If we want to understand the current advance of global capitalism, it is worth remembering that a liberal international economic order has actually arisen twice, both at the end of the nineteenth century and now, at the end of the twentieth. 1 In many ways, the world economy has simply caught up to where it was 100 years ago, prompting prominent economists to question whether the level of international integration is as high now as it was before the interruptions of two world wars and the Great Depression.
In a recent study, economists Michael Bordo, Barry Eichengreen, and Douglas Irwin ask whether globalization today is really different from globalization a century ago. 2 Answering that question can help us determine whether we are living in unprecedented times, whether the nation‐state is becoming obsolete, and whether the new liberal international economic order promises to endure. Indeed, as various observers have noted, the mere fact that the first episode of global capitalism met such a cataclysmic end should force us to reflect on the current features of commercial, financial, and labor integration.
One area in which the world is decidedly less liberal than it was under the Pax Britannica is that of immigration. Although technological advances have made travel far more affordable and convenient than in the nineteenth century when restrictions on immigration were minimal or nonexistent, today hardly a country in the world–certainly not a rich country–does not have an array of labor and immigration regulations. As economist Deepak Lal convincingly explains, such restrictions on the movement of people exist today because citizenship concedes rights to the services provided by the welfare state. 3 Yet even as the welfare state has grown, so have migration flows. From 1965 to 1990, the foreign‐born population rose from 75 million people to 120 million–with flows from poor to rich countries accelerating the most. The number of people emigrating to the United States has grown about ten times since 1945, for example, but as a percentage of the U.S. population immigration still represents only about one‐third of its peak at the turn of the century.4
By contrast world merchandise trade reached its 1913 level by the 1970s.5 Global exports as a percentage of global output stood at about 12 percent in the early 1970s and has since risen to about 18 percent. U.S. exports as a share of the country’s economy are only slightly higher today at 8 percent than they were in the late nineteenth century. Including trade in services, however, the U.S. export figure rises to about 11 percent. Indeed, the rise of trade in services such as tourism, finance, insurance, and technical assistance has become far more pronounced today than it was previously. Thus taking into account world exports of both goods and services, global exports rise to about 23 percent of world output today. 6
Two other features distinguish commerce in the new liberal international economic order: the rise of the multinational corporation and the change in the composition of trade. Much trade today involves corporations “slicing up the value chain” and engaging in intra‐industry trade. As a result, manufactured goods are increasingly exported from developing countries to developed countries. That contrasts sharply with the nineteenth century experience when countries on the periphery exported primary goods to rich countries, which exported manufactured goods made primarily in the center countries to the periphery. Bordo and his coauthors note, for example, that 80 percent of U.S. imports from Mexico are manufactured products while 100 years ago that figure was only 10 percent. And although U.S. exports of goods have not increased dramatically as a share of its economy, a much higher percentage of the production of the United States’ tradable goods is now exported. 7
Financial Integration
Is the world more financially integrated than it was in the past? A look at net capital flows suggests that the answer is no. The outflow of capital from Great Britain reached 9 percent of its GDP during the Victorian era with similar figures in Germany, France, and the Netherlands. No country today even comes close to those levels of net flows. In the 1990s, the average capital outflow for leading economies was slightly above 2 percent of GDP. 8
Other differences in capital market integration suggest that the world is indeed more globalized than ever. Gross flows of capital, at about $1.5 trillion per day are much larger than at any time in history, and much of that money represents short‐term investment. Investors can today react at a moment’s notice to economic and political developments around the world in a market that offers a wide and growing range of international financial instruments. Investors, moreover, are almost equally putting their funds into equity instruments as into debt instruments, which predominated 100 years ago. At that time, international finance concentrated on funding certain sectors, principally railroads and government bonds. 9 Today, with more rapid and perhaps more reliable information about investment opportunities, international funds flow into virtually every sector of countries’ economies. In short, although net capital flows are not as large as those of the nineteenth century, gross flows are unprecedented in size, as are the extent and sophistication of capital markets, suggesting that financial integration is greater today than in the first episode of world capitalism.
The Role of Technology and Politics
Has globalization come about because of political or because of technological change? Here again, Bordo and others suggest important differences between the two episodes of world capitalism. During the last century, technological changes clearly led to globalization. By the 1860s the political bases for a liberal international economic order were already in place. Great Britain repealed the Corn Laws and established its presence in China in the 1840s; it conquered India by 1857, and, with France, defeated Russia in the Crimean War by 1856. Contemporaneous and subsequent advances in technology led to a 40 to 50 percent drop in the cost of shipping in the latter part of the nineteenth century and early part of the twentieth. The transatlantic cable was laid in the 1860s; use of railroads and the telegraph proliferated; the Suez Canal was completed in 1869; and the radio telephone linked Europe and North America by 1900. Those and other innovations led to the first rise of world capitalism.
