Learning Objectives

After reading this chapter students should be able to:

• classify and describe the various eras of modern globalization
• summarize the theoretical arguments that were used to support policy development in each of these eras
• summarize critiques of the dominant policies in each era
• analyze the experience of Brazil related to globalization

Chapter Summary

Economic globalization, the movement of goods, services, capital and people across borders, has had many impacts on societies and individuals. This process is note new, but has picked up considerable momentum in the modern era. The chapter divides globalization into three phases that have relevance for the global south: 1800-1914 (the first global century); 1930-1980 (the ISI (Import Substitution Industrialization) phase); and from 1980 to the present (reintegration).

At least five factors led to increasing globalization during the first phase. First new technologies improved transportation and communication. Second, Western industrialization created an increased demand for raw materials, as well as for luxury items to satisfy the tastes of the increasingly wealthy elite. Third, many countries loosened or did away with protectionist policies, especially high tariffs. Fourth, many countries adopted the gold standard for currency, allowing for more stable exchange rates; this encouraged capital flow between countries. Fifth, attitudes of the governing elite were challenged by thinkers like Adam Smith who argued against the prevailing mercantilist ideology (which focused on acquiring wealth and resources and often resulted in protectionism) and by David Ricardo who introduced the idea of comparative advantage. Ricardo argued that all countries were better off producing something they had comparative advantage and exporting it while they imported other things. These five factors contributed to increasingly open international trade until this era ended with global conflict in World War I.

During the ISI phase, many LDCs turned inward. While some had followed autarky after WWI, ISI allowed for a more selective approach to protectionism. With ISI states used high barriers to imports, especially of consumer goods, so that their own domestic industries could develop. These barriers included high tariffs, quotas and licensing. In addition, local currencies were sometimes overvalued, allowing local companies to import machinery and other capital goods at cheaper prices. They also allowed foreign direct investment, but restricted where such investment could occur and what could be done with the profits from such enterprises. Many LDCs were able to stimulate industrial development of consumer industries following this strategy, but ISI had negative longer term consequences.

During this same time period, some countries (especially in Asia) pursued a different strategy, called export promotion. These countries had lower tariffs (to enable cheap importation of raw materials and capital equipment) and focused on developing industries that could produce consumer goods that would be sold on the world market. These countries also undervalued their currency to encourage exports.

Theoretically, there was much academic explanation of these first two phases of globalization. Three theories, Latin American structuralism, dependency theory and world systems theory started from some common central ideas. They viewed global economics as a single capitalist based system that had a core (Western developed countries) and a periphery (the LDcs). These theories explained the economic wealth and expansion of the West as based on the exploitation of the lDCs, initially through colonialism, but after independence through neocolonialism. Neocolonial trade arrangements were based an unfair system of global trade.

Latin American structuralism was a school of thought that disagreed with Ricardo’s idea of comparative advantage. These theorists, led by Raul Prebisch, argued that the terms of trade for primary product exporters (like LDCs) tended to decline compared to exporters manufactured goods (like the West). This meant that LDCs needed to produce more and more to buy the same amount of manufactured goods as in the past. There were two reasons for this: organized labor in the core tended to boost the price of manufactured goods while the fact that there were few producers of manufactured goods but many primary product exported, tended to drive down the price of raw materials and reducing LDC revenue. This school of thought led to the promotion of ISI as a development strategy.

Dependency theory contended that the dependent position of LDCs in the periphery was not a simple product of impersonal market forces described in structuralism, but by intentional actions of the core. The capitalist class, the core bourgeoisie, established multinational corporations to continue to exploit LDCs after the end of formal colonialism. MNCs sent profits back to the core, while their activities in the global south, ran their enterprises, often in isolated enclaves, in such a way that few workers gained much benefit. Some dependency theorists, like Andre Gunder Frank, claimed that this kind of economic activity in LDCs did enrich a local comprador class, but their economic interests were allied to the wealthy West, not to their countrymen within the LDCs. Compradors therefore had an interest in continuing this exploitative system. They also worked with the international bourgeoisie to prevent democratic or representative political regimes from being established in the global south.

