ization in Historical

erspective (A)
Haggard / Naughton
IR/PS
September 2005
 I. When did “Globalization” begin?
One obvious candidate for a starting point is back
around 1492, at the beginning of European
expansion.
The Portuguese, and then the Spanish, ventured
further out into the oceans than anyone had
gone before; They founded new island colonies
in the Atlantic, became sugar plantations.
The Portuguese steadily explored down the coast
of Africa, rounding the Cape of Good Hope
(1487); and reaching India (1497).
And of course Columbus came to the Americas.
By the 1500s, the whole world was
linked by maritime trade routes
A Final Link in a Global Chain: The
Manila Galleon, Annual Sailings,
beginning in 1571

A Direct Link Between the New World and Asia

“When the Portuguese -- going east -- met the Spanish,
coming from the West, in the Moluccas (the Spice
Islands) in 1521, the globe was united.” -C.R. Boxer
Bringing New World Silver to Asia, especially to China.
Expansion of the (silver) money supply fueled
commercialization and economic growth in late Ming
China. Regionally, silver, silk, and ceramics were traded
among China, Japan, and Manila (through Macau).
Europeans took over--but also linked together--existing
commercial networks based on trading cities. Trade was
flourishing before the Europeans arrived, and it
expanded under initial European impact. Europeans
built new Coastal Enclave cities (Bombay, Manila,
Macau), and also took over existing trading cities,
stringing them together to make their own Seaborne
Empires: First Portuguese, then Dutch.
Dutch Sea-borne Empire
Dutch Quarter in Nagasaki (isolated
from the main economy)
Do these important changes add up
to Globalization?

Use the multi-part definition of globalization

from Professor Haggard’s lecture
Thursday…..
1. Increased flows across national borders.

2a. Market integration leads to convergence

in prices. Changes in relative wages and
incomes.
2b. Reallocation of domestic and global
economic activity.

3. Firms and institutions that crossed

national boundaries.
 Overall this was not yet a process
of globalization. Its historical
importance is elsewhere:
A. Horizons expanded figuratively and literally.
The sense of discovery fed directly into the
Renaissance in Europe and, indirectly, into the
Scientific Revolution of the 1600s. New
“technologies” (food crops) diffused widely.
B. Devastation of the indigenous population of
the Americas. Europeans with superior military
technologies imported devastating new
diseases.
C. To replace the decimated indigenous
population, the slave trade transported 15-20
million black Africans to work in mines and
plantation agriculture in the Americas.
 The nature of global power
changed dramatically.
• The oceans, instead of being barriers, became the main
highways. Coastal areas were most open to outside
influence and economic stimulus.
• From this time forward, the nations that controlled the
sea routes were the dominant economic and political
powers. Later globalization would unfold under the aegis
of a hegemonic power.
• Iberian dominance was followed by Dutch control. The
English seized hegemony from the Dutch and kept it for
200 years, until it was passed to the US.
• The Islamic civilization of the Middle East lost its pivotal
position in land-based trade routes.
Ethnic and religious distribution today reflects the former
centrality of Islamic societies in pre-modern trade routes.
 Moreover, this period of global
dynamism did not lead directly to
today’s international economy.
The expanding international economy of the 1500s
did not last. Global economic exchanges
receded in the 1600s, and the world economy
slowed down, perhaps due to global climate
change (the “Little Ice Age” of the 1600s).
As the global economy lost speed, several regions
dropped out of the new networks. In East Asia,
Japan closed its doors, Tokugawa seclusion
decree, 1635.
 True Globalization had to Wait for
the Industrial Revolution (IR)
• During the 1700s, more than 50% of world
industrial output had been produced in
China and India. Mainly handicraft.
• The First Industrial Revolution in England,
1780-1820, changed this: Cotton Textiles,
Coal and Iron. Industrial production
became concentrated in Europe.
• A Second Wave of Innovation after 1840
brought Steel, Railroads, and practical
Steam Engines.
The IR in the UK provided the basis
for a truly global economy
• By the mid-1800s, the UK, with 2.5% of world
population, produced a third of world
manufacturing output.
• This created the basis for British dominance of
the global order. Not only a British Empire that
went far beyond earlier sea-borne empires, but
also informal British hegemony over the world
economy.
• Meanwhile, the IR gradually spread to a few
countries in continental Europe and to the US.
British Empire “ruled the waves” but
also extended its power inland
 After about 1870, a new wave of
massive technological change
rapidly pushed down the cost of
international trade:
• Ocean freight rates declined about 70%
between mid-1800s and 1914.
• Suez Canal, 1869; Railroads span
continents. Utah 1869.
• Telegraph linked all parts of the world.
From about 1870, the emergence of
an international economy with all
the characteristics of Globalization.
• Increasing trade in staple goods, not just
luxuries.
• Integration of markets:
– Example: Rice from Rangoon to Europe, transport
costs drop from 74% of selling price to 18%. Similar
reductions for Wheat shipped from Chicago. Result:
Integrated market: one world price for grain.
• Large international capital flows.
• Mass migration on a global scale; wages
affected by migration flows.
• Emergence of trans-national corporations.
We can assert with a surprising degree of
confidence:

Globalization didn’t begin in 1492, and it

didn’t begin in the 1980s or 1990s, either.
Instead, it began after about 1870, when
the world was first knit together into
integrated markets.
 II. Patterns of Globalization
Change of perspective.

Use some quantitative indicators: How can

we measure the trans-national flows we
have used in our definition of
globalization?

