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COMMENTARY This section is designed for the discussion and debate of current economic problems. Contributions which raise

new issues or comment on issues already raised are welcome.

Globalisation, history and development: a tale of two centuries

Deepak Nayyar*

This paper situates globalisation in historical perspective to analyse its implications for development. It sketches a picture of globalisation during the late nineteenth and twentieth centuries. A comparison of these two epochs reveals striking parallels, unexpected similarities and important differences. It shows that globalisation did not lead to rapid growth and economic convergence in the world, either then or now. Indeed, growth slowed down, and income levels diverged, while the gap between the industrialised and developing countries widened, in both epochs. The story of globalisation, it turns out, does not conform to the fairy tale about convergence and development.

Key words: Globalisation, Uneven Development, Convergence, Divergence, Exclusion JEL classifications: F02, O10, N00

Introduction

Globalisation means different things to different people. What is more, the word global-

isation is used in two ways, which is a source of some confusion. It is used in a positive sense

to describe a process of integration into the world economy. It is used in a normative sense to

prescribe a strategy of development based on rapid integration with the world economy.

Even its characterisation, however, is by no means uniform. It can be described, simply, as

an expansion of economic activities across national boundaries. There are three economic

manifestations of this phenomenon—international trade, international investment and

international finance—which also constitute its cutting edge. But there is much more to

globalisation. It is about the expansion of economic transactions and the organisation of

economic activities across the political boundaries of nation states. More precisely, it can be

defined as a process associated with increasing economic openness, growing economic

interdependence and deepening economic integration in the world economy.

Manuscript received 14 March 2005; final version received 24 August 2005. Address for correspondence: Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal

Nehru University, New Delhi 110 067 INDIA; email: deepaknayyar@mail.jnu.ac.in

* I should like to thank Ram Singh for valuable assistance and Dhiraj Nayyar for helpful leads in my search for information.

Cambridge Journal of Economics 2006, 30, 137–159 doi:10.1093/cje/bei090

Economic openness is not simply confined to trade flows, investment flows and financial

flows. It also extends to flows of services, technology, information and ideas across national

boundaries. But the cross-border movement of people is closely regulated and highly

restricted. Economic interdependence is asymmetrical. There is a high degree of interdepen-

dence among countries in the industrialised world. There is considerable dependence of

developing countries on the industrialised countries. There is much less interdependence

among countries in the developing world. It is important to note that a situation of

interdependence is one where the benefits of linking and costs of delinking are about the

same for both partners; where such benefits and costs are unequal between partners, it

implies a situation of dependence. Economic integration straddles national boundaries as

liberalisation has diluted the significance of borders in economic transactions. It is, in part,

an integration of markets (for goods, services, technology, financial assets and even money)

on the demand side, and, in part, an integration of production (horizontal and vertical) on

the supply side.

The world economy has experienced progressive international economic integration

since 1950. However, there has been a marked acceleration in this process of globalisation

during the last quarter of the twentieth century. There is a common presumption that the

present situation, when globalisation is changing the character of the world economy, is

altogether new and represents a fundamental departure from the past. But this pre-

sumption is not correct. Globalisation is not new. In fact, there was a similar phase of

globalisation which began a century earlier, circa 1870, and gathered momentum until

1914, when it came to an abrupt end. In many ways, the world economy in the early

twenty-first century resembles the world economy in the late nineteenth century. And there

is much that we can learn from history, for there is the past in our present (Nayyar, 1995).

This essay seeks to explore the theme of globalisation and development in historical

perspective. In doing so, it analyses the implications of globalisation for development in

retrospect and prospect. The structure of the paper is as follows. Section 1 sketches

a picture of globalisation during the late nineteenth century. Section 2 outlines the

contours of globalisation during the late twentieth century. Section 3 examines the

parallels, the similarities and the differences between these two epochs of globalisation.

Section 4 discusses the implications of globalisation for the Third World then, arguing that

it led to uneven development in the past. Section 5 considers the consequences of

globalisation for the Third World now, concluding that it has been associated with an

exclusion of poor countries and poor people from the process of development in the

present. The story of globalisation during the long twentieth century, it turns out, does not

conform to the fairy tale of development, convergence and prosperity. For much of the

Third World, it is about underdevelopment, divergence and exclusion.

1. The late nineteenth century

The period from 1870 to 1914 was the age of laissez faire. The movement of goods, capital

and labour across national boundaries was almost unhindered. Government intervention

in economic activity was minimal. There were, of course, differences among countries. In

general, however, these attributes were more clearly discernible in the Third World than in

the Atlantic economies. The openness of economies that characterised this era was

associated with a rapid expansion in trade, investment and finance across borders.

There was a rapid expansion of international trade from 1870 to 1913. It is estimated

that, during this period, the growth in world trade at 3.9% per annum was much faster than

138 D. Nayyar

the growth in world output at 2.5% per annum (Maddison, 1989). Another estimate

suggests that these growth rates were 3.5% per annum and 2.7% per annum, respectively

(Michie and Kitson, 1995). Consequently, the share of world trade in world output

registered a steady increase. This is confirmed by evidence available for select countries. In

Western Europe, the share of exports in GDP rose from 13.6% in 1870 to 18.3% in 1913

(Bairoch and Kozul-Wright, 1996). Similarly, for 16 developed countries, now in the

OECD, the share of exports in GDP rose from 18.2% in 1900 to 21.2% in 1913

(Maddison, 1989). Even among these sub-sets of countries, there were significant

variations. The export–GDP ratios in some small European economies such as Belgium,

the Netherlands and Switzerland were much higher than in the larger European economies

such as France, Germany and Italy. The export–GDP ratios were significantly lower in the

US and Japan (Maddison, 1989).

It is believed that this expansion in international trade was attributable to trade

liberalisation. It was in part, but only in part. During the first half of the nineteenth

century, free trade was practised only by Britain. Starting around 1860, trade barriers

began to come down in Europe. The Anglo-French treaty on trade was a first step. But the

tariff disarmament in Europe was driven by the most-favoured-nation clause (Kenwood

and Lougheed, 1994). However, this trade liberalisation was confined to Europe and lasted

just two decades (Bairoch, 1989). The US practised protection throughout the period

1870–1913 as average tariff levels remained in the range of 40–50% (Chang, 2002).

Between 1875 and 1913, the average level of import duties on manufactured goods rose

from 12% to 20% in France, 10% to 20% in Italy, and 5% to 13% in Germany. Much the

same was true of most other European countries (Bairoch, 1993). The only exceptions

were Britain and the Netherlands, which continued to practise free trade.

Free trade was, however, imposed on the rest of the world. Imperialism prised open

markets in the Third World, through gunboat diplomacy or colonial dominance. In 1842,

China signed a treaty with Britain which opened its market to trade and capped tariffs at

5%. In the 1840s, free trade was imposed on India by Britain and on Indonesia by the

Netherlands. In 1858, Japan signed the Shimoda–Harris treaties, persuaded by the

American gunboats of Commodore Perry, to switch from autarchy to free trade. Korea

followed the same path, through its market integration with Japan. Similar treaties, which

put a ceiling of 5% on import duties, were imposed on most Latin American countries

somewhat earlier. 1

This was achieved mostly through British gunboat diplomacy. Towards

the end of the nineteenth century, however, some Third World countries turned to

protection in their quest for industrialisation.

The reality of trade policy, it would seem, did not mirror the myth of free trade. The

West practised protection wherever necessary, but imposed free trade on the Third World.

In the sphere of trade, even in 1913, the developed world is best described as ‘islands of

liberalisation surrounded by a sea of protectionism’, whereas the developing world is best

described as an ‘ocean of liberalisation with islands of protectionism’ (Bairoch and Kozul-

Wright, 1996).

There was a similar expansion of international investment from 1870 to 1913. Foreign

direct investment increased rapidly during this period. And, by 1914, the stock of foreign

direct investment in the world was $14bn. An estimate made by the United Nations

suggests that this stock of foreign direct investment in the world economy was the

equivalent of 9% of world output in 1913 (UNCTAD, 1994, p. 130). The growth in

1 For a discussion on the advent of free trade in the Third World, see Williamson (2002).

Globalisation, history and development 139

portfolio investment was even more rapid. Consequently, by 1914, the stock of long-term

foreign investment in the world reached $44bn, of which $30bn, about two-thirds, was

portfolio investment (UNCTAD, 1994, pp. 120–1). It is not surprising that, in this age of

imperialism, Western Europe was the primary source of foreign capital. In 1914, Britain,

Germany and France together accounted for $33bn from a total of $44bn (Bairoch and

Kozul-Wright, 1996). For the world as a whole, in 1914, about half of total foreign

investment went to Asia, Latin America and Africa, while the remaining half, in almost

equal parts, went to Europe and North America. The latter half was concentrated in

a small group of newly industrialising countries in North America and Europe, for some of

which it constituted as much as 50% of gross domestic investment (Panić, 1992, p. 101).

