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EC120: The World Economy in Historical Perspective
Topics Week 25: The Present and Future (?) in Light of the Past
• 1. The changing character of globalization during the 20 century.
1a. Trade in goods.
1b. Factors promoting closer international integration in goods production.
1c. Trade in services.
1d. Financial integration.
1e. Possible explanations for changes over the 20th century.
• 2. Globalization and financial crises.
2a. Definitions.
2b. Summary overview.
2c. The build-up of debt since the 1970s.
• 3. The outlook after the crash.
EC120 Spring 2017: Week 25, Topic 20, Slide 0
EC120: The World Economy in Historical Perspective
1. The changing character of globalization during the 20 century.
• The global economy at the beginning of the 21st century looked more like it had
at the beginning of the 20th than in most of the years in between.
• So how different is the current phase of growing international economic
integration from that of the last one, that ended in 1914?
Cargo vessel, c. 1910
Cargo vessel, c. 2010
EC120 Spring 2017: Week 25, Topic 20, Slide 1
EC120: The World Economy in Historical Perspective
1a. The changing character of globalization during the 20 century: trade
in goods.
•
•
A study (Bordo, Eichengreen, and Irwin, NBER WP # 7195,
(June, 1999)) argues that in terms of trade and capital flows (but
not yet migration) the current phase of globalization is more extensive
and pervasive than the last one.
Trade in goods: the integration of manufacturing and commodity production
now appears much closer than a century ago.
Cars awaiting export
EC120 Spring 2017: Week 25, Topic 20, Slide 2
EC120: The World Economy in Historical Perspective
1b. The changing character of globalization during the 20 century.
•
Factors promoting closer integration in goods production after 1945:
– The rise of foreign direct investment (FDI) is a particularly important
reason for closer integration in manufacturing and commodity production.
– Transportation costs - an important driver of integration before 1914 have continued to fall and new modes have appeared.
– Communication costs have fallen sharply while becoming more flexible
– Tariff barriers have also fallen sharply (see Bordo, et.al. (1999), Table 3).
However, other measures less easily quantified - such as anti-dumping
actions, ‘voluntary’ trade restraint agreements, etc. - have also been
employed, possibly more effectively, for the purpose of protection.
Advanced FDI, 1914: Ford at Trafford
Park, Manchester
Advanced FDI, 2014: Volkswagen
in Chengdu, China
EC120 Spring 2017: Week 25,Topic 20, Slide 3
EC120: The World Economy in Historical Perspective
1c. The changing character of globalization during the 20 century: trade
in services.
• Trade in services, traditionally less traded, has also grown:
– For example, as in 1900, shipping and tourism are still the two largest
categories of U.S. service exports, but whereas they accounted for virtually
100% of American service exports in 1900, they now account for only
some 40%. Trends in Europe are similar.
– In 1900, the ratio of service exports to service total value-added was
virtually nil (well under 1%). By 1960, it had risen only to 1.7%, then
tripling to 1997, reaching 5.1% at a time when service output was itself
growing markedly more rapidly than the economy as a whole.
– As with manufacturing, so with services: FDI is also an important means
by which services such as banking and insurance are sold abroad. Such
sales also encourage technological transfer in services (e.g. derivatives
trading).
Deutsche Bank
Trading Floor,
London
EC120 Spring 2016: Week 25, Topic 20, Slide 4
EC120: The World Economy in Historical Perspective
1d. The changing character of globalization during the 20 century: financial
integration.
• As in the years before 1914, trade integration since 1945 has been
accompanied by financial integration.
− While capital flows in the recent past are, relative to the GDP of the largest
investing countries, still smaller than those of the last decade before the ‘Great
War’, they now come from more countries and reach a broader range of
countries and activities. Thus global capital flows, over business cycles, are in
total larger now relative to the aggregate sizes of both sending and receiving
economies.
− While not neglecting government finance and infrastructure projects, the main
focus of foreign investment before 1914, foreign investment is now more
heavily directed towards equities and concentrated on private sector
manufacturing and services (for estimates of shares of private-source debt
flows by recipient in the period 1865 to 1913, see Eichengreen & Bordo
(2002), Table 4).
− There are more sources of foreign investment flows (such as Taiwanese
investment in mainland China)
− In any case, as mentioned above, FDI (a special case of equity investment)
now makes up a much larger proportion of total foreign investment than was
the case before 1914, when portfolio investment dominated foreign lending.
