30 Analyzed the impact of at least four economic drivers which might impact globalization 30 Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation.
Factors Driving Global Economic Integration - by Michael Mussa, Economic Counselor and Director of Research, IMFAugust 25, 2000by Michael MussaEconomic Counselor and Director of ResearchIMFPresented in Jackson Hole, Wyomingat a symposium sponsored by theFederal Reserve Bank of Kansas Cityon “Global Opportunities and Challenges,”August 25, 2000The views expressed in this paper are those of the author and do not reflect those of the IMF. Contents.Charts.Tables.IntroductionGlobal economic integration is not a new phenomenon. Some communication and trade took place between distant civilizations even in ancient times. Since the travels of Marco Polo seven centuries ago, global economic integration—through trade, factor movements, and communication of economically useful knowledge and technology—has been on a generally rising trend. This process of globalization in the economic domain has not always proceeded smoothly.
Nor has it always benefited all whom it has affected. But, despite occasional interruptions, such as following the collapse of the Roman Empire or during the interwar period in this century, the degree of economic integration among different societies around the world has generally been rising. Indeed, during the past half century, the pace of economic globalization (including the reversal of the interwar decline) has been particularly rapid.
And, with the exception of human migration, global economic integration today is greater than it ever has been and is likely to deepen going forward.Three fundamental factors have affected the process of economic globalization and are likely to continue driving it in the future. First, improvements in the technology of transportation and communication have reduced the costs of transporting goods, services, and factors of production and of communicating economically useful knowledge and technology. Second, the tastes of individuals and societies have generally, but not universally, favored taking advantage of the opportunities provided by declining costs of transportation and communication through increasing economic integration. Third, public policies have significantly influenced the character and pace of economic integration, although not always in the direction of increasing economic integration.These three fundamental factors have influenced the pattern and pace of economic integration in all of its important dimensions.
In particular, this paper discusses three important dimensions of economic integration: (1) through human migration; (2) through trade in goods and services; and (3) through movements of capital and integration of financial markets. After examining how fundamental forces have influenced economic integration in these dimensions, the paper concludes with reflections on three issues of general importance to the future course of global economic integration: the importance of communication as an influence on integration; the possibility that we may see a sharp reversal in the general trend of increasing integration, as occurred in the interwar period; and the apparent end of imperialism as a mechanism of integration.
Before turning to this agenda, however, it is important to emphasize a key theme that will recur in subsequent discussion: the main factors that drive the process of economic integration exert not only independent influences but also interact in important and complex ways.Interactions Among the Fundamental Factors Driving Economic IntegrationAlthough technology, tastes, and public policy each have important independent influences on the pattern and pace of economic integration in its various dimensions, they clearly interact in important ways. Improvements in the technology of transportation and communication do not occur spontaneously in an economic vacuum. The desire of people to take advantage of what they see as the benefits of closer economic integration—that is, the taste for the benefits of integration—is a key reason why it is profitable to make the innovations and investments that bring improvements in the technology of transportation and communication. And, public policy has often played a significant role in fostering innovation and investment in transportation and communication both to pursue the benefits of closer economic integration (within as well as across political boundaries) and for other reasons, such as national defense.The tastes that people have and develop for the potential benefits of closer economic integration are themselves partly dependent on experience that is made possible by cheaper means of transportation and communication. For example, centuries ago, wealthy people in Europe first learned about the tea and spices of the East as the consequence of limited and very expensive trade. The broadening desire for these products resulting from limited experience hastened the search for easier and cheaper means of securing them. As a by-product of these efforts, America was discovered, and new frontiers of integration were opened up in the economic and other domains.
More recently, if less dramatically, it is clear that tastes for products and services produced in far away locations (including tastes exercised through travel and tourism), as well as for investment in foreign assets, depend to an important degree on experience. As this experience grows, partly because it becomes cheaper, the tastes for the benefits of economic integration typically tend to rise.
Positive Impacts Of Globalization
For example, it appears that as global investors have gained more experience with equities issued by firms in emerging market countries, they have become more interested in diversifying their portfolios to include some of these assets.Public policy toward economic integration is also, to an important extent, responsive to the tastes that people have regarding various aspects of such integration, as well as to the technologies that make integration possible. On the latter score, it is relevant to note the current issues concerning public policy with respect to commerce conducted over the internet. Before recent advances in computing and communications technology, there was no internet over which commerce could be conducted; and, accordingly, these issues of public policy simply did not arise. Regarding the influence of tastes on public policy, the situation is complicated.