The stock of foreign investment in developing countries, direct and portfolio, rose from

$5.3bn in 1870 to $11.4bn in 1900 and $22.7bn in 1914 (Maddison, 1989, p. 30). Such

foreign investment was probably equal to about one-third of the GDP of developing

countries at the turn of the century (Maddison, 1989, pp. 30, 113). Imperialism exercised

an important influence. Between 1870 and 1914, the share of British foreign investment

going to Europe and the US dropped from 52% to 26% of the total, whereas the share of

Latin America and the British colonies rose from 33% to 55% of the total (Kenwood and

Lougheed, 1994, p. 30). And income from foreign investments constituted around 10% of

British national income (Foreman-Peck, 1983, p. 133).

The late nineteenth and early twentieth century witnessed a significant integration of

international financial markets to provide a channel for portfolio investment flows. The

cross-national ownership of securities, including government bonds, reached very high

levels during this period. In 1913, for example, foreign securities constituted 59% of all

securities traded in London. Similarly, in 1908, the corresponding proportion was 53% in

Paris (Morgenstern, 1959). It is worth noting that there was a correlation between interest

rates, exchange rates and stock prices in the leading markets. There was also an established

market for government bonds. 1

In 1920, for instance, Moody’s rated bonds were issued by

50 governments. 2

International bank lending was substantial. Both governments and

private investors floated long-term bonds directly in the financial markets of London, Paris

and New York. Merchant banks or investment banks were the intermediaries in facilitating

these capital flows from private individuals and financial institutions, in the developed

countries of Europe, in search of long-term investments, on the one hand, to firms or

governments mostly in the newly industrialising countries or the underdeveloped countries

which issued long-term liabilities, on the other (Kregel 1994). This was so much the case

that, during the period 1880–1913, the principal capital exporter in the world economy,

Britain, ran an average current account surplus in its balance of payments, which was the

equivalent of 5% of its GDP (Keynes, 1919; Panić, 1992). And, in some years, this was as

much as 8% of GDP. In fact, by 1914, such capital flows were in the range of 5% of GDP in

most capital exporting countries (Bairoch and Kozul-Wright, 1996, p. 11).

2. The late twentieth century

The essential attribute of globalisation, then and now, is an increase in the degree of

openness in most countries. The three important dimensions of this phenomenon now, as

much as then, are international trade, investment and finance.

1 In 1914, as much as 70% of outstanding British and French long-term foreign investments consisted of

government bonds and railway bonds (Bloomfield, 1968, p. 4). 2

Cf., A survey of the world economy, The Economist, London, 7 October 1995.

140 D. Nayyar

The second half of the twentieth century has witnessed a phenomenal expansion in

international trade flows. World exports increased from $61bn in 1950 to $883bn in 1975

and $6338bn in 2000. Throughout this period, the growth in world trade was significantly

higher than the growth in world output, although the gap narrowed after the mid-1970s.

Consequently, an increasing proportion of world output entered into world trade. The

share of world exports in world GDP rose from 6% in 1950 to 14.3% in 1975 and 20.2% in

2000. For the industrialised countries, this proportion increased from 13.6% in 1975 to

16.7% in 2000. For the developing countries, this proportion increased from 17.5% in

1975 to 31.2% in 2000. 1

The story is almost the same for international investment flows. The stock of foreign

direct investment in the world economy increased from $68bn in 1960 to $636bn in 1980

and $6258bn in 2000. The flows of foreign direct investment in the world economy

increased from $5bn in 1960 to $55bn in 1980 and $1492bn in 2000. 2

Consequently, the

stock of foreign direct investment in the world as a proportion of world output increased

from 4.4% in 1960 to 6.1% in 1980 and 20% in 2000. 3

Over the same period, world

foreign direct investment flows as a proportion of world gross fixed capital formation rose

from 1.1% in 1960 to 2.3% in 1980 and 22% in 2000. 4

In the industrialised countries, as

an annual average, this proportion increased from 2.3% during 1981–85 to 4.4% during

1986–90, dropped to 3.6% during 1991–95 but rose sharply to 12.8% during 1996–2000.

In the developing countries, as an annual average, this proportion rose from 2.4% during

1981–85 to 2.7% during 1986–90, but rose rapidly thereafter to 5.7% during 1991–95 and

11.7% during 1996–2000. 5

The last quarter of the twentieth century witnessed an explosive growth in international

finance. The movement of finance across national boundaries is enormous—so much so

that, in terms of magnitudes, trade and investment are now dwarfed by finance. This

internationalisation of financial markets has four dimensions: foreign exchange, bank

lending, financial assets and government bonds. Consider each in turn.

In foreign exchange markets, trading was a modest $15bn per day in 1973. It rose to

$60bn per day in 1983. It soared to $590bn per day in 1989, $820bn per day in 1992,

$1190bn per day in 1995 and $1490bn per day in 1998. 6

Consequently, the ratio of

worldwide transactions in foreign exchange to world exports rose from 9:1 in 1973 and

12:1 in 1983 to 80:1 in 1992, 85:1 in 1995 and 100:1 in 1998. And some absolute

1 The data on world exports cited in this paragraph, as also the data on world GDP used to calculate the

proportions, are obtained from the UNCTAD Handbook of International Trade and Development Statistics and Handbook of Statistics, various issues. The data on GDP for country-groups are obtained from World Bank, World Development Indicators, 2003.

2 For data on stocks and flows of foreign direct investment in the world economy, cited here, see United

Nations, Transnational Corporations and World Development, 1978, and UNCTAD, World Investment Reports 1994 and 2002.

3 UNCTAD, World Investment Report 1994, p. 130, and World Investment Report 2002, p. 328

4 UNCTAD, World Investment Report 1994, p. 130, and World Investment Report 2002, p. 319

5 The data on foreign direct investment as a percentage of gross fixed capital formation, cited in this

paragraph, are obtained from UNCTADWorld Investment Report 1994, pp. 421–6, and World Investment Report 2002, pp. 319–20.

6 These statistics on the average daily turnover in foreign exchange markets are based on the Bank of

International Settlements, Survey of Foreign Exchange Activity, Basle, various issues, conducted by central banks and reported by BIS. The surveys are triennial. The data relate to average daily turnover in the global foreign exchange market during April each year, including spot transactions, outright forwards and foreign exchange swaps. The figures are adjusted for double-counting and estimated-gaps in reporting. The latest survey reports that this average daily turnover dropped to $1190bn in April 2001. For the purpose of comparison in this paragraph, the values of world exports and world GDP have been converted into an average daily figure.

Globalisation, history and development 141

numbers would help situate these magnitudes in perspective. In 1997, for example, world

GDP was $82bn per day, while world exports were $15bn per day, compared with global

foreign exchange transactions of $1490bn per day in April 1998, while the foreign

exchange reserves of all central banks put together were $1550bn in 1997.

The expansion of international banking is also phenomenal. As a proportion of world

output, net international bank loans rose from 0.7% in 1964 to 8.0% in 1980 and 13.5% in

2000. As a proportion of world trade, net international bank loans rose from 7.5% in 1964

to 42.6% in 1980 and 66.9% in 2000. As a proportion of world gross fixed capital

formation, net international bank loans rose from 6.2% in 1964 to 51.1% in 1980 and

62.8% in 2000. 1

It is worth noting that the gross size of the international banking market,

which includes claims on (or liabilities to) banks, was more than double that of net

international bank lending. Cross-border inter-bank liabilities rose from a modest $ 455bn

in 1970 to $5560bn in 1990 and $8998bn in 2000. 2

The international market for financial assets experienced a similar growth starting

somewhat later. The evidence is incomplete but revealing. Between 1980 and 1993, gross

sales and purchases of bonds and equities transacted between domestic and foreign

residents rose from less than 10% of GDP in the US, Germany and Japan to 135% of GDP

in the US, 170% of GDP in Germany and 80% of GDP in Japan. In the UK, the value of

such transactions was more than ten times that of the GDP in 1993. Similarly, between

1980 and 1993, the share of foreign bonds and equities in pension-fund assets rose from

10% to 20% in the UK, from 0.7% to 6% in the US, and from 0.5% to 9% in Japan. 3

Yet

another dimension of transactions in the international market for financial assets provides

evidence on subsequent years. Cross-border mergers and acquisitions rose from $75bn in

1987 to $151bn in 1990 and $1144bn in 2000. The pace of expansion was about the same

as that of foreign direct investment inflows in the industrialised countries but somewhat

slower in the developing countries and the transition economies. The value of such cross-

border mergers and acquisitions, which was about 0.5% of world GDP during the late

1980s, rose to 3.6% of world GDP in 2000. 4

Government debt has also become tradable in the global market for financial assets.

