commodity, Meta Intelligence

Globalization and Its Nuances

The PBS TV program History Detectives had an episode entitled “Atocha Spanish Silver” where the wreck of the Spanish ship Atocha was described like this:

“In 1985, one of the greatest treasure discoveries was made off the Florida Keys, when the wreck of the Spanish ship Atocha was found. On board were some forty tons of silver and gold, which in 1622 had been heading from the New World to the Spanish treasury as the means to fund the Thirty Years’ War.”

Is this an obvious case of globalization? What about Marco Polo? Rome–Han dynasty China trade in silks? Silk Road and Samarkand? Colombus? Magellan? Vasco da Gama?

All of these cases constitute a kind of harmless kind of “pop globalization” based on exotic voyages and travels.

Consider another such example, perhaps more academic:

“About the middle of the sixteenth century Antwerp reached its apogee. For the first time in history there existed both a European and a world market; the economies of different parts of Europe had become interdependent and were linked through the Antwerp market, not only with each other but also with the economies of large parts of the rest of the world. Perhaps no other city has ever again played such a dominant role as did Antwerp in the second quarter of the sixteenth century.”
(Europe in the Sixteenth Century, Koenigsberger and Mosse, Holt Rinehart Publishers, 1968, page 50)

Debt repudiations in several places in the 1550s are described like this:

“This caused the first big international bank crash, for the Antwerp bankers now could not meet their own obligations.”
(Europe in the Sixteenth Century, Koenigsberger and Mosse, Holt Rinehart Publishers, 1968, page 51)

This sounds like some kind of identifiably global period.

Actually, modern historians define globalization as “price convergence” (i.e., wheat has now a unified “world price,” implying a world market). This rigorous definition is confirmed by and also shows up in the data in the 1820s and may or may not be prefigured by all the Marco Polo and Atocha silver stories, mentioned above.

These episodes in history are not there yet.

One sees wheat prices and other commodity prices converging in the 1820s and thereafter based on railroads, steamships and telegrams.

The classic in this kind of analysis is:

Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, by Kevin O’Rourke and Jeffrey Williamson.

Kevin O’Rourke and Jeffrey Williamson present a coherent picture of In Globalization and History, Kevin O’Rourke and Jeffrey Williamson present a coherent picture of trade, migration, and international capital flows in the Atlantic economy in the century prior to 1914—the first great globalization boom, which anticipated the experience of the last fifty years. The authors estimate the extent of globalization and its impact on the participating countries, and discuss the political reactions that it provoked. The book’s originality lies in its application of the tools of open-economy economics to this critical historical period—differentiating it from most previous work, which has been based on closed-economy or single-sector models. The authors also keep a close eye on globalization debates of the 1990s, using history to inform the present and vice versa. The book brings together research conducted by the authors over the past decade—work that has profoundly influenced how economic history is now written and that has found audiences in economics and history, as well as in the popular press.
(book summary)

In everyday language, we associate the word globalization with some ever-increasing Marco Polo phenomena. While that’s not entirely wrong, globalization in the more technical sense begins to show up in the data only from the 1820s. At this point, we begin to see the convergence of worldwide wheat prices, for example. This makes the world, for the first time, a global “store” with unified prices. Here is the technical beginning of globalization. The years 1870-1914 are subsequently the first real era of modern globalization and represent a kind of “take-off” from the first stirrings of the 1820s. World Wars I & II might be seen as globalization backlash.

At this moment in world history, whether Putin’s invasion of Ukraine will constitute a new wave of deglobalization remains to be seen.

WANG Huiyao: To Save Global Trade, Start Small

[from the Center for China and Globalization]

by WANG Huiyao (王辉耀), Founder of the Center for China and Globalization

The global economy is being rocked by war, sanctions and spiraling commodity prices—not to mention the ongoing strain of the pandemic, geopolitical tensions and climate change. These compounding risks present a serious challenge to the system of open trade that the World Trade Organization was designed to uphold. But it also offers a chance for the beleaguered organization, which is holding its first ministerial conference since 2017, to prove its continuing relevance.

The WTO has traditionally focused on combating protectionism—measures designed to insulate producers from international competition. Now, though, the biggest threats to free trade come from policies meant to safeguard national security and protect citizens from risks, such as those related to health, the environment or digital spaces.