Reflecting the general desire to secure the perceived benefits of integration, public policies usually, if not invariably, tend to support closer economic integration within political jurisdictions. The disposition of public policy toward economic integration between different jurisdictions is typically more ambivalent. Better harbors built with public support (and better internal means of transportation as well) tend to facilitate international trade—both imports and exports.
Import tariffs and quotas, however, are clearly intended to discourage people from exercising their individual tastes for imported products and encourage production of domestic substitutes. Sadly, the mercantilist fallacy that seems to provide common-sense support for these policies often finds political resonance. Even very smart politicians, such as Abraham Lincoln (who favored a protective tariff, as well as public support for investments to enhance domestic economic integration) often fail to understand the fundamental truth of Lerner’s (1936) symmetry theorem—a tax on imports is fundamentally the same thing as a tax on exports.It should be emphasized that the interactions between public policy and both tastes and technology in their effects on economic integration can be quite complex and sometimes surprising. Two examples help to illustrate this point.
First, for several centuries, there has been active trade between Britain and the Bordeaux region of France, with Britain importing large quantities of Bordeaux wine. This trade, however, was seriously interrupted (if not completely suppressed) during various periods of hostility between the two countries when one side or the other wished to suppress trade with the enemy.
Partly as a result of being cut off from Bordeaux wines, and partly as a means of strengthening its alliance with Portugal, Britain sought to develop imports of Portuguese wines. The existing Portuguese wines, however, did not meet British requirements.
A solution was found in creating a new product—Portuguese red wine from the Duoro region, fortified with grape brandy that gave the wine an extra alcoholic kick, retained some of the fruit sugar that would otherwise have been absorbed in fermentation, and helped protect the wine during shipment in hot weather. Bell bike trailer manual. The result of this technological innovation was a new product—modern Port—that developed and retained a considerable market, especially in Britain, even after barriers to the acquisition of French wines were reduced.The second example concerns U.S. Public policy toward international trade in sugar which, in a bizarre way, is partly the consequence of policies pursued by Napoleon Bonaparte and Admiral Lord Nelson. For many years, the United States has maintained tight import quotas on sugar to keep the domestic price typically at roughly three times the world market level. The domestic political interests that support this policy include some sugar refiners, some producers of cane sugar in the deep south and Hawaii, and a few thousand sugar beet farmers primarily in the upper midwest. Production of sugar from beets is a “new” technology, dating back to the Napoleonic period. Before that time, sugar was produced from cane grown primarily in the West Indies.
Admiral Lord Nelson’s establishment of naval supremacy over the French enabled Britain to cut off Napoleon’s empire from imports of West Indian sugar. In response, Napoleon established a prize for finding a substitute for cane-based sugar which could be produced within his empire. The sugar beet was discovered, and has been with us ever since.This story becomes even more complicated when we consider reactions to the U.S. Governments’ sugar policy. Responding to the high domestic price of sugar, users have searched for alternatives. High fructose corn syrup is a cheaper and attractive alternative, especially for producers of soft drinks who are major users of sweeteners. A key by-product of high fructose corn syrup is corn gluten meal which can be used as animal feed and which the U.S.
Both uses domestically and exports, notably to the European Union. Thus, through this round-about channel of public policies and product innovations, what was started by Napoleon and Nelson has come back to European shores.Human MigrationEvidence from DNA has established that all modern humans are descended from common pre-human ancestors living in Africa roughly one million years ago. From that time until a few centuries ago, the most important mechanism for interaction among and integration of the activities of different human societies was undoubtedly people moving from one place to another, predominantly by foot. In the great span of pre-history up to roughly fifty thousand years ago, humans walked out of Africa and settled across the Eurasian land mass. Settlement of the Americas came later; my mother’s native American ancestors probably walked across the land bridge between Asia and North America now submerged under the Bering Strait roughly ten thousand years ago.Throughout most of historical time, extending back roughly five thousand years, human migration has remained the predominant mechanism of interaction and integration of different societies. Use of the horse and other beasts of burden changed somewhat the technology of human movement (and had a larger effect on methods of warfare), and boats were used to cross water barriers.
