Since World War II, economic globalization has been far‐reaching and intensive. The value of world trade has increased more than a thousand‐fold, growing considerably faster than the overall economy. Foreign investment has soared far beyond earlier levels, as companies have established plants in other countries and investors have added foreign stocks to their portfolios. Corporations with global reach have become dominant in many economic sectors, from oil to computers, from automobiles to retail. The financial world has also grown smaller, as new technologies have enabled traders to track information globally and to shift assets instantaneously. While cross‐border transactions are by no means friction‐free, barriers of all sorts, especially tariffs on goods and services, have come down. In contrast with the initial decades after World War II, when many countries still pursued inwardly oriented growth strategies, almost all parts of the world are highly integrated into a single world economy in which several “developing” countries, notably the “BRIC” group of Brazil, Russia, India, and China, now play a much more significant role.
In this more integrated system, events in one place can quickly ripple through the rest of the world, as was dramatically demonstrated in the global economic crisis that hammered the world economy starting in 2007. The initial blow was the bursting of the unsustainable price bubble in the US housing market, which had ballooned during years of low interest rates, careless lending by banks and other financial institutions, and carefree borrowing by consumers who blithely assumed that housing prices would rise forever. The bursting of the bubble sent shock waves through the world economy as financial institutions suddenly found themselves facing a severe liquidity crunch. What made the shock waves all the more damaging was the fact that housing prices had also ballooned in many other countries, rendering their financial systems highly vulnerable to a credit squeeze.
During 2008, the crisis became a calamity. Banks began to fail, lending was sparse, and markets for many sorts of exotic financial instruments – collateralized debt obligations, credit‐default swaps, and other privately traded derivatives often created to avoid the scrutiny of regulators – became so constricted that valuations could not be determined for tens of trillions of US dollars’ worth of investment vehicles. The viability of even the oldest and most respected financial institutions became suspect. As losses mounted and capital markets stalled, US Treasury and banking officials brokered the sale at deeply discounted prices of several high‐profile companies, among them the largest US mortgage lender, Countrywide Financial (in January, to Bank of America), and the prominent investment bank Bear Stearns (in March, to JP Morgan). But when officials refused to rescue another prominent investment bank, Lehman Brothers, in September 2008, the entire global financial system suffered a major seizure. Global credit markets virtually froze as the trust that is essential to the financial system evaporated almost overnight. The damage was worldwide and severe; hardest hit were small countries with heavily leveraged banks, such as Ireland and, particularly, Iceland, all of whose banks went under. Iceland’s financial collapse led to the first International Monetary Fund bail‐out of a developed country’s economy since a loan package to Britain in 1976.
The crisis provoked a rapid response of unprecedented proportions by governments, which stepped in with stupendous amounts of capital, credit, and credit guarantees for the ailing financial institutions, in some cases taking direct ownership of them. In Britain, China, France, Germany, India, Japan, Sweden, Switzerland, Taiwan, and many other countries, governments cut interest rates, bailed out banks, flooded capital markets with low‐interest loans, launched enormous economic stimulus packages, and expanded compensation to deal with rapidly rising unemployment. The lessons of the worst previous global economic crisis, the Great Depression of the 1930s, clearly had not been lost on public officials: When credit markets dry up and panic hits the stock markets (most of the world’s stock markets fell by more than half during the crisis), only states have the resources, authority, and credibility to take effective action that can restore investor, employer, and consumer confidence. Yet state support is not magical; it could not prevent steep declines in global capital investment, trade, and overall economic output that, even by 2019, had not yet recovered fully in many places. Such support also came at a price. Many governments that incurred large debts found their access to credit restricted, triggering further crisis intervention, especially in Europe, and a negative reaction in global markets – yet further confirmation of global economic integration.
