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Globalization myths: some historical reflections on integration, industrialization and growth

Discussion paper by Paul Bairoch and Richard Kozul-Wright, 1996

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This interesting discussion paper says that it has become popular to draw parallels between current trends in globalization and the half century of international economic integration before the First World War. This paper assesses this historical parallel. It accepts that many features of today's international economy are not unique. However, it is skeptical of efforts to make a direct parallel with the earlier period and questions whether this earlier period of globalization should be seen as one of rapid growth and convergence rather than as one of uneven economic development, during which a very small group of countries were able to reinforce their domestic growth efforts through links to the international economy. For other countries, these same links did little to alter long-term growth prospects, and in some cases even hindered them.



Paul Bairoch and
Richard Kozul-Wright

No. 113

March 1996

This paper was prepared for the WIDER Conference on Transnational Corporations and the Global
Economy, Kings College, Cambridge (UK), September 1995. The authors would like to acknowledge
the comments of Mica Panic, Paul Rayment, Rugerio Studart, Bob Rowthorn and Ha-Joon Chang on
earlier drafts of this paper.


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The opinions expressed in this paper are those of the authors and do not necessarily reflect the
views of UNCTAD. The designations and terminology employed are also those of the authors.

UNCTAD Discussion Papers are read anonymously by at least one referee, whose comments
are taken into account before publication.

Comments on this paper are invited and should be addressed to the authors, c/o Editorial
Assistant, Editorial Board, Office E-9013, United Nations Conference on Trade and Development
(UNCTAD), Palais des Nations, 1211 Geneva 10, Switzerland. Copies of the UNCTAD Review,
Discussion Papers and Reprint Series may also be obtained from this address (Tel. No. 022-907.5733,
Fax No. 022-907.0043).

JEL classification: N100 and O190.

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Chapter Page



BEFORE 1914 5


BEFORE 1913 18



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* Respectively, University of Geneva and UNCTAD, Geneva. The co-authoring of this paper has to a large extent
followed Adam Smith's longstanding advice on the b nefi s of specialization. The empirical work for this paper draws heavily
on the cumulative research of Paul Bairoch. The storyline was, largely, the responsibility of Richard Kozul-Wright.



Paul Bairoch and Richard Kozul-Wright*

It has become popular to draw a parallel between current globalization trends and the half
century of international economic integration before the First World War. Indeed, some writers
suggest that current trends mark a return to this earlier period, from which they draw strong
conclusions about growth prospects and convergence associated with globalization. This
paper assesses this historical parallel. It accepts that many features of today's international
economy are not unique. However, it is sceptical of efforts to make a direct parallel with the
earlier period. In particular, the paper shows that the period before 1913 was not one of trade
liberalization, nor one of reduced expectations about the role of the State, and suggests that
rapid industrial growth in some economies cannot be explained by globalization pressures.
More generally, a description of this earlier period of globalization as one of rapid growth and
convergence is questioned, and instead associated with uneven economic development, during
which a very small group of countries were able to reinforce their domestic growth efforts
through links to the international economy, while for others these same links did little to alter
long-term growth prospects, and in some cases even hindered them.


The "short twentieth century" has ended unexpectedly (Hobsbawm, 1994a). The economic shocks

of the late 1960s and early 1970s not only brought to an abrupt halt three decades of unprecedented

economic growth and stability, they also weakened many of the institutional structures which had come

to define the century's evolution. The subsequent emergence of a neoliberal agenda in the leading

industrial countries, reinforced by the fall of communism, made the removal of these same structures

a condition ofeconomic recovery and simultaneously identified a series of powerful economic forces

pushing towards a new international ec omic order where national boundaries, State structures and

domestic economic policies are of ever diminishing importance. Open markets, transnational

corporations and new information technologies have, on this account, become the new forces for

economic growth anddevelopment in a truly global economy. Through various channels these same

forces have had a profound influence on the policies pursued by many developing countries (Chang and

Rowthorn, 1995). Globalization entered the political and academic vocabulary, in part, to describe the

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speed and intensity of these changes. But it was also intended to suggest that the late 20th century was

entering a distinct and unchartered era of economic development.

However, the idea that global economic integration describes a wholly new stage of world

development has not received universal acceptance. Some economic historians from the Annales School

and elsewhere have described the emergence of a world economy beginning in the 15th century. More

recently the period in the half century before the First World War has become a favourite historical

vantage point from which to survey current trends in the world economy and its future prospects; those

more on the left to highlight the eternal contradictions of capitalism, those on the right to make the case

that growth and market openness are irrevocably linked. This paper addresses the historical parallel

between the contemporary era and the pre-First World War period. However, our approach is

unconventional. One of the authors of this paper has elsewhere noted the extent to which economic

history has become the source of "myths" for contemporary economic theorists and policy makers

(Bairoch, 1993) and this theme underpins the arguments developed in this paper. Indeed, because many

of these myths have obscured the real dynamics of international economic relations, we believe the

paramount challenge for economic historians looking at globalization is to distinguish myths and


We begin with some general remarks aimed at identifying a strong globalization thesis around

which a number of economic myths have emerged. The second part looks at the internationalization of

production and financial activities between 1870 and 1913 with the aim of distinguishing the myths from

the reality of an emerging international division of labour. The third part is concerned with whether the

way in which national economies became part of the new international division of labour mattered to

their growth and development prospects. This involves sifting through some of the myths that have

emerged around late industrialization. The final part asks whether the combination of forces associated

with international integration and industrialization in the late 19th century produced the kind of

development paths expected from globalization in the late 20th century. This leads us to examine the

myths surrounding economic growth before the First World War.


Globalization ideas can claim an impressive intellectual ancestry, including Adam Smith, Marx

and John Stuart Mill, Hecksher and Ohlin, John Maynard Keynes and Lenin, to name only the most

distinguished. Perhaps not surprisingly given this diverse list of thinkers, beyond a broad agreement that

economic activity has a tendency to expand beyond its initial national setting, connecting a growing

number of more widely dispersed economic locations, most contemporary observers have differed in

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1 To mention just one of the difficulties of discussing globalization in the absence of an adequate theoretical analysis of the
firm, most of the recent analysis of the expanding role of transnational corporations has ignored profit (and rent) seeking in shaping
global dynamics (Kozul-Wright, 1995a), which in turn can be linked to the absence of an adequate theory of FDI in most of the
globalization literature (Akyüz, 1995).

their description of the globalization process, and have failed to construct a consistent theoretical

explanation of what is driving it and where it might be going. In part, this struggle to construct a

coherent framework reflects terminological confusion over the closely related but nevertheless distinct

concepts of openness, integration and interdependence (Panic, 1995). In part, it reflects, theoretical

problems in linking trade, capital flows and foreign direct investment (FDI) (Akyüz, 1995). But this also

reflects important differences over whether economic integration isdomin ted by forces which make

for a smooth and continuous process, or for a discontinuous and conflictual one. This paper seeks to

tackle some of these issues from an historical perspective. However, it is necessary to begin with some

more general observations on the current globalization literature.

In the first place, inadequate consideration has been given in much of this literature to the fact that

globalization identifies both a process in which the production and financial structures of countries are

becoming interlinked by an increasing number of cross-border transactions to create an international

division of labour in which national wealth creation comes, increasingly, to depend on economic agents

in other countries, and the ultimate stage of economic integration wher such dependence has reached

its spatial limit. However, what this global economy actually looks like has not received the attention

that it merits (Gordon, 1988). Strictly speaking a truly global economy is one dominated by transnational

firms and financial institutions, operating in world markets independently of national boundaries,

national political objectives and domestic economic constraints (Bryant, 1980, pp. 140-42). Defined in

this way, the spread of market relations describes only one part of the globalization process, and,

arguably, not the most important one. Rather, capital mobility, because of its potential to connect

markets and production in a more direct, more complex and much deeper manner than other cross-

border flows, emerges as a more significant influence on global economic integration.

However, introducing capital mobility is far from satisfactory for analysing globalization.

Economists have never been very comfortable with the concept of capital and while it does imply a more

direct focus on the firm as the vehicle for globalization, the concept of the firm has itself had a somewhat

shadowy existence in economic discourse.1 Ind ed, there is a dilemma running across much of the

globalization literature between resting the analysis on the logic of the market - which hinges on price

coordination - and the logic of the firm - which is based on the failure of such coordination. Still,

making capital mobility the entry point into a discussion of gobalization is useful

in highlighting the distinction between production (trade and investment) and financial activities in the

integration process.

