Lecture 6: The reintegration of the world economy,
1939 AD to the present
1
As noted before, “de-globalization” from 1914 to
1950, but “re-globalization” from there forward:
Global trade/GDP from 14% to 42% in 2010;
Foreign assets/GDP from 5% to 150% in 2010;
Foreign-born from 8 to 14% in 2010.
For this week: what were main developments in
the world economy which caused this transition?
Introduction
Chronology of World War II is a little bit more
murky than that for World War I.
Started in 1939 with German invasion of Poland?
Or in 1938 with Austrian annexation?
In 1937 with the Marco Polo Bridge incident?
Or in 1931 with the invasion of Manchuria?
World War II
By December 1941, however, the alignment of
powers becomes clear…
World War II
End result pretty clear as well…
World War II
World War II
6
World War II
7
Like WWI, there were also big political effects:
1.) Extension of Soviet control in E. Europe;
2.) Extension of US control/influence in W.
Europe and Japan;
3.) Calls for the end of colonialism,
especially in India and SE Asia;
World War II
What sets the aftermath of WWII apart from
WWI is the reaction of the US.
But why should this matter?
In 1949, the US:
1.) was involved in 65% of world trade;
2.) held 60% of the world’s capital stock;
World War II
Rather than retreat again into isolationism, the
US becomes actively involved with reordering
the global economy from 1945.
The US as a hegemon which provided the
needed infrastructure of international law and
order in the Western world.
World War II
Following US’s lead, many countries commit
themselves to resurrecting the world economy.
At the heart of this transformation were a number
of key institutional developments.
Even before WWII’s end, delegates from 44
nations meet in Bretton Woods, NH during 1944.
Differing responses: Western nations
Bretton Woods (BW) built on the consensus that
the disaster of the interwar period was to be
avoided at all costs and required coordination.
Strong role for activist macroeconomic policies
to maintain full employment.
Chief feature: the role of the US dollar as anchor
Differing responses: Western nations
BW also notable for the establishment of two
inter-governmental bodies to aid coordination.
First, the International Bank for Reconstruction
and Development (IBRD), better known as the
World Bank.
With limited reserves, how to finance trade
deficits needed to import goods?
Differing responses: Western nations
Second, the International Monetary Fund (IMF),
designed to alleviate problems associated with
the gold exchange standard.
Financing in the face of balance of payments
crises and coordination of changes in the
valuations of currencies.
Currency stability plus flexibility:
gold backing via US dollar
Differing responses: Western nations
Running parallel, post-war period saw the rise of
the General Agreement on Tariffs and Trade
(GATT) in 1947 (succeeded by WTO in 1995).
Precedent of US’s Reciprocal Trade Agreements
Act of 1934.; two building blocks: reciprocity
and most-favored-nation (MFN) status→
liberalization as the only outcome.
Differing responses: Western nations
Finally, the post-war period saw attempts to
promote regional trade integration.
Most notably in Europe: customs union by 1958;
no internal tariffs by 1968 in six core countries.
Culminates in the EU in 1993: on the heels of
golden age; role of similar resource endowments.
Developments partially mirrored elsewhere:
Differing responses: Western nations
With obvious implications for trade flows...
Differing responses: Western nations
17
For all this, the global economy was not so
global all the way into the 1970s/1980s.
Three “Worlds”
World War II
Most obvious exception was “second world”:
areas under Soviet/CCP control/influence.
Emphasis on internal development with only
limited ties to other socialist/communist nations.
Then, there was the “third world”: any nation
not “rich” nor explicitly in Soviet/Chinese orbit.
Differing responses: ROW
The majority of third world countries turned
away from the global economy from 1945 (or
even earlier).
Most remained somewhat market-oriented.
At the same time, China and USSR provided an
example of “development from within”.
Differing responses: ISI
Coincided with two major developments:
1.) Disastrous interwar period for export-oriented
nations in LA: trade bust erodes profits and, thus,
power of ruling elites…
2.) WWII demonstrates weakness of the big three
European empires: add to this the US’s hostility
to empires…
Differing responses: ISI
Correlation of liberal trade policies and the
“Great Specialization”
Differing responses: ISI
Although generated by very different conditions,
there was a common response: importsubstitution-industrialization (ISI) as the
dominant paradigm for third world development.
Based on protection of domestic industry through
tariffs, quotas/licensing, and ER controls.
Differing responses: ISI
The record for ISI up to 1975…
Differing responses: ISI
What is more, growth would prove temporary.
Just as in the Soviet Union, rapidly diminishing
marginal returns from capital after a while.
Also, rent seeking plus thin domestic markets lead
to a decided lack of innovation.
Dependence on imported inputs and capital goods
Differing responses: ISI
But an alternative did exist in the form of export
driven growth (EDG).
As most countries flirted with ISI and fled world
markets, a few looked to the global economy to
promote growth in the 1950s and 60s.
Most prominent (early) examples were the
Four East Asian Tigers of Hong Kong,
Singapore, South Korea, and Taiwan.
Differing responses: EDG
Exploited abundant (cheap) labor forces,
education reform, high savings rates, and
technology transfer.
Primary markets for production were rich
industrialized nations, not domestic markets.
Not a hands-off approach:
Differing responses: EDG
EDG dominates
Differing responses: ISI
In 1975, global openness ratio ≈2.5x than 1950.
Impressive as majority of world (75%) remained
closed to global markets (but limited integration
of K and L markets…on which, more later).
In 2013, majority of world lives in “open”
economies, even excluding China and India.
The global economy in 1975
The global economy from 1975
30
The global economy from 1975
31
The global economy from 1975
32
So what explains post-1975 global trade growth:
1.) Declines in transport costs?
2.) Developing countries going open?
3.) Declines in developed countries’ tariffs?
4.) Changes in the structure of production?
The global economy from 1975
Mixed evidence:
1.) Declines in transport costs?
In 1980s, debt and subsequent macroeconomic
crises hit developing nations.
Macro reform as a political necessity or as a
consequence of IMF/WB conditionality?
Also unilateral moves in China (1978) and India
(1991) as well as the collapse of USSR and its
satellites in the late 80s/early 90s.
2.) Developing countries going open?
3.) Declines in developed countries’ tariffs
3.) Declines in developed countries’ tariffs
Rising role of multinational corporations:
now responsible for 70% of world trade.
Vertical specialization as one aspect of
“fragmentation of production” in which countries
specialize in stages of the production process.
Trade in tasks, rather than trade in goods,
coordinated by MNCs.
4.) Changes in the structure of production?
An example of VS?
Raw materials: chips, plastic, and
hair from Taiwan and Japan.
Assembly in China but from molds produced in
the United States and paints from Europe.
Other than labor, China supplies
4.) Changes in the structure of production?
Export value in HK = $4
$0.70 for labor;
$1.30 for (imported) materials;
$2.00 for transport & overhead
plus profits earned in HK.
Retail price in Canada = $45
$39 for transportation, marketing, wholesaling,
and retailing; Mattel earns $6.
4.) Changes in the structure of production?
Period from 1939 witnessed resurgence of global
economy to unprecedented heights.
But trajectories remained diffuse up to 1975 and
prospects uncertain, especially given shocks of
early 1970s.
Conclusion
41