Outlook for the 21st Century
Monday, February 14th 2000, 12:00AM
Most people consider the process called globalization to be relatively new, but in fact it was well underway during the closing decades of the 19th century and then stopped in much of the world for nearly eight decades because of the First World War and its impact on geo-politics.
There were tremendous technological breakthroughs all through the 20th century which set the stage for more global integration and convergence. The cost of air transport per revenue mile fell from 68¢ in 1930 to 11¢ in 1990. The cost of a three minute phone call between London and New York has fallen from several hundred dollars in 1930 to a few pennies today. The cost of computing power has declined by over 99% and is still falling.
If war had not broken out in Europe during 1914, these technological developments would have produced a highly integrated global market economy in the 1930’s and 1940’s rather than a depression and renewed warfare. Instead of shrinking from 9% of global GDP in 1913 to 7% in 1950, world trade would have reached its current level of 15% much sooner. There also would have been a dramatic expansion of global investment instead of a retreat to capital controls and restrictions on financial markets in many countries. In 1913, Britain was exporting capital on a scale equal to 9% of GDP per annum and had overseas assets worth almost 140% of GDP. Germany, France and Holland were also exporting capital on a growing scale. There was far more mobility of labor in the global economy than exists today as well. During the last half of the 19th century, nearly 40 million Europeans moved to North America while millions of others emigrated to southern hemisphere temperate zones such as Australia and Argentina. Large numbers of people also moved from India and China to territories under British rule in south east Asia and Africa.
The world economy is now reconverging with the era before 1914 because of the political revolutions which swept through both the Soviet Union and many developing countries during the 1980’s. They came to accept the market economy as a system for allocating resources and tore down barriers to trade and investment which had evolved during the previous half century. The average level of tariffs in the industrial countries today is less than 10% of the level which prevailed in the era before 1914 while developing countries are steadily dismantling tariff barriers which were even greater. Since 1991, there have been nearly 600 new treaties liberalizing the rules for foreign investment as well. Meanwhile, deregulation has accelerated the decline in transportation costs resulting from new technology. The unit cost of sea freight, for example, declined by 70% between 1980 and 1996 because of increased competition in the shipping industry.
In the half century before 1914, there were tremendous movements of capital between Europe and the developing countries through security markets. The British, for example, financed much of the infrastructure of the United States, Canada, Australia, and Argentina through the purchase of debt and equity listed on stock exchanges. The British global securities portfolio in that era consisted of 40% railway securities, 30% sovereign debt, 10% mining company securities, and 5% public utility securities. The new feature of the international business landscape compared to the 19th century is the growth of multinational companies. In 1996, the total stock of global foreign direct investment was about $3.2 trillion. During the 1990’s, FDI has been expanding at a 12% annual rate compared to only 7% for world trade.
According to a United Nations study, the world’s 60,000 transnational corporations now produce about one quarter of the world’s output. Their foreign affiliates had sales of $11 trillion in 1998 compared to world exports of $7 trillion The growth of multinational companies has produced a significant expansion of foreign direct investment in both the industrial countries and the developing countries. In the U.S. FDI is now equal to about 16% of GDP compared to only 3-4% in 1914 and 1% in 1960. American FDI overseas is also equal to about 20% of GDP today compared to 7% in the early 20th century. In the case of the developing countries, the flow of FDI has expanded even more dramatically. It was about $142 billion in 1997 compared to only $2-3 billion per annum during the late 1970’s. In the past, companies located production facilities in foreign countries in order to overcome perceived barriers to trade, such as import restrictions or shipping costs. But in recent years the focus of FDI has been much more on maximizing productivity and exploiting potential comparative advantages. This trend can be seen in the rising share of exports in the foreign affiliates of sales of U.S. multinational companies. In 1993, such exports accounted for about 40% of sales compared to only 20% in 1966. In the case of the developing countries, the swing was from 10% of sales to 40%.
A few Asian countries such as Japan and Korea have long resisted FDI but as a result of the recent financial crisis they are now opening the door to both FDI and cross border mergers. The changes now occurring in the organization and structure of multinational companies suggest that the process of global economic integration will become much more comprehensive during the early decades of the 21st century than it was during the era before 1914. The multinational company share of world output could easily double during the next twenty five years. The share of world trade occurring within international companies is likely to expand significantly. Many corporations will become effectively stateless because of the sheer scope of their international diversity.
