Globalization :an overview
Lecture 2 February 12
Topics disccused in this lecture
• What is Globalization?
• When did Globalization begin?
• Which are the major forces behind
Globalization?
• The economic consequences of Globalization:
• on economic growth
• on wage bargaining and income distribution
• on labour standards
What is Globalization?
• G. is market integration on a world scale.
• And what does market integration mean?
• It means that markets operate according
to’the law of one price’, LOOP.
• LOOP means that an identical good gets
the same price in any market.
• Well, actually it is more complicated than
that.
LOOP and transaction costs
• There are transport and other transaction
costs involved in bringing a good for one
market, say London, to another, say New
York, therefore LOOP must be rephrased.
• LOOP means that the (absolute) price
difference between an identical good sold
in two markets must not exceed the
transaction costs involved in bringing the
good between the markets.
Implications
• If transport and transaction costs fall then
there is price convergence.
• There are additional factors contributing to
price convergence:
• increased market efficiency reduces
excess trading profits
Domestic freight rates fall more
than transatlantic
Globalization is price convergence
Source: United Kingdom and France (Paris) until 1903: British Parliamentary Papers, Second series of
memoranda, statistical tables and charts: prepared in the Board of Trade with reference to various matters
bearing on British and foreign trade and industrial conditions. London 1904. Gazette average for UK, quality
not specified for France. 1904-1934 National Bureau of Economic Research Historical Database (19041934), http://www.nber.org/databases/macrohistory/contents/chapter04.html. 1960-1985 Economic
Research Service, US Department of Agriculture. United States: (New York) 1800-49 Arthur Harrison Cole
(1938), 1850-1900 Karl Gunnar Persson (2004). Main sources were New York Times and J.E. Beerbohm’s
Evening Corn Trade News. (Chicago) 1840-1995 National Bureau of Economic Research Data base.
http://www.nber.org/databases/macrohistory/contents/chapter04.html , C. Knick Harley (1980)
and increasing X/GDP ratio
Trade/GDP ratio
Percent
30
20
10
1800
1850
1914
Inter war period
2000
Globalization is increased capital
mobility
Source: NBER (2003), Globalization in Historical Perspektive.
…and falling interest rate differentials
Source: NBER (2003), Globalization in Historical Perspektive.
Does Globalization promote wage
convergence?
• We would expect wage convergence if migration is not
restricted.Why?
• Because bargaining position of workers remaining in
emigration-countries (Old world) will increase, while
bargaining strength of workers in immigration
nations(New world) will fall.
• In the 1870-1914 period migration was unrestricted in
the Atlantic economy and there was wage convergence.
• Sharp fall in migration and little or no wage convergence
in the Interwar period (1914-1945).
• World migration has been restricted after 1945 and
migration does not contribute strongly to wage
convergence.
19th century mass migration
promotes wage convergence
19th century wage convergence
When did Globalization begin?
• The Mediterranean world was ’integrated’
already in the Roman era.
• Then followed a period of disintegration.
• There was ’regionalization’ rather than
Globalization until transport costs fell and
the speed of information transmission
increased in the 19th century.
Two major phases of Globalization
• First phase from 1850 to 1914 when all
markets were free from restrictions.
• Second phase starting after 1945, but…
international mass migration was
regulated as well as capital mobility
(Bretton Woods) and trade was gradually
liberalized. Still work in progress.
The forces generating Globalization
• There are two major forces in Globalization: political and
technological.
• Liberal migration policy and trade policy in the mid
1850s were decisive in opening closed economies.
• Gold standard stimulated capital mobility and capital was
chasing migrant labour.
• At about the same time railways lowered transport costs
for land-locked regions and Ocean freight rates fell.
• The telegraph increased the speed of information
transmission from weeks to hours: by early 1870s the
whole world was ’wired’.
Domestic and international freight
rates
Scource: 1850-1868 Persson 2004, 1869-1950 Mohammed and J.G. Williamson 2003 Table A3D
1950-1974 FAO Production Yearbook, vol. 21, 1967 and vol.24,1975
Information revolution speeds up
price adjustment
Source: Based on ongoing work by M.Ejrnæs and K.G.Persson
Extent of trade determines speed
of adjustment
The economic consequences of
Globalization
Since Globalization implies openness we
can expect it to stimulate the transmission
of new goods and new technologies.
Trade will also increase the efficiency in the
use of existing resources.
But how will R&D spending be affected in an
increasingly competitive environment?
When theory is inconclusive,
history might have the answer
Source: NBER (2003), Globalization in Historical Perspektive.
Wage bargaining in rich countries
will be affected
• Globalization reduces the bargaining
power of trade unions in rich countries.
• The demand curve for labour will be more
elastic when there is ’unlimited’ supply of
low wage workers in China and India.
• Domestic inflation in rich countries will be
muted.
The demand curve is shifting
counter-clockwise
Nominal wage
Globalization
moves
demand curve
S’L
SL
b
 ac

DGL
DPL
c
b
a
Employment
Consequences of an upward shift
in labour costs
• In a protected economy an increase in
labour costs, the upward shift in the S
curve will be passed over to consumers as
higher inflation and only marginally as
higher unemployment, from employment
OL to OL’.
• In the global world that shift will generate
more unemployment and less inflation,
from employment OL to OL’’.
Will there be a race to the bottom in
labour standards?
• Will the implication be that labour standards, that
is working conditions, will be determined by
economies with lowest standards?
• Historical experience from the first Globalization
period suggests that there was a race towards
the top, that is economies with decent standards
inspired others to imitate.
• Such a ’demonstration effect’ is possible only if
workers have access to information and the right
to organize.
• But beware: labour standards are often used as
an excuse by protectionists.
Openness and labour standards in 1913
Source: Huberman, M. and W. Lewchuk (2003), European economic integration and the
labour compact, 1850–1913, European Review of Economic History, 7(1),p.29
Will there be a new Globalization
backlash?
• In the US primaries both major democratic
candidates are running on an anti-global ticket.
• Democrats are more protectionist and now
control US Congress.
• Small nations, which are more dependent on
trade, are normally more globally minded.
• Is that because they have better social safety
nets when nations face global shocks?
A lesson from history
• There is nothing inevitable about Globalization.
• In 1913 no-one could imagine the antiglobalization forces ruling the world in the
Interwar period with disastrous political and
economic results.
• Globalization needs peace and absence of
major shocks like the Great Depression.
• Globalization has winners and losers but the net
gains are positive.
• To stop a backlash you may need to
compensate the losers.
Farmers in New and Old world
complained about low prices
• European late 19th century protectionism
was a reaction to New World grain
invasion.
• But why was there a farm protest
movement in the US Midwest?
• Relative deprivation!
The paradox of rural discontent
graphically speaking
Conclusion
• Two periods of globalization,
• Beware of globalization backlash: there
are winners and losers within nations.
• Stiff competition reduces price setting
power also for big firms and reduce
bargaining power of trade unions.
• Fear of reace towards the bottom not
suppported by 150 years of globalization.