Transcript Winning the peace and the Cold War: The Bretton Woods era

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GLOBALIZATION: FROM ADAM TO 1945
Robert Z. Lawrence
24th November 2015
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Global integration has been taking place since
homo-sapiens walked on the earth
• .
International exchanges of people, goods, bads, capital,
ideas & institutions have been taking place ever since.
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Which are Indigenous?
• Horses in North America.
• Coffee in Colombia.
• Cattle in Argentina.
• Potatoes in Ireland.
• Tomatoes in Italy.
• Sugar in the Caribbean.
• Sheep in Australia.
• Bananas in Honduras.
• Wine in Chile.
None! Both Goods and Bads.
Challenges for Integration.
Barriers to integration
• Natural: Geography, Distance.
• Financial: Means of Payment
• Security: Piracy, Plunder
• Institutional: Tribalism, Nationalism.
Hence the speed and reach of integration has depended
upon:
• Technologies. (especially transportation,
communication)
• Finance. (money, debt, equity).
• Governance. (Security, rule of law, enforcement of
contracts).
Example: International Economy Activity:
Sovereign Risk
• Joseph told Pharaoh to
store grain for the seven
lean years .
• Was this the correct
advice?
• In Babylon lending on
grain yielded returns of
20 - 30%.
• So why not invest the
grain there, and collect
later?
• Would they have paid?
Source: Obstfeld and Rogoff.
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Agenda
• The rise and decline of Empires.
• Europe and its offshoots in the Industrial Revolution.
• The disastrous global fragmentation in the 1930s.
• Lessons from History
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GLOBALIZATION 1.0: THE RISE,
DECLINE AND FALL OF EMPIRES
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Empires: loss of local sovereignty
Who Benefits?
Openness
In much of early history, empires dominated. For the Romans,
innovation in sea transportation was the key to integration
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But As Rome Declined so did Integration
Trade: Limited but possible
Venice & Genoa
The merchant communities of Greeks, Syrians,
and Jews that were so prominent in the conduct
of long-distance trade in 1000, had largely given
way to the thrusting competition of the Venetians
and Genoese, backed up by armed force where
necessary.
Real Venture Capitalists!
• Mechanisms, known as the
Commenda in Venice were
developed to share the high
risks of trade.
• One party stayed at home and
provided the finance. The other
went abroad. They split the
profits in predetermined
shares.
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Then the Mongols amassed a vast empire. Their mastery of
horses for transport connected trade routes from China to Europe
•
Real Horse-Power! While Mongol armies were not large, each man had up to twenty horses, so
that a fresh animal was always available at decisive encounters.
•
Emperor Kublai Kahn built roads, irrigation, introduced paper currency, encouraged trade.
•
Land route from Crimea (Ukraine) to Beijing was perfectly safe (took 8 or 9 months).
•
Chinese silk sold in Italy for no more than three times its purchase price in China.
Price data cited by Lopez (1987, p. 353)
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Not only Goods, but “Bads” became mobile: with
interconnection, disease spread through trade routes
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With the disintegration of the Mongol empire,
Europe turned west to trade
When the Mongol Empire fell, Europe’s passage to the East
was blocked by Islamic Ottomans and Egyptian Rulers
So they went West! Voyages of Discovery
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Columbus leveraged finance and shipping innovation on
his journey to the New World
Columbus, of Genoa Italy financed
by Queen Isabella, of Seville Spain
• Until the 15th Century sea-
going vessels had a single
sail, but with attention on
the Atlantic additional masts
were added and larger
vessels were built.
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Mercantilism:
gold is seen as the key to power, leading to protectionist policies.
• Mercantilism is the principle economic system from 15th to 19th century under Western European
Powers: Spain, Portugal, Netherlands, England and France.
• Gold is required for foreign wars to maintain fleets and armies in foreign countries. Domestic
manufacturing bolsters wealth and national security at home.
Thus Gold + Protectionism = Power.
Under mercantilism, the government controls foreign trade..
• To accumulate Gold, the trade balance should be in surplus.
• Exports and domestic value-addition are good; Manufactured Imports are bad.
• High tariffs on imports prevent exports of gold and raw materials.
• No trade outside the empire. All finance, insurance and transport by nationals.
A raw deal for the colonies..
• Mother Country manufacturers and sells at high prices.
• Colonies supply raw materials at low prices.
Slavery and Trade.
The First Multi-National Companies: Genocide!