EC120 Spring 2017: Week 25, Topic 20, Slide 5
EC120: The World Economy in Historical Perspective
1e. The changing character of globalization during the 20 century:
explanations.
•
What factors best account for increased international economic integration
(excluding migration) since 1945 (and especially since 1979)? Bordo et. al.
(1999), (2002) propose the following:
– broad macroeconomic stability, much more akin to pre-1914 international
conditions than those of the 1920s and 1930s, yet without the extensive
trade and capital controls of the 1950s and 1960s.
– better (but far from perfect) information and investor infrastructure (such as
regulations governing corporate disclosure required by agencies such as the
American SEC; IMF reports; etc.) to guide foreign investment, especially
FDI.
– greater levels of social insurance to cushion trade shocks, thereby
encouraging greater political support for international trade and capital
flows.
– the growth of politically powerful advocates of trade, countering pressure
groups seeking protection; as before 1914, the political strength of such
advocates of openness varies from country to country.
EC120 Spring 2017: Week 25, Topic 20, Slide 6
EC120: The World Economy in Historical Perspective
2. Globalization and financial crises.
•
In view of the catastrophe of the 1930s and the financial crisis of 2008, it is
important to ask how robust the current phase of globalization is with respect
to financial crises. In particular, how well suited to current circumstances is the
current international monetary regime, which might be characterized as lightly
managed flexibility (of necessity) among large convertible currency blocs
(dollar, euro, yen, sterling, and increasingly the renminbi, from October 2016
all components of SDRs), of which uniquely the euro is composed of ultra-tight
pegs among members. All other currencies more or less track one or more of
the big blocs. These arrangements are in strong contrast to the near universal
hard pegs of the strongest economies during the classical Gold Standard
period, with all other currencies floating.
̶ The large currency blocs can deploy both monetary and fiscal policy to
maintain macroeconomic stability, although individual Euro-zone
countries have no control over monetary policy, which is entirely in the
hands of the European Central Bank. Does inflation targeting
encourage stabilizing co-ordination among the large currency blocs?
EC120 Spring 2017: Week 25, Topic 20, Slide 7
EC120: The World Economy in Historical Perspective
2a. Globalization and financial crises: definitions.
•
In the period 1945-1973, due to heavy controls, there were few
international financial crises. The currently available evidence suggest
that crises in the period 1973-1997 were growing more frequent than
those in the period 1880-1913, but not more severe, as measured by lost
output or protracted recovery time. For the number of crises by period
and market, see Eichengreen and Bordo, (2002), Table 6. For a summary
of output losses (as a percentage of GDP), see their Table 7. Note that
21 countries are covered 1880-1913, while both the same 21 countries
and an additional 35 countries are covered 1973-1997.
– Three types of crisis: currency, banking, and ’twin’ (currency and
banking combined). The definitions are:
• currency: forced change of parity, or abandonment of a pegged
exchange rate, or an international rescue, or, more subtly,
Exchange Market Pressure: the movement, one and a half
standard deviations above its mean in the relevant period, of an
index (calculated as a weighted [equally?] average of: (a) the
percentage change in the exchange rate; (b) the change in shortterm interest rate differentials; (c) and the percentage change in
reserves, all relative to the same variables in the centre country before 1914, Britain; 1945–1973, the U.S.; after 1973, the U.S.,
Germany, Japan, or China, depending upon the crisis.
EC120 Spring 2017: Week 25, Topic 20, Slide 8
EC120: The World Economy in Historical Perspective
2a [con’t]. Globalization and financial crises: definitions.
– Three types of crisis: currency, banking, and ’twin’ (currency and banking
combined). The definitions are [con’t.]:
• banking: significant runs on money centre banks, widespread bank
failures, and the suspension of convertibility of deposits into currency
such that currency circulates at a premium relative to deposits, or
significant banking sector problems resulting in the erosion of most or
all of banking system collateral, an erosion that is ultimately resolved
by a fiscally-underwritten bank restructuring.
• ‘twin’: both a currency crisis and a banking crisis occurring in the same
or immediately adjacent years.
• output losses: calculated as the sum of the differences between actual
GDP growth and the five year average preceding the crisis, until
growth returns to trend (as cumulative proportion of trend GDP). Note
that this calculation is sensitive to the precise measure used. A longer
averaging period tends to lessen measured losses (because growth
tends to accelerate in the years just before a crisis).
• recovery time: calculated as the number of years before the rate of
GDP growth returns to its pre-crisis average, defined in terms of the
five years preceding the crisis.
