Skip to 0 minutes and 8 secondsWelcome to phase three. This is the most exciting phase of globalisation's history by far. If you want, phase one and phase two are like a BBC documentary. This is going to be like a Hollywood thriller. The world got turned upside down in a sequence of events which was just like a Hollywood movie, as we'll come to in a second. The main change was that the centre of gravity of the world moved from Asia, China and India, to the North Atlantic. The change you can see in this chart. There was a massive reversal of fortune around 1820. Or it started in around 1820.
Skip to 0 minutes and 52 secondsNow, what we have here is the shares of world GDP of-- in the purple there, that's India and China-- starting from the year about 1000, going up to the most recent times. And as what you can see from the year 1000 up to 1820, the share of India and China in the world global GDP was about half, quite stagnant. Now, the G7 countries are what we call the rich countries today, the big, rich countries. So it's the four big European countries, France, Italy, Germany, and the UK; the two big North American countries, rich North American countries, the US and Canada; and Japan. That's the G7.
Skip to 1 minute and 37 secondsAnd I'm going to be using them in this lecture, but also in subsequent steps, as a proxy for the rich countries. Now, what you can see here is back in the year 1000, their share of world output and income was about 20%, because their share of world population is about 20%, more or less what it is even today. That did not change very much from the year 1000 up to 1820. Rose a little bit, but not much. Starting from 1820, which is the beginning of phase three, you can see the G7 share soared, from about a fifth up to 2/3. The India's and China's share plummeted from about half, way down to almost 10%.
Skip to 2 minutes and 24 secondsNow that is a reversal of fortune. The countries, the civilizations that had dominated the world economy fell back. The economies that used to be on the far eastern fringe of the Eurasian continent started dominating the world. Now, this set of centuries is best thought of as being broken up into three parts. Actually, it's always good to break up complicated stuff into three parts. When it's broken up into three, it's easier to understand, easier to explain, and easier to remember, because, in fact, it's one of the basic rules of drama. And history is written as a drama here. We will see phase three in three acts. And like all good dramas, act one has a set-up.
Skip to 3 minutes and 21 secondsIn other words, we introduce the hero. Things are going well. In act two, there is always a confrontation. Things go wrong. And in act three, the hero triumphs. That's the way it works. And that was the history of phase three. You can see it in this chart here. The chart is showing how steam power and peace brought trade costs down radically, and trade expanded rapidly. But it was not smooth. If we start at the early 1800s, you can see a steam revolution got going. This is on the blue chart. That's the trade costs. You can see the trade costs fell quite rapidly from about 1820 up to the beginning of World War I.
Skip to 4 minutes and 3 secondsThat was the set-up, where we met the hero. We saw globalisation. This is the old globalisation, driven forward by more goods crossing borders. Then, we have the confrontation. That was World War I, the Great Recession, and World War II, which set back globalisation steeply. After World War II, the decline of trade costs proceeded, and globalisation continued to advance. That's the old globalisation. Now, let me talk not about the events, one after another. We don't have time for that, and you've studied it probably in history. What I want to do with this slide is focus on the main changes during old globalisation. There are five. First of all, trade boomed. We already saw that.
Skip to 4 minutes and 54 secondsAnd that's the comfortable definition of globalisation, trade increasing. Two was north industrialised. The northern industrialisation happened. Three, at the same time, southern de-industrialization happened. Four, urbanisation, in other words, the rise of cities. And five, divergence big time. Let me go through those. Having already done trade, let me go through the northern industrialisation and the southern de-industrialization with this chart. Here, we see the G7 industrialises. Remember, the G7 are the rich countries. And the A7 de-industrializes. The A7 are the ancient civilizations, which are China, India, Iraq, Iran, Egypt, Turkey, and Greece-Rome, all put together. Now, what you can see on the left chart here is the UK is the one who started industrialising fast. They got an early start.
Skip to 5 minutes and 51 secondsAnd they rose rapidly. That strong growth of the red line is the basis of the British Empire and their dominance of the world during this period. You could see the US catching up very rapidly and passing the Brits, just right before World War I. The other G7 countries catch up a little bit more slowly and don't rise quite as fast. Now, look at the right. This is a very different outcome. The Asian countries, which we have this data for-- you can see India and Pakistan were one country at the time. And they were de-industrialized during this time. China was de-industrialized during this time. And Japan started to be de-industrialized.
Skip to 6 minutes and 31 secondsBut after about 1850, when they opened up and embraced globalisation, they started rising again. So the old civilizations were de-industrialized. The new civilizations industrialised. And that's what turned the world on its head, because with this industrialisation came riches and military dominance. The next fact is urbanisation. There has always been and still is today a very close correlation between wealth and the size of your cities, the share of your population that's in the cities. And during this time, we had another reversal. So for instance, the first cities in the world that had a million people was Alexandria or Baghdad. Later on, they arose in China.
Skip to 7 minutes and 18 secondsBut by the end of this period, there was 18 countries, 18 cities that had more than a million people. Almost all of them were in the North Atlantic economy.
Skip to 7 minutes and 31 secondsI've left the best to last. The most spectacular, Earth-shaping change during this time was what we call the Great Divergence. That is, the rich countries became rich, and the poor countries did not. Before that, there was never so much difference between the rich and the poor countries. They weren't that different. During this time, the world as we know it, where there are a few countries who are absolutely wealthy, like here in Switzerland, and many, many countries that are poor, that appeared exactly during this time. As you can see with this chart, that Great Divergence is where the green dots start rising and the purple dots start falling.
Skip to 8 minutes and 13 secondsAnd that is the great legacy of phase three, which I'd like to call the old globalisation. Next, we'll look at the new globalisation.
The great divergence
The old globalisation begins and creates the Great Divergence.
Radical improvements in transportation technology triggered modern globalisation (Phase 3) and produced the reality we live with today - a world where a few nations are very rich, but most are not. Because incomes were much more similar across the world at the beginning of Phase 3, this period is also called the “Great Divergence” (the divergence refers to incomes in rich and poor nations).
The steam revolution gave humans the ability to concentrate and control previously unimaginable amounts of energy. In an intricate, century-long waltz, the steam revolution and the Industrial Revolution completely transformed human’s relationship with the environment in general – and distance in particular.
National production patterns shifted, and international trade volumes skyrocketed as nations started to “do what they do best and trade for the rest.” Oxford economist Kevin O’Rourke and Harvard economist Jeff Williamson date the start of this process to 1820.
Europe industrialised – thus ending millenniums of stagnating incomes. By providing much larger markets, globalisation fuelled the cycle of industrialisation, agglomeration, and innovation. The industrialisation spread but only to a handful of nations including the US, Canada, Australia, and Japan. The fact that these nations were growing while the rest of the world continued to stagnant yielded a vast income gap between today’s rich and poor nations (the Great Divergence).
Once you’ve watched this video, you can learn more about this pivotal period of history by reading the article in the next step (this summarises Chapter 2 from my 2016 book The Great Convergence).
© Richard E. Baldwin