Globalization in historical perspective: Our era is not as unique as we might think, and current trends are not irreversible

Business Economics, Jan, 2002 by Michael D. Bordo

Globalization, in the sense of increased integration of international markets, has waxed and waned throughout history. Most recently, it thrived between the middle of the nineteenth century and World War I, languished and retreated until about 1970, and has thrived again since then. What have we learned from this experience? In eras of increasing globalization, technological change and reduction of barriers increased trade and caused international price convergence. In general, as barriers to trade diminished, so did barriers to international migration, leading to an increasingly integrated global market for skilled labor. Integration of capital markets corresponded in time with trade and migration, with flows increasing, decreasing and increasing again. However, the characteristics of modern capital flows are significantly different from previous eras of globalization. In general, it appears that countries that take advantage of free movement of goods and services, labor and capital can thrive in the aggrega te. However, sound macroeconomic policies are necessary Although the number of individual gainers appears to outnumber losers in increased globalization, it is possibile that the losers can create a backlash that will once again cause a retreat.

Globalization has become a buzzword of the new millennium. It is viewed as the cause of many of the world's problems as well as a panacea. The debate over globalization is manifest in public demonstrations against the World Trade Organization (WTO) in Seattle in the fall of 1999, against the Summit meetings in Quebec and Genoa this year, and against several annual meetings of the International Monetary Fund (LMF) and World Bank. It also has led to a spate of scholarly and not so scholarly books on the subject.

I define globalization as the increasingly close international integration of markets for goods, services and factors of production, labor and capital. Economists have long touted the advantages of free trade, open capital markets, and international migration in producing an optimal allocation of the world's resources. But while the economic benefits in the long run are generally agreed upon, many fear globalization because of the changes it brings in the structure of national economies and a reduction in the living standards of some groups in society while others gain. They also resent the fact that decisions made in other countries impact their lives.

In May, 2001 NBER held a major conference in Santa Barbara, California to debate these issues. The theme of the conference was globalization in historical perspective, and all of the papers presented were written from the perspective of the grand sweep of economic history to provide a long-run background for today's issues. This paper summarizes what we learned at the NBER conference about globalization within the context of an extensive literature on the subject.

In the next section, I discuss the basic dimensions of globalization in the long run: the patterns observed of international integration (disintegration) over the past two centuries and even earlier in the markets for commodities, labor, and capital (finance). The record reveals two ages of pervasive globalization: from the mid-nineteenth century until 1914 and since the early 1970's. In between, the process unraveled in the face of two world wars and the Great Depression. I then consider evidence of the effects of globalization on the historical real economic performance of nations and on the issue of winners versus losers.

The discussion then turns to the role of financial factors in globalization: the international exchange rate regime, financial development, financial crises, and international monetary reform. The paper concludes with a discussion of the backlash that arose against the earlier era of globalization that ended with World War I and considers the prospects for a repeat performance today.

The Dimensions of Globalization

International Trade

The state of the evidence on the integration of commodity markets is summarized in the conference paper by Findlay and O'Rourke (2001). Two dimensions of globalization are considered: (a) growth of international trade relative to population and income and (b) convergence in the prices of traded commodities. On both dimensions, although the process of international integration began with the opening up of the world in the Age of Discovery in the sixteenth century, the major spurt in globalization didn't really occur until after the Napoleonic wars. The growth of trade from 1500 to 1800 averaged a little over one percent per year, while population grew at 0.25 percent. Between 1815 and 1914 trade (measured by exports) grew by 3.5 percent per annum versus real income growth of 2.7 percent. Figure 1 shows that aggregate trade growth was similar in the twentieth century but did not outpace the growth of output to the same extent as in the previous century.

Commodity price convergence was also dramatic in the nineteenth century. For example, because of massive declines in transportation costs (steamships and railroads) the price of wheat in Liverpool relative to Chicago fell from fifty-eight percent in 1870 to sixteen percent in 1913. Similar convergence was the case for many other countries.