The Origins of Globalization
The term globalization is barely thirty years old (Giddens 2009). However, the sudden surge in the exchanges in trade, of trade and knowledge through various means has brought the term to the spotlight. Globalization can be defined as the increase in interdependency between people, groups, and nations throughout the world as facilitated by various factors such as internet and shipping containers.
The Influence of Transnational Corporations
Globalization has been driven immensely by the operations of transnational corporations with activities across nations that have influenced global production process as well as the distribution of labor. Integration of global financial markets has also been credited with the spread of globalization through an increase in world trade for goods and services (Giddens, 2009).
The Start of Globalization
However, globalization did not start with this level of trade and interaction. Some historians have argued that globalization may have started in the late 1400s. They concur with Adam Smith regarding Christopher Columbus discovery of the Americas by in 1942 marked the start of globalization. However, according to Kevin O'Rourke and Jeffrey Williamson (2001) paper, globalization did not start until the nineteenth century following the abrupt decline of transport costs that paved way for the convergence of goods between Europe and Asia. Whereas there was plenty of evidence supporting an increase in a trade before the 1900s, there is evidence that this trade had an effect on price convergence or decline in logistical and transport costs.
The Model for Globalization
To know what made globalization possible, O'Rourke and Williamson (2002) developed a model that was used to measure the integration of international commodity markets (figure 1). The model depicts trade happening between the home country and oversees.
p- Home prices
p*- Prices for the rest of the world
MM- Home import demand function
SS- Foreign policy supply function
t- Trade costs
Globalization and Trade Costs
Globalization occurs when the cost of trade (t) falls leading to the expansion of trade (Q to Q') and price convergence p and p* without any shift in M and S, as depicted in figure 2 below
Figure 2: Globalization
This fall of trade costs (such as cost associated with transport and border trade barriers) contributed to an increase in export prices, price convergence of commodities as well as an explosion in trade volumes. In their 2002 paper, O'Rourke and Williamson suggested fronted the two conditions to be met for globalization to have an independent influence on an economy. First, forces creating trade must change the prices of domestic prices. This must be followed by the reshuffling of resources so that trade will influence other factors such as quality of life, distribution of income or the scale of output. Trade between continents and nations developed because of the declining transport costs, international conflicts as well as mercantilist intervention. Trade between continents and nations started with only goods with a high value against their bulkiness such as precious metals and silk. The scope of goods traded expanded with time although it was marked by non-competing goods. This was during the pre-eighteenth-century periods when Europe exported goods such as gold, sugar, spices, and silk while Asia imported other items such as silver, and woolens. These non-competing goods were considered luxurious. This made them expensive in their importing markets and thus making them incur the heavy costs incurred during transportation. In spite of the trade expansion during this era, it was very limited to non-competing goods. This trade explosion of import demand and export supply was due to the increase in the population and not as a result of the integration of the world economy (O'Rourke K. and Williamson, 2002). It was marked by non-convergence of commodity prices.
The Era of Price Convergence
Increase in global trade is marked in the second era which is characterized by massive declines in the transport costs as well as commodity price convergence. According to O'Rourke and Williamson, this era started in the nineteenth century. There is an increase in simple competing goods such as wheat and textiles. During this century, price gaps between partners' fall sharply. It is also during this era that the income distribution influences on inter-country and global traders expanded, similarly suggested by the Heckscher-Ohlin trade theory (O'Rourke and Williamson, 1999). During this period, international transport costs in Atlantic Sea, Black Sea, as well as Egyptian ports, collapsed. O'Rourke and Williamson depict this drop in freight indexes of both the North index and the British index that underwent huge drops of 41 percent and 70 percent respectively between 1880 and 1910 (O'Rourke and Williamson, 2002). During this period, the barriers of trade were greatly reduced allowing trade between nations and continents to grow as well as converging the commodity prices for both imports and exports (O'Rourke and Williamson, 2002). Harley's (1980) data recorded a reduced gap in prices of wheat by 57.6 percent in the 1870s to 15.6 percent in 1912 for data between Liverpool and New York.
The Present Era of Globalization
Lastly, we have the era that contains the present decades which have experienced a surge in both the basic and highly differentiated manufactured products throughout the world. In this era of globalization, trade is dominated more by expertise skills and new complicated technologies, unlike the previous era.
Factors Enabling Globalization
Globalization was enabled by a number of factors and contributors. First, there was the revolution of transportation. In the nineteenth century, for instance, the introduction of the steamship, as well as the use of Suez, can contribute to the great dip in the freight charges. Between 1850 and the early 1900s, the railway network had spread throughout France, Wales, and England. These innovations facilitated massive growth and expansion in trade due to the drop in the transport costs as well as increased integration between countries.
Secondly, there were changes in trade policies between trading country partners that favored the expansion of trade during the nineteenth century. In 1846, for instance, Britain removed the Corn Laws followed by the Cobden-Chevalier pact between both Britain and France. These changes contributed to the decline in Britain trade tariff to 24 percent from 73 percent between 1815 and 1827 (O'Rourke and Williamson 2002). Elsewhere, the trend continued with Asia and Europe lowering their tariffs to promote trade. This was, however, not the case in the Northern United States as they sought to protect their industry from the British. During this time, however, there still existed other protectionism measures like the voluntary restraint agreements and anti-dumping actions not included in the tariff (Bordo, Michael, Rockoff, 1996)
Finally, contributing to globalization was the reduction in barriers of information. Improvements in information sharing lead to the increase in capital inflows. In the nineteenth century, specifically between 1880 and 1914, gold was adopted as a standard currency thus lowering currency risks to banks. Countries and markets that adopted and complied with the newly enacted gold standard rule lowered their fiscal deficit, become more stable in their money growth as well as lower inflation as compared to their counterparts (Bordo, Michael, and Rockoff,1996). The invention of the telegraph in 1866 solved the issues associated with information flow between different regions. Use of telegraph ensured that information was received within the same day between different regions thus achieving price convergence since 1866 counterparts (Bordo, Michael D., and Hugh Rockoff 1996).
Conclusion
Globalization has had a long journey to date with unlimited achievements across all nations. Factors above give more weight to the innovations and strides achieved since the nineteenth century as stressed by O'Rourke and Williamson's paper view of globalization.
References
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