Another theme running across much of the recent globalization literature suggests that the

combined pressure of capital mobility, technological progress and heightened market competition

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2 See Henderson, 1992; Cable, 1995; World Bank, 1995; Krugman, 1995. There have been two established approaches
among historians to this earlier epoch, both of which have influenced current thinking. The first, which might be dubbed
"Keynesian" because one of its earliest and most eloquent statements can be found in the Economic Consequences of the Peace,
looks back at this period from the perspective of the instability of the inter-war years. A second more "institutional" perspective
has long been aware of the pace of economic integration before the First World War in association with the workings of the
international gold standard.

describes an irreversible force beyond the influence of domestic policy makers. With the introduction

of this policy context, globalization is often used as a synonym for greater openness and closely linked

to the liberalization of domestic and foreign transactions. Thus behind the basic disagreement as to

whether globalization will lead to immiserization and economic crisis or to faster economic growth and

convergence, there is a widely shared assumption that the role of the State in managing economic activity

has already diminished under globalization pressures and will become irrelevant in the truly global


All these themes have received further elaboration with the recognition among economists that

global integration is not a new feature of the world economy and that the half century leading up to the

First World War might hold some useful lessons for understanding the current wave of globalization.2

A renewed, if somewhat belated, interest in this earlier period is broadly welcome. However, the

historical parallel has given rise to a distinct perspective, which has gained increasing acceptance among

policy makers and academics, seeing in the current period a return to the earlier period of globalization:

Then as now, capital transactions were relatively free and capital flows were dominated by

securities markets. Hence, the current regime can be seen as a return to the liberal international order

that existed before 1914 after a long diversion brought about by the disruptions of two world wars (IMF,

1994, p. 129).

In an important article in the recent 25th anniversary edition of the Brookings Papers, Jeffrey

Sachs and Andrew Warner have provided an extended defence of this argument. Their discussion of

the period 1870-1913 can be synthesized into four stylized facts, which will serve as the basis for our

discussion of globalization myths (Sachs and Warner, 1995, pp. 5-11). First, from the 1860s onwards,

low tariff barriers and technological breakthroughs in long-distance transportation and communications

stimulated export growth and rising trade shares. Differences in resource endowments ensured that this

trade had a strong North-South dimension as developing countries in Latin America, much of Asia and

parts of Africa specialized in raw material exports and imported manufactured goods. Second, the

adoption of appropriate legal institutions in a number of countries along with the spread of the gold

standard, convertible currencies and the assumption of financial leadership by Great Britain stimulated

large and relatively stable international capital flows. Because these capital flows were driven by the

search for higher profit opportunities in emerging growth markets they strongly complemented trade

flows. Third, the spread of capitalist institutions and free trade and capital flows generated a new growth

momentum encompassing the whole world economy. Industrialization spread rapidly beyond the core

North Atlantic economies to include the emerging markets of Continental Europe and Japan. But the

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3 Angus Maddison (1989) estimates that the annual growth of trade was slightly higher (3.9 per cent) and output growth
slightly lower (2.5 per cent).

period also saw the take-off of many developing regions, including the raw material exporters in Latin

America, Asia and Africa. Moreover, this was a period of convergence as poorer economies grew faster

than the richer economies in large part thanks to rapid export growth. Fourthly, the end of this global

age of integration was sudden, unexpected and the result of exogenous political and military shocks.

As a result of the first World war, socialist revolution and a new statist zeitgeist the global capitalist

system was laid waste for over half a century.

Sachs and Warner (1995) make a direct parallel between these features of 19th century

globalization and developments in the late 20th century anticipating similar results in terms of broad

economic trends in the world economy:

The world economy at the end of the 20th century looks much like the world economy at the end

of the 19th century. A global capitalist system is taking shape, drawing almost all regions of the world

into arrangements of open trade and harmonized institutions. As in the 19th century, this new round of

globalization promises to lead to economic convergence for the countries that join the system (Sachs and

Warner, 1995, p. 61).

Moreover, like the previous globalization period, Sachs and Warner argue that this promise of a

global capitalist system in terms of growth and convergence will depend upon appropriate policy

choices. In particular, all governments but particularly those in the developing world must commit

themselves to a rapid and comprehensive agenda of liberalization in areas of trade, capital flows and

foreign direct investment. Much of their paper attempts to substantiate this tro g globalization thesis

for the contemporary period. But is the parallel with the process of global economic integration before

the First World War an accurate one and does it support their policy advice?


The period 1870-1913 certainly witnessed a rapid expansion in international trade. The growth

of trade averaged 3.5 per cent per annum during this period compared with output growth of 2.7 per cent

(Mitchie and Kitson, 1995, table 1.1).3 As a result, the share of trade in output (or openness) rose

steadily reaching a highpoint in 1913 which was not surpassed until the 1970s (table 1). There was, of

course, considerable country variation around this trend, with a group of smaller "super-trading

economies", such as Belgium, the Netherlands and Switzerland, having a much higher degree of

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4 This small group of exported-oriented newly industrializing economies, has some parallels with today's newly industrializing
economies, particularly in East Asia.

openness than larger European economies, such as France and Italy.4 There was also variation among

countries in their peaks of openness; the United States (and Canada) reached its peak around 1900,

falling back slightly in the yearsb fore the First World War, while Japan did not reach its peak until

1929 -a peak it has still not surpassed. This variation across countries and over time already points to

inconsistencies in the idea of a continuous and common process of trade-led integration during this


Table 1
Merchandise exports as a percentage of GDP, 1870-1992

(Three year annual average, except for 1950)


United States Western Europe Japan

1870 ... 5.4 13.6 ...

1890 11.7 6.7 14.9 5.1

1913 12.9 6.4 18.3 12.5

1929 9.8 5.0 14.5 13.6

1938 6.2 3.7 7.1 13.0

1950 7.8 3.8 13.4 6.8

1970 10.2 4.0 17.4 9.7

1992 14.3 7.5 21.7 8.8

Source: Bairoch (1996a), tables 1 and 4, with additional data for 1870.
a For reasons of statistical consistency, the Western developed countries include the following regions and countries:

all Western Europe excluding Yugoslavia, the United States and Canada, Australia, New Zealand and Japan.

Although trade was clearly an important feature of the late 19th century world economy, some

of the most striking myths - which have been revived in the contemporary discussion of globalization

-concern the forces driving international trade. Of these, undoubtedly the most prominent and persistent

is the idea that this was an era of trade liberalization.

In the first half of the 19th century free trade, both in theory and in practice, was a British

preoccupation. Declining trade barriers did become a more general trend beginning around 1860 with

the Anglo-French trade treaty, followed by treaties between France and many other countries, which led

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5 It should be noted that for the smaller and more open economies average tariff figures hide the fact that specific industries
received much higher protection.

to tariff disarmament in Continental Europe, mostly as a result of the inclusion of a most-favoured-

nation clause (Kenwood and Lougheed, 1994, pp. 64-66). However, this interlude lasted less than two

decades and was confined to Europe (Bairoch, 1989). Coinciding with the start of European

liberalization, and accelerating after the North's victory in the Civil War, the United States economy

began its period of import substitution industrialization behind risingtariff barriers; the tariff in force

from 1866 to 1883 provided for import duties averaging 45 per cent for manufactured goods (the lowest

rates of duty were about 25 per cent and the highest about 60 per cent). Given the growing weight of

the United States economy in the world economy during the forty years before the First World War,

excluding its experience from the lessons of global integration is a rather significant oversight which has

helped perpetuate the mistaken notion of an "Anglo Saxon" model of capitalist development (Kozul-

Wright, 1995b).

During the three decades up to the First World War rising protection was the common trend in

the developed world, largely as a result - in Continental Europe at least - of a coalition between agrarian

interests and the representatives of fledgling industry who found common ground in higher tariffs as

a response to the inflow of cheap grain from the United States and Russia and the long depression of

1870s (Hobsbawm, 1994b, pp. 38-40). Although tariffs rose only gradually up to the early 1890s,

because most new duties were based on specific quantities and were not d valorem, and because this

was a period of falling prices, the significance of tariff pr tection was greater than the nominal figure

might otherwise suggest. From the early 1890s protectionism became a much more pronounced trend

and by 1913 all the large countries had adopted a protective stance (table 2).5 Even som of the smaller

European economies, such as Sweden, made a decisive move in this direction. And after regaining its

autonomy over tariff policy in the late 1890s, Japan also sought tariff protection for its infant industries.

