Skip to 0 minutes and 9 secondsThis is phase four, what I like to call the new globalisation, from 1990 to today. We're not going to bother with much of the history, because many of you will remember it. What I really want to convey today is how new the new globalisation is. Globalisation is affecting the world in the last two decades or so in a way that's fundamentally different than it did for the two centuries before that. Perhaps the best way to see this is to look at this chart one more time. Now, the chart is labelled the "Great Convergence." It takes the same percentage of GDPs.
Skip to 0 minutes and 49 secondsBut you can see at the end there, from 1990 to today, there's a dramatically different evolution of the green dots, which is the share of the rich countries in the world economy, and the purple dots. What you see is that the G7 share has gone from about 2/3 to under half. It's now back to where it was in 1900, and India's and China's along the way. There's a handful of other developing countries who are really rising rapidly. But this is a great convergence, coming back a little bit more towards the way it used to be.
Skip to 1 minute and 27 secondsWhat caused this? What could possibly have made globalisation affect the world economy in such different ways? What I want you to think about is the role of knowledge, the role of the ICT revolution, the Information and Communication Technology revolution, in changing the nature of globalisation. What I really want you to believe and think about is how the information and communication revolution that you're all so familiar with, the internet, email, cell phones, how that changed how interactions between countries would change. But let me first go through what I mean by ICT. The first thing is information. Information, processing in particular, this information revolution allowed us to process information in vastly greater quantities than we had before.
Skip to 2 minutes and 30 secondsFor example, the computing power in a high-powered cell phone is about the computing power they used to send the first rockets into space. The C is for communication. That is allowing the world to communicate much more rapidly, much more easily, and much more assuredly. There's a bit about communication which is really important here. And that's two-way communication. In the old days, when I was an assistant professor, we communicated by sending each other airmail letters. And what's really difficult about that is I say one thing to you, and you may misunderstand what I say. Then, you have to send another email back to me to clarify.
Skip to 3 minutes and 13 secondsWhen we get on the phone or we're on Skype or internet, we can immediately understand what we're doing and be absolutely sure that you understand that I understand what you are trying to say. That is really very revolutionary. We get instant coordination through communication. The T is for technology, which is driving everything and really changing the way we do things in the world. It's important to note that this ICT revolution came fast. It was driven forward by three laws. It wasn't driven forward by new technologies that evolved slowly, like the steam revolution or container ships or air cargo. This is driven forward by three laws. The first two have to do with electronics. The first is Moore's Law.
Skip to 4 minutes and 2 secondsSo Moore's Law says that computing power doubles every year or year and a half, which leads to an incredible transformation after just a few years. Gilder's Law says that the bandwidth for transmission increases three times faster than the communication power, which has allowed the development of things like the cloud and cloud computing, in addition to local computing power. The last one is called Metcalfe's Law, which says that the usefulness of a network increases way faster than the size of the network. The way to think about that is each time you add a new user to the network, you're getting more value-added with all the existing members.
Skip to 4 minutes and 48 secondsSo each growth of the network leads to growth on the growth, and it expands very rapidly. And that's explaining things like Facebook and Twitter, email. Once it starts going, it becomes incredibly useful. And since it's useful, it starts growing even faster. These are revolutionary things. Or another way to say it is the ICT revolution, the clock ticks in months. In the old revolution, the clock ticked in years. Now, what I want to do in the rest of this stage is not go through a historical narrative. I want to talk about the outcomes of it, the sort of symptoms of this radical change. And what you can see here on this graphic is a picture of the world share of GDP.
Skip to 5 minutes and 40 secondsSo here, we have shares of GDP. At the top, there is 80%. And down here, we have the years going from 1970 up to 2010. And what you can see here is this is the share of the G7. It started up around 70%, and it declined gently to 1990, down to about 2/3. It declined much more rapidly during this phase four, down to under half. Now, interestingly a great deal of this manufacturing shifted to China. That won't be surprising to most of you. China's share of GDP rose from 3% to 19% in just 20 years. Never happened before in history. And there were six other rapidly industrialising countries who saw their share go up.
Skip to 6 minutes and 27 secondsBut the rest of the world-- that's more than 100 countries-- saw very little change in their share. So it was a very different kind of globalisation. Didn't affect the whole world. It seemed to be affecting the very rich countries and then these rapidly industrialising countries. The next point I want to look at is how developing countries viewed foreign direct investment. So in the '60s, '70s, and '80s, most foreign direct investment was viewed with suspicion at best with developing countries. They were a little afraid that the multinationals were coming and stealing the family jewels from their country. So they're very cautious about it. But just around 1990, developing countries embrace foreign direct investment.
Skip to 7 minutes and 16 secondsThey change their domestic laws and sign trade agreements that made their countries very welcoming to foreign direct investment. And foreign direct investment boomed, especially in manufacturing. The next symptom is on the next slide, where I'm going to show you about tariffs. So tariffs are really just taxes on imports. So we're going to have here applied tariffs, which, as I said, taxes on imports. And down here, we're going to show from the late 1980s up to fairly recent. Now, the interesting thing about this was when we were at the very end of phase three, before we started with the new globalisation, developing countries all had very high tariffs on imports.
