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Created 3/18/1996
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Thoughts on Globalization

Presentation for the Session on "The International System Perspective" of the March 8, 1996, BRIE Working Meeting on Globalization


Brad De Long

Associate Professor of Economics, 601 Evans
University of California at Berkeley
Berkeley, CA 94720-3880
delong@econ.berkeley.edu
http://econ161.berkeley.edu/


Let me annoy Raymond Vernon by expressing a different take on the difference beween 1913 and 1995, so let me start with the question of how things today are different from things during the last flourishing of the international economy, the pre-WWI Belle Epoque. Trade back then was not confined to areas of informal empire--there is a literature in pre-WWI Britain to which Jeffrey Williamson has the references on how in industry by industry British producers decried their losses of export share to German and American producers. My wheat-farming great grandparents in Illinois, whose prices hinged on European demand for grain would have been astonished to have been told that they were not part of an integrated economy.

So what's the difference? Are financial flows stronger and more important today?

Is trade stronger and more important?

How about labor? Is international migration more important?


So what is different? Why has "globalization" become such a powerful banner in the past decade? One possibility: back before the Belle Epoque, what you could transfer across national boundaries was limited--pretty much limited to the commodity, or the security. As long as you could pack it in a crate or an envelope, and send it across the sea (or over the telegraph lines), you could transfer it. If not, not. Call this "low bandwidth" trade. International transactions and linkages that required more in the form of cross-border linkage were very hard to accomplish.

And I think of Ford's early post-WWI attempts to transfer its assembly-line productivity to Britain; of British and Japanese attempts to use Lancashire-manufactured textile machinery to achieve high productivity in factories in India or China; or of the frantic attempts of British investors--who had never imagined how easily Jay Gould would be able to buy the courts of New York--to extract bond coupons and dividends from the Erie Railroad that they "owned".

Today we have "high-bandwidth" trade and investment. The breadth of cross-national links has vastly increased. Back then you could not exercise corporate control across national borders. Now you can. Back then you could not transfer forms of organization to achieve home-country productivity in foreign production operations. Now you can. Back then you could not integrate design and specification in one country with production in another. Now you can.

There are counterforces: trans- or multi-national corporations are going to be a good candidate for someone to blame. We are beginning to see denunciations of "rootless cosmopolitans", of "Goldman-Sachsonomics", that somehow seem to me reminiscent of the old-style European contrast between good engineers and bad financiers. Where that will end up I do not know...

And this shift to "higher bandwidth" in international economic links is still hard to see in its impact on the aggregate numbers--yet. I was one of the subcommanders in a Bentsen Treasury Department guerilla offensive against a Reich Labor Department--arguing that if you took a serious look at the numbers, the gain in blue-collar construction jobs in the 1980s as a result of foreign-financed investment in the U.S. was more than the loss in blue-collar manufacturing jobs as a result of the trade deficit. That the modal service export was not a computer program written by a symbolic analyst in an office tower to program NC machine tools oiled by someone in Malaysia, but was in travel and tourism--the modal service export was someone making a bed for a Japanese tourist outside of Yellowstone.

In 1975 the average U.S. manufacturing import came from a country with a wage level 59% of the U.S. In 1992 the average U.S. manufacturing import came from a country with a wage level 73% of the U.S. In 1975 0.7% of U.S. Gross National Expenditure was made up of non-oil imports from countries with mfg. wage levels less than half that of the U.S. In 1992 this percentage was not higher but lower--0.6%. (Think of it: Japan and Italy in 1975 were economies that Harley Shaiken would have correctly classified as having an enormous labor cost advantage vis-a-vis the U.S.)

But as I thought about this, it seemed to me that all we were saying was not yet. That the vision found in, say, Bob Reich's Work of Nations--one in which the division of labor becomes global at a very finely-grained level, and God help those citizens of rich countries who find themselves among the unskilled--was not yet a powerful force, at least as far as the U.S. economy was concerned.

Think back to 1700, and note that then the "rich" countries had perhaps twice the material standard of living of the "poor", and that this relative gap has been widening since. By 1900 the industrialized "rich" had perhaps six times the material standard of living of the world's "poor" countries. And today? 20 times?

In the long run our descendants will probably not live in a world in which relative international differences in material standards of living are as large as today. And if by 2050 the gap between "rich" and "poor" has shrunk back to a factor of 6, I pray that it will have been by levelling up--by granting software programmers in Bangalore three-bedroom houses like those in Los Gatos, and by giving auto workers in Hermosillos high enough purchasing power to buy the cars that they make.

Up until now, I would argue, a lot of things other than trade and globalization have been driving the erosion of the U.S. income distribution--the Federal Reserve's 1979-1993 war on wage increases, the Reagan NLRB's legitimation of new advanced forms of union busting, the collapse of the "union threat" as a serious constraint on non-union employers, the failure of schools to keep up with requirements for white-collar jobs, falling public investment, the Reagan attempt to tilt the distribution of income in favor of the rich to try to rev up the engine of accumulation. I could go on and on.

But that other things have been more important in the past does not mean that international economic forces will not be the most important in the future.

When will the hammer of factor price equalization across the international economy come down on America's non-necktie (and perhaps on many strata of the -necktie) wearing class? And what should governments and international institutions be doing to keep the hammer of factor price equalization from levelling downward, rather than levelling upward over the next two generations?


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Created 3/18/1996
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Associate Professor of Economics Brad De Long, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://econ161.berkeley.edu/