If by 1913 trade policy in the developed world is best described as islands of liberalism

surrounded by a sea of protectionism, the developing world might best be characterized as an ocean of

liberalism with islands of protectionism. In many cases, openness to trade was the direct result of

colonial rule, where the general principle consisted of free access to all the products of the colonial

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6 Although non-tariff barriers did play a role, particularly in the British colonies but also other cases.

Table 2
Incidence of protection, 1875 and 1913

Average levels of duties on
manufactured goods

All products

1875 1913 1913

Austria-Hungary 15-20 18-20 18-23

Belgium 9-10 9 6-14

Denmark 15-20 14 9

France 12-15 20-21 18-24

Germany 4-6 13 12-17

Italy 8-10 18-20 17-25

Russia 15-20 84 73

Spain 15-20 34-41 37

Sweden 3-5 20-25 16-28

Switzerland 4-6 8-9 7-11

Netherlands 3-5 4 3

The United Kingdom 0 0 0

The United States 40-50 44a 33b

Source: Bairoch (1993), tables 2.2, 2.3 and 3.2; and Bairoch (1989), pp. 144.
a After 9 October 1913, 25 per cent.
b After 9 October 1913, 16 per cent.

power.6 However, the fact that tariffs had played an important role in the rejection by the United States

of British rule was an important factor in Britain's early decision to grant a large measure of tariff

independence to what were later to become the self-governing colonies (Canada, Australia and New

Zealand). While all these countries, but particularly Canada, used this indep ndence to protect infant

industry they all retained preferences for British goods. In the nominally independent States of Latin

America and East Asia, Western pressure had imposed on most of them treaties (mainly with Britain)

in the first half of the 19th century which entailed the elimination of customs and duties. Generally, it

was the "5 per cent rule" that applied, that is, a tariff regulation under which no duty could rise above

5 per cent of the import value of the goods. All these treaties opened up markets to British and European

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7 The first Brazilian tariff of 1879 was the result of a trade mission to Europe to study trade liberalization, which came back
converted to infant-industry protection (Bandeira de Mello, 1935).

manufactured goods. However, between 1870-90 a number of Latin American countries, notably Brazil,

turned to more protectionist policies as a means to promote industrialization.7

If the idea that liberalization was an important driving force behind rising trade between 1870 and

1913 is largely a myth, is it still the case that resource endowments were the key to trade flows and that

the geographical composition of trade during this period, to a large extent, was dominated by a North-

South pattern? Perhaps the first thing to note is the degree of stability in trade shares throughout this

period. World trade was dominated by intra-European trade and Europe's trade with overseas areas;

Europe accounted for 66.9 per cent of total trade at the beginning of this period and 62 per cent in 1913

with a corresponding small rise in the North American share (Kenwood and Lougheed, 1994, p. 80-81).

Still, the fact that trade in primary commodities continued to dominate world trade and actually grew

slightly faster than trade in manufacturing goods over this period might suggest that North-South trade

dominated; the share of primary products in world trade peaked in the late 1890s when it accounted for

68 per cent before falling back slightly to 62.5 per cent in 1913 (Kenwood and Lougheed, 1994, p. 83).

Moreover, if the United Kingdom - the leading trading nation throughout this period - is taken as

exemplar, then the dominance of North-South trade would indeed appear to be an appropriate

description (Krugman, 1995); the United Kingdom exported manufactures to and imported primary

commodities from the developing world. But as table 3 shows, the United Kingdom was in important

respects, the exception rather than the rule. Other countries in the North traded much more intensively

with each other, including in manufactured goods; exports of manufactures to other industrial economies

as a share of total manufacturing exports was less than one-third in the United Kingdom in 1913 but any

where from one half to two-thirds in the other industrializing economies. Thus, i 1913 close to forty

per cent of total world trade was taking place between European economies, and broadening the

perspective to all industrial economies the figure was around 60 per cent (Maizels, 1963) Much of this

intra-North trade was, of course, trade in primary products. However, it is important to remember that

many of the leading primary producers at this time were not low income economies and it would seem

that international trade in the period before the First World War was, to a large extent, connecting the

richest parts of the world economy.

The discovery of intra-industry trade in the post-second World War period has often been taken

as an indication of a major change in the international division of labour. In fact industrial

interdependence has been rising since the mid 19th century. Already by 1899 manufacturing trade was

dominated by trade among industrial countries, accounting for 54 per cent of world trade in

manufactures, and although the growth of this intra-North trade was slightly slower than exports to the

rest of the world between 1899-1913 - an annual rate of 3.7 compared to 4.1 per cent - this was

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Table 3
Commodity and geographical composition of exports, 1913

(Percentage shares)

Share of
world exports

Trade with
the North

Exports of
manufactures as

share of total

Exports to other

economies as share
of total


United Kingdom 22.8 37.9 76.6 31.8

France 12.1 68.2 57.9 63.8

Germany 21.4 53.4 71.7 53.5

Other Western

15.0 70.3 49.4 62

United States 22.1 74.5 34.1 63.2

Source: Maizels (1963), table A1 and A3.

still the case in 1913 (Maizels, 1963, p. 89). Although there is little direct evidence, it seems unlikely that

intra-industry trade was absent from 19th century globalization (Rayment, 1983). It is also almost

certainly the case that, in light of the large stock of foreign direct investment (FDI) accumulated during

this period, much of the trade was intra-firm trade (Wilkins, 1995). All this goes a long way to suggest

that confining the pressures behindinter ational trade in this earlier period to a given distribution of

resource endowments hides a more complex and more dynamic process.

Although absent from Sachs and Warner's account of late 19th century globalization, the

introduction of intra-firm and intra-industry trade reminds us that the internationalization of production

was an important feature of developments in the world economy. It is thus a myth that international

production is a distinct feature of the current period of globalization. Foreign direct investment was

growing rapidly during this earlier period, accounting for as much as one-third of overseas investment.

Indeed, our own estimate suggests that the stock of FDI reached over 9 per cent of world output in 1913,

a figure which had not been surpassed in the early 1990s.

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8 By contrast, in the most recent period of globalization, the extension of international production has been in services, where
FDI acts to compensate for the non-tradeable nature of many of the products of this sector (see Petit, 1995).

Much of the FDI in this period was seeking natural resources in developing countries, in which

respect i was a stimulus to trade.8 Perhaps a little over a half of FDI went directly to the primary sector

during this period (Dunning, 1984, p. 89). However, it would be misleading to restrict the discussion

of the role of transnational corporations (TNCs) to developments in this sector. In some important host

countries, uch as Argentina and Brazil, there was considerable FDI in railways and utilities - although

in many cases this was related to FDI in the primary sector - and in other countries, including Russia,

which was the second largest host in this period behind the United States, there was considerable FDI

into manufacturing, including chemicals, metal fabricating, textiles and metal refining. Outward FDI

from Germany and France went into manufacturing in other European countries, especially Russia, and

United States investments in Canada were also in manufacturing. It seems likely that the growing role

of FDI in this sector was as a substitute for trade in response to rising tariff barriers (Kenwood and

Lougheed, 1994, p. 35).

During this era of global integration, there is little doubting that TNCs were having an impact on

economic integration and development. Moreover, the close links between trade and FDI whether as

complementary aspects of an integrated division of labour organized within the firm or as an alternative

means of gaining market access, suggest that the pressures shaping international production were often

of a dynamic nature closely related to the growth of large firms whose expansion abroad aimed to

strengthen profit opportunities in an increasingly competitive environment.

Although the importance of FDI in 19th century globalization has often been ignored or

downplayed, the role of international finance has received extensive discussion. Like the current period,

this emphasis reflects the real dominance of finance in the globalization process; between 1870-1913, the

growth of foreign portfolio investment exceeded the growth of trade, FDI and output. By 1913, the

volume of international capital flows had reached 5 per cent of the GNP of the capital exporting

countries (Bairoch, 1976, p. 99), and the available evidence points to considerable integration of

international financial markets (Zevin, 1988). Western Europe was the major source of supply of foreign

capital throughout this period. In 1874, the combined total of Britain, Germany and France amounted

to some $6 billion. By 1914 this figure had risen to $33 billion out of a total of $44 billion. Among these

leading financial powers, Britain was, unquestionably, the single largest overseas investor during this

period; between 1870 and 1914 the average annual outflow of capital was around 4 per cent of national

income, and actually reached a staggering 9 per cent at the end of this period.

