Since the early 1990s, the literature on economic globalization has grown in plentiful abundance. This book adds to that but also stands somewhat apart from it. Here I take issue with our common assumptions about economic globalization, about its origins and historical precedents. Following that, and based on a revised understanding of contemporary political economy, I look at some of its key consequences. Economic globalization in the twenty-first century includes globalization of financial transactions and of production, and the liberalization of trade. The major exclusion is labor mobility, which continues to be limited by border controls. Unlike globalization of finance and of production, globalization of labor is a project for the future. This is in contrast to conditions during the nineteenth century and until the outbreak of the First World War when international labor mobility was relatively easy and, indeed, welcomed particularly in the New World, the USA, Australia, Canada, Brazil, and so on. Security considerations at the time of the First World War, however, restricted international labor mobility. More recently, terrorist attacks in the USA on September 11, 2001, heightened concerns for border protection and added to even stricter controls on cross-border flow of people. Terror groups that have spread fear through indiscriminate acts of murder and mayhem have lessened the likelihood of any progress, in the immediate future, toward liberalizing international movement of people. There are some exceptions, such as Japan , where demographics and a declining population have forced the government to relax immigration policies and facilitate the entry of migrant labor. Germany too stands out as a relatively open country. In 2016, it accepted about one million immigrants and refugees from war-torn Middle East, considerably more than any other country, again in part because of domestic population pressures.
A commonly held view is that contemporary economic globalization represents a continuation of liberal economic and trade policies after the Second World War. Adam Smith established an intellectually convincing case for free trade in the late eighteenth century and demonstrated that it maximized wealth and welfare of consumers. He based his free trade theories on the principles of specialization and division of labor and argued that if a ‘foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage’ (Smith 1964:401). For reasons of efficiency and maximization of consumer welfare, Smith advocated free trade and the removal of barriers between domestic and international markets so that consumers could source products from the most efficient producers, whether domestic or foreign. A capitalist system based on free trade policies was, therefore, best in maximizing both production and consumption, and wealth and welfare. For Smith, there was no sense in simply accumulating gold and precious metals as advocated by the dominant mercantilist ideas of the time. For him, the true measure of wealth was consumption, the power to purchase and consume, not accumulate. He understood also that expanding the consumption frontier required free trade (See Heilbroner, 1993:44). Unlike in mercantilism, a capitalist economy protected the interests of consumers by maximizing their market choices and purchasing power.
Nonetheless, even as capitalism became more deeply established in Europe after the industrial revolution, mercantilist policies continued to hold sway. In the 250 years since Smith’s advocacy of it, free trade policy has never found universal acceptance and we have only ever had periods of relatively liberal trade policies in the late nineteenth and the late twentieth centuries. Liberal trade in the twentieth century initially produced a period of increased interdependence between states, which arguably later morphed into contemporary globalization. Many analysts, as we shall see in the next chapter, have also retrospectively labeled nineteenth-century liberal trade as the first period of globalization. An implication of this is that there is basic continuity between the two periods, and a denial of anything particularly unique about contemporary globalization.
Globalization of finance followed liberalization of capital accounts and removal of exchange restrictions. The Bretton-Woods agreement after the Second World War included these measures as a necessary complement to proposed trade liberalization. It was the function of the International Monetary Fund (IMF) to oversee and encourage financial liberalization but, in reality, not many countries lived up to their commitments in the first decades after the War. Eventually, however, IMF members phased out exchange controls and this liberalization led to an unprecedented and unanticipated globalization of finance. The increase in international financial flow vastly outpaced the level of trade and this was completely unanticipated because, at the time of the Bretton-Woods agreement, a common assumption was that settlement of trade accounts would determine cross-border financial flows. In the contemporary period, however, speculative, not trade related, capital flows dominate all aspects of international financial transactions. Moreover, contrary to expectations, financial institutions have themselves become major players in national economic structures. In years preceding the global financial crisis in 2008, banks and financial institutions in the USA accounted for 40 percent of all profits generated.
