What is globalisation? Fact vs fiction

Those who welcome globalisation and those who oppose it tend to regard it as unprecedented, inevitable and irreversible. It is none of these things.

Globalisation is neither an ideology nor a set of outcomes, but a process. It is, as the Penguin Dictionary of Economics defines it, 'the geographical dispersion of industrial and services activities (for example, research and development, sourcing of inputs, production and distribution) and the cross-border networking of companies (for example, through joint ventures and the sharing of assets)'.

In other words, globalisation is simply the logical extension of the tendency towards increasing specialisation and trade that has been going on throughout human history. Adam Smith may not have coined the phrases 'specialisation' and 'division of labour' to describe this particular aspect of human evolution until 1774, but it had been going on for a long time before he did. Thus, nations have traded with one another since time immemorial.

The extent and pattern of trade among nations has not been determined simply by differences in endowments of natural or human resources. Throughout human history there have been barriers to exchanges of goods and services, both within nations and among them. These barriers generally consist of three types: (i) physical - for example, high mountains, harsh deserts and wide oceans; (ii) economic - for example, when the cost of transporting goods from one place to another exceeds the difference between the cost of producing them in each; and (iii) political - such as laws prohibiting outright trade in particular goods and services, or with particular countries, or laws which impose such high taxes on cross-border transactions as to render some or all of them uneconomic.

Seen in this light, 'globalisation' can be viewed as a logical extension of the process through which barriers to the exchange of goods and services among far-flung nations are being either dismantled or overcome.

Not unprecedented

Many aspects of what is referred to today as 'globalisation' proceeded at least as rapidly in the four decades before the outbreak of World War I as they have over the past two decades. The increase in world trade as a share of world GDP, for instance, was proportionately greater between 1870 and 1913 than it has been since 1975. True, trade in services was much smaller and some parts of the world (such as China) were largely outside the global system. Notwithstanding the East India Company and others like it, the term 'multinational corporation' was yet to be invented. But in at least one respect - the movement of people - the world was in fact much more 'globalised' than it is today. Around 60 million Europeans migrated to the Americas, Australia, New Zealand and South Africa during the century after 1820, until 'New World' countries began placing restrictions on immigration from the late 1880s onwards.

Australia, like the United States at this time, was an 'emerging economy', and was very much part of the process of global economic integration. Until the 1890s depression, British investment in Australia was roughly the same proportion of GDP as foreign investment from all sources has been over the past 20 years. By 1913, exports accounted for a larger share of our GDP than they ever were to again until the mid-1980s. This was an era in which Australians enjoyed the highest living standards in the world.

It was also a period of rapid technological change. New means of transport (think of the steamship and refrigeration) were coming into vogue, new means of communication (the telegraph and the telephone) were spreading, and the costs of both were falling.

Another interesting parallel is that, like the 1990s, it was a time of considerable financial instability, especially in emerging markets. There were reportedly 32 separate currency crises in 16 different countries, including Australia between 1882 and 1913. In most cases, the economies affected by these crises bounced back surprisingly quickly, as most of the Asian countries did from the 1997-1998 crisis.

Of course, there were some important differences between the globalisation of the period before World War I and the contemporary era. First, the composition of trade has shifted from primary commodities to manufactures and, more recently, services. Second, the nature of capital flows has changed. Where portfolio investment (stocks and bonds) was once the predominant form of cross-border investment, direct foreign investment through the establishment and expansion of branches, subsidiaries and affiliates is now common. Another significant difference is that a century ago globalisation involved a certain degree of coercion through colonial expansion, 'gunboat diplomacy' and 'unequal treaties'. Today, it is largely being facilitated by the voluntary decisions of the world's governments to open their doors to international trade and investment.

Not irreversible

'Globalisation' during the period before World War I eventually prompted a political backlash. Continental European governments began raising tariffs in the late 1870s and 1880s, when the impact of cheap grain from the Americas, Russia and Australia began to make itself felt in European markets. The United States raised tariffs as a revenue measure during the Civil War, and kept them high for a long time after. Canada adopted an explicitly protectionist policy after 1878. Tariffs rose in Latin America from the 1870s onwards.

In Australia, Victoria raised its maximum tariff from 10% in 1865 to 45% by 1893 and, as the dominant colony, it was then able to impose its protectionist policies on the rest of Australia after Federation in 1901. Britain finally succumbed to the protectionist tide in the first decade of the 20th century. The only part of the world where trade barriers did not increase significantly after the 1870s was Asia, and that was because of colonial policies or 'unequal treaties' rather than the decisions of sovereign rulers.