The Great Recession hit only seven years after another spectacular boom‐and‐bust, the “dot.com” mania (investment in internet companies) that imploded in March 2000. That bust came on the heels of yet another implosion, the 1997 crisis that plunged many Asian countries (especially Thailand, Malaysia, the Philippines, Indonesia, Taiwan, South Korea, and Singapore) into recession and eventually hurt economies as far away as Brazil and Russia. All of these economic downturns demonstrate the highly interdependent nature of the world economy: flows of raw materials, finished goods, services, and capital itself are now organized in global markets that are integrated far more tightly than ever before, and the volumes of these flows are many orders of magnitude greater than they were in the “take‐off” period of globalization in the second half of the nineteenth century.
These upheavals in the world economy reveal the reality and the danger of globalization. They also obscure the fact that, in the decades prior to the Asian crisis, economic globalization had been generally welcomed. Business leaders, economists, and politicians cheered as world trade grew faster than world GDP, foreign direct investment grew faster than domestic investment, and the volume of international currency transactions increased exponentially. Many formerly marginal “Third World” countries became growing, exporting tigers, particularly in Asia. The production of goods once monopolized by the industrialized West spread across the globe, linking companies, workers, and whole countries in transnational “commodity chains.” Not only did economic exchange intensify, but also it was increasingly managed by international organizations, such as the General Agreement on Tariffs and Trade (GATT) and its successor, the World Trade Organization, that promulgated global rules, and the International Monetary Fund (IMF), which sought to maintain stability in the global financial system. Economic integration had become a hallmark of globalization, deliberately promoted by governments, corporations, and international organizations alike.
At the same time, skeptical voices began to challenge the prevailing view of globalization’s beneficial effects. Like Immanuel Wallerstein in Part II, scholars question the uniqueness of the late twentieth century. The sixteenth and the nineteenth centuries, they argue, already witnessed dramatic integration that set the stage for all subsequent developments. Financial markets may operate differently due to new computer technology, and the geopolitical context may be different due to the demise of the Soviet Union, but these are not qualitative changes. Other skeptics, by contrast, argue not that capitalism has always been global but that it is not yet fully globalized. For example, they suggest that the real roots of economic crises, such as the recent Great Recession and the Asian “contagion” of the 1990s, lay in bad domestic policies. International markets can exploit and aggravate poor policies and practices, but they are not the primary cause of a contagious crisis. The involvement of countries in the world economy varies greatly in any case. While some small economies, such as the Netherlands, are highly dependent on exports, for large countries, especially the United States, imports and exports still represent only a relatively small portion of total GDP. For these skeptics, the whole notion of integration is misleading, since the core of the world economy is only perhaps 30 of the world’s 200 countries – Western Europe and North America, and several countries of Pacific Asia, which account for the vast bulk of world capital and nearly all of the largest multinational corporations. Globalization, from this perspective, amounts to only modestly more intense ties among countries, corporations, and consumers in the industrialized democracies.
We think the skeptics make some good empirical points but underestimate the significance of recent qualitative changes. Our purpose, however, is not to settle these debates. Instead, we present illustrations of integration with a focus especially on China, an analysis of different measures of global inequality, and a trenchant look at the poorest segment of the world’s population. These are followed by two largely complementary analyses of the causes of the Great Recession. This part concludes with a provocative assessment of economic globalization by an influential economist.
The first selection by American journalist James Fallows highlights the most striking change in the world economy of the past three decades – the extraordinarily rapid expansion of China’s economy, which has grown about 10 percent a year during that period. Fallows takes us inside the factories and corporate offices of the area of Shenzhen, north of Hong Kong, one of the vital centers of the new China that has emerged. He recounts the great progress China has made in lifting many of its people out of poverty while noting that this upward swing has entailed arduous working conditions and heavy worker subordination in many sectors of the economy. He also finds reason to believe that, so far, China’s rise has been largely beneficial for Western countries, though continued Chinese expansion could eventually pose a serious challenge to the West.
