Economic Development Since World War II: The Making of Globalization

Modern economic growth took off in the middle of the 18th century, and like the ripples on a pond after a stone has fallen into the water, the ripples of economic growth spread to other parts of the world through the 19th century. The closer to the epicenter of the Industrial Revolution, the closer to England, the faster were countries to receive that ripple, to take off on their own, and escape from extreme poverty. The more that countries were proximate to ports the more that they could trade internationally, the better their climate, the more productive their agriculture. All of these were conducive to a faster takeoff into modern economic growth. And of course politics played an enormously important role. Independence and sovereignty was essential for modern economic growth in the 19th century. Those countries that were unfortunate to succumb to imperial rule did not have the basis for economic takeoff because the imperial powers, typically the European imperial powers, weren’t very much interested in educating the population, building the kind of infrastructure needed for their own industrial take off. Instead they were interested in seeing their colonies as places for primary commodities to build the home industry. And the result is that by the beginning of the 20th century, one could say the following. First, it was a miraculous age because waves of technological change had led to unprecedented breakthroughs in the ability of humankind to produce, to meet material needs, to extend life to, solve long-standing problems of public health, to make breakthroughs in transport, in quality of life in so many ways through electrification, modern transportation, mass industrial production. It was already an age of huge variation between the rich and powerful on the one side and the poor and vulnerable on the other side. Modern economic growth had come to Europe. It had come to the lands of new settlement, the United States and Canada, Australia, and New Zealand. It had spread to other places mainly in the temperate zones of the world like Argentina, Uruguay, Chili. It had not spread to Africa. It had not spread to much of Asia which was under the pressures of European imperial rule. None-the-less, it was a most remarkable age. And as you know, I’m such a fan of John Maynard Keynes because of the power of his economic and political vision in the 20th Century. But one of the things he wrote about this age is worth us recalling. At the end of World War One, he looked back to the period just before World War One, and described this unique global circumstance. He said, and I’m quoting from his famous work, The Economic Consequences of the Peace. What an extraordinary episode in the economic progress of man, that age was which came to an end in August 1914 with World War One. He writes, the inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth in such quantity as he may see fit, and reasonably expect their early delivery upon his doorstep. He could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world and share without exertion or even trouble, in their prospective fruits and advantages. But most important of all, writes Keynes, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it is aberrant, scandalous, and avoidable. Of course, Keynes was speaking as an Englishman, and a quite brilliant and privileged Englishman. He was the one sitting in bed, sipping his tea, and ordering commodities from all parts of the world. Those under colonial rule could not do so. But he was also expressing the uniqueness of an age where modern economic growth had broken out and had taken hold in many parts of the world and had created a global economy. But, of course, that economy came crashing apart tragically, unexpectedly, with the onslaught of World War One. Such a destructive war that historians still today, a hundred years later, are trying to figure out what could have caused that, because there were no deep motives for that war. That war was massively destructive. It unleashed chaos, deaths from violence of course, epidemic diseases such as the flu epidemic at the end of the World War One. It unleashed the Bolshevik Revolution that gave birth to Soviet era communism. It unleashed a tremendous economic forces that led to huge instability in the 1920s. And it played a key role, though complex role, in the onset of  the Great Depression in 1929. And of course, that depression gave rise to horrific political forces, none other than the rise of Adolf Hitler. In January, 1933, in the rise of fascism and thereby the birth of the second devastating world war that which broke out in Europe in 1939 and in Asia, lead by Japan the industrial power of Asia around the same time to create a truly world war. By 1945, technology had continued to advance, but many of the technological leaders were in ruins, though they would quickly rebuild. One technological leader, the world’s technological leader was not in ruins, because other than one attack on Pearl Harbor it was not directly touched in its own territory by the war. That of course, was the United States which far and away by the end of World War Two was the world’s leading economy, the most powerful, the technology leader. And the one that would have the greatest influence on the world economy basically until now. But in very