But like many of the myths surrounding international trade, those surrounding international

finance stem from an excessive focus on Britain's role in the world economy. It is undoubtedly true that

the gold standard made possible increased capital flows and that the role of sterling and the dense

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network of institutions which made up the London capital markets were of paramount importance to

the efficient workings of this international monetary system. However, then, as today, the links between

finance and economic development were complex. According to conventional wisdom, a fully

globalized capital market should sever the links between national savings and investment, and reallocate

global savings from the capital-rich to the capital-scarce countries, strengthening the development

prospects ofpoorer countries. It was certainly the case that between 1870 and 1914 the share of British

foreign investments going to Europe and the United States halved, from 52 per cent to 26 per cent of the

total, while the share of Latin America and the British Dominions rose from 23 per cent to 55 per cent

of the total (Kenwood and Lougheed, 1994, p. 30). However, taking the world as a whole, while half

of all lending went to Asia, Latin America and Oceania-Africa, half went to other advanced countries,

and one-quarter was to North America alone, by then the wealthiest region of the world economy (table

4). Moreover, the large capital flows to Latin America were very unevenly distributed, the majority

directed to the wealthiest parts of the continent; during the 1880s just two nations - Argentina and

Uruguay - were responsible for over 60 per cent (in value terms) of all loans negotiated in the region

(Marichal, 1989, p. 127).

Table 4
Main international lenders and borrowers: 1913

(Percentage of total)

Lenders Borrowers



FDI Region Total



Britain 41 45.5 Europe 27 17.7

France 20 12.2 Latin America 19 32.7

Germany 13 10.5 North America 24 16


8 18.5 Asia 14 20.9

Others 18 13.3 Africa-Oceania 16 12.6

Source: Kregel (1994), p. 23; Dunning (1984).

Another myth is that capital flows were dominated by the market sentiment of private investors

during this period. It certainly not the case that, as suggested in the earlier quote from the IMF, securities

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markets were dominant. Ra her bond issues dominated other debt instruments (notably equities) and

the floatation of new issues dominated trading of second-hand debt. Although a fairly significant

proportion of these flows did bring together developing country issuers of long-term liabilities with

private individuals and financial institutions in developed countries seeking long-term investments

(Kregel, 1994), the bulk of foreign lending went into railways, utilities and public works and one of the

most important features of the international capital market at this time was the influence of government

borrowing; according to Bloomfield (1968, p. 4), in 1914 as much as 70 per cent of outstanding British

and French long-term foreign investments consisted of government and railway bonds.

Finally, it is worth emphasising that not all countries actually adhered to the gold standard

throughout this period. The majority of (independent) countries were late arrivals, maintained a rather

lose allegiance or never joined (Panic, 1992, pp. 32-33). Moreover, those countries which did remain

committed to the gold standard were not subject to autonomous pressures whereby employment and

income were automatically reduced in order to eliminate deficits on their current account balances

(Panic, 1992, ch. 3), thereby sacrificing short-term economic welfare for the financial discipline

necessary for long-term stability and growth.

The discussion of globalization before the First World War appears to be a collection of myths

and realities. Undoubtedly, international production and financial activities were evolving rapidly. But

their development was very uneven both geographically and by sector. In particular, international capital

flows, like international trade flows, during this period were highly concentrated, with a very high

proportion absorbed by those countries which were already the wealthiest and most dynamic in the

world economy. At the same time, the most dynamic sector in the world economy, industry, was the

least globalized. Moreover, the idea that national States were impotent in the face of international

pressures paints a particularly misleading picture of developments during this period.

Before linking the trends in international production and finance to other aspects of economic

development before the First World War, it is worth making a brief comparison with the inter-war

period, a comparison which has been a source of a number ofglobalizati n myths. Contrary to much

conventional wisdom, the inter-war period was not one of stagnation but contained spurts of rapid

growth. Indeed, the 1920s grew considerably faster than any previous decade, and taking a longer

perspective there was, in fact, very little difference in the annual growth rate in the globalization era and

the period 1913-1950 (see chapter IV below). It is also a myth that globalization tendencies were absent

from the inter-war period. Although the average annual growth of trade in the 1920s was slower than

in the previous epoch it was actually faster than in the period 1870-1890 and trade grew very rapidly

between 1924-1929. Indeed, by 1929 the share of trade in world output was close to its 1913 level, and

actually peaked in some countries, most notably Japan. Also between 1914 and 1938, the stock of FDI

rose significantly, almost doubling from $14.3 billion to $26.4 billion. There was particularly rapid

- 14 -

9 Deindustrialization s the source of a number of contemporary globalization myths. On the one hand, a post-industrial
society thesis has fused with globalization to suggest that manufacturing will disappear from the North as it becomes a specialized
service producer, importing manufactures from the South (Brown and Julius, 1994). On the other hand, ideas of a new
international division of labour have linked deindustrialization in the North to the growth of low-skill manufactured exports from
the South (Wood, 1994), raising the prospect of immiserization of large sections of the Northern labour force. See UNCTAD
(1995) for a critique of both these globalization myths.

growth of outward investment from the United States which included new locations in the developing

world to access oil, minerals, and rubber as well as public utilities (Dunning, 1984, pp. 91-93).

Without elaborating further on these trends, they do go some way t exposing the myth that the

disintegration of the global economy can be explained sim ly by irrational political factors unleashed

by the First World War and its aftermath. At the very least, the political economy of the inter-war period

involved a complex intertwining of domestic and international economic forces.


The current era of globalization has coincided with, and in important respects reinforced, a

downgrading of industry's role in economic growth and development.9 By contras , the dynamic role

of industrial development in the earlier period of globalization is not in doubt. During the period 1870-

1913, manufacturing output rose fourfold at an annual growth rate of 3.5 per cent (League of Nations,

1945, table 1), more rapidly than world trade and trade in manufactures and certainly more rapidly than

FDI in manufacturing. Rapid industrial development, moreover, was closely associated with a burst of

technological progress, a series of profound socio-economic change in the organization of production

and work, and was instrumental in giving shape to the modern political landscape.

When the rapid growth economies of this period are examined more closely, there is little

doubting that industrial development was the real engine of growth during this period; the 5.1 per cent

average annual growth of manufacturing output in the United States between 1871/75-1881/85 which was

unprecedented historically, was surpassed during the following decade by a number of countries,

notably Sweden and Finland (8.2 per cent and 8.5 per cent respectively), and which were in turn

surpassed over the next decade by Japan whose manufacturing sector grew at annual rate of 9.0 per cent

(League of Nations, 1945, table 8). Consequently, on some measures the most dynamic part of the world

economy was becoming less globalized during this period.

As important as this rapid growth of world manufacturing output was, just as significant was its

changing geographical composition (table 5). During this period, Britain ceased to be the only truly

industrial power and in 1913 both the United States and Germany were contributing a larger share of

world output. Just as striking, while in 1870 no country had achieved a per capita industrialization level

- 15 -

half that of the lead economy (the United Kingdom), by 1913 five economies (the United Kingdom,

Belgium, Switzerland, Germany and Sweden), had a level more than half that of the United States, by

then the lead industrial economy. Still, at the end of this period of globalization, the core of world

industry comprised a very small group of countries and even among these it would be misleading to give

too much emphasis to the process of convergence. In 1860 the three leading industrial nations produced

a little over a third of total output, by 1913 their share was a little under two-thirds (of a much larger

total). Industrial development in much of Southern and Eastern Europe was weak and erratic in

comparison to the successful catch-up economies. This was the case for France, Italy, Russia and

Austro-Hungary, each of which had pockets of advanced industrial development by 1913, but were

unable to reach and sustain the very rapid rates of growth of the other newly industrializing economies.

Thus, while the relative decline of Britain as the economic and industrial hegemon was inevitable, there

was nothing spontaneous or predictable about the path of late industrialization.

Table 5
Percentage distribution of the world's manufacturing production



Germany France Russia Other


1830 2.4 9.5 3.5 5.2 5.6 13.3 60.5

1860 7.2 19.9 4.9 7.9 7.8 15.7 36.6

1913 32.0 13.6 14.8 6.1 8.2 17.8 7.5

Source: Bairoch (1982).