However, most people most of the time continued to travel by foot. Although migration was slow (by the standards of present speeds of human transport) and often posed considerable risks, it proceeded on a vast scale. Indeed, even for many societies that pursued agriculture (as well as hunting and gathering) migration was a very common phenomenon up until quite recent times—as is testified to by the waves of migration out of Asia and across Europe extending up to roughly 1000 AD.What fundamental factors were driving these waves of human migration? Relevant technologies (e.g., use of horses) presumably had some effect, and changing tastes may also have mattered somewhat. But, the key factor was surely public policy. In some cases a society would see that it was exhausting the productive opportunities in a particular location and decide to move on.
Also, if one society thought it had the military might to improve its welfare by taking over the territory and other property of one of its neighbors and perhaps also enslave its citizens, it would launch an attack. Seeing discretion as the better part of valor, the society under attack might decide to move on—and perhaps attack somebody else.For the victor who succeeded in subjugating or driving out a rival society, the result would probably be an improvement in economic welfare. The loser, of course, would lose. The overall result presumably was negative sum. Indeed, in the first work in the entire field now known as social science, Thucydides opens his History on the Peloponnesian War with the following observation:“.it is evident that the country now called Hellas had in ancient times i.e., well before 400 BC no settled population; on the contrary, migrations were of frequent occurrence, the several tribes readily abandoning their homes under pressure of superior numbers. Without commerce, without freedom of communication either by land or sea, cultivating no more of their territory than the necessities of life required, destitute of capital, never planting their land (for they could not tell when an invader might not come and take it all away, and when he did come they had no walls to stop him), thinking that the necessities of daily sustenance could be supplied at one place as well as another, they cared little about shifting their habitation, and consequently neither built large cities nor attained to any other form of greatness. Their richest soils were always subject to this change of masters.
The goodness of the land favored the enrichment of particular individuals, and thus created faction which proved a fertile source of ruin. It also invited invasion.”This ancient observation remains highly relevant today. It reminds us that good governance at the national and international level—especially maintenance of reasonable security for peoples’ lives and property—is essential for economic progress. It also reminds us that not all forms of economic interaction among different societies are necessarily beneficial. Globalization by means of the sword, the gun boat, or the slave ship is very different from globalization through voluntary movements of people, goods, services, and physical and financial assets.Turning to human migration in more recent times, it is useful to distinguish between mass migrations which have continued to occur in response to wars and political and social turmoil, and migrations of individuals and families undertaken primarily for economic reasons. Of course, the two categories are not completely distinct; individual and family decisions about migration are often affected by both economic and non-economic factors. Nevertheless, events such as the mass migrations in Europe that occurred during and immediately after World War II clearly reflect different fundamental factors than those that were primarily at work in influencing migration to the United States during the past two centuries.As the noted historian Oscar Handlin observed, America is a nation of immigrants.
The greatest surge of immigrants came during the period from the end of the Civil War up to the start of World War I, especially during the first decade of this century; see. Economic considerations, including the cost of transportation mainly explain why immigration was particularly high during this period, with fluctuations in annual immigration flows reflecting (with a short lag) business cycle conditions in the United States.Even in the early part of the 19 th century, the United States was, relatively, a rich country. Average per capita income was roughly comparable to that in England, but the average American worker and his family probably lived better than the average English working family. The gap between America and much of the rest of Europe was substantial. However, travel from Europe to America was neither cheap nor fast nor without risks. A sailing ship could easily take a month to make the voyage. During colonial times, if a poor man wanted to immigrate, he could secure passage by agreeing to become an indentured servant, usually for five to seven years.By the middle of the 19 th century, the cost, speed, and safety of human transport across the Atlantic had all progressively improved, especially with the replacement of wooden sailing vessels by iron-made steam ships.
These improvements in passenger transportation continued through the 19 th and into the 20 th century. By 1907 when my father’s family migrated from Paris to New York, the cost of passage was down to a couple of months’ wages. Indeed, my grandmother Marie Noel earned sufficiently good wages as a skilled seamstress for high fashion houses in New York (where speaking French was an important advantage), and was sufficiently suspicious of American doctors, that she sailed back to France in 1908 to give birth to her fourth son, before returning to live out the rest of her life—generally quite happily—in America.