powerful ways, throughout the second half of the 20th century. In technology, in forging markets, and in geopolitics. What’s important for us in understanding how the ripples of modern economic growth diffuse after World War Two, is to understand that by the end of World War Two, the world was divided in three parts. And those three parts gave rise to a kind of division of the world economy that would persist for some decades, and then finally, themselves, give way to a unified global economy. The first part was the US led part. It was the US, it was Europe, it was vanquished Japan which became and ally of the United States after World War Two. This part is sometimes called the first world. It was the richest part, especially after rebuilding. It was mainly a market economic system. It traded among each other and it was the leading engine of technological change through to the end of the 20th century. The second world, so-called, was the world of Soviet communism. This was the Soviet Union itself which had 15 republics  which, after 1991, became 15 independent  ountries. It was the world conquered by the Soviet Union in central and eastern Europe, Czechoslovakia at the time Hungary Bulgaria, Romania and, other countries of the region where the Red Armies sat and created Soviet style government and economies. It included the People’s Republic of China after 1949, which adopted a communist system. The one that soon enough would be very different from the Soviet style communism.  The third division of the world was the former colonial powers because one of the mega results of World War Two, was that the imperial European countries, themselves in ruins, were certainly in no shape to run empires. And the former colonies had had enough of it. They not only had the ideology, the sense, the awareness that independence was theirs to grab but they saw how destructive their imperial masters had been. The legitimacy of empire was over and the ability of the imperial powers to continue to maintain empire was gone as well, although many of them didn’t notice it because they continued to try to fight rear guard wars to defend imperial possessions. And so the period of decolonization which began around 1947 with the, India, and then with Indonesia, and it followed on throughout Africa, Asia, and other places. That stretched out over a course of decades. But, it created a kind of third world. Third world is a term we sometimes use to mean poor and middle income countries, but it meant something more literal back when the phrase was invented. It meant not the first world of the United States, not the second world of the communist era, but the post-colonial world. Sometimes also a grouping called the non-aligned countries. They said we don’t want US domination, we don’t want Soviet domination, we want to be on our own. And a little bit less formally, a fourth world was sometimes also brought into the mix. That’s the group of countries, basically, that we call the least developed countries today, the countries in absolute abject poverty. Well these were quite the sharp divisions and the world economy evolved under these geopolitical divides for several decades. The first world recovered from the damage of World War Two remarkably quickly by the 1950s. And endogenous technology driven economic growth took hold and the process of modern economic growth and rising living standards took hold in the first world very, very powerfully. In the second world, the communist world, there was industrialization and it seemed pretty dynamic for awhile, but already by the 1960s it was coming into crisis. And by the 1970s, economic development under a non-market communist system was basically screeching to a halt. Countries began to reform. China was the first great reformer in the communist group in 1978 when Deng Xiaoping came to power and said we need to market economy. We need to open China to trade. And that unleashed China’s own catching up growth with remarkable success to the point where China became by far the fastest growing major economy in the world in, in history. Now other parts of the communist world took longer to break free, because the Soviet Union wasn’t having it for a very long time. And it was only when Mikhail Gorbachev came to power in the middle of the 1980s and began his own market reforms and then came the revolutions of Eastern Europe in 1989. And then the end of the Soviet Union itself at the end of 1991 did the second world, basically stop being its own self-contained economic unit, and become part of the world economy. The third world, and the fourth world, included dozens, and dozens of countries, and each had their own economic history, and their own strategies. A very few of the countries early on said, we like that first world model. We’re pretty much interested in integrating with the first world economies. And they figured out something that most of the rest of the developing countries did not figure out until later, and that was that diffusion, the arriving of those ripples, could lift them into a very special kind of industrialization. Mainly where new industries in their own countries, many foreign owned, would become part of global production systems so that a company in Korea or in Taiwan would begin to produce the electronics goods, or the shirts and, and, pants on the racks of, of retailers in the United States and