10:17 AM May 23, 1996
GLOBALIZATION MODEL MEANS UNEVEN DEVELOPMENTGeneva 23 May (Chakravarthi Raghavan) -- The currently dominant neo-liberal version of the globalization process, namely that rapid and comprehensive liberalization of trade, capital flows and foreign direct investment and a starkly diminished role for the State, far from resulting in a convergence of national economies, will in fact result in a process of uneven development and reinforce the existing differences in the world economy. This is the conclusion of Prof. Paul Bairoch of the University of Geneva and Mr. Richard Kozul-Wright, a senior economist at the UN Conference on Trade and Development in their just published UNCTAD discussion paper, "Globalization Myths: Some Historical Reflections on Integration, Industrialization and Growth in the World economy." The paper knocks down several of the "myths" being propagated in relation to the kind of globalization being promoted by the major industrial countries and organizations controlled by them and compares some of the common elements and differences between the globalization and integration processes of the last century and the current one. The two authors say that the evidence presented by them confirm a sceptical view of "an altogether new globalizing world" and that the idea (of the orthodox economic school) that the world is simply recovering a trend of global economic integration broken by two world wars and a perverse era of State management is not convincing either. The internationalization of finance capital which dominated the earlier globalization process as much as in the contemporary era, the authors say, appear to be strongly related to a process of uneven development, often reinforcing existing differences in the world economy rather than bringing about convergence. A basic issue in the globalization/liberalization debate, and one which is increasingly joined by civil societies of the North and South who are concerned by the negative effects of the process, is whether this globalization model will lead to immizerisation and economic crisis, or to faster growth and convergence of economies. Some of the leading theologians of the neo-liberal versions of globalization/integration view current trends as a return to the earlier era of liberal international order before 1914, but was disrupted by two world wars. A running theme of this stylised version of globalization is that the combined pressure of capital mobility, technological progress and heightened market competition is an irresistible force beyond the influence of domestic policy makers and countries should adjust and join the process and benefit, and those marginalized have to blame themselves. The paper by Bairoch and Kozul-Wright knocks down the myths surrounding the 19th century versions of globalization, typified by the stylized facts of that period presented for e.g. by Jeffrey Sachs and Andrew Warner in the 25th anniversary edition of the Brookings Papers. In this Sachs-Warner view, from 1860 low tariff barriers and technological breakthroughs in long-distance transport and communications stimulated export growth and rising trade shares. Differences in resource endowments ensured a strong North-South dimension to this trade, with developing countries in Latin America, and much of Africa and Asia specializing in raw material exports and importing manufactures. The spread of the Gold standard, convertible currencies and UK's financial leadership ensured large and relatively stable international capital flows which, driven by search for higher profit opportunities in emerging markets, strongly complimented trade flows. This spread of capitalist institutions and free trade and capital flows generated a new growth momentum in the world economy. Industrialization spread rapidly beyond the core North American economies and included the emerging markets in Europe and Japan, and also the takeoff of many raw material exporters in the developing region. The end of this global age of integration was unexpected and due to exogenous political and military shocks. In the Sachs-Warner view, the promise of a new global capitalist system, assuring growth and convergence, will depend on appropriate policy choices. In particular, developing countries must commit themselves to a rapid and comprehensive agenda of liberalization in areas of trade, capital flows and FDI. Bairoch and Kozul-Wright challenge some of these myths and note that while trade was an important feature of the 19th century economy, it was not an era of trade liberalization as made out. The trade liberalization -- beginning about 1860 with the Anglo-French treaty, followed by treaties of France with many others that led to "tariff disarmament" of continental Europe and the standard MFN clause in all of them -- was an interlude that lasted barely two decades and was confined to Europe. But from 1866 to 1883, the US had begun a period of import substitution industrialization behind rising tariff barriers -- average import duties of 45% for manufactured imports (with a 25% lowest rate and a highest rate of 60%). Given the growing weight of the US in the world economy in the 40 years before First World War, excluding this experience from lessons of global integration is a "rather significant" oversight that perpetuates the mistaken notion of an Anglo-Saxon model. In the three decades before World War I, protection was the common trend in the developed world, atleast in Continental Europe. From early 1890s, protectionism was a much more pronounced trend and by 1913 all large countries had adopted a protectionist stance. After regaining its autonomy over tariff policy in the late 1890s, Japan also sought tariff protection for its infant industries. By 1913, trade policy in the developed world was a picture of "islands of liberalism surrounded by a sea of protectionism", while the developing world was characterized by "an ocean of liberalism with islands of protection". This openness in the developing world was the result of colonial rule, where the general principle was of free access to all products of the colonial power. While, after the successful US rejection of British rule, Canada, Australia