of Suez Canal linked the Mediterranean Sea by the way of Egypt to the Red
Sea. The Asian became some 4,000 miles closer to Europe in transport terms, and freight costs
thus fell. Technological innovation in the shape of steel hulls masts maid sailing ships and more
efficient. The more efficient triple-expansion engine drove the sailing ships from the oceans.
 Aside from lowering freight and transaction costs, the rise of free trade stimulated market
integration. In 1846, the merchants of Manchester, England, the center of the world’s cotton
textile industry, had forced the British government to remove tariffs on all imported goods aside
from a few luxury items. The first to go were the tariffs on wheat production which caused the
opening up of the Great Plains of the United States for wheat production to supply Britain.
 This policy of the open markets became a leading principle extended through much of the British
Empire, including the vital market of India. The British Empire’s open-market polices played a
critical role in sustaining a complicated interrelated mesh of world payments, and newly
industrializing countries took advantage of the system (while somewhat maintaining their own
protective walls).
 Through free trade, countries could specialized in producing goods they were best endowed by
nature to produce, and could exchange them for the other merchandises they needed. Because
of its big surpluses on the sales of opium, cotton yarn, and textiles from Bombay, India also
benifitted for instance.

Start of the 20th Century

 The international economy entered the 20th century with the freest flow of goods, services, and
capital in the human history.
 The beginning of the 20th century observed the progression of real incomes and the growth of
the world trade through the elimination of artificial barriers to trade such as tariffs, reduced
costs of transport, and the drop in costs of international transactions. At the same time, the
integration of the world capital markets proceeded rapidly.
 The United Kingdom was, as is well known, the world’s banker and at its peak, owned 80 % of
the foreign assets globally. Its capital outflows were as much as 10 % of GDP in some years, and
averaged of 4.5 % of GDP per year between 1870 and 1914 (Krueger, 2006).

The First and Second World War

 Nonetheless, World War I led to a sudden reverse in the pace of globalization. The earlier
integration of the global economy was fundamentally reversed as transport paths were
disrupted and nations experienced different degrees of inflation due to the differential strains of
the wartime costs. 1925, imbalances related to the overvaluation of the pound sterling following
the British return to the Gold Standard, notwithstanding efforts to reinstate the status quo ante
after the war. And German reparations led to sluggish progress in the 1920s.
 1929-1939, the industrialized world experienced its worst economic downturn, Great
Depression. It started after the sock market crash of 1929, which sent to Wall Street inyo a panic
and wiped out millions of investors. The Great Depression reversed even more the degree of
globalization.
 1930s, were marked by mounting trade barriers (both tariffs and non-tariffs restrictions) and
competitive devaluations, usually referred to as “beggar they neighbor policies”, and by swiftly
falling bulks of trade and prices of traded goods.
 Recovery was underway by the late 1930s, but then World War II erupted and hasty expansion
ensued in response to wartime demand. Obviously, output and trade patterns were once again
upset, as manufacture of costumer and investment goods required in peacetime were replaced
in substantial part by production linked to the Second World War.