Europe. According to the technology designs and the in, intellectual property of the so-called first world companies. The early developers of that new strategy for catching up were called the Asian Tigers, Korea, Taiwan China, Hong Kong, Singapore. The four of them already by the 1960s and then by the 1970s were growing extremely rapidly by integrating their new young industrial base with the high tech industries of the first world. And as that happened other developing countries watched and said, wait a minute, that’s pretty interesting. Maybe we shouldn’t stay quite so non-aligned, politically yes, but economically maybe we should open our own doors to trade and to foreign investment and try to attract those new multinational companies that could use our country, and our labor force, and our natural resources as a base for their global production systems. This is how globalization came into being. Globalization came into being as this diffusion process created a new kind of catching up after World War Two. Especially starting in countries that opened their trade and opened their borders to foreign investment, so that new global industry centered around multinational companies, could use those countries as basis for global production systems. And that process backed by big breakthroughs in technology, better transport, intermodal transport, so called, from ships to the to the backs of trucks in a very smooth process, containerization of trade through the standard 20 foot containers. And of course the advent of modern computer-assisted design and manufacturing. And the enormous breakthroughs made possible by the internet and by mobile telephony revolutionized the ability of companies to engage in global production systems. And thereby create globally integrated companies, often with hundreds of thousands of employees, operating in more than one hundred countries. And the world’s multinational companies thereby became the main agents for the continuing transmission of those ripples around the world and the continuing diffusion of modern economic growth. Japan was a leader in its own region in this. And they developed a,a wonderful, visual metaphor for this called the flying geese model. Have a look at these geese in formation. You have a goose flying in front and then yeah, in back are others following the lead. And this is how economic development in Asia started as well with the industrialization first of Japan, and then flying in formation just behind came Korea and Taiwan, Hong Kong and Singapore. Behind them, Indonesia, Malaysia, Thailand. Behind them, China, Vietnam. Behind them, Cambodia, Laos. But, as the leading country moves from textiles to electronics, then from electronics to automobiles, then from automobiles to advanced information technology, the country just behind it moves from agriculture, to apparel and textiles, from apparel and textiles to electronics, from electronics onto its own technology innovation of information technology, and one goose after another, to use Japan’s metaphor follows along the way. This map that you’re looking at now shows where the textile firms located. And every red dot is essentially a node of multinational production, where often low wage labor is hired to produce in a global production network of textiles and apparel. You’ll see virtually that every dot in Asia is on the coast just like Adam Smith said in 1776 before he could know anything about such global production chains. You’re looking at a map here of China attracting foreign direct investment. Again China’s great breakthrough after 1978 when Deng Xiaoping opened China to the world was to attract foreign investment that made China an export base for world manufacturing production. And, you can see, also, that the wave goes from darker provinces where its foreign direct investment is the highest, into the interior. Moving from coast to the interior just as Adam Smith had told us. And, the result is by the end of the 20th century and into the early years of the 21st century, what had started as the preserve of England, and then had spread across the English Channel and the North Sea into Western Europe, that had spread to the lands of new settlement first, that had then spread to other temperate zones, then it spread to Central and Eastern Europe, that had been taken up by Japan in late 19th century industrialization, that in the 20th century after World War Two could now spread to the former colonized parts of the world and as they gained their independence was a process of global economic development that had reached almost all the world. There are still places where this is not true til today. Often the most land-locked interior places with difficult climate, with lack of natural resources, and so forth that have all of the burdens and few of the benefits should take hold. But for most of the world, the breakthrough by now has taken place. Of course, those who made the breakthrough early on are today’s rich world. They’re the high income countries. Those who have come late to this by virtue of their history, their politics, their resource base, their geography are today’s middle income or low income countries. Those still waiting to take off are today’s least developed countries. We’re going to turn our attention carefully and in detail to how those least developed countries can make the breakthrough now in the 21st century.