Former WTO Director-General Pascal Lamy has called this growing use of export controls, cybersecurity laws, investment blacklists, reshoring incentives and the like “precautionism.” It’s been on the rise since the start of the pandemic, when many countries moved to restrict exports of medical supplies and other essentials. COVID-19 has also raised concerns about the vulnerability of supply chains, particularly those dependent on geopolitical rivals.

The world’s two biggest trading nations, the United States and China, have both engaged in precautionism. The U.S. is actively pursuing a policy of “friend-shoring”—shifting trade flows from potentially hostile countries to friendlier ones. China’s “dual circulation” strategy aims in part to reduce dependence on foreign imports, especially technology, while its government has long imposed limits on data flows in and out of the country.

With Russia’s invasion of Ukraine, the momentum toward friend-shoring has grown. Meanwhile, food shortages and surging prices have triggered another round of precautionary measures: Since the war began, 63 countries have imposed a more than 100 export restrictions on fertilizer and foodstuffs.

While the impulse driving such policies is understandable, the trend could cause great harm if allowed to run unchecked. It will increase inflation and depress global growth, especially if it involves costly redeployment of supply chains away from efficient producers such as China. A recent WTO study estimated that decoupling the global economy into “Western” and “Eastern” blocs would wipe out nearly 5% in output, the equivalent of $4 trillion.

As a recent study by the International Monetary Fund points out, the way to make global value chains more resilient is to diversify, not dismantle them. Turning away from open trade will only make states more vulnerable to economic shocks such as war, disease or crop failures.

The WTO is an obvious vehicle to rally collective action on these issues. However, like other global institutions, it has been weakened by years of deadlock. At this week’s meeting, countries should start to build positive momentum with some small but symbolically significant breakthroughs to show the WTO can still mobilize joint action.

Given current threats to food security, at the very least members should agree not to restrict exports of foodstuffs purchased for the World Food Programme. A step further would be a joint statement calling on members to keep trade in food and agricultural products open and avoid imposing unjustified export restrictions. There should also be closer coordination to smooth supply chains and clogged logistics channels.

Another low-hanging fruit is finally securing a waiver covering intellectual property rights for COVID-19-related products. This proposal has languished for over 18 months but has now been redrafted to address concerns from the U.S. and European Union. Signing it would go some way to expanding global access to vaccines, which are still sorely needed in many parts of the world.

Beyond this week, the WTO secretariat and members need to develop a work program to reform the organization. This should include developing a framework to ensure that if states do take precautionary measures, they do so in a transparent, rules-based manner that does not slide into more harmful forms of protectionism.

Reviving the WTO’s defunct dispute settlement mechanism is a clear priority. Twenty-five members have agreed to an interim arrangement that would function in a similar way. More members should join this agreement, ideally including the U.S., and start negotiating the full restoration of a binding mechanism. They should also set clear criteria for carveouts for legitimate precautionary measures related to national security, healthcare and environmental issues.

No one should expect big breakthroughs in Geneva. But practical agreements on immediate priorities such food security and vaccines would at least help to reassert the WTO’s relevance and show that the world’s trading partners are not simply going to give up on multilateralism. At this dangerous moment, even small victories are welcome.

Movies As Parallel Universities: The Promised Land

The Promised Land is a Polish film masterpiece based on Nobel laureate Reymont’s 1899 novel. The novel describes the industrialization of the Polish city of Łódź in the nineteenth century and reminds one a little of Upton Sinclair’s The Jungle of 1906 but with the emphasis not on dangers and miseries for labor but on the “mad dance” of the capitalist industrial free-for-all:

“The Promised Land (Polish: Ziemia obiecana) is a 1975 Polish drama film directed by Andrzej Wajda, based on the novel by Władysław Reymont. Set in the industrial city of Łódź, The Promised Land tells the story of a Pole, a German, and a Jew struggling to build a factory in the raw world of 19^th century capitalism.”
(Wikipedia)

Wajda presents a shocking image of the city, with its dirty and dangerous factories and ostentatiously opulent residences devoid of taste and culture. The film follows in the tradition of Charles Dickens, Émile Zola and Maxim Gorky, as well as German expressionists such as Dix, Meidner and Grosz, who gave testimony of social protest. Think also of the English poet, William Blake’s metaphor describing industrial England as a world of “dark Satanic mills.”

Reymont, the author of the original novel, was in his heart a ruralist and intensely disliked the modern industrial world, which he saw as maniacal and destructive.

