Globalization is Going into High Gear!
Summary of “The Great Convergence”
It was the best of times, it was the worst of times, …, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us….
Richard Baldwin has written a book that explains 200,000 years of human economic development — well, at least with broad strokes for the first 198,800 years. He builds a compelling case for how globalization began in the “North” (Baldwin’s shorthand for the small group of mostly Western countries that developed first) and supplanted more than a thousand years of leadership by the “South” (his shorthand for the areas of ancient civilization such as China, India and the Middle East). But in less than 30 years, the tables have been almost completely turned, restoring a great deal of the former dominance of the South. He weaves into this massive canvas an explanation for how and why industrial jobs that built the rich world’s middle class are gone forever and how the near future could entail even greater shocks. It’s a fascinating book, with many keen insights. It repeats key ideas and points as he progresses, so keeping things in context is not difficult.
He organizes his narrative into 4 big tranches: Pre-Globalization (most of human history up to 1820), the First Unbundling (1820–1990), the Second Unbundling (1990-the present) and the Third (and final) Unbundling, which is about to begin. Three key measures featured in these globalizing tranches: the cost of trade, the cost of communications and the costs of face-to-face meetings.
The Pre-Globalized world suffered from high costs for all of the three measures; it was expensive to move goods — and communications were nearly as expensive as moving goods or people. Thus, both production and consumption were mostly local. Of course people who lived prior to 1820 coveted goods (and sometimes information) from afar, such as spices from India and porcelain from China; but, high costs of moving the goods limited the volume and value of trade, rendering them mostly luxury items.
In the First Unbundling, something amazing happened: the costs of moving physical items began to fall. Steam power initially, then other transportation technologies, made moving goods both predictable and cheap. It soon became advantageous to produce goods in one locale and move them to many. Since the innovations began in the “North”, the first hubs of mass production began and largely stayed there, in Europe, North America and later, Japan. In 1500, India and China produced about 50% of world GDP; the North, 8% — both roughly in alignment with their respective populations. By 1990, the North had nearly 70% of world GDP, while India and China had fallen precipitously to 5%. Almost all of the productive capacity and know-how was concentrated in the North, allowing it to completely dominate the traditional centers of human activity and wealth. In this era, the Ricardian principle of national comparative advantage quickly separated the two worlds and turned the South into an exporter of raw materials and a consumer of finished goods.
The Second Unbundling completely reversed this imbalance so much so that in just 25 years from 1990 to 2015, China alone soared from 2% of world GDP to more than 10%. The North, which includes Europe, North America and Japan, fell to below 50%. What was this amazing development, the Second Unbundling? In sum, it was the emergence of low communications and computing costs. Where it had once been necessary to co-locate production and knowledge about production processes, in the Second Unbundling, production was decomposed into its aliquot parts. Importantly, some parts that other countries could build efficiently were outsourced to them. Unlike in the first First Unbundling, the global supply chains could now be efficiently spread far and wide to seek out the most efficient producer. This was abetted by the plunging costs of moving goods, as in the earlier tranche. But, it was enabled in the first place by the efficient transfer of knowledge throughout the global supply chain, so that factories could use the best know-how. Information and communications technology (ICT) allowed the efficient management of extremely complex supply chains that were part of the production processes of most modern goods manufacturing.
Thus, companies like Apple and Toshiba and General Motors broke down their products into subassemblies that could be made with their own technology throughout their worldwide supplier network. Creating products became both global and optimized to seek efficiencies wherever they could be found. China (and other East Asian countries) were the primary targets for the global supply chains and they benefited accordingly. Thus, first rate technology in the hands of (expensive) Northern labor could not compete with the same first rate technology in the hands of (less expensive) Southern labor.
Interestingly, as this has occurred, the actual value added in manufacturing has shrunk. Baldwin shows that after 1990, the value share in fabrication of a product has plunged 30% or more, while the service component has risen by 20% and design by more than 15%. In other words, industrial policy that attempts to recapture “manufacturing jobs” is doomed to failure; those jobs don’t exist in the North or even the South. The value is simply moving into servicing and designing the product.
In the final unbundling, which Baldwin is prognosticating, he suggests it will be driven by the reduced cost of face-to-face meeting or in-person work. Travel is still onerous and technologies like robots, telepresence and remote control will be at the heart of the Third Unbundling. It’s a provocative idea that we are already seeing emerge: today, drones are used to deliver lethal payloads in hostile environments while their operators are safely ensconced far away. This could be an early example of delivering skilled services at a distance.
Baldwin has pulled together a lot of academic and other research into a readable summary. He has also tied together classical economics (e.g., Smith and Ricardo) with modern economics (e.g., Krugman, Kuznets). One of the salient points is that free trade in combination with comparative advantage deindustrialized the South. Ironically, the same tools, updated, are now deindustrializing the North! The book weakens considerably when describing the Third Unbundling, the one we are putatively in now. He doesn’t attempt to describe the future or give prescriptions. It may well take a different form or perhaps AI will put a still more interesting twist on globalization.
However, it’s fair to say that the First Unbundling was very disruptive to the South; it destroyed their social orders and societies. Those inexorable processes continued for nearly 200 years, only interrupted by war and revolution. The Second Unbundling has proven somewhat disruptive to the North, reaching a crescendo in 2016; the Third could be even more so.
Reference: Baldwin, Richard. 2016. The Great Convergence. Belknap | Harvard. http://www.hup.harvard.edu/catalog.php?isbn=9780674660489