This uneven pattern of i dustrial development among the more advanced economies of Europe

and North America s not explained by differences in resource endowments, including human capital,

although this was certainly a factor in some cases (Cameron, 1985; O'Rourke and Williamson, 1995).

Rather, it was probably a reflection of the extent to which some late industrializing countries were able

to bridge an institutional hiatus with the lead industrial economies and begin a process of catching-up

through igh rates of investment, technological progress and rapid productivity growth. In practice, this

meant establishing a series of complementary institutional structures necessary to accelerate investment,

including a secure system of property rights but also the establishment of an effective financial system

with close links to the industrial sector (Studart, 1995, pp. 68-76). It also included profound changes

at the enterprise level both in the scale of production units and in managerial and entrepreneurial

- 16 -

10 Gershenkron's thesis is usually illustrated with reference to German, Russian and Japanese development. But it is equally
true of some of the most successful late industrializers, for example, Sweden (see Chang and Kozul-Wright, 1994) and the United
States (Kozul-Wright, 1995b).

11 In today's globalizing world, a number of developing countries, such as Chile, are placing considerable faith in this
rediscovery of primary exports (see World Bank, 1995). There is, of course, an opposing myth with its roots also in the pre-1913
era, which sees such exports as the basis of economic dependency and stagnation. For a critique, see Bairoch (1993).

capabilities, as well as the creation of new linkages within and between industrial sectors, associated with

the dynamic complementarities and externalities associated with technological progress. Moreover, as

Alexander Gershenkron suggested a long time ago, all the successful late industrializers in this era were

characterized by reforms to their State structures which helped encourage accumulation and

technological progress, through infant industry protection and other (incipient) forms of industrial


But if unevenness among the more advanced countries was an important feature of

industrialization in the era of globalization, just as striking was the polarization of industrial activity

between the North and South. Deindustrialization in developing countries predated the era of global

integration; both in absolute terms and as a share of world manufacturing output, the position of the

developing world declined sharply between 1830 and 1860 (table 5). But this process continued, and

indeed, accelerated, during much of the period of global integration. Between 1860 and 1913, the

developing country share of world manufacturing production declined from over one-third to under a

tenth (Bairoch, 1982). There seems little doubt that deindustrialization in the South was the result of a

massive inflow of European manufactured imports. This was particularly true of the textile and clothing

industries, where free trade exposed the local artisanal and craft producers to the destructive competitive

gale of more capital intensive, high productivity Northern producers. The destruction of the Indian

textile industry provides the most familiar example of this process, but similar cases can be found across

Latin America and the Middle East (Batou, 1990). The absolute destruction of industrial capacity in the

South appears to have been reversed beginning around 1900 and was, in some instances followed by

quite rapid bursts of growth, often with advanced industrial techniques linked to FDI. However, in no

case was the basis for sustainable industrial growth laid in the developing world in this latter period.

While late industrialization certainly opened up a sustainable growth path for those States able to

intervene ffectively to alter their position in the emerging international division of labour, the question

still remains whether it was necessary to industrialize to benefit from globalization. An increasingly

popular myth from this earlier period is that, in line with comparative advantage, the export of primary

products provided the best growth path for many parts of the world economy.11

There is, of course, an element of truth behind this myth; in 1913, five exporters of primary

products were among the world's richest countries (table 6). Indeed, the United States which had

become the lead economy in the world had an export profile dominated by primary products. The other

- 17 -

wealthy primary exporters included Australia, Canada, Denmark and New Zealand. Argentina (and

Uruguay), whose GNP per capita was the average for developed countries at the beginning of the

globalization era, should also be included among this group of r ch primary exporters, particularly if it

is recognized that large parts of the country had a per capita income which far exceeded the average

(Marichal, 1989, p. 145). It is also the case, that the average annual growth rate of these six economies

between 1870-1913 was, with the exception of New Zealand, significantly higher than the average for

other developed countries (table 6). With the exception of the mineral-rich North American economies,

the place of these economies in the international division of labour was determined by the export of

agricultural products.

Table 6
Primary producers in the new international division of labour, 1870 and 1913

GNP per capitaa Average annual
growth, 1870-


Primary exports
as a share of total

exports, 19131870 1913

United States 580 1358 2.0 62b 75c

Argentina 360 1010 2.4 97 97

Australia 667 1096 2.0 88 97

Canada 470 1112 2.0 80 88

Denmark 365 883 2.1 100 100

New Zealand 480 756 1.1 100 100


360 662 1.4 27 33

Source: Bairoch (1996b) and Yates (1959) - data for Argentina and New Zealand GNP are preliminary).
a In 1960 US dollars and prices. b Excluding metals. c Including metals.

However, a closer examination of the experience of these economies casts doubt on the idea that

primary sector led growth provided an optimal strategy for much of the world economy. In the first

place, these countries were relatively wealthy before the start of the globalization era; these were the lead

economies of an essentially pre-industrial world (table 6). Second, and in striking contrast to the current

period of globalization, primary producers, with the exception of sugar producers, experienced a

- 18 -

12 Sugar, which was at the beginning of the 19th century a major export crop for a number of developing countries, was one
of the first export crops to be adversely affected by successful competition (beet sugar) from developed countries (Bairoch and
Etemad, 1985).

particularly favourable shift in terms of trade; between the 1870s and late 1920s, the terms of trade for

primary products relative to manufactured goods improved by between 10 and 25 per cent.12

But even ignoring these favourable circumstances, the best proof of the limits f specializ ng in

primary products and the more dynamic impact of industrialization on economic growth and

development is found in the fact that all countries that successfully established an industrial base have

become rich, as opposed to the successful exporters of primary goods which, with the exception of

North America, have seen GNP per capita fall to or below the average for developed market economies

over the intervening three-quarters of a century. Thus, New Zealand, which was the sixth or seventh

richest country in the world around 1880, had by 1990 declined to around twentieth position and the

relative decline of Argentina was even more pronounced.

Thus, from this brief review of the evidence, we can conclude that while specializing in exports

of primary goods was consistent with a high level of income, maintaining that level and pushing the

economy on to a new dynamic growth path required not only that the export sector increase its

productivity but that there was a structural shift in the pattern of economic activity towards industry.

Eric Hobsbawm's observation that even as the favoured white settler colonies became prosperous

through exporting primary resources, the "cage of international specialization" was restricting their future

growth potential, from which only a small number escaped (Hobsbawm, 1994a, p. 64) seems even more

appropriate for those countries which lacked the advantages of this small group of economies.


The contemporary significance of the globalization debate does not lie in reporting broad trends

in the world economy, but in the inferences drawn from these trends for growth and development

prospects, and the accompanying policy advice. As Sachs and Warner make clear, globalization is

expected to release a new growth dynamic in the world economy. Although it is probably no accident

that the current debate on globalization has coincided with a revivalof Hecksher-Ohlin trade theory, a

mixture of static and dynamic advantages linked to greater openness through such channels as increased

competitiveness and economic efficiency, greater specialization and learning economies, and FDI and

technological upgrading, underpin this expectation (Sachs and Warner, 1995, p. 3; O'Rourke and

Williamson, 1995). Perhaps more importantly for the policy debate, these channels are expected to have

their greatest impact on the growth potential of developing countries and the single greatest obstacle to

- 19 -

13 See Milberg, 1995; Elmslie and Milberg (forthcoming). The reasons why some developing countries - notably the East
Asian newly industrializing economies - have successfully adapted to the pressures of globalization, are the source of considerable
disagreement among economists (see World Bank, 1994; UNCTAD, 1994). However, greater openness to FDI and TNC activity
is not what distinguishes them from their less successful counterparts in the developing world (Chang, 1995).

rapid growth and convergence in the world economy lies in States adopting a national policy focus

which establishes a path towards marginalization and economic stagnation.

An immediate problem with this argument is that the world economy has been on a visibly slower

growth path over the past two decades and that most of the available evidence points to divergence, not

convergence among countries.13 What then are the lessons on the links between globalization, growth

and convergence from the 19th and early 20th centuries?