Liberalization and removal of capital restrictions allowed safe and quick foreign exchange transactions, and enabled capitalists and investors to profit from opportunities elsewhere. This was the main driver of financial globalization. In 1990, total cross-border financial assets were close to 60 percent of global GDP but had more than doubled to slightly above 130 percent by 2004 (IMF 2007: Chap. 4). Financial globalization has its share of supporters who see access to global capital markets as beneficial, and detractors who are apt to see global capital flows as destabilizing and conducive to crises. Imprudent and irresponsible lending practices of international banks precipitated both the Latin American debt crisis of 1982 and the global financial crisis of 2008, and yet, these financial institutions received considerable taxpayer-funded bailout packages that secured their corporate viability and survival. These actions increased moral hazard and financial concentration, and strengthened banks at the expense of other groups in society. Kose et al. (2007) acknowledge that while it was unclear whether the supporters or detractors had a stronger case, the benefits of financial globalization were significant, including ‘development of the domestic financial sector … discipline on macroeconomic policies … efficiency gains among domestic firms by exposing them to competition from foreign entrants, and … better government and corporate governance. These collateral benefits could enhance efficiency and, by extension, total factor productivity growth.’ However, the frequency of crises alludes to inherent difficulties in assuming good governance in financial institutions.
In this book I deal with globally fragmented production networks that have become a defining feature of contemporary globalization. An orthodox explanation for the emergence of such networks and globalized production is trade liberalization after the Second World War, and facilitated by breakthroughs in communications technology and lower transportation costs. Technological facilitation is indisputable, but I will argue that globalized production originated from a different set of circumstances. Its roots are, indeed, in state-level policy shifts, but from liberal to neo-protectionist policies in the 1980s. The USA turned to protectionism in order to provide relief to struggling domestic industries and firms from Japanese competition, and to encourage manufacturers in Japan to rely less on exports and invest, instead, in manufacturing in export markets. In this way, policy-makers hoped that an inflow of Japanese investments would create jobs and other benefits for the US economy. Japanese manufacturers not only met these expectations, but they went a step further and transplanted their own ‘networked’ manufacturing strategy on to foreign soils, aspects of which were soon also adopted by their western competitors. This export of their production strategy ultimately became the source of globalized production that is so ubiquitous in contemporary economic globalization.
This book deals with the origins and consequences of globalized production, defined as the disaggregation and dispersion of various stages of production across different countries. Manufacturing has evolved in the shape of global production networks (GPNs), a collective of inter-linked, but geographically dispersed, production units. Whether loosely integrated or otherwise, these GPNs constitute the nucleus of an emerging global economy . Economic globalization and globalization of production are, as the terms imply, a process of becoming, a journey leading to a fully evolved global economy , when national economic identities fade into insignificance. There is no timeline or expectation that this project will come to full fruition anytime soon, nor even a clear vision or mapping of the end-state. Globalization and global economy are as democratization and democracy except that while there are multiple definitions of liberal democracy, a global economy is, as yet, undefined essentially because there are no historical parallels or precedents to draw upon. Nonetheless, even if we cannot fully comprehend the end-state, it is still a mistake to speak of a journey without a destination.
I will present an analysis of globalization that highlights differences from nineteenth-century interdependence , and identifies some of its important consequences. In the nineteenth century , trade as a percentage of GDP grew rapidly but trade was essentially in finished consumer goods. In the contemporary period, particularly since the 1980s, trade in parts and components have increased at a rapid pace and today constitutes a large chunk of total international trade. This is because of the spread of global manufacturing strategies. Instead of a single production location for any given consumer product, manufacturers have taken advantage of disaggregating and dispersing production in different geographic locations, leading to the emergence of globally networked production . This feature of the contemporary period was missing in earlier times of economic interdependence. Moreover, it has arisen not only because it is now technologically feasible to maintain and operate globally dispersed production networks but largely because of protectionist policies in the 1980s that threatened to limit access to export markets. Not progressive trade liberalization after the Second World War, but a short burst of protectionism in the early 1980s triggered the initial drive to dispersed and networked production . Protectionism spawned the birth of GPNs, but from a broader perspective, trade liberalization was also useful in facilitating trade across borders and in globalizing consumption patterns.