Available evidence suggests that there is a growing international market for government

bonds. Between 1980 and 1992, the proportion of government bonds held by foreigners

rose from less than 1% to 43% in France, from 9% to 17% in the UK, from 10% to 27% in

Germany, while it remained steady at about 20% in the US. 5

Between 1993 and 2000, the value of outstanding international bonds, as a proportion

of GDP, rose from 8% to 23% in the world economy, from 8% to 26% in the industrialised

countries and from 2% to 7% in the developing countries. 6

But all international bonds do

not constitute government debt, for the global bond market is made up of public debt and

1 For data on 1964 and 1980, UNCTAD, World Investment Report 1994, p. 128. The proportions for 2000

are calculated. The statistics on international bank loans are obtained from BIS Quarterly Review, June 2003. The data on world GDP, world exports and world gross fixed capital formation are obtained from UNCTAD statistics.

2 Inter-bank claims/liabilities increased faster during the 1990s, so that, by 2000, gross international

lending by banks was three times net international lending by banks. 3

The proportions cited so far in this paragraph, are estimated from data compiled by BIS and IMF, and are reported in ‘A Survey of the World Economy’, The Economist, London, 7 October 1995.

4 The data on cross-border mergers and acquisitions cited in this paragraph are obtained from UNCTAD,

World Investment Report 2002, p. 341. See also UNCTAD, World Investment Report 2000, pp. 106–23. 5

See ‘A Survey of the World Economy’, The Economist, London, 7 October 1995. 6

The data cited here are from Observatoire de la Finance and UNITAR, Economic and Financial Globalisation: What the Numbers Say, New York and Geneva, 2003, p. 145.

142 D. Nayyar

private debt. Evidence from another source suggests that, in 2000, public sector debt

(including debt issued by state and local governments and government-sponsored enter-

prises) constituted 21% of international bonds in the world as a whole, 19% of

international bonds in the industrialised countries and 35% of international bonds in

the rest of the world. 1

On the basis of these proportions, it would be reasonable to infer

that, at the end of 2000, the size of the international market for government debt was the

equivalent of 4.8% of GDP in the world economy, 5% of GDP in the industrialised

countries and 2.5% of GDP in the developing countries.

3. Two epochs of globalisation: a comparison

The preceding discussion shows that the world economy experienced a rapid internation-

alisation of trade, investment and finance during the last quarter of the twentieth century,

which continues apace. It also shows that there was a similar internationalisation of trade,

investment and finance during the last quarter of the nineteenth century, which continued

until 1914. It would seem that the long twentieth century witnessed two phases of

globalisation. A comparison of these two phases reveals striking parallels. It also suggests

that there are both similarities and differences between these two phases of globalisation.

The similarities are in the underlying factors, which made globalisation possible then and

now. The differences are in the form, the nature and the depth of globalisation then and now.

3.1 The parallels

There are parallels in each of the three dimensions: trade, investment and finance. It is

important to highlight some.

It would seem that the integration of the world economy, through international trade,

was about the same at the beginning and end of the twentieth century. This is borne out by

available evidence for selected industrialised countries. In the UK, the share of exports in

GDP rose from 16.4% in 1973 to 19.7% in 2000, compared with 14.9% in 1900 and

20.9% in 1913. In France, the share of exports in GDP rose from 14.4% in 1973 to 23.1%

in 2000, compared with 12.5% in 1900 and 13.9% in 1913. In Germany, the share of

exports in GDP rose from 19.7% in 1973 to 29.4% in 2000, compared with 13.5% in 1900

and 17.5% in 1913. In Japan, the share of exports in GDP rose from 8.9% in 1973 to

10.1% in 2000, compared with 8.3% in 1900 and 12.3% in 1913. In the US, the share of

exports in GDP rose from 5% in 1973 to 8% in 2000, compared with 7.5% in 1900 and

6.1% in 1913. 2

The striking thing is that the average tariff rate on imports of manufactured

goods in these industrialised countries then, with the exception of the UK, were in the

range 20–40% (Bairoch, 1993). Tariffs were much higher then but non-tariff barriers are

stronger now.

The significance of foreign direct investment in the world economy was also similar at

the beginning and at the end of the twentieth century. In 1913, the stock of foreign direct

investment in the world economy was the equivalent of 9% of world output. The stock of

foreign direct investment in the world economy as a proportion of world GDP increased

steadily from 6.1% in 1980 to 8.9% in 1990 and remained in the range of 9% through the

1 See http://www.imf.org/external/pubs/ft/icm/2001/01/eng/pdf/annex.pdf p.222, which reports IMF esti-

mates of the size of global bond markets in December 2000. The total value of international bonds issued for the world as a whole was $6003.2bn, of which $1262.8bn was public debt. The total value of international bonds issued by US, Canada, Japan and EU-15 was $5196.4bn, of which $977.3bn was public debt.

2 The proportions for 1973 and 2000 are calculated from UNCTAD and United Nations statistics on world

exports and world GDP. The estimates for 1900 and 1913 are obtained from Maddison (1989, p. 143).

Globalisation, history and development 143

http://www.imf.org/external/pubs/ft/icm/2001/01/eng/pdf/annex.pdf

first half of the 1990s. 1

This proportion rose sharply and surpassed its 1913 level only in the

late 1990s. The significance of foreign investment in the developing world is also

comparable. In 1914, the stock of foreign investment in the developing countries, direct

and portfolio, at 1980 prices, was $179bn, which was almost double the stock of foreign

direct investment in developing countries, in 1980, at $96bn. 2

At the beginning of the

century, in 1900, foreign investment in developing countries, direct and portfolio, was

equal to about one-third of the GDP of developing countries. 3

At the end of the century, in

2000, the stock of foreign direct investment in developing countries was about 30% of their

GDP. 4

There was a significant integration of international financial markets in the early

twentieth century which is, in some respects, comparable with the late twentieth century.

The only missing dimension then, as compared with now, was international transactions in

foreign exchange which were determined entirely by trade flows and capital flows, given the

regime of fixed exchange rates under the gold standard. The cross-national ownership of

securities, including government bonds, was similar. In 1920, Moody’s rated bonds issued

by 50 governments. As late as 1985, only 15 governments were borrowing in the capital

market of the US. The number reached 50, once again, in the 1990s. In relative terms, net

international capital flows were perhaps larger at the beginning than at the end of the

twentieth century. During the period 1880 to 1913, Britain ran an average current account

surplus which was the equivalent of 5% of GDP (Panić, 1992). In contrast, since 1950, the

current account surplus of the US to begin with, or Germany or Japan in subsequent years,

did not exceed 3% of GDP.

3.2 The similarities

There are four similarities that are worth noting: the absence or the dismantling of barriers

to international economic transactions; the development of enabling technologies;

emerging forms of industrial organisation; and political hegemony or dominance.

The four decades from 1870 to 1913 were the age of laissez faire. There were almost no

restrictions on economic transactions across borders. It was believed that a virtuous circle

of rapid economic growth and international economic integration in this era created the

core of a global economy (Keynes, 1919). This was followed by three decades of conflict

and autarchy. The two World Wars and the Great Depression interspersed these troubled

times. International economic transactions were progressively constrained by barriers and

regulations that were erected during this period of economic and political conflict. These

barriers and regulations were dismantled step by step during the second half of the

twentieth century. Globalisation has followed the sequence of deregulation. Trade

liberalisation came first, which led to an unprecedented expansion of international trade

between 1950 and 1970. The liberalisation of regimes for foreign investment came next.

And there was a surge in international investment which began in the late 1960s. Financial

liberalisation came last, starting in the early 1980s. This had two dimensions: the

1 Cf., UNCTAD, World Investment Report, online database.

2 The figure for the stock of foreign direct investment in developing countries in 1980 is obtained from

UNCTAD, World Investment Report 1993, p. 248, while the estimate of the stock of foreign capital in developing countries in 1914, at 1980 prices, is obtained from Maddison (1989, p. 30).

3 It has been estimated by Maddison (1989) that, at 1980 prices, in 1900, the stock of foreign capital in

developing countries was $108.3bn (p. 30), while the GDP of 15 selected developing countries in Asia and Latin America was $333.8bn (p. 113).

4 UNCTAD, World Investment Report 2002, p. 329. It is worth noting that this proportion rose sharply in the

late 1990s, as it was much less at 10.2% in 1980 and 13% in 1990.