World Systems theory, as developed by theorists such as Immanuel Wallerstein, divided the world into core, semi-periphery and periphery based on levels of capital accumulation, administrative capacity and production of capital-intensive goods. The international chain of production results in a system that promises the highest profits and wages for those who produce finished consumer goods. The core is able to purchase domestic stability through this system of higher wages and through redistribution of a portion of the exploitative profits earned by core-based corporations. Peripheral countries cannot do this, and this explains persistent instability there.

The neoclassical economic explanation for the global economy during these first two phases is related to the need for raw materials during the Industrial Revolution. Because this demand was so high, capital was drawn to the primary sector of the LDC economies rather than to manufacturing. Because exports and modern employment were so highly concentrated in just one or two primary products that were exported, international price volatility made the domestic economy of most LDCs unstable, further reducing the likelihood of investment outside the primary sector.

The chapter then presents evidence that can be used to critique these theories. First, Prebisch’s claim about declining terms of trade can be disputed depending upon when you start and stop measuring the data. Second, even though ISI provided some industrial development in the short term, longer term problems inevitably emerged. First, the industries produced under this strategy were inefficient and provided poor quality goods at higher costs. The strategy also worsened inequality between rural and urban peoples. Rural people were particularly disadvantaged by overvaluing their agricultural exports and by keeping agricultural prices low to satisfy urban workers. Such strategies encouraged peasants to leave the lands, thereby increasing urbanization. Third, to get foreign currency, ISI governments needed to borrow, thereby increasing national debt, spectacularly in the case of some Latin American countries.

Another piece of evidence against these theories is that some of the countries that followed export promotion (rather than ISI) became the Newly Industrialized Countries.

These events resulted in many of these LDCs changing their economic policies in the 1980 and 1990s. Countries liberalized their trade policies by reducing tariffs unilaterally. Preferential trade areas increased and the World Trade Organization was established. Further liberalization occurred through the conditionality of International Monetary Fund and World bank structural adjustment loans. Trade was also increased through technological innovations which made transportation and communication easier and cheaper.

A second aspect of the global reintegration was that restrictions on the movement of capital were also reduced or eliminated. Countries became more willing to allow foreign ownership of companies (foreign direct investment) or at least investment in their domestic enterprises (foreign portfolio investment).

Another aspect of global reintegration was the change in migration flows. While international migration generally has remained steady, more developed countries allowed more immigrants from the global south. These migrants frequently remained contact with their countries of origin and sent remittances to family.

Global reintegration has been criticized from several perspectives. First, the opening of LDC markets to international competition has resulted in losses of local manufacturing businesses. Those countries that maintained their manufacturing businesses may have eliminated protections for workers and the environment to attract or keep foreign business investment. This is known as the race to the bottom. In response, the fair trade movement has evolved which promotes products in the West that have followed fair trade practices (a living wage, green production, humane working conditions, etc.) during production in LDCs. This movement is still fairly small.

A second problem with global reintegration is that the opening of LDC financial markets to foreign investment creates risks such as capital flight that can seriously impact LDC economies. Investors typically withdraw money when they believe their investment is at risk or when better opportunities arise elsewhere. A few large investors behaving this way can set a trend that others follow. This risk is illustrated by the East Asian financial crisis. While larger economies like those in the West have open economies, their size and the diversity of investment provide protections that are not present in smaller LDCD economies.

Another issue is that global reintegration often leads to increasing indebtedness by LDC governments. Debts can be a significant part of the government budget and often must be repaid in foreign currency which governments can only obtain through exports or further borrowing.

A fourth problem with global reintegration is that increased south-north migration frequently leads to a brain drain. The migrants that are most acceptable to the more developed countries are those with special skills and education like doctors and engineers. When these people move to more developed countries, LDCs lose important human capital.

The chapter also reviews defense of globalization. For example it seems that both China and sub-Saharan African countries that have pursued this strategy have experienced steady economic growth due to opportunities in the export oriented sectors. There were also substantial benefits to consumers in these countries.

Defenders of globalization also dispute the issue of working conditions, arguing that  the notion of “sweatshops” is actually misleading because it makes an improper comparison to Western working conditions; in addition, these factories provide economic opportunities that would otherwise be absent for these workers. In addition foreign investment also encourages countries to improve infrastructure, business practices and education, all things that can lead to wider improvements in social well-being.

As far as migration, defenders of globalization point to the remittances that migrants send back to their families, which in some countries impact a significant portion of the population.

Brazil is used as a case study to illustrate the various arguments about globalization.