Globalization and Economic Growth in the 19th Century - Literature review Example

Introduction With the world economy witnessing recovery from a major global financial crisis, the area of globalization has become a very hot topic amongst economists. The concept of globalization is a double-edged knife which provides both: economic opportunity as well as economic disruption. The phenomenon has significant impact on the relationship between different countries and the overall political scenario of the world. Globalization plays a key role in the economic growth of a country. The objective of this essay is to analyze the various factors that led to globalization in the 19th century and to assess the impact of these factors on the economic growth of these countries. The next section of the essay deals with the history of globalization which is followed by a study of the factors leading to globalization in the early phases of 19th Century. Globalization Globalization: A Historical Perspective Many economists suggest that globalization is a very old phenomenon which dates back to as long as establishment of trade links between India, Persian Gulf and Red Sea during the third millennium B.C.1. The first significant development towards considerable exchange of culture and material between countries was made after America was discovered. Just before the 16th century, Portuguese established factories in Africa, Asia and Brazil. They dealt with the trade of local products and established an international business center in India. Globalization continued with the Europeans taking over the Americas and undertaking Columbian Exchange which created hug markets for Europe2. 1: Frank, 1998, pg 88 2: Crosby, 1973, pg 218 This period was characterized by substantial movement of people (in the form of slaves), materials like animals, food, plants and culture between the two hemispheres. The 16th and the 17th century witnessed the growth of maritime European Empires by the Portuguese, Spanish, Dutch and England. During the same time, the first multinational companies (the British East India Company and the Dutch East India Company) were established. Owing to the large risks associated with cross-border trade at that time, British East India Company became the first company in the world to have joint ownership through issuance of stock. This trend of dividing the ownership of companies has proved to be amongst the most important drivers for globalization. It was in the 19th century that globalization began to appear in its modern form. The Industrial revolution enabled cheap production of household items using economies of scale. At the same time, high population growth generated large demand for commodities. With the British conquest of the Indian subcontinent, the large populations of these countries became the ready consumers for goods produced in Europe. This phase is often referred to as the first phase of Globalization. However, this phase began to break down with the outbreak of the First World War. Yeates (1962) in his book Winged Victory says that the financial forces of globalization were the primary reasons for the First World War. This phase finally came to an end during the Great Depression of the 1930s3. Globalization in its most modern sense came into being after the Second World War. During this period, many countries in Asia and South America gained independence which resulted in these countries having their own economic policies and establishing trade relationships with the other countries of the world. 3: Yeates, V.M. (1962), pp 54–55 Some other factors that led to globalization in the modern times are: Opening up of economies Elimination of hindering factors such as double taxes and limits on capital inflows Development of Telecommunication networks Setting up of multinational companies Creation of organizations such as the World Trade Organizations & United Nations Bordo et. al. (1999) suggests that although the idea that globalization is unprecedented is accepted in many publications, there existed a period when the markets of the world were integrated4. The authors claim that the integration of the various countries on the financial and the commodity markets front is also accompanied by rising political and economic tensions amongst various countries. One of the major differences between the two phases is the set of institutions such as the WTO, IMF, and the UNO which have been set up after the II WW. Factors leading to globalization in the 19th century Globalization as a phenomenon is driven by various factors which go much beyond the generally believed reason of trade. Some of these factors are listed. At the same time, we will also see if these factors led to fostering of economic growth. Improvement in Technological Processes: Industrial and Agricultural The Industrial Revolution of the 18th century provided increased avenues for producing good quality goods at cheaper prices. However, most of the countries in Europe had to deal with other countries for two reasons: for the countries to serve as a market for their surplus production and to act as a source of additional raw material that will be required5. 4: Bordo, M D., B Eichengreen & D.A. Irwin. (1999), pg 1. 5: Kenwood and Lougheed, 2002, pg 9. As a result of this phenomenon, European manufacturers went to every continent except Antarctica. The improvement in the processes enhanced productivity, created more jobs and increased the income levels of employees. This in turn fostered the economic growth of the countries of the world. Reduction in Transport Costs It was during the early 1900s that the development of transport modes such as steam shipping and railways enabled cheaper transport of goods across countries. The advent of railways enabled cheap movement of goods overland. At the same time, steam ships could be used to sell goods at a low cost across the countries of the world. When deflated by the US price index, the freight rate index on US Exports fell by as much as 41% between 1870 and 19106. Authors are of the opinion that the cheaper modes of transport differed from country to country. While the American domestic market made extensive use of the railways, the major modes of transportation in Europe during the first phase of globalization was the ships7. This phase however did not make use of roads owing to their high costs. As a result, if there was no route through railway or the sea, the transportation costs used to shoot up because of the use of roads. Development in Communication Channels The developments in modes of transport were accompanied by development in the telecommunication modes such as postal services, telegraph and marine cables. This development enabled considerable improvement in accuracy, relevancy and the timeliness of the information available with the businessmen. This information enabled businessmen to make decisions about which markets to venture and what to produce. 