144 D. Nayyar

deregulation of the domestic financial sector in the industrialised countries and the

introduction of convertibility on capital account in the balance of payments. 1

The

globalisation of finance, at a scorching pace since the mid-1980s, is not unrelated to the

dismantling of regulations and controls.

Both phases of globalisation coincided with a technological revolution in transport and

communications which brought about an enormous reduction in the time needed, as also

the cost incurred, in traversing geographical distances. The second half of the nineteenth

century saw the advent of the steamship, the railway and the telegraph. The substitution of

steam for sails, and of iron for wooden hulls in ships, reduced ocean freight by two-thirds

between 1870 and 1900. 2

The opening of the Suez Canal in 1869 halved the distance from

London to Bombay, which also brought about a sharp reduction in the cost of freight. The

decline in freight rates between 1870 and 1914 was just as dramatic on shipping routes

passing through the Black Sea and Egyptian ports. 3

The spread of the railways,

everywhere, brought the hinterland of countries into the world economy. The arrival of

the telegraph revolutionised communication and shrank the world. The second half of the

twentieth century witnessed the advent of jet aircraft, computers and satellites. The

synthesis of communications technology, which is concerned with the transmission of

information, and computer technology, which is concerned with the processing of

information, has created information technology, which is remarkable in both reach and

speed. These technological developments have had an even more dramatic impact on

reducing geographical barriers. The time needed is a tiny fraction of what it was earlier.

The cost incurred has come down sharply. Obviously, enabling technologies made the

globalisation of economic activities that much easier in both phases.

Emerging forms of industrial organisation, in both phases, played a role in making

globalisation possible. In the late nineteenth century, it was the advent of mass production

which was characterised by a rigid compartmentalisation of functions and a high degree of

mechanisation. The production of perfectly interchangeable parts, the introduction of the

moving assembly line developed by Ford and methods of management evolved by Taylor

provided the foundations for this new form of industrial organisation. Mass production

realised economies of scale and led to huge cost reductions compared with craft

manufacturing. The accumulation and concentration of capital reinforced the process of

globalisation. 4

In the late twentieth century, the emerging flexible production system,

shaped by the nature of the technical progress, the changing output mix and the

organisational characteristics (based on Japanese management systems), forced firms

constantly to choose between trade and investment in their drive to expand activities across

borders. The declining share of wages in production costs, the increasing importance of

proximity between producers and consumers, and the growing externalisation of services,

are bound to influence the strategies and the behaviour of firms in the continuing process of

globalisation. 5

1 The latter was not simultaneous. The US, Canada, Germany and Switzerland removed restrictions on

capital movements in 1973, Britain in 1979, Japan in 1980, while France and Italy made the transition as late as 1990.

2 Freight costs began to decline from the mid-nineteenth century but the spectacular downturn came after

1870 (Lewis, 1977). 3

See Williamson (2002). Around this time, there was another innovation, refrigeration, which had major trade implications. In 1876, Australian meat and New Zealand butter were also being exported in large quantities to Europe.

4 See Lewis (1978) and Chandler (1990).

5 For a detailed discussion on the relationship between forms of industrial organisation and globalisation,

see Oman (1994).

Globalisation, history and development 145

The politics of hegemony or dominance is conducive to the economics of globalisation.

The first phase of globalisation from 1870 to 1913 coincided with what has been described

as ‘the age of empire’, when Britain more or less ruled the world. 1

The second phase of

globalisation beginning in the early 1970s coincided with the political dominance of the US

as the superpower. This political dominance has grown stronger with the collapse of

communism and the triumph of capitalism, which has been described as ‘the end of

history’ (Fukuyama, 1989). Apart from dominance in the realm of politics, there is another

similarity in the sphere of economics between Pax Britannica and Pax Americana. That is

the existence of a reserve currency, which is the equivalent of international money: as a unit

of account, a medium of exchange and a store of value. In the late nineteenth century and

the early twentieth century, this role was performed by the pound sterling. In the late

twentieth century and the early twenty-first century, this role is being performed by the US

dollar, ironically enough after the collapse of the Bretton Woods system, when its statutory

role as a reserve currency came to an end. It would seem that, in both phases, globalisation

required a dominant economic power with a national currency that was, and is, acceptable

as international money.

3.3 The differences

There are, also, important differences between the two phases of globalisation. It is

important to highlight four such differences: in trade flows, in investment flows, in financial

flows and most important, perhaps, in labour flows, across national boundaries.

In the sphere of trade flows, there are differences in the composition of trade and in the

channels of trade. During the period from 1870 to 1913, a large proportion of

international trade was constituted by inter-sectoral trade, where primary commodities

were exchanged for manufactured goods. The leading trading nation during this era,

Britain, exported manufactures to, and imported primary commodities from the de-

veloping world (Foreman-Peck, 1983). However, the British pattern of trade was not the

norm for the industrial world. For Western Europe and the US, in 1913, two-thirds to

three-quarters of their trade was with other industrialised countries. Some of this intra-

North trade was in primary commodities, and some of it was in manufactured goods. 2

But much of this trade was, to a significant extent, based on absolute advantage derived

from natural resources or climatic conditions. It is possible to discern two phases since

1950. During the period 1950–75, inter-industry trade in manufactures, based on

differences in factor endowments, labour productivity or technological leads and lags,

constituted an increasing proportion of international trade (Glyn et al., 1990). During

the period 1975–2000, intra-industry trade in manufactures, based on scale economies

and product differentiation, constituted an increasing proportion of international trade.

At first sight, it may seem that trade flows were in the domain of large international

firms then as much as now. There are, however, two important differences. First, the

large trading firms of the nineteenth century, such as the East India Company or the

Royal African Company ‘were like dinosaurs, large in bulk but small in brain, feeding

on the lush vegetations of the new worlds’ (Hymer, 1972). The forerunners of what we

now describe as transnational corporations were not these giant trading firms but the

small workshops and the entrepreneurial firms of the late nineteenth century. Second,

during the present phase of globalisation, an increasing proportion of international trade

1 For a succinct and perceptive historical analysis of this period, see Hobsbawm (1987).

2 For an analysis of, and evidence on, international trade flows during this period, see Maizels (1963).

146 D. Nayyar

is intra-firm trade, across national boundaries but between affiliates of the same firm. In

the early 1970s, such intra-firm trade accounted for about one-fifth of world trade, but by

the early 1990s, this proportion was one-third of world trade (UNCTAD, 1994, p. 143).

Even more important, perhaps, is the changed composition of intra-firm trade. The

second half of the twentieth century witnessed a steady decline in the importance of

primary commodities, and a sharp increase in the importance of manufactured goods and

intermediate products, in intra-firm trade.

Consider, next, investment flows, where there are differences in the geographical

destination, the sectoral distribution and the risk-form of the investment. In 1914, the

stock of long-term foreign investment in the world economy was distributed as follows:

55% in the industrialised world (30% in Europe, 25% in the US) and 45% in the

underdeveloped world (20% in Latin America and 25% in Asia and Africa). In 2000, the

stock of foreign direct investment in the world economy was distributed in a more uneven

manner: 66% in the industrialised countries and 32% in the developing countries. 1

Comparable data for flows of foreign investment during the two periods are not available.

But in 2000, industrialised countries absorbed 82% of the inflows of foreign direct

investment in the world economy, whereas developing countries received only 16%. 2

It is

clear that developing countries are now far less central to the process. Yet, the spatial web of

foreign direct investment is almost certainly more extensive than it was at the beginning of

this century. The principal recipients then were China, India and Indonesia in Asia, with

Argentina, Brazil and Mexico in Latin America. The number of recipients now is much

larger and the sectoral distribution is also considerably different. In 1913, the primary

sector accounted for 55% of long-term foreign investment in the world, while transport,

trade and distribution accounted for another 30%; the manufacturing sector accounted for

only 10% and much of this was concentrated in North America or Europe (Dunning,

1983). In 2000, the primary sector accounted for less than 10% of the stock of foreign

direct investment in the world, while the manufacturing sector accounted for about 35%

and the services sector for the remaining 55%. 3

The nature of the risk borne by foreign

investors was discernibly different in the two phases. In the early twentieth century, such

investment was only long term: two-thirds of it was portfolio while one-third of it was

direct. In the late twentieth century, much of such long-term investment was direct,

although portfolio investment rose sharply in the 1990s.