Globalization today has benefited from technological improvements but has been almost entirely due to dramatic political changes. Countries around the world have lowered their trade barriers and opened their economies since the 1980s and especially so since the fall of the Berlin Wall. (That actually contrasts with the nineteenth century experience as nations were actually raising tariffs incrementally as the century wore on.) New technology such as air transport may have helped propel today’s globalization, but the role of such change in leading to globalization should not be overstated. On the other hand, technology in the information age may make it more difficult for politicians to reverse the course of world capitalism.
Although globalization is often said to create inequality and economic volatility, historical evidence points, in fact, to economic convergence in living standards among countries that open their economies. Studies have shown tendencies to converge among countries in the Organization of Economic Cooperation and Development, among U.S. states, and among Japanese prefectures. 10 Significantly, economist Jeffrey Williamson found a decreasing gap in living standards among people living in countries participating in the international economy during both periods of global capitalism. “History offers an unambiguous positive correlation between globalization and convergence. When the pre‐World War I years are examined in detail,” Williamson adds, “the correlation turns out to be causal: globalization played the critical role in contributing to convergence.” 11
The Financial System
The incidence of financial crises in Asia, Russia, and elsewhere in recent years has also often been treated as novel and as a consequence of globalization. Yet economists have examined the causes of the recent economic turmoil and have formed a consensus that the causes included pegged‐exchange rates, government‐directed credit, protected financial systems, moral hazard at the national and international level, and the lack of transparency in official accounts. Despite that consensus, the crises are used by critics of globalization to advocate moving away from a more market‐based system and toward more interventionism. Thus India is cited as having followed more prudent policies than its East Asian neighbors since its more closed system allowed it to avoid succumbing to the regional financial crisis. The price it has paid for stability, of course, has been enduring poverty. By contrast, Hong Kong has had a volatile economic history but has become one of the wealthiest places on earth. Indeed, even after the financial turmoil, East Asian crisis countries are still eight to 15 times richer than India.
Financial crises also occurred in the first era of world capitalism. One common feature between the two eras is that banking and currency crises occurring at the same time tend to be more common in the periphery, or less‐developed, countries than in the rich countries, where currency but not banking crises are more common. However, under the gold standard of the Victorian age, crises were resolved differently from how they are resolved under the current system of adjustable exchange rates based on fiat money.
One significant difference was that financial rescues 100 years ago were undertaken by the private sector, while today they are official, usually led by the International Monetary Fund. British Foreign Secretary Lord Palmerston summed up the attitude that prevailed for the rest of the century when U.S. states defaulted in the 1840s: “British subjects who buy foreign securities do so at their own risk and must abide the consequences.” 12 Largely as a result of that approach, economic recovery was more rapid in crisis countries than it is today and crisis countries then did not experience wealth losses as large as those experienced by crisis countries today. 13
Liberalism from above or Liberalism from below?
The distinct institutional framework under which liberalization is taking place worldwide—including the prominence of supranational governmental organizations like the IMF, the World Bank, the World Trade Organization, and the United Nations, and the prominence of welfare and regulatory states—causes both enemies and proponents of globalization to attribute the market revolution to the efforts of those institutions, and to recommend that further developments be managed by international world bodies.
Yet the evidence indicates that such international organizations have at best been marginal to the globalization process and at worst have caused disruptions or delays along the way. Decades of World Bank and IMF lending to inward‐looking regimes, for example, have certainly slowed the move to world capitalism. 14 Yet countries have unilaterally undertaken economic restructuring, trade and capital account liberalization, and other policy reforms as past policies failed. That is even so of countries that have entered into multilateral free‐trade agreements, like Mexico, which reduced its trade barriers for years before proposing the North American Free Trade Agreement. China, in its bid to join the WTO, is following the same course. Thus while aid agencies are likely to cause more harm than good in the globalization process (lending to Russia, for example), free‐trade agreements such as the WTO are likely to be helpful. However, they serve more to preserve trade liberalization reforms than to promote them. 15
In short, the world economy has evolved as a result of changes coming from the national level rather than changes directed at the international level—what German liberal Wilhelm Röpke called an international order “from within and beneath” rather than the “false internationalism” that characterizes supranational organizations. The danger of the constructivist approach to achieving a liberal economic world order is that it may lead to discretionary and arbitrary use of power. Razeen Sally of the London School of Economics describes those hazards.