covergence.docx - The Pre-Globalized World and...

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The Pre-Globalized World and Globalization’s First AccelerationIn the pre-globalization world, distance isolated people and production to such an extent that the world economy was little more than a patchwork of village-level economies. Things started to change when the cost of moving goods fell. Transport technologies improved in a process that fostered and was fostered by the Industrial Revolution.With easier international shipping, more people bought faraway goods. Middle-income Britisherscould, for example, afford to dine on bread baked with U.S. wheat while sipping tea brewed fromChinese leaves and sweetened with Jamaican sugar—all set on a tablecloth made of Indian cotton. Oxford economist Kevin O’Rourke and Harvard economist Jeff Williamson date the start of this process to 1820. I refer to this separation of production and consumption as globalization’s first unbundling.While shipping got cheaper, the costs of moving ideas and people fell much less. This unbalanced reduction of separation costs triggered a chain of causes and effects that eventually produced enormous income differences between today’s developed nations (called the “North” for short) and today’s developing nations (the “South”). First, markets expanded globally but industry clustered locally. As history would have it, industry clustered in the North. This Northern industrialization fostered Northern innovation, and since ideas were so costly to move, Northern innovations stayed in the North. The result was that modern, innovation-fueled growth took off sooner and faster in the North. In just a few decades, the resulting growth differences compounded into the colossal, North-South income asymmetries that define the planet’s economic landscape even today. In short, the Great Divergence was produced by the combinationof low trade costs and high communication costs.Globalization’s Second Acceleration (the Second Unbundling)Globalization accelerated again from around 1990, when the information and communication technology (ICT) revolution radically lowered the cost of moving ideas. This launched globalization’s next phase—call it the “second unbundling” since it involves the international separation of factories. Specifically, radically better communications made it possible to coordinate complex activities at distance. Once this sort of offshoring was feasible, the North-South wage gap that had arisen during the first unbundling made it profitable.The offshoring of production stages to low-wage nations changed globalization, but not just because it shifted jobs overseas. To ensure that the offshored stages meshed seamlessly with those left onshore, rich-nation firms sent their marketing, managerial, and technical know-how along with the production stages that had been moved offshore. As a consequence, the second unbundling—sometimes called the “global value chain revolution”—redrew the international boundaries of knowledge. The contours of industrial competitiveness are now increasingly

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