In the first place, it should be noted that although there was an acceleration of growth in the

period 1870-1913, it was not impressive by the standards established during the Golden Age of

capitalism after 1945. Indeed, the average growth rate of 1.4 per cent per annum for the world economy

between 1890 and 1913 - a rate faster than that achieved in the previous two decades - was little different

than that achieved in the period 1920-1950. Equally telling, although the period from 1890-1913 did see

a jump in growth rates in the developing world, the gap with the developed countries was not closed

(table 7). There was consequently, no convergence across the world economy in this period and if

anything, much like the current period, the 19th-century episode of globalization was marked by


Mica Panic's description of this earlier globalization era as one divided into distinct growth clubs

seems an appropriate one (Panic, 1992, pp. 32-37). A small group of rapidly industrializing economies

did exhibit convergence, and because it included the United States represented a significant part of the

world economy. These same economies were also the core of the gold standard and their rapid growth

ensured that they benefited most from international flows of capital. A small group of settler economies

maintained a high level of income through the export of food and raw materials to the rapidly

industrializing economies but, in most cases, these were unable to sustain high growth rates. Finally,

a rather more diverse g oup of outsiders shared a tenuous position in the new international division of

labour. Some did begin to i dustrialize and exhibited very rapid productivity growth towards the end

of this period, although this was not always sustainable. But most were unable to establish, or in those

countries under colonial control were prevented from attempting, an industrialization path.

- 20 -

14 For a review of the contemporary literature on the links between trade and growth which also reaches this agnostic
conclusion, see Edwards (1993).

Table 7
Trends in economic growth, 1830-1990

(Annual growth rates of the volume of GNP per capita, based on three-year averages)

Developed countriesDeveloping countries World

1830-1870 0.6 -0.2 0.1

1870-1890 1.0 0.1 0.7

1890-1913 1.7 0.6 1.4

1913-1920 -1.3 0.2 -0.8

1920-1929 3.1 0.1 2.4

1929-1950 1.3 0.4 0.8

1950-1970 4.0 1.7 3.0

1970-1990 2.2 0.9 1.5

Source: Bairoch (1993.)

Bearing in mind this diversity, is it possible to identify the underlying causes of economic growth

in the half century before the First World War? From our earlier discussion, it should be apparent that

trade liberalization was not a stimulus to growth; rapid export growth in this period occurred against a

tide of rising protection, at least in the newly industrializing parts of the world. Moreover, it should be

recalled that trade flows continued to be dominated by primary products and the most dynamic sector

of the world economy at this time, industry, was not participating to the same extent in the globalization

process. Furthermore, although it is undoubtedly true that rapid export growth in a group of small

industrializing economies was an important stimulus to growth, for most countries the causal links

between trade and economic growth are more difficult to make.14

However, a closer inspection of the 19th century episode of globalization does provide some

evidence to suggest that economic growth leads to international trade and not vice versa. Thus, the

period of trade openness between 1860-1879 coincided with slower growth of both output and exports.

Just as significantly, the subsequent move towards protectionism coincided with a period both of more

rapid economic growth and also trade; during the 20 years following the reintroduction of protectionist

policies the annual growth of output increased by more than 100 per cent and the volume of exports

grew by more than 35 per cent. Looking at individual country experiences (table 8), it is the case that

- 21 -

in all countries (except Italy) that the introduction of protectionist measures coincided with a distinct

acceleration of economic growth during the first ten years following a change in policy. In the next ten

years, during which protectionist measures were strength ned, there was usually a further acceleration

in economic growth. As far as foreign trade is concerned, an almost universal slowing of expansion is

noticeable in the firstten years after the abandonment of free trade, but in the second ten years, the rate

of growth in the volume of exports in nearly all the protectionist countries was faster than it had been

in the ten years prior to the adoption of protectionist measures.

Given the close association between globalization and FDI in the current period, and in light of

our earlier conclusion that TNCs were a more prominent feature of the pre-First World War international

economic landscape than has been recognized, it is important to ask whether TNCs were an engine of

growth in this period. There is little doubt that TNCs were linked to areas of quite rapid growth in some

developing countries, and both for primary sector and industrial activities, where they could introduce

rapid technological and organizational change at the enterprise l v l which would have evolved more

slowly, or not at all, from purely domestic sources. However, from a national perspective, given the

concentration f FDI in the primary sector and related services, the engine of growth story is much less

convincing. This is not only because of the particular sectoral bias of FDI flows but equally because the

very uneven pattern of FDI flows suggests that they were as much a response to, as a cause of, growth


Thus the United States and Canada, both wealthy economies, were among the largest hosts to FDI.

However, FDI represented a very small fraction of domestic capital formation in the United States, and

although certainly much higher in Canada, it was probably not of real significant until towards the very

end of this period. It is also of importance to understanding the development of this region that in North

America, FDI was relatively less important than other types of long-term capital flows. By way of

contrast, during the 1880s when the nominal value of British owned enterprises operating in Latin

America rose from 50 million pounds to 230 million pounds, over 40 per cent went to Argentina and

Uruguay, which were among the most advanced parts of the continent. Although FDI in this region

represented a much greater share of dom stic investment, this was unable to establish a more dynamic

growth path. Thus a large TNC presence in the world economy does not, by itself, establish FDI as an

engine of economic growth. Rather, it seems more likely that FDI, like trade, was helping to reinforce

a pattern of uneven development in the world economy.

A possibly more significant determinant of economic growth was the ability of economies to

generate and absorb new technologies. Much like the current era, the period before the First World War

was one of tremendous technological change. Moreover, new sources of power, new modes of

transportation, new materials and new consumer products were associated with institutional changes at

the enterprise level and in the organization and location of industry which were an integral part of a new

- 22 -

Table 8
The pattern of trade policy reform, exports and growth in selected European countries

(Annual growth rates based in three-year annual average)a

Date of

Ten-year period

protectionist move

Periods following protectionist move

First 10 years Second 10 years

Exports GNP Exports GNP Exports GNP

Belgium 1887 4.9 1.2 2.3 2.0 2.7 2.8

Denmark 1889 1.4 3.3 4.3 3.8 4.1 3.0

France 1892 2.1 1.2 1.9 1.3 2.7 1.5

Germany 1885 3.0 1.3 2.4 3.1 5.2 2.9

Italy 1887 0.4 0.7 1.7 0.5 4.5 2.7

Sweden 1888 3.4 1.5 2.8 3.5 2.4 3.3

Switzerland 1887 0.4 ... -0.6 ... 3.8 ...


1889 3.0 1.1 2.6 2.3 3.7 2.3

Source: Bairoch (1993).
a Average of three years preceeding the period, including the year when the policy change was made.

notion of modernity and progress. However, only a few countries occupied a leadership role in the area

of technology. Indeed, at the beginning of the globalization era, only i dustry in the United Kingdom

had been visibly effected by new technologies; for developed countries as a whole, less than one fifth

of industrial production was associated with these new technologies. This situation had changed

dramatically by the end of the period (table 9). This was part of a cumulative dynamic related to

structural changes towards more high-technology industries (such as chemicals and engineering

products) which were also among the most rapidly expanding areas of trade (Maizels, 1963, ch. 7).

Thus, successful catching-up for most countries depended upon their gaining access to new technologies

and ensuring that these played a role in enhancing the competitiveness of their industries through

productivity growth.

However, if technological progress was an important source of economic growth, it was not an

exogenous one. Rather, focusing on technological progress highlights the role of two central elements

in the growth dynamics of the period which are often downplayed or overlooked altogether when too

great an emphasis is placed on globalization tendencies. On the on hand, during this period the State

became a much more active agent in technological change. This was most visible in its organization of

national transportation and telecommunication networks, which not only were themselves industries

- 23 -

Table 9
The share of new technology industriesa

in the total manufacturing output by regions, 1830-1913

United Kingdom Other developed

Third world




1830 32-40 6-10 0-1 4-6

1860 60-70 18-24 0-1 17-23

1880 62-74 30-38 1-3 30-38

1900 68-78 49-57 4-9 49-56

1913 72-80 55-65 10-19 54-62

Source: Bairoch (1982), p. 288.
a The concept of "new technologies" is inevitably rather rough. Our estimate of their importance in each region

and period is based not only on distinctions made between sectors, but also within sectors. In the case of
cotton, for example, we have used a different "new technology" weighting factor for each region and in each
period for spinning and for the rest of the operations of the sector. Although these percentages have been
derived from a huge mass of direct and indirect information, they are of course only approximations. Still,
because of thee emergence of new sectors within traditional industries, it is likely that the figures are biased in
favour of the first industrialisers.

at the frontier of technological progress but had extensive links to other related new industries, such as

steel and engineering. But, in addition, there was also growing State involvement in the area of

technological progress through the creation of demand for new product, including in emerging military

complexes (Hobsbawm, 1994b, p. 308), as well as more direct funding of technical education and

research activities (Freeman, 1989). On the other hand, because technological change is to a significant

degree embodied in capital goods, it is closely related to the process of capital accumulation.