and New Zealand got some tariff independence, in the nominally independent States of Latin America and East Asia, Western pressure imposed unequal treaties entailing elimination of customs and duties and generally the "five percent rule" applied on all tariffs. All these opened up these markets to British and European manufactured goods. But the idea that liberalization was the driving force behind rising trade during 1870-1913 was a myth say Bairoch and Kozul-Wright. In fact world trade was dominated by intra-European trade. By 1899, manufacturing trade was dominated by trade among industrial countries, accounting for 54% of world trade in manufactures. Though direct evidence is lacking, much of this trade among industrial countries was intra-industry and intra-firm trade. "It is thus a myth that international production is a distinct feature of the current period of globalization. FDI was growing rapidly during the earlier period, accounting for as much as one-third of overseas investment, and the world stock of FDI reached over 9% of world output, a figure not surpassed in early 1990s". Much of the FDI to developing countries went to seek their natural resources, though some as in Argentina and Brazil went for infrastructures like railways and utilities. Much of French and German FDI went to manufacturing in countries like Russia; the same was the case with US FDI to Canada. The FDI was a substitute for trade because of rising tariff barriers. In the current phase of TNC-led global integration, the pressures shaping international production (whether as close links between trade and FDI or complementary aspects of integrated division of labour within a firm), appear to be related to growth of large firms whose expansion abroad is aimed at strengthening profit opportunities. But as in the current period, the 19th century globalization too was dominated by financial flows. Between 1870 and 1913, growth in foreign portfolio investment exceeded growth of trade, FDI and output, and Western Europe was the major source of supply of foreign capital. Under the conventional wisdom, a globalized capital market should help to sever the links between national savings and investment and reallocating savings from the capital-rich to capital-poor countries. But this is not what happened in that period. Taking the world as a whole, and not merely focusing on British FDI, while half of all world FDI went to Asia, Latin America and Oceania-Africa, half went to other advanced countries and one-quarter to North America alone, by then the wealthiest region in the world economy. And the large capital flows to Latin America too were unevenly distributed. It is also a myth that capital flows were then dominated by market sentiment of private investors or, as the IMF contends in its 1994 economic survey, by the securities market which were dominant. Bond issues dominated other debt instruments and in 1914 as much as 70% of outstanding British and French long term FDI consisted of government and railway bonds. The discussion of globalization before the First World War thus "appears to be a collection of myths and realities," say Bairoch and Kozul-Wright. International capital flows, like international trade flows, were highly concentrated with a very high proportion absorbed by the already wealthiest and most dynamic countries in the world economy. But the dynamic sector of the world economy, industry, was least globalized. And the idea that national States were impotent in the face of international pressure is also misleading. And contrary to conventional wisdom the inter-war years was not a period of stagnation, but contained spurts of rapid growth, and the 1920s grew considerably faster than any previous decade. The share of trade in world output by 1929 was close to its 1913 level and FDI stock had also risen significantly between 1814 and 1938. These trends go some way to expose the myth that disintegration of the global economy can be explained simply by irrational political factors unleashed by the First World War and aftermath. At the least the political economy of the interwar period involved a complex inter-twining of domestic and international economic forces. The authors challenge the rosy view about that era's industrialization and the international division of labour (with the South exporting raw materials and importing manufactures) and everyone benefiting and growing. Industrial development was the real engine of growth during that period. While in 1870 no country had achieved a per capita industrialization level half of that in the UK, between 1870-1913, Britain ceased to be the only industrial power, and by 1913 both the US and Germany were contributed a larger share of world output. Five economies -- the UK, Belgium, Switzerland, Germany and Sweden -- had a level more than half of that of the US, by then the leading industrial economy. But Southern and Eastern Europe had weak industrial development; France, Italy, Russia and Austro-Hungary had each pockets of advanced industrial development but not enough to reach and sustain the very rapid growth of other newly industrializing economies. And while the relative decline of Britain as the economic and industrial hegemon was inevitable, there was nothing spontaneous or predictable about the path of industrialization. The uneven patterns of industrialization was not explainable by differences in resource endowments or human capital, but the way some of the late industrializers were able to bridge an institutional hiatus and begin a process of catching-up through high rates of investment, technological progress and rapid productivity growth. And all the successful late industrializers were characterized by reforms to their State structures which helped encourage accumulation and technological progress through infant industry protection and other forms of industrial policy. Just as striking as the unevenness among the advanced countries was the polarization of industrial activity between the North and the South. The deindustrialization of the South preceded this era of global integration, but the process continued and accelerated during this period of integration. Between 1860 and 