In order to finance colonial expansion, government gave merchant companies
monopolies and rights to govern & protect territory with private militia. Merchant kings
had few restraints.
Genocide and Monopoly. The Dutch East India
Company slaughtered a population to control
spice production in Indonesia.
Bown, Stephen R. (2010-12-07). Merchant Kings: When Companies Ruled the World, 1600--1900 (Kindle Locations 57-62). Macmillan. Kindle Edition.
Another Merchant King: Clive of India
• Empire: The Dutch East India Company, MNCs and
International Trade
• https://vimeo.com/132762311
• Password: Globalization
Despite some gains from mercantilism, Adam Smith saw that it
was self-defeating; better to reap efficiency gains from trade
Though Merchants and Governments profited…
•
Merchants, and Investors, benefited from enforced monopolies,
… it was only on a limited set of products (high-value lightweight)
• Thus, pepper, spices, cottons, tea, coffee came from Asia.
Silver and manufactures from Europe. Sugar and tobacco,
the Americas.
Adam Smith advocated efficiency over mercantilism
• Gold allows foreign military operations and thus equals power.
But more gold leads to higher prices and thus less valuable
gold so the system is self defeating. You make more gold
by being more efficient and reaping gains from trade. So
ultimately national wealth is better generated by trade.
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GLOBALIZATION 2.0 : 1850 –
1914.(IMPERIALISM)
EUROPE AND ITS OFFSHOOTS
TAKE OFF!
Until the 19th century, for the most part, economic
growth was non-existent. Since then it has been
spectacular. Driven both by domestic innovations and
by global integration.
A Real Revolution! The world changed. Britain
experienced dramatic economic growth
20,000
18,000
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
0
200
400
600
800
1000
1200
GDP per capita in Great Britain
Source: data from Maddison
1400
1600
1800
2000
Britain leads the way out of mercantilism,
to free trade
• In the 18th Century, Britain begins to industrialize.
• By mid 19th Century competitive British industrialists want free
trade, not state monopolies, and foreign markets for their
exports.
• Urban consumers want cheap food.
• The City of London wants to lend to USA and Argentina, which
implies these countries need to export to repay.
• 1846: Britain supports repeal of the Corn Laws (protectionist
trade barrier) and an open British Home Market.
• Followed by free trade with France.
…The Sun Never Set on the British Empire!
Under Pax Britannia, in the fifty years prior to World War I, the
(British) world experienced increased integration
Built on steamships, railroads and guns
With the Industrial Revolution, information moved
faster, and shipping was cheaper than ever before
The speed with which information
traveled went from walking to
telegraph
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From 1815 to 1910 there was a roughly
ten-fold fall in ocean freight rates
250
200
150
100
50
0
1790
1810
1830
1850
1870
1890
Speed of Information Transmission, miles per hour
Source: Clark 2007
American Export Freight Rate Index, 1815-1910
Though in late 1800s some advanced
countries raised industrial tariffs
But Goods were moving: trade rose rapidly
And Many Prices Converged!
• Price gaps for manufactured goods (which were initially dearer in the
United States) were falling as well:
•
•
•
•
13.7% in 1870 to-3.6% in 1913 for cotton textiles,
75% to 20.6% for iron bars,
85.2% to 19.3% for pig iron
32.7% to-0.1% for copper.
• Price convergence was not limited to the North Atlantic economy.
• Liverpool cotton prices exceeded their Alexandria equivalents by
42.1% in 1824– 32 and by 40.8% during 1863– 67, but by just 5.3%
during the last decade of the nineteenth century (Issawi 1966, pp.
447– 48).
Source: Findlay and O'Rourke Power and Plenty.
The difference between wheat prices in Britain
and the US almost disappeared
Source: O’Rourke and Williamson (2002)
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18 0-1
90 88
19 - 1 9
1 9
19 9-1 13
27 92
19 - 1 6
32 93
19 - 1 1
47 93
19 - 1 9
60 95
19 - 1 9
7 9
19 4-1 73
89 98
-1 9
99
6
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Absolute value of current
account, % of GDP
Money was moving: net capital movements
were higher pre-WWI than in 1990s
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Source: Wolf, table 8.6 (from Taylor, 1996)
UK
USA
Railroads, for instance, were built around the
world with foreign capital
km
Evolution of the Railway Network (in km), 1850-1913
Source: Rioux, J-P (1989) La revolution industrielle 1780-1880, Paris: Editions du Seuil.