In the sphere of financial flows, the most striking difference is the size of international

financial markets in absolute if not relative terms. There are, however, important

differences in the destination, the object, the intermediaries and the instruments. In the

last quarter of the nineteenth century, capital flows were a means of transferring investible

resources to underdeveloped countries or newly industrialising countries with the most

attractive growth opportunities. A century later, these capital flows were destined mostly

for the industrialised countries which have high deficits and high interest rates to finance

public consumption and transfer payments rather than productive investment. 4

During the

first phase of globalisation from 1870 to 1913, the object of financial flows was to find

1 In 1914, the total foreign investment of $44bn was distributed as follows: $14bn in Europe, $10.5bn in

the US, $8.5bn in Latin America, and $11bn in Asia and Africa. See UNCTAD, World Investment Report 1994, p. 158. For data on 2000, see UNCTAD, World Investment Report 2002, pp. 310–13. The percentages do not add up to 100, as Central and Eastern Europe accounted for the remaining 2%.

2 UNCTAD, World Investment Report 2002, pp. 303–6. Once again, Central and Eastern Europe accounted

for the remaining 2%. 3

Cf. UNCTAD, World Investment Report, online database. 4

For a comparison of the destination of such financial flows, during the two phases, see Kregel (1994).

Globalisation, history and development 147

avenues for long-term investment in search of profit. During the second phase of

globalisation since the early 1970s, financial flows are constituted mostly by short-term

capital movements, sensitive to exchange rates and interest rates, in search of capital gains.

The intermediaries, too, are different. In the late nineteenth century, banks were the only

intermediaries between lenders and borrowers in the form of bonds with very long

maturities. In the current phase, institutional investors such as pension funds and mutual

funds are more important than banks; the latter continue to act as intermediaries but now

borrow short to lend long, thus resulting in a maturity mismatch. Consequently, the

financial instruments need to be far more sophisticated and diversified than earlier. In the

late nineteenth century, there were mostly long-term bonds with sovereign guarantees

provided by the imperial powers or the government in borrowing countries. In the late

twentieth century, there has been an enormous amount of financial innovation through the

introduction of derivatives (futures, swaps and options). These derivatives (which are also

not entirely new to the world and are reported to have existed in the seventeenth and

eighteenth centuries: options in the Amsterdam stock exchange and futures in the Osaka

rice market) are a means of managing the financial risks associated with international

investment. This is essential now because, unlike the earlier phase of globalisation, there is

a maturity mismatch, and there is no effective securitisation provided by nation states.

International financial markets have simply developed the instruments to meet the needs of

the times. It is paradoxical that such derivatives, which have been introduced to counter

risk may, in fact, increase the risk associated with international financial flows by increasing

the volatility of short-term capital movements.

The fundamental difference between two phases of globalisation is in the sphere of

labour flows. In the late nineteenth century, there were no restrictions on the mobility of

people across national boundaries. Passports were seldom needed. Immigrants were

granted citizenship with ease. Between 1870 and 1914, international labour migration was

enormous. During this period, about 50 million people left Europe, of whom two-thirds

went to the US while the remaining one-third went to Canada, Australia, New Zealand,

South Africa, Argentina and Brazil (Lewis, 1977, p. 14). This mass emigration from

Europe amounted to one-eighth its population in 1900. For some countries such as Britain,

Italy, Spain and Portugal, such migration constituted 20–40% of their population (Stalker,

1994). But that was not all. Beginning somewhat earlier, following the abolition of slavery

in the British Empire, about 50 million people left India and China to work as indentured

labour on mines, plantations and construction in Latin America, the Caribbean, Southern

Africa, Southeast Asia and other distant lands (Tinker, 1974; Lewis, 1978). The

destinations were mostly British, Dutch, French and German colonies. In the second half

of the twentieth century, there was a limited amount of international labour migration from

the developing countries to the industrialised world during the period 1950–70. This was

largely attributable to the post-war labour shortages in Europe and the post-colonial ties

embedded in a common language (Nayyar, 1994). Since then, however, international

migration has been significantly reduced because of draconian immigration laws and

restrictive consular practices. 1

The only significant evidence of labour mobility during the

last quarter of the twentieth century is the temporary migration of workers to Europe, the

Middle East and East Asia. But the advent of globalisation is conducive to new forms of

labour mobility (Nayyar, 2002). The present phase of globalisation has also found

substitutes for labour mobility in the form of the trade flows and investment flows. For one

1 For an analysis of, and evidence on, international migration in historical perspective, see Nayyar (2002).

148 D. Nayyar

thing, industrialised countries now import manufactured goods that embody scarce

labour: the share of developing countries in world manufactured exports rose from 5.5% in

1970 to 26.9% in 2000, while the share of manufactured exports in total exports of

developing countries rose from 18.7 in 1970 to 64.6% in 2000. 1

For another, industrialised

countries export capital which employs scarce labour abroad to provide such goods. In

1992, for example, total employment in transnational corporations was 73 million, of

which 44 million were employed in the home countries, while 17 million were employed in

affiliates in industrialised countries and 12 million were employed in affiliates in developing

countries; the share of developing countries in such employment rose from one-tenth in

1985 to one-sixth in 1992 (UNCTAD, 1994, p. 175).

The first phase of globalisation in the late nineteenth century was characterised by an

integration of markets through an exchange of goods that was facilitated by the movement

of capital and labour across national boundaries. The second phase of globalisation is

characterised by an integration of production with linkages that are wider and deeper,

except for the near absence of migration. It is reflected not only in the movement of goods,

services, capital, technology, information and ideas, but also in the organisation of

economic activities across national boundaries. This is associated with a more complex—

part horizontal and part vertical—division of labour between the industrialised countries

and a few developing countries in the world economy.

4. Uneven development: the past

The ideologues believe that globalisation led to rapid industrialisation and economic

convergence in the world economy during the late nineteenth century. In their view, the

promise of the emerging global capitalist system was wasted for more than half a century, to

begin with by three decades of conflict and autarchy that followed the First World War and

subsequently, for another three decades, by the socialist path and a statist world view. The

return of globalisation in the late twentieth century is thus seen as the road to salvation.

The conclusion drawn is that globalisation now, as much as then, promises economic

prosperity for countries that join the system and economic deprivation for countries that do

not (Sachs and Warner, 1995).

This perspective extends beyond the ideologues. Some economic historians juxtapose

the past with the present. An analysis of the past provides the foundations for prescriptions

about the present. The argument runs as follows. The integration of markets through an

exchange of goods led to commodity-price convergence in the world economy during the

first epoch of globalisation. This commodity-price convergence, in turn, led to a factor-

price convergence. 2

It is believed that, ultimately, this process was associated with

a convergence of growth and income among the participating countries. It is worth

exploring whether this convergence hypothesis is borne out by the experience of the world

economy during the late nineteenth century.

1 These percentages have been calculated from data in UNCTAD Handbook of International Trade and

Development Statistics and Handbook of Statistics, various issues. 2

See, for example, Williamson (1996, 2002). Orthodox trade theory provides the analytical foundations for this argument. The factor-price equalisation theorem emerged as a corollary of the Heckscher–Ohlin formulation of comparative advantage. Samuelson (1948) considered a situation in which there is free trade but there is no factor-mobility. The Heckscher–Ohlin assumptions about production conditions ensure a unique relationship between the factor-price ratio and the commodity-price ratio. In this world, free trade equalises commodity prices. If complete specialisation is ruled out, commodity-price equalisation necessarily leads to factor-price equalisation.

Globalisation, history and development 149

Available evidence suggests that there was, indeed, a commodity-price convergence.

The price gaps between exporting and importing countries, which were substantial in 1870

diminished rapidly until 1914, mostly because of the transport revolution. 1

The contri-

bution of trade liberalisation in this convergence process was limited. This convergence in

commodity prices extended beyond the Atlantic Economy to Latin America, the Middle

East and Asia. It is claimed that the commodity-price convergence improved the terms of

trade (prices of exportables relative to prices of importables) for all countries that were part

of this process. However, the improvement in the terms of trade was significant for land-

abundant countries and modest for land-scarce countries. From the perspective of the

Third World, the distribution of gains was perhaps even more asymmetrical, because the

gains accrued in large part to countries such as Argentina and Uruguay, or to the large

trading firms from the metropolis rather than the producers in the colonies.

There was some factor-price convergence during the age of globalisation from 1870 to

1914. But this process was confined to the Atlantic economies. Indeed, much of this

convergence vanishes if we include Eastern Europe and evaporates altogether if we include

the Third World. 2

The logic of the argument is simple enough. Globalisation led to an increase in the wages

of workers in land-scarce countries, where wage rates were low, and an increase in the rent

of land in land-abundant countries, where wage rates were high. Available evidence shows

that, in the period from 1870 to 1914, land-scarce Europe experienced a surge in wage–

rental ratios, while land-abundant US and Australia witnessed a sharp drop in wage–rental

ratios. 3

But that is not all. There was, also, some convergence in real wages. 4

Yet, it must be

recognised that the convergence hypothesis is overstated, for it was confined to a few

countries in Europe, such as Denmark, Ireland, Norway and Sweden. There was little in

terms of catch-up for Italy, while Spain and Portugal witnessed a widening gap in wages.