How can we make comparisons across

periods? How can we normalize data?
 Exports as a Share of GDP
30%

25%

20%
Percent of GDP

UK
15%

Latin America
10%

World
5%

US
0%
1850 1870 1890 1910 1930 1950 1970 1990
 Exports as a Share of GDP
30%

WW I WW II
25%

20%
Percent of GDP

UK
15%

Latin America
10%

World
5%

US
0%
1850 1870 1890 1910 1930 1950 1970 1990
 Foreign Assets as Share of World GDP
70%
Liabilities
60%

50%
Assets
Percent of World GDP

40%

30%

20%

10%

0%
1850 1870 1890 1910 1930 1950 1970 1990
 Foreign Assets as Share of World GDP
70%

60%
WW I WW II
50%
Percent of World GDP

40%

30%

20%

10%

0%
1850 1870 1890 1910 1930 1950 1970 1990
 Foreign Assets as Share of World GDP
70%

60%
First Wave WW I WW II
50%
Inter-War
Post-War
Percent of World GDP

40% Current Wave

30%

20%

10%

0%
1850 1870 1890 1910 1930 1950 1970 1990
 Four Periods of Globalization,
1870-Present
1. First Wave of Globalization, 1870-1914.
2. War and the Inter-War Retreat from
Globalization, 1914-1945.
3. Postwar Growth and National Economic
Reconstruction, 1945-1975.
4. Current Wave of Globalization, 1975-Present

Each period reflects a distinctive way of organizing

international transactions. The current system
can be best understood in the context of these
past systems.
 For Each Period, We Look At:
A. International Context, Framework of
Cooperation.
B. Trade
C. Investment
D. Money (International Finance)
E. Growth and Well-being
Topics B-E are sections in the syllabus; for now, we
won’t give them equal weight, but instead select
elements to tell a story.
A. What kind of international regime
prevailed in the 1870-1914 period?

1. There were no international institutions.

2. Competing colonial systems developed
under informal British hegemony.
Contracts were enforced by gunboats.
3. The last period of expansion of
European colonialism—the “scramble for
Africa”—occurred during this period.
The US took the Philippines and Cuba.
B. Trade Growth in the First Wave,
1870-1914
• Trade grew rapidly, about 3.5% per year,
much faster than GDP at that time.
• Two-thirds of trade was in raw materials:
food, agricultural raw materials, and
minerals. One third was manufactures.
• European core exported manufactures
and imported raw materials.
• Trade was based on “comparative
advantage.”
 In many different economies, the
stimulus of trade during this “First
Period” began a process of
development for the first time.
• Honduras became a “banana republic” providing
the bulk of world banana exports from US-owned
plantations.
• Malaysia became a tin and rubber exporter.
• Brazil became a huge coffee exporter (over 50%
of exports).
• Burma was the world’s largest rice exporter.
C. Capital Flows Became Large
• UK was the “banker to the world.”
• Massive outflows of capital, proportionately large
than those of any country today. From rich
countries to poor countries: simple and logical.
• Much capital went to purchase government
bonds, often used for the construction of
infrastructure, such as railroads.
– UK outflows: 69% infrastructure; 4% manufacturing.
35% of the total was for government bonds;
• The US was the largest borrower, but also
became a large supplier of capital by the end.
 Multinational Corporations
Emerged, along with Foreign Direct
Investment (FDI)
• Multinational financial institutions, often British,
emerged: Barings, Rothschilds.
• Large international manufacturing and mining
enterprises developed, as firms sought to
capture the economic advantages derived from
new technologies.
• European individuals set up individual
businesses around the globe, which often had
loose and informal links to home businesses. A
close substitute to establishing direct “cross-
border control,” which is often difficult.
 Mass Migration
“People moved. They did not need passports….
Between 1871 and 1915, 36 million people left
Europe….The great streams of capital, trade
and migration were linked. Without the capital
flows, it would have been impossible to construct
the infrastructure—the railways, the cities—for
the new immigrations.”
–Harold James

At least 15 million people left China and India,

mainly for plantations in Southeast Asia, Africa
and the Caribbean.
 D. The Gold Standard
• International payments were based on gold.
The world went on the gold standard during the
1870s. (Britain was on gold before this.)
• Currencies had a fixed gold value, and countries
retained reserves in the form of gold.
• If a country had a payments deficit, gold flowed
out. The money supply shrank, prices declined.
Adjustment was automatic.
• Countries had little autonomy to set their own
monetary or macroeconomic policies.
Everybody had to play by the “rules of the
game.”
 E. Growth
• Rapid growth spread from the UK to
Germany, France, Belgium in Europe, and
to most of the countries of new settlement
(US, Canada, Australia, Argentina).
• Indeed, these newly industrializing powers
seem not only to catch up with the UK, but
in many respects seem poised to
overtake.
 US Economic Growth
• The US industrialized rapidly behind high tariff
walls. The ‘manufacturing belt’ of the North East
produced what was probably the highest GDP
per person in the world.
• US encouraged massive immigration, cities grew
rapidly.
• High incomes and large size gave incomparable
market size advantage.
• Result: US developed lead in new scale-
intensive industries: steel, chemicals,
machinery, electricity.
• But US involvement in world trade was modest,
due to its huge size and relative self-sufficiency.
“In 1914, the inhabitant of London could
order by telephone, sipping his morning
tea in bed, the various products of the
whole earth, and reasonably expect their
early delivery upon his doorstep; he could
at the same moment [invest] his wealth in
the natural resources and enterprises of
any quarter of the world, and share in their
prospective fruits and advantages; he
could secure cheap and comfortable
transit to any country or climate without
passport or other formality. But, most
important of all, he regarded this state of
affairs as normal, certain, and
permanent.”