There seems little doubt that capital accumulation accelerated in the late 19th century in line with

the needs of late industrialization. The United Kingdom's industrial leadership had been established with

a rate of capital formation that never exceeded 10 per cent of national income and supported by a

financial system that evolved very slowly (see Deane, 1961; Pollard, 1964; Studart, 1995). By contrast

rates of capital formation in the late industrializing countries rarely fell below 10 per cent and in some

cases exceeded 20 per cent (Panic, 1992, table 3.1). This more demanding investment regime involved

institutional changes, among which closer links between finance and industry were, undoubtedly central

to the growth dynamics of late industrializing countries. We have criticised earlier the idea that

globalization i the pre 1913 era was one of weakening States. Rather, as Schumpeter recognized in the

case of German development, bridging the institutional hiatus with the leading industrial economies and

- 24 -

establishing a viable late industrialization path often involved close collaboration between the State and

financial and industrial interests:

In some instances the bankers initiallyperceived new opportunities for investment and suggested

methods of exploiting them. More important, however, were entrepreneurial tasks that were allied with

financial ends. Frequently, interested bankers obtained government approval and support for the

projects of others (Schumpeter, 1939, p. 178).

Similar developments can be found in Sweden, one of the most successful late industrializing

economies of the late 19th century and in Japan where "large banks were increasingly important in

financing both the initial and the continued development of large-scale enterprise, based on high

indebtedness and stable interest rates" (Studart, 1995, p. 73). In this context, although it is probably fair

to say that international capital flows were more cause than effect of successful industrialization, they

were important - and in some cases critical - in sustaining the growth momentum in some of the core

industrializing economies (Panic, 1992, p. 93; O'Rourke and Williamson, 1995, pp. 23-28).

Perhaps more important in terms of the overall direction of the world economy during this period

was the strong complementarity between capital exporting and importing countries. On the one hand,

growth in the core industrial economies not only generated excess savings in search of profitable outlets,

but also growing markets for food products and raw materials. On the other hand, a group of land and

raw material abundant economies in the Western Hemisphere and Oceania lacked the capital to fully

exploit these resources. Because these economies had some of the infrastructural and institutional

prerequisites to attract and absorb large inflows of capital and labour, the integration of financial markets

generated the relative concentration of international capital flows discussed above. It is worth noting

in this context, that large capital outflows were not always seen as an advantage to late industrializers.

Indeed the disadvantages of such outflows - which had earlier been raised by Adam Smith and David

Ricardo (Panic, 1988, ch. 7) - were a concern of policy makers in both Germany and (although to a

lesser extent) France during this period, who tried to discourage such outflows or a least sought ways

to tie them more closely to export orders (Bloomfield, 1968, p. 2).

What this suggests is that domestic capital formation was closely associated with various

international pressures in a process of uneven development in the world economy. Essentially, the

emergence of a group of countries with a strong growth dynamic gave shape to an internationally

integrated monetary and economic framework. These developments were reinforcing; the more

successful a country was in sustaining a high rate of growth relative to t e res of the world the more

likely it was to attract international investment and sustain a rapid rate of industrialization. Even in those

countries where there was a close association between the export dynamic and capital inflows, such as

the white settler economies, powerful domestic forces on the supply and demand side were an equally

important ingredient of economic growth (Bloomfield, 1968, p. 5).

- 25 -

For those countries unable to establish such a cumulative growth dynamic, speculative capital flows

were more likely to become a destabilising element. Certainly this was true in much of Latin America,

where unsustainable financial flows could quickly give way to deflationary pressures, debt crises, a

reduction i imports, particularly of capital goods, and a significant slowdown in growth rates (Marichal,

1989). An interesting case from the globalization era is Argentina where rapid liberalization of trade and

finance in the late 1880s, disturbed a more balanced and stable development path. As described by

Marichal, an initial period of State-building in the 1860s and 1870s, gave way to a laissez-faire ideology

under domestic political pressures generating an explosive but largely speculative increase in capital

inflows, particularly in real estate. The subsequent crisis sparked a minor banking crisis in Europe with

the downfall of Barings Brothers. But in Argentina, austerity measures, falling real wages and the sale

of State enterprises to foreign investors destroyed the growth dynamic and, moreover, had a negative

spillover effect on other economies in the region:

"... the crisis of 1890 subjected the Argentine State to the dictates of the international banks that imposed severe
financial conditions on both the national and the provincial governments in order to guarantee that they would
recoup their loans and to assure the profitability of allied enterprises, such as British railway firms. At the same
time, the European bankers took advantage of the failure in 1890 of numerous Argentine-owned enterprises,
public and private, to further consolidate the dominant position of foreign capital in key spheres of the Argentine
economy. And after the turn of the century they promoted a renewed burst of capital exports to the Rio de la
Plata region, coordinating their strategies closely with commercial, railway and industrial magnates interested
in expanding their interest there. This trend was common to many other Latin American nations as international
bankers promoted a new and powerful wave of loans and direct investments that continued to run strong until
World War I" (Marichal, 1989, pp. 169-70).


The issues surrounding globalization involve much more than measuring the extent of cross-border

economic exchanges and their interlinkages. The real questions concern whether such exchanges have

already eroded the ability of States to manage their economies and whether the removal of State

responsibility over the direction of economic activity is a welcome development. An increasingly

prominent version of the globalization thesis answers both questions positively. In this paper we have

sought o challenge this strong globalization thesis by looking at changes in the world economy before

the First World War. This has become a favoured vantage point for those observers who see in

contemporary developments a recovery of an earlier globalization trend, interrupted for half a century

by a series of, largely undesirable, economic and political events.

The evidence presented in this paper confirms the sceptical view of an altogether new globalizing

world. However, in light of the profound social, political and economic changes that have characterized

the short 20th century, the idea that we are simply recovering a trend of global economic integration

broken by two world wars and a perverse era of State management is not convincing. To take two of

- 26 -

the most prominent elements in the contemporary globalization debate, the liberalization of trade and the

diminishing role of the State, from our survey of trends in the half century before 1913, these can best

be described as historical myths. Perhaps even more significantly, we do not find evidence to support

the idea that this earlier period was a golden age of economic growth and rapid convergence. Moreover,

industry, which was the dynamo of economic growth in this period appears, was much less influenced

by international factors than other sectors and was also an important source of divergence across the

world economy. In this respect, we have also suggested that the internationalization of finance capital,

which dominated the earlier globalization process as much as in the contemporary era, appears to be

strongly related to a process of uneven development, often reinforcing existing differences in the world

economy rather than bringing about convergence.

While modern capitalism is an expanding system whose origins lie in the dynamic processes of

investment and innovation, these dynamic processes are neither abstract nor spontaneous, but channelled

and shaped by particular institutional arrangements and policy interventions. Although the institutional

changes which have taken place over the intervening three-quarters of a century since 1913 exclude any

simple policy lessons across the two episodes of globalization, the broad finding that policies did effect

important and lasting change, particularly in the spread of industrial activity in the late 19th century, is

worth emphasising. In this respect it is wrong to describe State-led industrialization as a product of the

post Second World War era. Rather, the combination of rising tariffs, support for technological

upgrading and extensive State-borrowing on international capital markets were already important

ingredients of economic development in the 19th century era of globalization. But understanding, why

some countries were able to harness internationalization t a successful process of catching-up cannot

be restricted to a question of appropriate policies and the presence of a good (or bad) State. The wider

institutional dynamics which are part of this process are, f r bette or worse, the product of social and

political actors, and link changes in international forces to the context of political economy.

- 27 -


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* Out of stock.