What is more, the Heckscher–Ohlin–Samuelson parable is not quite validated by the late

nineteenth century experience. Computable general equilibrium models show that the

factor-price convergence, such as it was, cannot be attributed simply to commodity-price

convergence, even in the Atlantic economies. In fact, commodity-price convergence can

explain only about three-tenths of real wage convergence between the US and Britain

during the period 1870–95, and about one-tenth of the real wage convergence between the

US and Sweden during the period 1870–1910 (Williamson, 1996, p. 287). An econo-

metric analysis of trends in the wage–rental ratio for seven Atlantic economies provides

confirmation. The commodity-price convergence could explain just about a quarter of the

wage–rental convergence between the Old and New Worlds separated by the Atlantic Ocean

(O’Rourke et al., 1996).

1 For example, the difference in wheat prices between Liverpool and Chicago came down from 58% in

1870 to just 18% in 1895 and 16% in 1912. Similarly, the price spread on Egyptian cotton, between Liverpool and Alexandria, plunged from more than 40% in the 1860s to 5% in the 1890s. The story was more or less the same for the raw cotton price spread between Liverpool and Bombay or the jute price spread between London and Calcutta. There were similar reductions in price gaps between London and markets in South America or Southeast Asia. See Williamson (2002).

2 This is accepted even by Williamson (2002), who is the principal exponent of the hypothesis about such

convergence during the late nineteenth century. 3

In Britain, Ireland, Denmark and Sweden, on an average, the wage–rental ratio rose by 50% between 1875–79 and 1890–94 and by 27% between 1890–94 and 1910–14. In contrast, between 1870–74 and 1910– 14, the wage–rental ratio fell by 69%, on average, in the US and Australia. See Williamson (2002, p. 74).

4 During the period 1870–1900, as a proportion of the real wage in Britain, real wages rose from 54% to

85% in Denmark, from 73% to 89% in Ireland, from 42% to 82% in Sweden, and from 42% to 65% in Norway. Indeed, by 1913, wages in these countries almost caught up with wages in Britain and significantly narrowed the gap with the US. Williamson (1996, pp. 284–5).

150 D. Nayyar

The obvious question is: what explains the observed factor-price convergence in the

Atlantic economies? The answer is to be found in migration, which is simply assumed away

in the factor-price equalisation theorem. Emigration from Europe had a profound impact

on the labour market in these countries, for it lowered unemployment and raised the real

wage. Immigration into the US, in effect, augmented the labour force to exercise

a profound influence on the labour market, for it dampened real wages and employment

opportunities. 1

It has been estimated that, between 1870 and 1910, mass migration

explains seven-tenths of the real wage convergence between the Atlantic economies

(Williamson 1996, p. 295). It is clear that, in the absence of mass migration across the

Atlantic, real wages would have been much lower in the Old World and much higher in the

New World.

The story about growth, it turns out, does not quite conform to the fairy tale of

acceleration and convergence. The growth was uneven over time and across space. For one

thing, growth did not accelerate. The average growth rate of 1.4% per annum for the world

economy between 1890 and 1913 was somewhat faster than that achieved in the preceding

two decades but was not significantly different from that achieved in the subsequent three

decades. It is also worth noting that during the period 1867–69 to 1889–91, GNP per

capita in Europe increased by a mere 0.2% per annum, compared with 1.1% per annum

during the preceding 25 years and 1.5% per annum during the following 25 years (Bairoch,

1989, p. 246). For another, growth did not converge. Growth rates in the developing world

were significantly lower than growth rates in the developed world, so that there was

a widening of the gap. In developing countries, the growth in GNP per capita did increase

from �0.2% per annum during 1830–1870 to 0.1% per annum during 1870–90 and 0.6% per annum during 1890–1913. In developed countries during the same periods, the

corresponding rates were 0.6%, 1% per annum and 1.7% per annum respectively. 2

It is clear that there was no convergence of growth, let alone income, across countries in

the world economy during the age of globalisation from 1870 to 1914. This era was

characterised by uneven development. Industrialisation and growth was concentrated in

a very small group of countries. In 1860, Britain, the US, France and Germany accounted

for two-fifths of industrial production in the world. By 1913, their share was more than

two-thirds of a much larger total. Similarly, in 1913, as much as 60% of world trade was

among the industrialised countries. The same economies also absorbed a disproportion-

ately large share of the international capital flows for they were at the core of the gold

standard (Bairoch and Kozul-Wright, 1996). There was, in fact, a small group of

industrialising economies which experienced rapid growth and income convergence to

catch up with Britain and France. Much of it was attributable to the inclusion of the US.

Indeed, most of the gains from international economic integration of this era accrued to

the imperial countries which exported capital and imported commodities. There were

a few countries like the US and Canada—new lands with temperate climates and white

1 This was, perhaps, an important factor underlying the political economy of immigration restrictions in

the US. In fact, the era of open immigration in the US came to an abrupt end with the final passage of the Literacy Test in February 1917. For a discussion on this issue, see Nayyar (2002).

2 See Bairoch (1993). The belief that trade liberalisation was conducive to growth during this era is not

borne out by the available evidence. In continental Europe, the story was the opposite, as intensified protectionism was associated with faster economic growth. It is significant that, during the period 1889– 1913, GNP growth in Britain, which remained faithful to free trade, at 0.9% per annum, was slower than that in continental Europe at 1.5% per annum. Indeed, the US, which did not practise free trade, experienced the most rapid economic growth during this era, so that, by 1913, it had overtaken Britain not only in industrial production but also in per capita income. See Bairoch (1989) and Bairoch and Kozul-Wright (1996).

Globalisation, history and development 151

settlers—which also derived some benefits. In these countries, the pre-conditions for

industrialisation were already being created, and international economic integration

strengthened this process. Foreign direct investment in manufacturing activities stimulated

by rising tariff barriers, combined with technological and managerial flows, reinforced the

process. The outcome was industrialisation and development. But this did not happen

everywhere. Development was uneven in the industrial world. Much of southern and

eastern Europe lagged behind. This meant divergence rather than convergence in terms of

industrialisation and growth. 1

At the same time, inequality rose in the resource-rich

labour-scarce industrialising countries of the New World. 2

Clearly, it is not correct to characterise this era of globalisation during the late nineteenth

century as one of rapid growth across countries and convergence between countries. In

fact, it was associated with uneven economic development. The industrialised countries

prospered. A small group of newly industrialising countries were able to reinforce their

domestic efforts through links with the international economy. But, for countries in the

developing world, the same integration with the world economy led to de-industrialisation

and underdevelopment. Consequently, this epoch witnessed a growing divergence in

income per capita and average living standards between the centre and the periphery

(Williamson, 2002).

There was, in fact, an increase in economic inequalities between countries and within

countries. The income gap between the richest and the poorest countries, for instance,

which was just 3:1 in 1820, more than doubled to 7:1 in 1870 and increased further to 11:1

in 1913 (Maddison, 1995). Countries in Asia, Africa and Latin America, particularly the

colonised ones, which were also a part of this process of globalisation, were even less

fortunate. Indeed, during the same period of rapid international economic integration,

some of the most open economies in this phase of globalisation—India, China and

Indonesia—experienced de-industrialisation and underdevelopment. We need to remind

ourselves that, in the period from 1870 to 1914, these three countries practised free trade

as much as the UK and the Netherlands, where average tariff levels were close to negligible

(3–5%); in contrast, tariff levels in Germany, Japan and France were significantly higher

(12–14%); whereas tariff levels in the US were very much higher (33%). 3

What is more,

these three countries were also among the largest recipients of foreign investment

(Maddison, 1989). But their globalisation did not lead to development. The outcome

was similar elsewhere: in Asia, Africa and Latin America. So much so that, between 1860

and 1913, the share of developing countries in world manufacturing output dropped

sharply from 36.6% to 7.5%: a share that was just about one-fifth its level at the beginning

of this era (Bairoch 1982). Export-oriented production in mines, plantations and cash-

crop agriculture created enclaves in these economies which were integrated with the world

economy in a vertical division of labour. But there were almost no backward linkages.

Productivity levels outside the export enclaves stagnated at low levels. They simply created

dualistic economic structures where the benefits of globalisation accrued mostly to the

outside world and in small part to the local elites.

1 See Bairoch and Kozul-Wright (1996), who show how globalisation led to uneven development in the

world economy during the period 1870–1913, not simply between the colonisers and the colonised but also within Europe.

2 Inequality remained unchanged in countries such as Britain, France, Germany and the Netherlands that

were leaders and already industrialised. Inequality fell only in a few resource-poor labour-abundant agrarian economies in the Old World of Europe such as Ireland, Italy, Portugal, Spain and Sweden. For a detailed discussion, see Williamson (1997).