Some of my father’s Italian relatives and friends also made trips back and forth between Europe and both the United States and Argentina. A couple of them, after experience in the new world, returned permanently to Italy. Beyond these anecdotes, there is evidence of significant back and forth movement of people between Europe and the Americas in the period shortly before World War I.This phenomenon of back-and-forth movement is significant.
Four Economic Drivers That Might Impact Globalization
It suggests that by no later than the early part of this century, the costs and risks of transportation had fallen to the point that (in contrast to earlier times) they were no longer a substantial factor in economic decisions about migration. Also, this reduction in transportation costs probably interacted with tastes in a way that enhanced the likelihood of migration.
Even if, as is often the case, one knows family or friends who have migrated to a new country and culture, there must be uncertainty and concern about adapting to a new environment. If the decision to migrate is seen as practically irreversible, deterrence to migration is relatively high. If the cost of reversal are comparatively low, it is possible to experiment and see whether one’s tastes are compatible with or adaptable to the new environment.Undoubtedly, the transportation costs of migration have continued to decline since World War I.
Why has the pace of immigration into the United States slowed? For migration from Europe, the answer is partly that income differentials have narrowed and so too have the economic and non-economic incentives for migration. However, economic incentives for migration to the United States (and most other industrial countries) from developing countries remain very large.
Here, it is clear that public policies restricting migration—even though not fully effective—are the key reason why migration has declined from the high rates prevailing before World War I. Indeed, for the United States, there was no restriction on inward migration until the Chinese Exclusion Act of 1882 (adopted because of domestic political opposition, especially in California and other western states, to further immigration of Chinese laborers for railroad construction and other work).
General restrictions on immigration from other countries did not come until the National Origins Act of 1924. Interestingly, as will be discussed further below, enactment of this highly restrictive measure was part of the general retreat of the United States into isolationism during the interwar period. This retreat, which was not limited only to the United States, reflected a general shift in tastes toward opposition to many forms of involvement and interaction with foreign countries.Trade in Goods and ServicesTraditionally, economists tend to focus on trade in goods and, to a lesser extent, services as the key mechanism for integrating economic activities across countries and as a critical channel (but not the only important one) for transmitting disturbances between national economies. Indeed, in the economic theory of international trade (specifically the Hecksher-Ohlin-Samuelson theory described in most textbooks), trade in goods is seen as a substitute for mobility of factors of production. Under certain restricted conditions, which do not apply completely in practice, the theory says trade in the outputs of production processes may be an essentially perfect substitute for mobility of factors, with the result that factor returns are equalized internationally—i.e., factor price equalization is achieved—without the necessity for factors to move internationally to achieve this equalization.If the conditions for factor price equalization did apply, there would be no economic benefit from international mobility of factors of production. Full economic efficiency could be achieved exclusively through trading outputs. A key reason why the conditions for factor price equalization do not fully apply is because of barriers to trade in outputs that effectively prevent the equalization of relative output prices at different locations.
These barriers take two forms: natural barriers to trade in the form of transportation costs and also costs of information about product prices and availabilities at different locations; and artificial barriers to trade arising from tariffs, quotas, and other public policy interventions. Indeed, even if the broader conditions for factor price equalization (e.g., identical technologies with constant returns to scale) and, consequently trade in goods alone (without factor mobility) is not sufficient to achieve full international economic integration, a focus on natural and artificial barriers to trade is still important in assessing the extent to which international economic integration through trade achieves as much as is possible through this channel. Specifically, if there were literally no natural or artificial barriers to trade in goods or services, then the relative prices of all goods and services would be equalized everywhere, and integration through the channel of trade would be perfect and complete. In practice, of course, there are important natural and artificial barriers to trade which preclude such perfection. In general, the higher are the barriers to trade, the lower will be the degree of international integration through trade, and conversely. Thus, it is relevant to consider what has been happening to barriers to trade as a means of assessing what has been happening to international economic integration through this important channel.The development of ocean-going sailing vessels beginning in the late 15 th century expanded the horizons for trade to a truly global scale.