Skip to 8 minutes and 4 secondsNow, the idea there was they viewed the import tariffs as a way of protecting their industry against the competitiveness of the G7 countries. Well, you can see the G7 countries, or at least these three down here, US, Japan, and EU, had very low tariffs. But the developing countries had very high tariffs. But something changed around 1990 to 1995. All the developing countries started lowering their tariffs, because what they'd discovered was that the protection was not helping their industry. It was hurting the industry, because industry was coming through the foreign direct investment and offshoring, and the tariffs hindered all that. So they started lowering the tariffs in a quiete radical way.
Skip to 8 minutes and 53 secondsThe last bit I want to show you is a change in the nature of trade. So this is a little bit harder to explain. But let me start the way it was at the very end of phase three, before the new globalisation. So countries like France and Germany or the US and Canada traded similar goods in both directions. You might call this back and forth trade. So for example, you'd take a train in France, load it up with car and cars and car parts. You move it over to Germany, unload the French cars and car parts. And you take a whole bunch of German cars and car parts, put it on the train, and move it back to France.
Skip to 9 minutes and 30 secondsAnd that was a very large share of the trade between France and Germany, similar between US and Canada, and between the US and Japan. What changed with the new globalisation is the trade between those rich industrialised countries and nearby developing countries started to look like it was between rich countries, back and forth trade in similar products. That, of course, was as the offshoring, outsourcing of G7 factories progressed, we got back and forth trade in parts and components between the rich countries. And it happened between the US and Mexico. It happened between Japan and Southeast Asia and East Asia. And it happened between Germany and Poland.
Skip to 10 minutes and 18 secondsOne of the most marvellous things about phase four, the new globalisation, was that it allowed 650 million people to rise out of abject poverty. Now, as you can see in this chart, it was not a completely global phenomenon. It was the poor people in the middle income countries-- and this is dominated by India and China-- that saw a huge decline in the number of poor people. But in the very poorest countries, that number continues to rise. And in the middle income countries, it's only recently started to turn down. But that implication of the new globalisation for the poorest people of our planet is one of the truly transformative things about it. That's a quick run through 200,000 years of history.
Skip to 11 minutes and 11 secondsIt was a bit rushed. There will be a lot more in the readings. What we're going to do next week is think about how to understand why it changed and why the implications, the impact of it changed.
Phase 4 : the new globalisation
Phase 4: ICT Revolution starts the New Globalisation
The radical improvements in communication technology that came with the Information and Communications Technology (ICT) Revolution triggered the New Globalisation much as the Steam Revolution started the Old Globalisation.
The ICT Revolution allowed firms based in rich, industrialised nations to combine their advanced marketing, managerial and technical knowledge with low-wage labour in developing nations. This new combination of high-tech and low-wages proved to be a world-beating mixture. To take advantage of this, industrial firms in most of today’s rich nations moved some stages of production to developing nations.
Since the firms moved their know-how along with the offshored production and jobs, the result was a massive movement of knowledge from developed nations to a handful of developing nations. The result of all the new knowledge was the industrialise of a few developing nations at historically unprecedented rates - China above all. Of course, the rapid industrialisation also required the right policy on the part of the emerging markets.
The industrialisation of these emerging market nations sparked income growth that resulted in the “Great Convergence”. The reason is simple, these rapidly industrialisation developed nations grew much, much faster than the rich nations (just the opposite of what happened between 1820 and 1990).
The result was that the rich nation’s share of global income fell from about two-thirds to under a half in just two decades – reversing the two-century trend we saw in Phase 3.
This video provides a brief overview of the essential outcomes, namely:
For convenience, I’ll refer to the G7 nations (US, UK, France, Germany, Italy, Japan, and Canada) as representative of the rich nations (the “North”) even though the list of rich nations also includes countries like Australia, New Zealand, and the other West European nations.
The G7’s share of world GDP plummeted while that of a handful of developing nations soared; the dramatic changes were historic in size, but extremely concentrated geographically.
The G7 deindustrialised while a handful of developing nations (for example, China, India, Poland, Korea, Indonesia and Thailand) industrialised at a pace that is entirely without historical precedence. For example, in just two decades, China’s world share of manufacturing leaped from under 5% to almost 20%.
Income growth in the rapid industrialisers soared and this triggered a boom in commodity exports and prices known as the ‘commodity super-cycle’. This follow-on boom allowed a number of commodity exporting nations – many of them developing nations – to join the growth bonanza of the rapid industrialisers.
The nature of trade between the G7 and many developing nations changed dramatically. North-North trade had long been dominated by back-and-forth trade in parts and components. In the mid- to late-1980s, this spread to the trade between the G7 and rapidly industrialising developing nations.
Almost all developing nations massively liberalise their policies on trade, investment, capital, services and intellectual property. Quite simply, industrial protectionism became industrial destructionism in the eyes of most developing nations. This was part of their effort to attract the offshored jobs and factories that had been so critical in the rapid industrialisation of the I6.
When you have watched this introductory video, read the article in the next step to learn more about how and why the globalisation we are living with today is so different than the globalisation that shaped the world after World War Two.
© Richard E. Baldwin