But Not Always Smoothly.
High
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0.9
Share of Countries
in Banking Crisis, 3-year Sum
(right scale)
1914
0.8
30
25
0.7
0.6
Percent
Index
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Capital Mobility
(left scale)
0.5
15
0.4
0.3
1825
1980
1860
10
0.2
5
1945
1918
0.1
Low
0
1800
0
1810
1820
1830
1840
1850
1860
1870
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Source: Rogoff and Reinhart
2010
Cumulative impact on population of
migration
People were moving: there were massive migrations within
the “Atlantic economy” from Europe to the Americas
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
Source: Hatton and Williamson, 1998
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British Empire expansion in the 19th century had its
winners…
• 'The 19th-century empire undeniably pioneered free trade,
free capital movements and, with the abolition of slavery,
free labor.
• It invested immense sums in developing a global network
of modern communications. It spread and enforced the
rule of law over vast areas.
• Though it fought many small wars, the empire maintained
a global peace unmatched before or since.
Niall Ferguson, Empire
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… and its losers: Empire powers positioned for growth
boomed after 1800 while others were left behind
New colonies joined in trade:
Europeans scrambled for
Africa
The British Empire grew dramatically
while colonies like India grew only
marginally
5,000
4,500
4,000
3,500
Britain
3,000
2,500
2,000
India
1,500
1,000
500
0
1500
1600
1700
GDP per capita in Great Britain
1800
GDP per capita in India
1900
UK, British Offshoots and Western Europe gained …..the
rest of the world, not so much
Per Capita Income Over Time, 1990 dollars
6000
Per Capita Income
5000
4000
1500
3000
1820
1870
1913
2000
1000
0
United
British Western
Kingdom Offshoots Europe
Eastern
Europe
Latin Asia (excl
America Japan)
Africa
Source: Angus Maddison
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…leading to an anomalous period in the
global distribution of income
Year 0 to 1800
Industrial revolution 1800-present
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In fact, many developing countries
deindustrialized!
Levels of Industrialization in Third World and Developed Countries
(UK in 1900 = 100)
Year
1750
1800
1830
1860
1900
1913
Total
Third World Developed
93
34
99
47
112
73
83
143
60
481
70
863
Per Capita
Third World Developed
7
8
6
8
6
11
4
16
2
35
2
55
Source: Bairoch P Economics and World History
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And within countries?
Trends in the Ratio of Wages to Land Values
1870
1910
Britain
42.28
115.42
United
States
127.99
64.07
Source: O’Rourke, Taylor Williamson
In Europe, a shrinking workforce, growing demand for manufactured exports
to the New World led to growth in wages relative to land. Meanwhile in the
US, increased competition from manufactured imports and immigration plus
increased exports of farm products meant lower wages relative to land.
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Some Are Freed…
Church Missionary Society, founded 1799 and committed to abolishing slave trade.
William Wilberforce, CMS
leader.
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……………..And some meet even worse fates
Opium Wars
• The British hooked many Chinese to
opium. When the Chinese banned
opium imports in 1839, war was
declared, and China was defeated by
a small British military force.
• Under the Treaty of Nanking (1842),
Britain was granted Hong Kong
Empire: Hong Kong and the
Opium Wars
https://vimeo.com/132762312
Password: Globalization
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Political Rights: Expand in the rich countries,
while many others are colonized
Rise of Democracy
Widespread Colonization
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Major social transformation occurred in Industrialized
countries, in response to the new labor environment
• Industrialization with mass production led to large
corporations and a large urban working class.
• Political responses:
• Nationalism and collectivist ideologies (e.g. socialism, communism)
and populism.
• Policy Responses:
• Anti-trust, higher tariffs.
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Keynes described abundant choices available to the
upper-middle class in Britain - goods, investments, and
mobility
What an extraordinary episode in the economic
progress of man that age was which came to an
end in August 1914! …in[to] the middle and upper
classes, for whom life offered, at a low cost and
with the least trouble, conveniences, comforts, and
amenities beyond the compass of the richest and
most powerful monarchs of other ages. 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 might see fit, and reasonably expect their
early delivery upon his doorstep.
The world economy became highly integrated
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THE WORLD UNRAVELS:
(1914-1939)
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“The struggle for empire turned into the struggle among
empire builders that we know as the first World War”
--Martin Wolf
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After WW1: Major political changes occurred, often with
extensive government involvement in the economy
• Old Empires collapsed (Germany, Russia, Ottoman, Austro-
Hungarian). In most industrial countries all men and women had the
vote.
