Ghost of globalisation past

28th March 2014

By: Keith Campbell

Creamer Media Senior Deputy Editor

  

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Globalisation. Love it or hate it, it is the economically dominant phenomenon of today. As much free trade as possible encompassing as many countries as possible, to mutual benefit and enrichment. Many countries have enjoyed rapid economic growth. Of course, when something goes badly wrong in one country, globalisation means that the problem can rapidly affect other countries, far away, and not just the immediate neighbours, as we have seen all too clearly in recent years.

Globalisation has been made possible by a plethora of events and developments: the collapse of the communist economic system (or, in China and some other Asian countries, its abolition), the freeing up of trade and investment around the world, the rise of air transport, the development of the Internet and Internet commerce, satellite communications, TV and radio, the development of containerisation (which has revolutionised maritime and terrestrial transport), and so on. Emerging at different times, these factors came together some two decades ago, in the last years of the twentieth century. (The World Wide Web became publicly available on August 6, 1991. It was opened to everyone and anyone to develop and use, without having to pay any fees, in 1993 – it was developed by Tim Berners-Lee under the aegis of the European Organisation for Nuclear Research, better known as Cern.)

Now, of course, there is a problem with the term globalisation. What is meant by it? If it means the existence of trade networks that embrace and link all the inhabited continents of the world, then we have been living with globalisation for 500 years. After all, “in 1492, Columbus sailed the ocean blue”. Did you know that the Peruvian capital, Lima, was founded in 1535? Or that São Paulo, in Brazil, was established in 1554? And trade between Africa, Asia and Europe can be traced back millennia, not just centuries.

However, most of that trade, most of the time, was not really free. It was often highly regulated and highly taxed. Travel was usually slow, often dangerous, especially on land. In the days of the great sailing ships, a voyage from Europe to India could take six months.

What is striking about modern globalisation is its ubiquity (only North Korea has completely opted out), its ease and its speed. There has never been anything quite like it. Or so many believe. They are, of course, wrong. There was, in fact, another great era of globalisation, of global-spanning unprecedentedly swift trade, investment and migration, enabled by revolutionary technologies which transformed transport and communications and which also brought rapid economic growth to many countries.

That previous period of globalisation, in the modern sense, can be said to begin in 1869 (the year the Suez Canal was opened) and was enabled by the steam and electricity revolutions – the railways, steamships, powered machinery, effective artificial (gas) illumination, effective refrigeration and the World Wide Web of the ninetieth century: the telegraph. People, goods, information and capital flowed at unprecedented rates. The development of a widely accepted gold standard helped. European economies became highly integrated. European trade increased, in real terms, some four-fold between 1870 and 1913. People could use catalogues and the telegraph to order products from all over the world and to pay for them.

Global market integration, pointed out Guillaume Daudin, Matthias Morys and Kevin O’Rourke in their 2009 paper for the Centre of Economic Policy Research, Globalisation, 1870–1914, is best shown by the convergence in the prices for commodities and manufactured goods. Thus, in 1870 wheat prices in Liverpool, UK, exceeded those of Chicago, US, by 57.6%, but by 1913 the difference had fallen to only 15.6%. Likewise, Liverpool cotton prices were 57% higher than those in Bombay in 1870, but were only 20% higher in 1913. Price differences between the US and UK for iron bars fell from 75% in 1870 to 20.6% in 1913. And so it went on.

Global capital flows were also impressive: in 1870, foreign assets accounted for 7% of the the world’s gross domestic product (GDP). By the period 1900 to 1914, this had risen to 20%. Bonds spreads (price gaps between bonds issued in different countries) between the core Western European economies of France, Germany and the UK and peripheral economies (both in and beyond Europe) had an average decline from about 5% in 1870 to 1% in 1914. Strikingly, there was an immediate drop in the spreads on the US 5-20 bonds when the trans-Atlantic telegraph was inaugurated in 1866. Daudin, Morys and O’Rourke noted: “[C]apital market integration increased substantially between 1870 and 1914, but this was not a continuous process. As is true today, there were reversals which potentially subjected capital-receiving countries to ‘sudden stops’.”

Note that the major European powers did not direct most of their overseas capital exports to their respective empires. No less than 61.1% of French capital exports went to other European countries; the figure for Germany was 53.3%. Latin America received 13.3% of French foreign investments and 16.2% of German investments. Africa, where most French and German colonial possessions were, got only 7.3% of French capital exports and 8.5% of German capital exports. As for Britain, 20.5% of its capital exports went to the US, 10.1% to Canada, 8.6% to Argentina, 8.3% to Australia, 7.8% to India and 4.2% to Brazil. The whole of Africa (including South Africa) received 9.1%.

It was all totally wrecked, of course, by the First World War, which erupted 100 years ago this year. It was not until the 1970s that the percentage of global GDP accounted for by foreign assets reached the 1914 level again. A grim warning against the assumptions that progress is inevitable, that economic integration cannot be undone and that a globally interlinked economy makes major wars impossible.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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