A main argument in this book is that global integration of finance and production will continue. Admittedly, however, as the level of globalization has deepened, so has the voice of those who are opposed to it. The decision of British voters, in 2016, to leave the European Union was a prominent reflection of this opposition. Advocates of British exit, or Brexit , argued forcefully, and in the end successfully, for an end to British globalism and a return to the defense of national sovereignty and territorial integrity, eroded by membership in the EU. In January 2017, British Prime Minister Theresa May reinterpreted Brexit not as a rejection of globalism but of Britain’s European identity and an opportunity, therefore, for a more global engagement but with full control over labor mobility. Across the Atlantic, the Republican nominee in American presidential elections in 2016 also made similar arguments, and promised to scale back globalization, keeping ‘America First.’ Defying all expectations, Donald Trump won the election in November.
A number of factors have contributed to this backlash against globalization. These include the large chasm between real and promised gains, and concentration of benefits in the hands of a small minority. While recent events may not reverse the course of globalization, there is a palpable sense of anger and frustration that deserves serious consideration. The reality is that even if economic benefits are significant, globalization can only achieve broad-based support and legitimacy if the process of trade integration is fair and does not lead to the marginalization of a large section of society. Rising global inequality is indicative of political failure but for political leaders it is easier to channel anger toward ‘the system’ rather than acknowledge their own sins of the past. I will discuss these issues in some depth in the final chapter.
The main body of the book is in two parts. The first chapter in Part 1 develops an alternative explanation to globalization than is commonly presented in existing literature. In this chapter, I will explain why it is an error to compare contemporary globalization to interdependence in the nineteenth century or as an extension of interdependence in the 1970s . In Chap. 2, I trace the origins of globalization to American neo-protectionist trade policies of targeted trade restrictions in the early 1980s, and secondarily to currency realignment in mid-1980s following the Plaza Accord . I will show how Japanese foreign investments after neo-protectionist trade restrictive measures led to the emergence of networked manufacturing and eventually to globally networked manufacturing. Just as trade can be a mechanism for technology transfer, Japanese foreign investments led to a transfer of Japanese production technologies that formed the basis of the central component of globalization, the spread of disaggregated production.
Part 2 of the book has three chapters. Each chapter will examine some of the main consequences of globalization, in particular for development, income inequality, and trade stability beyond that resulting from political leadership, as proposed by the hegemonic-stability thesis. These are not an exhaustive list of consequences and there are many other important consequences of globalization in the contemporary period and indeed much has been written about the impact on welfare states and on labor standards and trade unions because states are forced to balance social goals with pressures to enhance international trade competitiveness. Globalization also has conflict mitigation effects but we should not presume a world of immediate, or immanent, peace and harmony. I will touch on some of these and others cursorily in the course of my analysis, but will leave their more exhaustive analyses to others.
Chapter 3 deals with the issue of trade stability. There are a number of economic and political economy explanations for the cyclical drift between liberal trade and protectionist policies and I will discuss each of these before explaining the impact globalization has had on trade stability and trade liberalization. The essential argument is that globalization has added a degree of permanence to liberal trade and it is not surprising that there was no surge in protectionist policies even after the global financial crisis. This was unlike earlier periods of economic crises when states instinctively moved to protect domestic manufacturers from foreign competition. Absolute trade levels fell sharply after the financial crisis but this drop was more a function of difficulties in obtaining trade finance rather than higher levels of import protection.
Chapter 4 looks at the developmental impact of globalization. Following the collapse of earlier unorthodo...