While the growth of multinational companies is the new feature of the global business landscape compared to the era before 1914, it would be a mistake to underestimate the role of portfolio capital flows. They have expanded dramatically since the abolition of exchange controls in many countries during the 1980’s and are likely to continue mushrooming because of the growth of institutionalized savings pools, such as pension funds and mutual funds. There are now about $15 trillion of pension fund assets in the global financial system while the U.S. mutual fund industry, alone, has $6 trillion of assets. In the half century before 1914, most of the world’s capital flows were controlled by a few thousand wealthy European families. In the new century, capital flows will be driven by fund managers allocating the savings of hundreds of millions of people accumulating in pension funds and mutual funds. At the present time, most of the world’s pension fund assets are in the U.S., Britain, Switzerland, Holland and a few other English speaking countries. But developing countries in locations as diverse as Chile and Thailand have been promoting retirement savings through pension plans which also should encourage the growth of their domestic capital markets. When the cold war ended ten years ago, there were probably about 100 million people on the planet earth who owned a share of stock or had a pension plan. By the year 2010, it is not difficult to imagine this number rising to one billion because of the spread of pension funds to large developing countries such as Mexico, Poland and China. Indeed, China already has over 35 million retail shareholders despite the fact its stock market is only eight years old. Mexico did not have even 100,000 shareowners before NAFTA set the stage for a stock market boom there during the early 1990’s.
The developing countries offer the greatest potential for stock market development because they currently represent only about 8% of world stock market capitalization compared to 45% of world output, 70% of the world’s land area, 85% of the world’s population and 99% of the projected growth in the world labor force during the early decades of the 21st century.
When the 20th century began, the process of global economic integration was occurring so rapidly many people believed it could not be reversed. In 1911, a British journalist named Norman Angell even produced a book, the Great Illusion, predicting there would never again be a European war because it would make no economic sense. Since Germany was Britain’s largest trading partner and Lloyd’s of London had insured the German merchant marine , it was difficult to imagine a war between Britain and Germany during those golden years. Yet, in 1914, the great European powers permitted the assassination of a Hapsburg prince in Sarajevo to plunge the continent into a war which destroyed the ruling dynasties of several major countries and set the stage for political upheavals which divided Europe until the 1990’s.
|
Transport and Communication Costs Expressed in 1990 Dollars |
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|
Year |
Average Ocean Freight and Port Charges Per Short Ton of Import and Export Cargo |
Average Air Transport Revenue per Passenger Mile |
Cost of a 3 Minute Telephone Call New York to London |
|
1920 |
$95 |
NA |
NA |
|
1930 |
60 |
$0.68 |
$244.65 |
|
1940 |
63 |
0.46 |
188.51 |
|
1950 |
34 |
0.30 |
53.20 |
|
1960 |
27 |
0.24 |
45.86 |
|
1970 |
27 |
0.16 |
31.58 |
|
1980 |
24 |
0.10 |
4.80 |
|
1990 |
29 |
0.11 |
3.32 |
|
Sources: Historical Statistics of the United States; Statistical Abstract of the United States |
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The world tried to learn from the mistakes of the First World by establishing a variety or organizations after 1945 designed to lessen the risk of economic crisis which could set the stage for political conflicts including the International Monetary Fund, The World Bank, and the General Agreement on Tariffs and Trade. These organizations have had a mixed record addressing the challenges of the post cold war world, but they have at least provided a framework for more international cooperation and burden sharing than existed before 1914. As a result of the recent Asian experience, they are also attempting to refocus their efforts from rescue operations to crisis prevention.
The new millennium is likely to produce far more experimentation with international institution building and integration of political systems than ever before. There is no alternative to co-operation because of the immense demands which mankind is now placing on the planet’s resources. When the current millennium began, the population of the world was 270 million and per capita income was about $130. By the time of the industrial revolution, the world’s population had expanded to 600 million while per capita income was about $160. Today, the population of the world is 6.3 billion people and per capita income exceeds $20,000 in the industrial countries.
The lesson from 1914 is that economic integration, alone, cannot guarantee that the nation states will agree to co-operate or even avoid conflict. The forces of nationalism, tribalism, and ethnic rivalry are still very much part of the human condition, especially in countries where industrialization is at an early stage.
As two thirds of the world’s people are still living in the countryside, we should not underestimate the potential for social and political conflicts resulting from the introduction of new technology. The industrial revolution set the stage for dramatic improvements of living standards but it also disrupted long established social orders and unleashed political rivalries that finally culminated in the Great War of 1914-1918. All we can say with certainty about the new millennium is that the political revolution which swept through Eurasia during the late 1980’s and 1990’s has given us a second chance to create a global market economy and to share the benefits of the industrial revolution with all of the world’s people.
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