Postwar Situation
 According to Krueger in 2006, with the resolution of China and Soviet Union to insulate their
economies after the war, the global economy was in effect split into three: the industrial
countries, the “underdevelop”economies, and the centrally planned economies.
 The industrial countries include those where production had fallen largely the war and those
where the structure of production had shifted but output increased.
 Many of these so-called underdevelop countries had been able to export key commodities at
high prices to the combatants during World War II and had accumulated hefty reserves of
foreign exchange. They were nonetheless largely concentrated on producing raw materials and
small-scale labor-intensive consumer goods, with very low standards of living compared to the
industrial countries.
 In the centrally planned economies, the state government makes economic decisions rather than
these being done by the interactions between consumers and businesses. Centrally planned
economy controls what is produce and the use and distribution of resources. Until the 1990s, the
evolution of the centrally planned economies was almost completely independent of that of the
rest of the world.
 Moreover, the postwar proposers planned the creation of the United Nations for political
cooperation and a framework for international economic cooperation in which there would be
international organizations.
1. International Monetary Cooperation - It aimed to facilitate international trade by encouraging
currency convertibility, inhibiting competitive devaluations, and allowing coordinated international
financial policies. The Articles that Agreement for the International Monetary Fund were thus drafted,
and afterwards ratified by 38 nations by the time its Board of Governors held its inaugural meeting in
March 1946. Signatories to the Articles also agreed to Article VIII, which is about the convertibility of
their currencies for current accounts transactions, although it took more than 15 years before even
the chief industrial countries had eradicated exchange control regulations to the degree necessary to
conform to Article VIII
2. Reconstruction and Development - To provide capital for the acceleration of the reconstruction of
the war-damaged nations, the postwar planners decided that longer term financing would have to
come from official sources given the supposed absence of the private source of capital. As a spring
longer-term, official finance, the International Bank for Reconstruction and Development, now
generally known as the World Bank, was institute. This was also intended to facilitate higher rates of
investments, and thus of growth, of the “underdevelopment” economies.
3. International Trade in Goods and Services - this was for multilateral cooperation for an open
international trading system. It is signed in 1947, the General Agreement on Tariffs and Trades (GATT)
was seen as an interim agreement pending the formation of the planned International Trade
Organization (ITO), but proved noticeably resilient in the absence of ratification of the ITO charter.
The GATT arrangement afforded nondiscriminatory treatment of all trading partners, abolition of
quantitative restrictions on trade, and fora in which nations could mutually negotiate tariff decreases
and in which trade disagreements among nations could be settled.

 1946 the IMF and World Bank began operating. The GATT and later the World Trade
Organization (WTO) included two crucial provisions:
(a) the member countries would not impose and/or would eliminate nontariff barriers to trade;
(b) that member countries would grant “most favored nation” status to their GATT/WTO trading
partners so that all tradings partners would face the same trade barriers unless there was a
preferential trade arrangement (the conditions for which including coverage of all trade items, zero
tariffs between the PTA countries, and a certain timetable for achieving zero tariffs)” (Krueger, 2006).
 A preferential trade area (also preferential trade agreement, PTA) is trading bloc that provides
preferential access to some products from the participating countries. This done by decreasing
tariffs but not by eliminating them completely. A PTA can be founded through a trade pact.
 When the war ended, the United States emerged dominant. When the postwar reconstruction
necessities were far greater than had been predicted, it fell principally to the United States to
support the European and other countries in the reconstruction efforts, first through Point Four
Program, and then through the Marshall Plan.
 Point Four Programs is the U.S. policy of economic aid and technical assistance to
underdeveloped countries, so named because it was the fourth point of President Harry S.
Truman’s 1949 inaugural address. Its first appropriations were made in 1950. On the other hand,
the Marshall Plan (officially the European Recovery Program, ERP) was an American initiative to
help Western Europe, in the U.S. gave over $12 billion in economic assistance to help reconstruct
Western Europe economies in after the Second World War.
 From the condition in the late 1940s when many European economies traded with each other
through bilateral payments arrangements (using the Marshall Plan Aid), countries shifted to
multilateral clearing arrangements by the early 1950s. This started a period of sustained rapid
growth where tariff reductions took place and quantitative restrictions were lifted. With the
foundation set by the Marshall Plan, progressively free exchange systems and tariff drops (as
incited also by the GATT multilateral tariff reductions), the world economy boarder upon a
quarter century of persistent and unprecedentedly quick economic growth.
 Although it could legitimately be said that the United States dominated in 1950s, Europe and
Japan became chief players too in the world economy by the early 1970s. Tariff reduction
persisted during the golden quarter century. These reduction of tariff and nontariff barriers to
the trade became the main impetus to the growth of trade in the postwar years.
 The IMF played a key role in enabling adjustments to take place without the disruption to the
international system through the provision of financial assistance to countries in balance of
payments crises. In 1977, Britain was the last main industrial country to borrow from the Fund
on a big scale.