However, despite gradual and cumulatively substantial improvements in transportation technology, during the era of sail high sea transportation costs (including risks from piracy or misadventure) generally remained an important barrier to trade over substantial distances. For most goods, shipping by land for more than a few score miles was prohibitively expensive. Shipping by water across the Atlantic or, even more so, between Europe and Asia was mainly restricted to goods with high ratios of value to weight and substantial disparities in relative prices between distant trading locations. Unlike recent times when there is a good deal of two-way intra-industry trade in very similar products, trade over long distances consisted primarily of products which were not produced domestically or of payment flows of gold and silver. Gradually, as sailing vessels became larger and piracy and other hazards to ocean-borne commerce were reduced., ocean-borne shipping costs did decline significantly and longer-distance trade expanded as a result.
Nevertheless, well into the 1800s, transportation costs remained an important natural barrier to global trade.The invention and development of steam-powered iron ships during the second half of the 19 th century further reduced the costs of ocean shipping. By the end of the century, the cost of shipping a ton of cargo across the Atlantic was probably less than one-fifth of what it had been at the start of the century. This reduction in shipping costs contributed importantly to the expansion of world trade and to the range of products participating in that trade.Artificial barriers to trade in the form of import tariffs and other public policy interventions have a very long history. No doubt, there has always been some interest in such measures as means of providing protection to domestic producers (often including monopolists and cartels) from foreign competition. Owners of warehouses in ancient Rome, for example, supposedly objected to the construction of the new harbor at Ostia which would improve the city’s ability to deal with food shortages by increasing imports from around the Mediterranean.
However, raising revenue for the state probably remained the most important reason for the imposition of tariffs until the 19 th century. In the United States, in particular, tariffs were generally the most important source of revenue for the federal government up to World War I.Despite the continuing importance of revenue as a reason for imposing tariffs, it appears that interest in these measures as a means of providing protection to domestic producers increased as natural barriers to trade from transportation costs declined and as the revolution in manufacturing technology created important new competitive threats to more traditional and higher cost producers. Interestingly, the tariff proposed by Treasury Secretary Alexander Hamilton in President Washington’s first administration was intended both to raise much needed revenue for the new federal government and to provide protection to domestic manufactures. Manufactured products typically had quite high ratios of value to weight, and even the quite high transatlantic shipping costs of the 1790s offered comparatively little natural protection for American producers of such products.By the end of the 19 th century, ocean shipping costs for high valued products like most manufactures had generally declined to the point that they were no longer a substantial natural barrier to trade among the industrialized countries bordering the Atlantic. Import tariffs imposed by most of these countries—except for Great Britain which retained a policy of free trade—were, by this stage, generally far more important barriers than transportation costs.The interwar period witnessed a collapse in the volume of world trade. This collapse reflected both the worldwide depression of economic activity in the 1930s and the widespread and massive increase in tariffs and other trade restrictions during this period. The retreat into protectionism included, and to an important degree was probably stimulated by, two massive increases in tariffs imposed by the United States.
The first was imposed just after the end of World War I and was intended as both a revenue measure (to absorb the elimination of the wartime income tax and to help pay-off debts accumulated during the war). The second was the infamous Smoot-Hawley tariff of 1930 which must be seen largely as an effort of protectionism.Since World War II, the world economy has enjoyed a remarkable era of prosperity that has spread quite broadly, but not universally, across the globe.
Over the past five decades, real world GDP has risen at somewhat more than a 4 percent annual rate, with real GDP in developing countries (as a group) growing in per capita terms at about the same pace as the industrial countries. The result has been that real living standards, as measured by real per capita GDP, have improved on average about three-fold in just half a century; see. During this era of remarkable economic growth, world trade in goods and services has expanded at nearly double the pace of world real GDP. As a result the volume of world trade in goods and services (the sum of both exports and imports) rose from barely one-tenth of world GDP in 1950 to about one-third of world GDP in 2000.
. Interdependence: Globalization leads to the interdependence between nations, which could cause regional or global instabilities if local economic fluctuations end up impacting a large number of countries relying on them. National Sovereignty: Some see the rise of nation-states, multinational or global firms, and other international organizations as a threat to sovereignty.
Ultimately, this could cause some leaders to become nationalistic or xenophobic. Equity Distribution: The benefits of globalization can be unfairly skewed towards rich nations or individuals, creating greater inequalities and leading to potential conflicts both nationally and internationally as a result.