0.3 Globalization  (Page 2/9)

Globalization in 2014 means different things to different peoples. To some it means the rapid spread of culture and ideas in a world wired tightly together by the internet. By 2014, the number of websites worldwide surpassed 1 billion. To others it means growth of international travel and tourism.

In a course on economics, an economic definition of globalization should be used. Simply put, globalization is “the increasing inter -dependence between nation’s economies, as measured by greater flows of goods, services as well as cheap tools of communication and capital across national borders, indeed globalized communications. There is even mobile network service at summit of Mount Everest, so climbers can call home from the summit.

Popular discussions of: “globalization” imply that it is something of a new phenomena. It is not. In its present incarnation, it began after about 1980. But there was a previous, huge wave of modern globalization between 1840 and 1914.

Between 1870-1914, world trade grew very rapidly, from 10% of world GDP to 21% of world GDP “The Rise and Fall of World Trade”, NBER Reporter, Winter 2005/2006, pp.20-21 . Global capital flows, especially to the U.S. and some Latin American nations (especially Argentina) also grew rapidly. In 1870, foreign direct investment (FDI) in “developing nations” in Africa, Asia and Latin America was only 9% of the total output of these Nations. By 1914 the percentage reached 33%, a 3 ½ fold increase.

However, it is important to understand that there were material differences between the first big wave of modern globalization and the most recent wave, extending into the second decade of the 21st century. The first wave was impelled by growth in international foreign investment. The second wave included much more financial integration across countries, as well as growing trade and investment flows.

The first wave of globalization paused abruptly in 1914 by World War I. The coup de grâce was the great depression when world trade shrank precipitously after 1929 to only 9% of world GDP by 1938. Trade fell so sharply that many in the U.S., especially politicians, began to think of the U.S. as a mostly closed economy. In their view, the role of international trade and capital movements were seen as largely inconsequential for the U.S. economy.

Even in the two decades after World War II, in the U.S. and Europe most econometric models depicted a closed economy. This might have been acceptable in 1955 when U.S. international trade was only 6% of GDP. By 1992 NBER Reporter, Winter 2005/2006, p.20. , trade was 27% of GDP and remained there through 2011. Open economy models not closed economy models are needed in these circumstances.

In sum, in the immediate years of World War II (1945-55) “closed economy” was not too bad an assumption. Foreign trade was a very small percent of GDP in U.S., and capital movements were then almost all one-way, from U.S. to rest of world. Economists liked the closed economy because it was simple to model: the math was easy. Because the dominant models were closed, people were led to believe that trade and capital flows could be ignored in economic model-building, as well as in policymaking in taxation and trade.