In the 2015 poll conducted by the Polish Museum of Cinematography in Łódź, The Promised Land was ranked first on the list of the greatest Polish films of all time.

Plot

“Karol Borowiecki (Daniel Olbrychski), a young Polish nobleman, is the managing engineer at the Bucholz textile factory. He is ruthless in his career pursuits, and unconcerned with the long tradition of his financially declined family. He plans to set up his own factory with the help of his friends Max Baum (Andrzej Seweryn), a German and heir to an old handloom factory, and Moritz Welt (Wojciech Pszoniak), an independent Jewish businessman. Borowiecki’s affair with Lucy Zucker (Kalina Jędrusik), the wife of another textile magnate, gives him advance notice of a change in cotton tariffs and helps Welt to make a killing on the Hamburg futures market. However, more money has to be found so all three characters cast aside their pride to raise the necessary capital.
On the day of the factory opening, Borowiecki has to deny his affair with Zucker’s wife to a jealous husband who, himself a Jew, makes him swear on a sacred Catholic object. Borowiecki then accompanies Lucy on her exile to Berlin. However, Zucker sends an associate to spy on his wife; he confirms the affair and informs Zucker, who takes his revenge on Borowiecki by burning down his brand new, uninsured factory. Borowiecki and his friends lose all that they had worked for.
The film fast forwards a few years. Borowiecki recovered financially by marrying Mada Müller, a rich heiress, and he owns his own factory. His factory is threatened by a workers’ strike. Borowiecki is forced to decide whether or not to open fire on the striking and demonstrating workers, who throw a rock into the room where Borowiecki and others are gathered. He is reminded by an associate that it is never too late to change his ways. Borowiecki, who has never shown human compassion toward his subordinates, authorizes the police to open fire nevertheless.”
(Wikipedia)

Notice the sentence above:

Borowiecki’s affair with Lucy Zucker (Kalina Jędrusik), the wife of another textile magnate, gives him advance notice of a change in cotton tariffs and helps Welt to make a killing on the Hamburg futures market.

Textiles and hence cotton prices and tariffs are, as elsewhere, “the name of the game” in Łódź industry.

There is a concrete basis in reality for this 19^th century version of our derivatives trading contributing to 2008 and the Great Recession:

In a discussion of futures markets, we read:

“Already in 1880 merchants were buying an idea rather than a palpable commodity, as we saw happen in the grains futures market. In that year, sixty-one million bags (coffee, in this example) were bought and sold on the Hamburg futures market, when the entire world harvest was less than seven million bags!
It was this sort of speculation that caused the German government to shut down the futures market for a while.”
(Global Markets Transformed: 1870-1945, Steven Topik & Allen Wells, Harvard University Press, 2012, page 234)

The danger with such speculative excesses is that the economy, national or global, becomes a “betting parlor” (bets on bets on bets in an infinite regress, as in the lead-up to 2008) and governments have been paralyzed and passive in the face of such “casino capitalism” (to use Susan Strange’s vocabulary) because laissez-faire neoliberal ideology has a profound hold in the West, especially in Anglo-America.

Professor Milton Friedman (died in 2006) argued in interviews going back to the 1960s and before, that speculators fulfill a valuable economic function since they “keep the system efficient.”

The current semi-dismantling and neutralizing of the Dodd-Frank financial reforms and guidelines has to do not only with lobbying but also with the hold of various strands of such “laissez-faire” ideology and market fundamentalism.

Keynes’s classic essay, “The End of Laissez-Faire” tends to yield to the countervailing force of this market fundamentalism/“laissez-faire religion.”

Looking Backwards and Forwards at the Same Time

Janus and Bi-Directional Smarts

The Roman god Janus looks backwards and forwards at the same time and learning to be somewhat Janus-like is very conducive in the metaintelligence (i.e., larger overview) quest.

There’s a useful French phrase, “reculer pour mieux sauter” which means like a high jumper, you have to take steps backwards to jump higher. In other words, learn to look bi-directionally at the world.

First look back, then forward.

Here’s a concrete example:

W. Arthur Lewis, the “father” of development economics, originally from the Caribbean, taught at Princeton. He won the Nobel in 1979 and wrote various classics such as Growth and Fluctuations, 1870-1913 (1978).