6: O’Rourke, Kevin H., and Jeffrey G. Williamson. (1994), pg 897 7: Hannah, 2008, pg 14 Development of the Multinationals Besides, local producers had a better understanding of the tastes and needs of the local markets. This encouraged companies to establish information networks across countries. This setting up of multinationals meant the division of labour in the various countries of the world. As a result of this, the various processes of a business were carried out from different parts of the world. This development also meant that certain parts of the world specialized in certain kind of processes. The more developed countries of the world took to capital intensive functions. Uniformity in the prices The phenomenon of globalization resulted in uniformity of the prices of various commodities across the world. O’Rourke and Williamson (1999) examined the price-differentials between various countries in the late 19th century. The authors found that the prices across countries witnessed significant reduction in difference during the first phase of globalization. For example the difference between the wheat price in Chicago and Liverpool reduced to as much as 15% in 1912 from about 58% in 18708. The same level of trend can be seen in various other commodities as well. As a result a local producer can’t price his products at a price higher than what is prevalent in the markets of the other countries. At the same time with both the local as well as the international manufacturer fighting for the same customer, the price comes down and the affordability of the product increases. Movement of People With very minimal or nil restrictions on emigration of people from one country to other, all the countries tend to come towards an equal level in terms of standard of living. Migration of people affect the income distribution amongst the countries of the world in a significant way. 8: O’Rourke, Kevin H., and Jeffrey G. Williamson (1999), pg 43 For example, unskilled workers in Ireland were able to get increased wages because of many of their compatriots emigrating; with import of cheap food from countries such as US, the farmers of Europe suffered. Some of the major reasons cited for migrating to another country include higher income levels, better personal safety, short distance to home countries and existence of established immigrant networks9. Thus it can be seen that it was primarily the pull factors that encouraged people to immigrate. Fewer Trade barriers Although there were certain barriers such as the French Meline tariff of 1892, the trade barriers in the form of customs and duties was significantly lower during that time as compared to the present times. It can also be seen that the barriers in Europe without Russia were lesser than that in US or Russia. The import duties in UK, Germany and France were only 4.6%. 8.1% and 8.8% of the import values respectively in the year 1900. The same percentage in the case of USA and Russia were much higher at 27.6% and 32.6% respectively during the same period10. The existence of bilateral treaties such as the most favored nation encouraged various countries to indulge in cross-border trade which positively impacted the economic growth of the participating countries. Cultural and Other Reasons Studies have suggested that factors leading to globalization went beyond tariff barriers and reduction in transport costs. Factors also include various social and cultural reasons. One of the examples of such a reason is the growth in the world population during that time. This growth provided large markets for goods produced in Europe. 9: Hatton T. & Williamson J. (1998), pp 3-51 10: Broadberry, 1997,pg 21. The co-operation policies set up between the various countries of Europe encouraged significant exchange of goods, man, and commodities amongst themselves. Besides, the cultural affinity of the various countries also fostered greater trade. Conclusion To conclude, it can be seen that the primary factors which drove globalization in 19th century were lesser transport costs, industrialization and fewer trade barriers. Besides these primary factors various other factors such as development of communication channels, increase in population and setting up of multinationals also encouraged movement of people, goods, services, and capital from one country to other. The international migration of people from one country to another can be largely attributed to pull factors of high income, better facilities etc. References Frank,A.G. (1998). "Reorient: Global economy in the Asian age" U.C. Berkeley Press. Bordo, M D., B Eichengreen & D.A. Irwin. (1999). Is Globalization today really different than Globalization a hundred years ago? NBER Working paper 7195, [Online]. Available at: http://www.nber.org/papers/w7195. Last Accessed on 15th November 2010]. Broadberry, Stephen. (1997). Productivity race: British Manufacturing in Hisotrical Perspective, 1850-1990. Cambridge: CUP. Crosby, Alfred W. (1973). "The Columbian exchange: biological and cultural consequences of 1492", Greenwood Publishing Group. Hannah, Leslie. (2008). “Logistics, market size and giant plants in the early 20th century: A global view,” Journal of Economic History 69 (March 2008): 46-79. Hatton T. & Williamson J. (1998) The Age of Mass Migration: Causes and Impacts, Oxford University Press, Oxford. Kenwood, A.G. and A.L. Lougheed. (2002). The growth of the international economy, 1820-2000, 4th ed. London: Routledge. O’Rourke, Kevin H., and Jeffrey G. Williamson (1999). Globalization and History: The Evolution of a 19th Century Atlantic Economy. Cambridge: MIT Press. O’Rourke, Kevin H., and Jeffrey G. Williamson. (1994). “Late Nineteenth Century Anglo-American Factor Price Convergence: Were Heckscher and Ohlin Right?” Journal of Economic History 54 (December), pp 892-916 Yeates, V.M. (1962). Winged Victory. Jonathan Cape. London. pp 54–55. Read More