• The United States emerged as the World’s largest economy, the
leading lender and the most powerful nation. President Woodrow
Wilson led the Versailles settlement but then US became isolationist.
• Russia: Adopted Communism
• Germany, after chaos in 1920’s turned to National Socialism under
Hitler
• Italy became fascist under Mussolini
• Japan became ultra-nationalist under militarism
• In many European countries, Socialists were often in government
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Losing the peace: unworkable economic systems and
closed trade created an unstable environment
• After WWI, punitive reparations compelled the losers
(Germany) to repay the winners. The US attempted to
collect debts from its allies. Many conflicts ensued.
• There was no international cooperation on trade flows
(within Europe or globally).
• Attempts were made to put countries back on the gold
standard due to its “automatic” stabilizers. But they lacked
needed accommodations and policies for adjustment of
exchange rates.
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German (and Austrian) hyperinflation of 1923 undermined
the currency, and the state, creating the basis for Nazis to
assume power
• Germans don’t want to pay reparations,
abandon fiscal discipline and print
money.
• Result: hyperinflation until US bails
them out with a loan and currency is
stabilized
http://upload.wikimedia.org/wikipedia/commons/8/8f/GermanyHyperChart.jpg
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In the 1920s there was a recovery, but then
major economic shocks
Stock Market Crashes in 1929
Falling Export Prices Cause
Country Debt Defaults
Source: Eichengreen and Portes
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US and world banks collapsed after multiple runs draining
liquid assets (1929-1933), leading into the Great Depression
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The shortage of funds drastically reduced international and
domestic economic activity; businesses let workers go
World Trade Plummets
Unemployment Soars
Unemployment Rates among Industrial
workers (%)
40
35
30
France
25
Germany
United Kingdom
20
Netherlands
United States
15
Canada
Australia
10
5
0
1920-29 1930-33 1934-38
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Nations searched for solutions. Many chose to drop the gold
standard, restoring some growth until WWII began in 1939
Graph shows income per capita and point at
which country left gold standard
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As WWII drew to a close, world leaders attempted to “win
the peace” with a better balance of the tri-lemma
Sovereignty
Achievement
of Public
Purpose
Openness
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LESSONS FROM HISTORY
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Technological advances especially in transportation
have been crucial in dealing with geographic obstacles
Technological advances fostered interconnection
• The Romans did it with Roads and Ships.
• The Mongols did it with Horses.
• The Europeans did it with Rigged Sailboats.
• 19th Century Britain did it with Steamships,
Railroads and the Telegraph.
• Military technology also played a role, from stirrups, to arrows,
to cavalry, to pistols, gunboats, and machine guns.
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Innovations in finance deal with the need for capital,
the bearing of risk and problems of collection.
Financial tools and systems enabled larger endeavors
• The Venetians pooled risks with the Commenda.
• Columbus, a Genoan sailed, but the Spaniards financed.
• The Empires were built on Private Corporations and Joint Stock
Multinationals.
• The globalization of bond markets under Rothschilds were crucial in
providing funds for rulers and firms in the 19th Century.
• But collection is a common problem: There have been many
sovereign defaults as well as wars over payment – gunboat
diplomacy.
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Security, oversight (governance), and political
institutions define the path of globalization
• The basis of globalization has generally been the persuasion
of power rather than the power of persuasion.
• The world has seen periods of integration and periods of
disintegration.
• Free trade has been the exception, rather than the rule.
• The mechanisms of governance have had a major impact on
who wins and who loses.
• Mutual gains have been more likely in interactions between
political equals.
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(Very) Optional Reading: Books I’ve
Enjoyed
• Acemoglu, Daron and James Robinson. 2012. Why Nations Fail: the origins
of power, prosperity and poverty. New York: Crown Business.
• Weatherford, Jack. 2004. Genghis Kahn and the Making of the Modern
World New York: Three Rivers Press.
• Brown, Stephen R. 2009. Merchant Kings: When Companies Ruled the
World 1600-1900 New York St Martin’s Press
• Ahamed, Liaquat. 2009. Lords of Finance: The Bankers who Broke the World
New York: Penguin.
• Findlay, Ronald and Kevin O’Rourke, 2007. Power and Plenty: Trade, War
and the World Economy in the Second Millenium Princeton: Princeton
University Press