Lewis writes:

In this book we shall not be attempting to give formal or complete explanations of why fluctuations occurred. Like the captain of a ship navigating in stormy seas, we shall need to identify the waves, without needing an exhaustive theory of what causes waves.
When analyzing these fluctuations economists have identified four different cycles, distinguished by length of periodicity, each of which is named after the economist who first wrote about it:
the Kitchin (about three years)
the Juglar (about nine years)
the Kuznets (about twenty years)
the Kondratiev (about fifty years)
(W. Arthur Lewis, Growth and Fluctuations, 1870-1913, 1978, page 19)

Lewis gives us a quick overview of how we got to the era covered by his book:

“The essence of the industrial and agricultural revolutions in the first three quarters of the nineteenth century was in new ways of doing old things—of making iron, textiles and clothes, of growing cereals, and of transporting goods and services. In the last quarter of the nineteenth century the revolution added a new twist—that of making new commodities: telephones, gramophones, typewriters, cameras, automobiles and so on, a seemingly endless process whose twentieth century additions include aeroplanes, radios, refrigerators, washing machines and pleasure boats.”

(Growth and Fluctuations, 1870-1913, page 29)

Professor Norman Stone in his masterpiece on WWI calls this late nineteenth century explosion of material change and inventions the greatest fast quantum leap in world history in transforming the world.

If one reads these lines with a “Janus mind” we wonder, looking forward from the Lewis book and its era:

How does his catchy metaphor of waves in the ocean relate to fluctuations and cycles? When Ben Bernanke (Fed Chair) describes recent decades as “The Great Moderation” does he mean to imply that Lewis-type waves disappeared or got much smaller?
Can computers and mobile phones really match cars and planes in profundity of impact? Or is it only the tremendous spread of mobile or smartphones in the Global South that can?

In fact, the recent economic history classic, Robert Gordon’s The Rise and Fall of American Growth argues against the assumption of endless technical change as a growth accelerator or endless frontier:

In the century after the Civil War, an economic revolution improved the American standard of living in ways previously unimaginable. Electric lighting, indoor plumbing, home appliances, motor vehicles, air travel, air conditioning, and television transformed households and workplaces. With medical advances, life expectancy between 1870 and 1970 grew from 45 to 72 years. Weaving together a vivid narrative, historical anecdotes, and economic analysis, The Rise and Fall of American Growth provides an in-depth account of this momentous era. But has that era of unprecedented growth come to an end?

Gordon challenges the view that economic growth can or will continue unabated, and he demonstrates that the life-altering scale of innovations between 1870 and 1970 can’t be repeated. He contends that the nation’s productivity growth, which has already slowed to a crawl, will be further held back by the vexing headwinds of rising inequality, stagnating education, an aging population, and the rising debt of college students and the federal government. Gordon warns that the younger generation may be the first in American history that fails to exceed their parents’ standard of living, and that rather than depend on the great advances of the past, we must find new solutions to overcome the challenges facing us.

A critical voice in the debates over economic stagnation, The Rise and Fall of American Growth is at once a tribute to a century of radical change and a harbinger of tougher times to come.

Why does one not read of the four cycles mentioned by Lewis (i.e., Kitchin) and the rest listed above in today’s business and financial press? Has there been some great discontinuity?

If you apply a “Janus mind” to the past (described by Lewis) and our sense of the future (described by techno-pessimists like Gordon) you get a more thoughtful sense of “the human prospect.”

IMF, ECB and Others Give 2022 Economic Outlook Today

from the World Economic Forum Davos Agenda:

Today the IMF, European Central Bank, and global economic leaders discussed the future of the economy at the “Global Economic Outlook” session at Davos Agenda 2022.

Inflation, global economic recovery and COVID-19 impacts are discussed.

Please find selected quotes below. View the full session here.

Christine Lagarde, President, European Central Bank:

“In Europe, we are not seeing inflation spiral out of control. We assume energy prices will stabilize from the middle of 2022, bottlenecks will also stabilize in 2022 and gradually, inflation numbers will decline.”

“When I look at the labor market, we are not experiencing anything like The Great Resignation, and our employment participation numbers are getting very close to the pre-pandemic level.”

“In Europe we are unlikely to face the kind of inflation increases that the U.S. market has faced.”

“More recently, we have learnt the lesson of humility–the ECB, IMF, OECD and others all underestimated the recovery, the employment participation and, obviously, inflation.”

Kristalina Georgieva, Managing Director, International Monetary Fund (IMF):

“The response to the pandemic crisis has been anything but orthodox— in a highly coordinated manner both central banks and finance authorities have prevented the world falling into yet another great depression.”