Next, Miguel Korzeniewicz, an American sociologist, demonstrates how global production actually works in one highly visible sector. The Nike Corporation relied on Asian production and American marketing from the outset, but production in Asia diversified as Korean producers began to manage sites in Vietnam and Indonesia. The Nike commodity chain thus pulled in cheaper workers in new countries while most profits still flowed to corporate owners in the West. Since the 1990s, this disparity has motivated various groups to protest the treatment of Asian workers producing Nike shoes.
China’s huge and rapidly growing economy has led many to predict that China will replace the USA as the dominant economic power of the twenty‐first century, but our selection from British magazine The Economist urges caution about such a prediction. Although the USA’s shares of world industrial production and trade have certainly declined, The Economist argues that the country still enjoys numerous advantages in the world economy and its centrality is likely to endure, especially in technology and finance. The road ahead is likely to be bumpy, however.
That more people and organizations are becoming better connected through buying similar products, engaging in trade, or following common economic rules is not in doubt. There is less agreement on the consequences of economic globalization. Does it lessen poverty? Could it aggravate inequality? These are the questions that Branko Milanovic, a World Bank economist, addresses in the next selection. Milanovic shows that different concepts of inequality – as an average across countries, as a country average weighted by population, and as a measure of inequality across individuals – yield different answers to these questions. Averaged across countries, inequality has declined dramatically since 1950. But weighted by population, inequality across countries rose just as dramatically at the same time, though it has declined modestly since 2000. When inequality among all the world’s individuals is considered, the situation is bleakest: this measure indicates greater inequality than either of the country‐based concepts and it has changed little since 1990. The richest 8 percent of the world’s people garner 50 percent of the world’s income, a higher proportion than for any individual country in the world.
A central concern of global development aid organizations since the 1990s is the poorest of the world’s poor, the “Bottom Billion.” Paul Collier, a British economist and former World Bank official, explores four “traps” that make it extremely difficult for the poorest countries to climb out of poverty: the conflict trap, the natural resources trap, the dual trap of being landlocked and having bad neighbors, and the trap of bad governance. Some of the poorest countries are trapped in two or more ways, with the result that they are poorer now than they were in 1970. Collier points out that some countries have managed to escape the traps, and huge numbers of people have escaped poverty in China and India, but even a recent upsurge in economic growth in some of these countries has not improved the prospects of the bottom billion to any significant degree.
The next two selections, by Australian economist Malcolm Edey and Indian‐American economist Ashok Bardhan, analyze the genesis of the Great Recession that began in 2007. Edey offers a brief chronology of the events in 2007 and 2008 before discussing the complex set of circumstances that led to the crisis, which was sparked by the collapsing US housing market. Writing in April 2009, just after world stock markets reached their lowest point, Edey documents the severity of the ensuing economic contraction. Presciently, he predicts a gradual recovery, thanks in large part to the extraordinary actions by governments to flood the world economy with money and undertake massive deficit spending programs that averted a repeat of the Great Depression of the 1930s. This analysis is complemented by Bardhan’s more explicitly global perspective, in which “over‐financialization” and “over‐globalization” were the culprits. The former refers to the disproportionate growth of the global financial sector in recent decades and that sector’s increasing reliance on complex and poorly understood financial instruments. The latter entails too‐rapid foreign investment, export growth, and outsourcing in emerging market economies, especially China, which led to severe global imbalances in trade and consumption patterns. Bardhan observes that these problems have been reduced by the global crisis but suggests that inherent tensions in world society are making a permanently stable world economy unlikely.
Joseph E. Stiglitz, formerly chief economist at the World Bank, concludes this part with his argument that thus far economic globalization has been unjust, undemocratic, and disadvantageous to developing nations. Capital liberalization has created undue volatility, and trade liberalization has put large groups of workers at risk. He attributes the downside of globalization especially to the policies of international financial institutions, which he accuses of advocating “market fundamentalism,” that is, the neoliberalism decried by David Harvey in Part II. Stiglitz calls for a new global economic agenda and a new form of global governance.