3 For evidence on tariffs during this era, see Maddison (1989) and Bairoch (1982).

152 D. Nayyar

The growing inequalities between and within countries, particularly in the industrial

world, were perhaps a significant factor underlying the retreat from globalisation after

1914. The following passage, written by John Maynard Keynes at the time, vividly

highlights the benefits of globalisation for some people and some countries, those included,

but also recognises how economic and political conflicts associated with the process

stopped what had seemed irreversible at the time.

What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914. The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into 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 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 trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without any passport or other formality, could dispatch his servants to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed to foreign quarters, without knowledge of their religion, language or customs, bearing coined wealth upon his person, and could consider himself greatly aggrieved and much surprised at least interference. But most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions and exclusions, which were to play the serpent to this paradise, were little more than amusement of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internation- alisation of which was nearly complete in practice. (Keynes, 1919, pp. 9–10).

5. Development and exclusion: the present

The process of globalisation, which gathered momentum during the last quarter of the

twentieth century, has brought about profound changes in the international context. It

could have far-reaching implications for development. The reality that has unfolded so far,

however, belies the expectations of the ideologues. The development experience of the

world economy from the early 1970s to the late 1990s, which could be termed the age of

globalisation, provides cause for concern, particularly when it is compared with the period

from the late 1940s to the early 1970s, which has been described as the golden age of

capitalism. Any such periodisation is obviously arbitrary, but it serves an analytical purpose. 1

Growth did not accelerate. It slowed down. During the 1960s, the average rate of growth

of world GDP per capita was 3.5% per annum. Deceleration set in thereafter. The average

1 The quarter century that followed the Second World War was a period of unprecedented prosperity for

the world economy. It has, therefore, been described as the golden age of capitalism. See, for example, Marglin and Schor (1990) as also Maddison (1982). The age of globalisation, however, is not a phrase that has been used in the literature to describe the world economy during the last quarter of the twentieth century. It was suggested in an earlier paper by the author (Nayyar, 2003), as this periodisation facilitates comparison. The discussion that follows, in part, draws upon the argument developed in that paper. For an analysis of the implications of globalisation for development during the last quarter of the twentieth century, see also Nayyar (2001).

Globalisation, history and development 153

rate of growth of world GDP per capita was 2.1% per annum during the 1970s, 1.3% per

annum during the 1980s and 1% per annum during the 1990s. 1

This growth was more

volatile compared with the past, particularly in the developing world. 2

The growth was also

unevenly distributed across countries. Between 1985 and 2000, the growth in GDP per

capita was negative in 23 developing countries, 0.2% per annum in 14 developing

countries, 1.2% per annum in 20 developing countries, 2.2% per annum in 12 developing

countries, and more than 5% per annum in just 16 developing countries. Over the same

period, growth in GDP per capita was negative in 17 transition countries and 1.8% per

annum in 22 industrialised countries. 3

Available evidence suggests a divergence, rather than convergence, in levels of income

between countries and between people. Economic inequalities have increased in the late

twentieth century as the income gap between rich and poor countries, between the rich and

the poor in the world’s population, as also between rich and poor people within countries,

has widened. The ratio of GDP per capita in the richest country to GDP per capita in the

poorest country of the world rose from 35:1 in 1950 to 42:1 in 1970 and 62:1 in 1990. 4

The ratio of GDP per capita in the 20 richest countries to GDP per capita in the poorest 20

countries of the world rose from 54:1 during 1960–62 to 121:1 during 2000–2002. 5

The

income gap between people has also widened over time. The ratio of the average GNP per

capita in the richest quintile of the world’s population to the poorest quintile in the world’s

population rose from 31:1 in 1965 to 60:1 in 1990 and 74:1 in 1997. 6

Income distribution within countries also worsened. This is borne out by a study on

trends in the distribution of income, during the period from the 1960s to the 1990s, for

73 countries comprising developed, developing and transitional economies. It shows that

income inequality increased in 48 countries, which account for 59% of the population

and 78% of the PPP-GDP in the sample of 73 countries. Income inequality remained the

same in 16 countries which account for 36% of the population and 13% of the PPP-GDP

in the sample of 73 countries. Income inequality decreased in only nine countries, which

account for 5% of the population and 9% of the PPP-GDP in the sample of 73 countries

(Cornia and Kiiski, 2001). The increase in income inequality was striking in some

industrialised countries. Between 1975 and 2000, the share of the richest 1% in gross

income rose from 8% to 17% in the US, from 8.8% to 13.3% in Canada and from 6.1%

to 13% in the UK (Atkinson, 2003).

The incidence of poverty increased in most countries of Latin America, the Caribbean

and Sub-Saharan Africa during the 1980s and the 1990s. Much of Eastern Europe and

1 These figures are calculated from data on annual growth in world GDP per capita, drawn from World

Bank, World Development Indicators 2003, as the arithmetic mean of annual growth rates for each decade. 2

For evidence on the volatility of growth in the world economy during the period 1975–2000, see World Bank, World Development Indicators 2003. For evidence on the volatility of growth in developing countries during the period 1980–2000, as compared with the period 1960–80, see UNCTAD, Trade and Development Report 2003, p. 59.

3 These growth rates are calculated from the basic data compiled by the World Bank, World Development

Indicators 2003, for 124 countries (which accounted for 92% of the estimated world population in 2000) for which consistent information is available over time. The growth rates for transition economies relate to the period 1991–2001.

4 Calculated from Maddison (1995, Appendix D, pp. 194–206), which provides data on levels of GDP per

capita. 5

Between 1960–62 and 2000–2002, in constant 1995 US dollars, GDP per capita in the 20 richest countries rose from 11,417 to 32,339, while GDP per capita in the poorest 20 countries barely increased from 212 to 267 (World Bank, World Development Indicators 2003).

6 For 1965 and 1990, these ratios are obtained from UNCTAD, Trade and Development Report 1997, p. 81.

For 1997, the ratio is obtained from UNDP, Human Development Report 1999, p. 3.

154 D. Nayyar

Central Asia experienced a sharp rise in poverty during the 1990s. However, East Asia,

Southeast Asia and South Asia experienced a steady decline in the incidence of poverty

during this period. But most of this improvement is accounted for by changes in just two

countries, with large populations, China and India. 1

The employment situation during the last quarter of twentieth century provides a sharp

contrast with the preceding quarter century, during which full employment was almost the

norm in industrialised countries. Unemployment in the industrialised countries has

increased substantially since the early 1970s and remained at high levels since then. During

the 1980s and 1990s, the unemployment rate has been in the range of 10% in the European

Union and about 7% in the OECD countries. The US is the exception, where the

unemployment rate has been around 5%. In contrast, Japan has witnessed a sharp increase

in the unemployment rate from near-zero to more than 5%. 2

In the developing countries,

employment creation in the organised sector continues to lag behind the growth in the

labour force, so that an increasing proportion of workers are dependent upon low

productivity and casual employment in the informal sector. Inequality in terms of wages

and incomes has registered an increase almost everywhere in the world. This has been

associated with an increasing casualisation of the workforce, for employment opportunities

in the organised sector have stagnated so that labour absorption is possible largely in the

informal sector of economies. The share of non-agricultural self-employment as a pro-

portion of total non-agricultural employment, for the world economy as a whole, rose from

26% during the 1980s to 32% during the 1990s. These proportions were the same at 26%

and 32% respectively for Asia, but rose from 29% to 44% in Latin America and from 44%

to 48% in Africa. (ILO, 2002, p. 22)

It would seem that, in some important respects, the world economy fared better in the

golden age than it has in the age of globalisation. It is obviously not possible to attribute

cause and effect simply to the coincidence in time. But it is possible to think of mechanisms

through which globalisation may have accentuated inequalities. Trade liberalisation has led

to a growing wage inequality between skilled and unskilled workers, not only in

industrialised countries but also in developing countries. 3

As a consequence of privatisa-

tion and deregulation, capital has gained at the expense of labour, almost everywhere, for

profit shares have risen while wage shares have fallen. 4

Structural reforms, which have cut

tax rates and brought flexibility to labour markets, have reinforced this trend. The mobility

of capital combined with the immobility of labour has changed the nature of the

employment relationship and has reduced the bargaining power of trade unions. The

object of managing inflation has been transformed into a near-obsession by the sensitivity

of international financial markets, so that governments have been forced to adopt

deflationary macroeconomic policies which have squeezed both growth and employment.