EC120 Spring 2017: Week 25, Topic 20, Slide 9
EC120: The World Economy in Historical Perspective
2b. Globalization and financial crises: summary overview.
• Summary of conclusions regarding crises (c. 2006):
– ‘Twin’ crises (fortunately a minority of crises in both periods) do seem to
be becoming both more frequent and more severe (again, the
increased number of countries covered may artificially magnify
‘intrinsic’ frequency). However, more recent work by Bordo and
Murshid (2006), drawing a distinction between international and
coincidental crises, suggests that truly international crises are not
more prevalent in the recent period (at least until 2008).
–
Bordo and Murshid (2006) suggest that severing the links to gold in
favour of a managed floating regime, the growing financial maturity of
advanced countries, and the widening of the number of major
financial centres has reduced the incidence of global crises.
– The pre-1914 international monetary regime seems to have worked
better in limiting the tendency for banking crises to destabilize
currency markets, but only for the ‘core’ industrial economies.
Emerging markets in both periods have found the extent of crises (in
terms of accumulated losses and recovery time) similar.
EC120 Spring 2017: Week 25, Topic 20, Slide 10
EC120: The World Economy in Historical Perspective
2c. Globalization and financial crises: the build-up of debt and leverage.
• In light of the current financial crisis, recent views, such as those of Eichengreen
and Bordo (2002) and Bordo and Murshid (2006) are likely to be modified,
although it is still too soon to know just how the current crisis will be resolved.
• The current crisis has some familiar features, especially rapid and persistent
build up of debt (combined with greater leverage) in the years immediately
preceding the crisis, as in the UK and Spain and, to a somewhat lesser extent,
in South Korea, France, and the US. (See Lund & Roxburgh (2010), Fig 1.).
There were also some important differences, notably: (1) the suddenness and
extent of its global onset, affecting both trade surplus and trade deficit
countries equally; (2) its initial concentration in the financial sectors of many
countries, both those with trade surpluses and trade deficits simultaneously.
• The structure of debt across categories (financial institutions, households, nonfinancial businesses, and governments) varies widely across countries,
suggesting that the strategies for bringing debt under control (deleveraging)
will also vary widely. (See Lund & Roxburgh (2010), Figs. 2, 3, & 4).
EC120 Spring 2017: Week 25, Topic 20, Slide 11
EC120: The World Economy in Historical Perspective
2d. Globalization and financial crises: possible consequences.
• Widespread changes in financial regulation to make it more unlikely
that the credit losses of financial institutions can occur so suddenly
and with such devastating impact.
• Reinhart & Rogoff stress that depressed demand (and related
deflationary pressures), protracted weak income growth, depressed
asset prices (especially housing), and elevated unemployment are the
characteristic consequences of severe financial crises, and may be
exacerbated by proposed reforms (such as restrictions on bank
lending).
Recent
political
protests in
Athens
EC120 Spring 2017: Week 25, Topic 20, Slide 12
EC120: The World Economy in Historical Perspective
3. The outlook after the crash
• Reinhart & Rogoff, among others, argue that high levels of debt (both
public and private) work against rapid recovery from the 2007-08 global
financial crisis. Hence the near-term outlook is one of a slow, fragile,
tentative resumption of growth.
• As always, the longer-term outlook will be determined by the productivity
advance made possible by technolgy and economic reform.
• Although the near-term outlook is not over-bright, the global economy has not
(yet) succumbed to an economic (and political) catastrophe comparable to
the 1930s, although the experience of some countries has come close.
Something has been learned. Time will tell if it’s enough.
Wall Street, October 1929
Lehman Bros’. ex-employee, London, Sept. 2008
EC120 Spring 2017: Week 25, Topic 20, Slide 13
EC120: The World Economy in Historical Perspective
Summing Up: Overview 1914 – 2017
• 1914-1945: De-globalization due to war, depression, more war.
• 1946-1958: First steps in the reconstruction of the global economy, largely
confined to Europe and North America.
• 1959-1973: Continued global growth on a broader basis, still with fixed exchange
rates underpinned by a variety of controls on capital flows.
• 1973-early 1980s: Wide-spread high inflation accompanied by macroeconomic
turbulence and volatility.
• Early 1980s-2008: A gradual reduction of inflation, de-regulation (especially of
capital controls), resumed economic growth, and an accelerated process of
globalization, at first centred on East Asia but subsequently spreading to Latin
America and Eastern Europe.
• 2008-?: Will international financial crisis once again lead to de-globalization?
EC120 Spring 2017: Week 25, Topic 20, Slide 14