“If I were to offer policy makers a new year’s resolution, it would policy flexibility.”

“In low-income countries, 60% are in either debt distress or in danger of debt distress–more than twice as many as in 2015.”

Haruhiko Kuroda (黒田東彦), Governor, Bank of Japan:

“Japan response to the pandemic has been relatively successful, however, the pandemic has had a significant, negative impact on Japan’s economy.”

“Unlike U.S. or Europe, we have to continue extremely accommodative, easy monetary policy for the time being. We expect the inflation rate in 2022 and 2023 to be around 1 percent still.”

Paulo Guedes, Minister of Economy, Ministry of Economy of Brazil:

“Central banks are sleeping at the wheel–inflation will be a real problem very soon for the western world.”

“More than 3 million new jobs were created in 2021 and the government has assisted 68 million Brazilians with direct income transfers.”

Sri Mulyani Indrawati, Minister of Finance, Ministry of Finance of Indonesia:

“We see a strong recovery in the Indonesian economy in 2022, and to build on this we are expecting more than 1% of additional GDP growth from a series of recent reforms.”

“Indonesia is the largest economy in the ASEAN region, but it is vulnerable to a dependence on commodities–the emphasis now is on value-added activities.”

About the Davos Agenda 2022

For over 50 years, the World Economic Forum has been the international organization for public-private cooperation. The Davos Agenda 2022 is the focal point at the start of the year for leaders to share their outlook, insights and plans relating to the most urgent global issues. The meeting will provide a platform to accelerate the partnerships needed to tackle shared challenges and shape a more sustainable and inclusive future. Learn more about the program and view sessions live and on demand.

Essay 104: Economics—A Decade after the Global Recession: Lessons and Challenges for Emerging and Developing Economies

from M. Ayhan Kose, Director, Prospects Group, World Bank Group:

Dear Colleagues.

This year marks the tenth anniversary of the 2009 global recession. Most emerging market and developing economies (EMDEs) weathered the global recession relatively well, in part by using the sizeable fiscal and monetary policy buffers accumulated during the prior years of strong growth. However, a short-lived rebound in activity has been followed by a decade of protracted weakness in EMDEs amid bouts of financial market stress, falling commodity prices, and subdued trade and investment.

Are EMDEs ready to face a deeper global downturn, if it materializes? Our new study A Decade After the Global Recession: Lessons and Challenges for Emerging and Developing Economies [PDF] takes on this question. It examines developments of the past decade, draws lessons for these economies, and discusses policy options. The study is the first comprehensive analysis on the topic with a truly EMDE focus. It offers three main conclusions. First, perhaps for the first time, many EMDEs were able to implement large-scale countercyclical fiscal and monetary policy stimulus during the last global recession. Second, looking ahead, policymakers in many EMDEs are now equipped with stronger policy frameworks than in earlier global downturns or financial crises. Third, EMDEs have now less policy room to face a global downturn than they had before the 2009 global recession. Irrespective of the timing of the next global downturn, the big lesson of the past decade for EMDEs is clear: since they are less well prepared today than prior to the 2009 episode, they urgently need to undertake cyclical and structural policy measures to be able to effectively confront the next downturn when it happens.

You can download the book here [PDF]. Its table of contents is below (each chapter individually downloadable). All charts featured in the book (with underlying data series) are also available below.

A Decade After the Global Recession: Lessons and Challenges for Emerging and Developing Economies [PDF]

Edited by M. Ayhan Kose and Franziska Ohnsorge

Part IV: Implications for the World Bank Group

Chapter 8: The Role of the World Bank Group [PDF]

Excel Charts

Complete archive [ZIP]

Chapter 1 [XLSX]
Chapter 2 [XLSX]
Chapter 3 [XLSX]
Chapter 4 [XLSX]
Chapter 5 [XLSX]
Chapter 6 [XLSX] Box [XLSX]
Chapter 7 [XLSX]
Chapter 8 [XLSX]

PS: This study follows on the World Bank Group’s recent book on Inflation in Emerging and Developing Economies. For their main periodical products, please visit: Global Economic Prospects and Commodity Markets Outlook. For their full menu of monitoring publications, please visit: World Bank Economic Monitoring. For their analytical work on topical policy issues, please visit Prospects Group Policy Research Working Papers.