The excess supply of labour has repressed real wages. Financial liberalisation, which has

meant a rapid expansion of public as well as private debt, has been associated with the

1 For supporting evidence, see World Bank, World Development Report and Global Economic Prospects,

several issues. 2

Cf., OECD, Economic Outlook and Employment Outlook, Paris, 1998. 3

For evidence in support of this proposition, see UNCTAD (1997). In addition, see Wood (1994) and Wood (1997). Stewart (2003) also suggests that trade liberalisation (associated with globalisation) provides an explanation for rising inequality, and cites supporting evidence.

4 Some evidence on the increase in profit shares in industrialised countries and the decrease in wage shares

in developing countries is reported in UNCTAD (1997). Stewart (2003) develops a similar argument that globalisation may have led to an increase in inequality through an increase in returns to capital as compared with labour.

Globalisation, history and development 155

emergence of a new rentier class. And the inevitable concentration in the ownership of

financial assets has probably contributed to a worsening of income distribution. 1

Global

competition has driven large international firms to consolidate market power through

mergers and acquisitions which has made market structures more oligopolistic than

competitive. The competition for export markets and foreign investment, between

countries, has intensified, in what is termed ‘a race to the bottom’, leading to an unequal

distribution of gains from trade and investment.

It must also be recognised that the spread of globalisation is uneven. The exclusion of

people and of countries, from the process, is a fact of life. Consider some evidence, for 2000,

on international trade, international investment and international finance, which constitute

the cutting edge of globalisation. 2

Industrialised countries accounted for 64% of world

exports, while developing countries accounted for 32% and transitional economies for the

remaining 4%. Industrialised countries accounted for 82% of foreign direct investment

inflows in the world economy, whereas developing countries accounted for 16% and

transitional economies for the remaining 2%. Industrialised countries accounted for 95% of

cross-border mergers and acquisitions in terms of purchases, whereas developing countries

accounted for just 4% and transitional economies accounted for a mere 1%.

This sharp divide between rich and poor countries is no surprise but the spread of

globalisation is just as uneven within the developing world. There are no more than a dozen

developing countries which are an integral part of the process of globalisation: Argentina,

Brazil and Mexico in Latin America; China, Hong Kong, India, Indonesia, Korea,

Malaysia, Singapore, Taiwan and Thailand in Asia. During the 1990s, these countries

accounted for 70% of total exports from the developing world and 75% of manufactured

exports from the developing world, absorbed almost 72% of foreign direct investment

flows to the developing world and received about 90% of foreign portfolio investment flows

to the developing world. 3

Countries in Sub-Saharan Africa and West Asia are simply not in

the picture, apart from many countries in Latin America, South Asia and the Asia Pacific,

which are left out altogether. The exclusion of the least developed countries, everywhere in

the world, is almost complete.

The exclusion of poor countries and poor people extends beyond trade, investment and

finance, in so far as their access to globalisation, in terms of communication and technology,

is exceedingly limited. Indeed, the excluded are barely connected with the globalised world.

For example, in 2000, the distribution of access to the Internet was most unequal: of the

Internet users in the world, 75.8% were in the industrialised countries, 18.4% were in Asia,

just 4.6% in Latin America and the Caribbean, and a mere 1.2% in Africa. 4

Similarly, in

1999, the access to telecommunications systems was most unequal: there were 100–125

telephone lines per 100 inhabitants in the OECD countries compared with 25 telephone

lines per 100 inhabitants in the rest of the world. The difference was much greater in other

1 This argument is developed in UNCTAD (1997).

2 For evidence on the share of country-groups in world exports, see UNCTAD, Trade and Development

Report 2003. For evidence on the share of country-groups in foreign direct investment inflows, as also cross- border mergers and acquisitions, see UNCTAD, World Investment Report 2002.

3 The share of these 12 countries in total exports and manufactured exports from developing countries is

calculated from data in UNCTAD Handbook of Statistics 2002. Their share in foreign direct investment inflows to the developing world is calculated from data in UNCTAD World Investment Report 2002. The evidence on the share of these 12 countries in portfolio investment flows to the developing world relates to the period 1992–97 and is drawn from UNCTAD, World Investment Report 1998, p. 15.

4 The ITU reports that, in 2000, the number of Internet users in the world was distributed as follows: 137

million in North America, 110.8 million in Europe, 38 million in Japan, 8.2 million in Australia-New Zealand, 71.3 million in Asia, 17.7 million in Latin America and the Caribbean and 4.6 million in Africa.

156 D. Nayyar

modes. In the OECD countries, for 100 people, the number of personal computers was in

the range 25–30, while the number of mobile phones was in the range 20–40. In the rest of

the world, the number of personal computers and mobile phones, for 100 people, was less

than 5. 1

These are averages for the non-OECD world. Obviously, such access was probably

far less in most developing countries and minimal in the least developed countries.

The story of globalisation in the late twentieth century, it turns out, does not quite

conform to the fairy tale of growth and convergence. There is, of course, a commodity-

price convergence, driven by the revolution in transport and communication and the

progressive dismantling of barriers of trade associated with a sharp reduction in tariffs.

There is no evidence of factor-price convergence. This is not surprising, because the

migration of people across national boundaries has been limited in this era. Globalisation is

conducive to some forms of labour mobility, particularly professionals and guest workers,

but these may have accentuated wage inequalities across countries or left them unchanged.

The outcome is a globalisation of prices without a globalisation of incomes.

It would seem that this era of globalisation, as much as the earlier era, is characterised by

uneven development. For a few, rich countries and rich people, it has led to prosperity. For

the many, poor countries and poor people, it has led to marginalisation if not exclusion.

The benefits have accrued essentially to the industrialised world and a small number of

developing countries. For many developing countries, and their people, the process of

integration with the world economy has not yielded benefits in terms of economic growth

or poverty reduction either because they did not create the necessary pre-conditions or

because the process of integration was too rapid. The least developed countries, as also

their people, have simply been marginalised and almost excluded from the process.

Globalisation has, indeed, created opportunities for some people and some countries

that were not even dreamed of three decades ago. But it has also introduced new risks, if

not threats, for many others. It has been associated with a deepening of poverty and an

accentuation of inequalities. The distribution of benefits and costs is unequal. There are

some winners: more in the industrialised world than in the developing world. There are

many losers: numerous both in the industrialised world and in the developing world. It is,

perhaps, necessary to identify, in broad categories, the winners and the losers. 2

If we think of people, asset-owners, profit-earners, rentiers, the educated, the mobile

and those with professional, managerial or technical skills are the winners, whereas asset-

less, wage-earners, debtors, the uneducated, the immobile and the semi-skilled or the

unskilled are the losers. If we think of firms, large, international, global, risk-takers and

technology-leaders are the winners, whereas small, domestic, local, risk-averse and

technology-followers are the losers. If we think of economies, capital-exporters, technol-

ogy-exporters, net lenders, those with a strong physical and human infrastructure, and

those endowed with structural flexibilities are the winners, whereas capital-importers,

technology-importers, net borrowers, those with a weak physical and human infrastruc-

ture, and those characterised by structural rigidities are the losers. It needs to be said that

this classification is suggestive rather than definitive, for it paints a broad-brush picture of

a more nuanced situation. But it does convey the simultaneous, yet asymmetrical, inclusion

and exclusion that characterises the process of globalisation. It is not surprising, then, that

the spread of globalisation is uneven and limited both among people and across countries.

1 See Observatoire de la France and UNITAR, Economic and Financial Globalization: What the Numbers

Say, New York and Geneva, 2003, p. 23 2

The paragraphs that follow draw upon earlier work by the author. For a more detailed discussion, see Nayyar (2003).

Globalisation, history and development 157

Globalisation has introduced a new dimension to the exclusion of people from develop-

ment. Exclusion is no longer simply about the inability to satisfy basic human needs in terms of

food, clothing, shelter, health care and education for large numbers of people. It is much more

complicated. For the consumption patterns and lifestyles of the rich associated with

globalisation have powerful demonstration effects. People everywhere, even the poor and

the excluded, are exposed to these consumption possibility frontiers because the electronic

media has spread the consumerist message far and wide. This creates both expectations and

aspirations. But the simple fact of life is that those who do not have the incomes cannot buy

goods and services in the market. Thus, when the paradise of consumerism is unattainable,

which is the case for common people, it only creates frustration or alienation. The reaction of

people who experience such exclusion differs. Some seek short cuts to the consumerist

paradise through drugs, crime or violence. Some seek refuge in ethnic identities, cultural

chauvinism or religious fundamentalism. Such assertion of traditional or indigenous values is

often the only thing that poor people can assert, for it brings an identity and meaning to their

lives. Outcomes do not always take these extreme forms. But globalisation inevitably tends to

erode social stability. 1

Thus, economic integration with the world outside may accentuate

social tensions or provoke social fragmentation within countries.

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