1913, the developing country share of world manufacturing production declined from over one-third to under a tenth and "there is little doubt that this deindustrialization of the South was the result of a massive flow of European manufactured imports, particularly in the textile and clothing industries, where free trade exposed local artisanal and craft producers to the destructive competitive gale of more capital intensive and high productivity Northern producers." Another increasingly popular myth from that era is that in line with comparative advantage, the export of primary products provided the best growth path for many parts of the economy. There is an element of truth behind this myth. In 1913, the five exporters of primary products were among the world's richest countries -- US with a per capita of $1358 (in 1960 dollars), Canada of $1112, Argentina $1010, Australia $1096, Denmark $883, and New Zealand $756. The average per capita then of all the developed countries was $662. While the place of these economies in the international division of labour was determined by export of agricultural products, a closer examination casts doubt that primary sector led export growth provided an optimal strategy for much of the world. Firstly, these countries were relatively wealthy before the start of that globalization era. Secondly, at that time, in striking contrast to the current era of globalization, primary producers, with the exception of sugar producers, enjoyed a particularly favourable shift in terms of trade . But the best proof of the limits of specializing in primary products and the more dynamic impact of industrialization on economic growth and development, Bairoch and Kozul-Wright argue, lies in the fact that all those who successfully established an industrial base at that time have become rich while the successful exporters of primary goods, with the exception of North America, have seen their GNPs fall. New Zealand which was the sixth or seventh richest country around 1880, had by 1990 declined to the 20th position while the decline of Argentina is even more pronounced. In the current era, "globalization is expected to release a new growth dynamics to the world economy....and the single gratest obstacle to rapid growth and convergence of the world economy lies in States adopting a national policy focus which establishes a path towards marginalization and economic stagnation". But the world economy has been on a visibly slower growth path for the past two decades and most of the available evidence points to a divergence rather than convergence among countries. While there was an acceleration of growth between 1870-1913, it was not as impressive as that after 1945. And while 1890-1913 saw a jump in the growth rates of the developing world, the gap with the developed was not closed and there was no convergence across the world economy in that period. As now, the 19th century episode of globalization was marked by divergence. Trade liberalization was not a stimulus to growth in the half a century before 1913. Rapid export growth occurred against a rising tide of protection, atleast in the newly industrializing parts of the world. Trade flows were dominated by trade in primary products, while industry, the dynamic sector was not participating to the same extent in the globalization. Economic growth led to growth in international trade and not vice versa. And while there was FDI, given its concentration in the primary and related services, its role as an engine of growth is much less convincing. The US and Canada, both wealthy economies, were among largest hosts to FDI, but FDI represented a small fraction of domestic capital formation in the US. Though much higher in Canada, it was not of real significance until the very end of that period. And while FDI at that time represented in Latin America a much greater share of domestic investment, it was unable to establish a more dynamic growth path. "Thus a large TNC presence in the world economy does not by itself establish FDI as an engine of economic growth. Rather, it seems more likely that FDI, like trade, was helping to reinforce a pattern of uneven development in the world economy." A more significant determinant of economic growth was ability to generate and absorb new technologies, but only a few countries occupied a leadership role in technology. The successful catching-up for most countries depended on their gaining access to new technologies and ensuring that these played a role in enhancing competitiveness of their industries through productivity growth. But if technological progress was an important source of economic growth, it was not exogenous. During that period, the State became a more active agent in technological change - most visible in organization of national transport and telecommunication networks. There was also growing State involvement in area of technological progress through creating demand for new products, including in the emerging military complexes. And since technological change to a significant degree is embedded in capital goods, it was closely related to capital accumulation. And large capital outflows were not always seen as an advantage to late industrializers. The disadvantages of such outflows, which had been raised earlier by Adam Smith and David Ricardo, were a concern of policy-makers in Germany and France who tried to discourage such flows or tried to tie them closely to export orders. Echoing some of the current concerns about speculative capital flows, the two authors note that in Argentina in the late 1880s, rapid liberalization of trade and finance disturbed a more balanced and stable development path. An initial period of State-building in 1860s and 1870s gave way to a laissez-faire ideology under domestic political pressure, generating an explosive but largely speculative increase in capital inflows, particularly real estate. The subsequent crisis sparked a minor banking crisis in Europe with the downfall of Baring Brothers. But in Argentina, austerity measures, falling real wages and sale of State enterprises to foreign investors destroyed the growth dynamic and had a negative spillover effect on other economies in the region.