UNCTAD Discussion Papers

*No. 20, October 1986 Reinaldo GONÇALVEZ UNCTAD, structural adjustment and structural change:
In search of a comprehensive approach

No. 21, February 1988 R. ERZAN, The profile of protection in developing countries

No. 22, February 1988 Refik ERZAN & Products facing high tariffs in major developed
Guy KASENTY market-economy countries: An area of priority for

developing countries in the Uruguay Round

No. 23, January 1988 Bruno LANVIN International trade in services, information services
and development: Some issues

No. 24, April 1988 Reinaldo GONÇALVEZ Export expansion, import liberalization and economic
growth in Latin America: An analysis of foreign trade

No. 25, February 1989 Yilmaz AKYÜZ Financial system andpolicies in Turkey in the 1980s

No. 26, June 1989 Juan A. DE CASTRO Determinants of protection and evolving forms of
North-South trade

*No. 27, August 1989 Juan A. DE CASTRO Protectionist pressures in the 1990s and the coherence
of North-South trade policies

No. 28, April 1990 Andrew J. CORNFORD Notes on a possible multilateral framework for
international trade in banking services

No. 29, April 1990 Jesko HENTSCHEL Availability of intermediate and capital goods in
import-restrained debtor countries

No. 30, April 1990 Alice H. AMSDEN & Republic of Korea's financial reform: What are the
YOON-DAE EUH lessons?

No. 31, August 1990 Simon CHAPPLE A sequence of errors? Some notes on the sequencing
of liberalization in developing countries

No. 32, August 1990 Harmon C. THOMAS The implications for developing countries' exports
earnings growth of an increase in the share of imports
by developing countries from each other: A
simulation analysis

No. 33, September 1990 Juan A. DE CASTRO & El Acuerdo de Libre Comercio entre Estados
Serafino MARCHESE Unidos y Canada y su impacto sobre el comercio de

America Latina y El Caribe

No. 34, March 1991 R. de C. GREY "1992" Financial services and the Uruguay Round

No. 35, March 1991 Simon CHAPPLE Financial liberalisation in New-Zealand, 1984-90

No. 36, March 1991 Yilmaz AKYÜZ Financial liberalization in developing countries: A
neo-Keynesian approach

No. 37, March 1991 Joseph Y. LIM The Philippine financial sector in the 1980s

No. 38, April 1991 J. F. OUTREVILLE The use of computer technology in the insurance
sector of developing countries

No. 39, April 1991 Andrew J. CORNFORD The Multilateral Negotiations on Banking Services:
Context and selected outstanding issues

No. 40, August 1991 Yilmaz AKYÜZ & Financial policies in developing countries: Issues
Detlef J. KOTTE and experience

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* Out of stock.

No. 41, August 1991 Manuel R. AGOSIN Trade policy reform and economic performance: A
review of the issues and some preliminary evidence

No. 42, October 1991 Georg KELL & Technology and competitiveness in the textile industry

*No. 43, February 1992 Yilmaz AKYÜZ On financial deepening and efficiency

No. 44, July 1992 Cem SOMEL Finance for growth: Lessons from Japan

No. 45, July 1992 Sebastian SCHICH Indebtedness, sovereign risk and the spread: The
example of Hungary and the Euromarkets

No. 46, July 1992 Raju J. SINGH An imperfect information approach to the structure of
the financial system

No. 47, August 1992 V. BHASKAR Privatization and the developing countries: The
issues and the evidence

No. 48, August 1992 Ha-Joon CHANG & Public enterprises in developing countries and
Ajit SINGH economic efficiency

No. 49, October 1992 Ajit SINGH The stock-market and economic development: Should
developing countries encourage stock-markets?

No. 50, November 1992 Ulrich HOFFMANN & Demand growth for industrial raw materials and its
Dusan ZIVKOVIC determinants: An analysis for the period 1965-1988

No. 51, December 1992 Sebastian SCHICH Indebtedness, creditworthiness and trade finance and
payment arrangements

No. 52, December 1992 Dwight H. PERKINS China's 'gradual' approach to market reforms

No. 53, December 1992 Patricio MELLER Latin American adjustment and economic reforms:
Issues and recent experience

No. 54, January 1993 Trevor GARDNER The present economic situation in Zambia and the role
of privatisation in improving its economy

No. 55, February 1993 Alexandre R. BARROS Prospects for world sugar trade

No. 56, March 1993 Yilmaz AKYÜZ Financial liberalization: The key issues

No. 57, April 1993 Alice H. AMSDEN Structural macroeconomic underpinnings of effective
industrial policy: Fast growth in the 1980s in five
Asian countries

No. 58, April 1993 Celso ALMEIDA Development and transfer of environmentally sound
technologies in manufacturing: A survey

No. 59, May 1993 Ali-Reza NIKPAY Privatization i Eastern Europe: A survey of the main

No. 60, July 1993 Jean-Marc FONTAINE Reforming public enterprises and the public sector in
sub-Saharan Africa

No. 61, July 1993 Korkut BORATAV Public sector, public intervention and economic

No. 62, July 1993 Roberto FRENKEL Growth and structural reform in Latin America:
Where we stand

No 63, July 1993 Machiko NISSANKE & Mobilization and allocation of domestic savings: A
Priya BASU study on Bhutan

No. 64, July 1993 Machiko NISSANKE & Mobilization and allocation of domestic savings: A
Priya BASU case study on Nepal

No. 65, August 1993 Ercan UYGUR Liberalization and economic performance in Turkey

No. 66, August 1993 YilmazAKYÜZ Maastricht and fiscal retrenchment in Europe

- 31 -

No. 67, September 1993 Cem SOMEL The State in economic activity: Problems of
economic policy-making

No. 68, September 1993 Andrew CORNFORD The role of the Basle Committee on Banking Super-
vision in the regulation of international banking

No. 69, September 1993 Sebastian SCHICH The level and volatility of external financial positions
and the costs of export credit insurance

No. 70, October 1993 Veena JHA, Ecolabelling and international trade
Simonetta ZARRILLI

No. 71, October 1993 Adolfo CANITROT The exchange rate as an instrument of trade policy

No. 72, October 1993 Xiaoning J. ZHAN North American economic integra ion and its impli-
cations for the exports of China and Hong Kong

No. 73, November 1993 J.H. REICHMAN Implications of the Draft TRIPS Agreement for
developing countries as competitors in an integrated
world market

No. 74, November 1993 Priya BASU & Fiscal adjustment in the Gambia: A case study

No. 75, November 1993 William W.F. CHOA The relevance of market structure to technological
progress: A case study of the chemical industry

No. 76, December 1993 Ajit SINGH The Plan, the market and evolutionary economic
reform in China

No. 77, January 1994 Shigehisa KASAHARA A rescue plan for the post-bubble Japanese economy:
The establishment of the Cooperative Credit
Purchasing Company

No. 78, January 1994 Jean K. THISEN The European Single Market and i s possible effects
on African external trade

No. 79, February 1994 Kálmán KALOTAY & Emerging stock markets and the scope for regional
Ana María ALVAREZ cooperation

No. 80, February 1994 Edouard DOMMEN Développement durable: Mots-déclic

No. 81, March 1994 Juan A. DE CASTRO The internalization of external environmental costs
and sustainable development


No. 83, May 1994 YilmazAKYÜZ & Regimes for international capital movements and some
Andrew CORNFORD proposals for reform

No. 84, May 1994 David FELIX Industrial development in East Asia: What are the
lessons for Latin America?

No. 85, July 1994 S.M. SHAFAEDDIN The impact of trade liberalization on export and GDP
growth in least developed countries

No. 86, July 1994 Raju J. SINGH Bank credit, small firms and the design of a financial
system for Eastern Europe

No. 87, July 1994 Thomas ZIESEMER Economic development and endogenous terms-of-
trade determination: Review and reinterpretation of
the Presbisch-Singer Thesis

No. 88, August 1994 Sebastian SCHICH The payment arrangements in the trade of CEECs and
LDCs between 1986 and 1994

No. 89, September 1994 Veena JHA & Are environmentally sound technologies the
Ana Paola TEIXEIRA Emperor's new clothes?

No. 90, October 1994 Manuel R. AGOSIN Saving and investment in Latin America

No. 91, October 1994 YilmazAKYÜZ & The investment-profits nexus in East Asian
Charles GORE industrialization

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No. 92, November 1994 Charles GORE Development strategy in East Asian newly
industrializing economies: The experience of post-
war Japan, 1953-1973

No. 93, December 1994 J. F. OUTREVILLE Life insurance in developing countries: A cross-
country analysis

No. 94, January 1995 XIE Ping Financial services in China

No. 95, January 1995 William W.F. CHOA The derivation of trade matrices by commodity groups
in current and constant prices

No. 96, February 1995 Alexandre R. BARROS The role of wage stickiness in economic growth

No. 97, February 1995 Ajit SINGH How did East Asia grow so fast? Slow progress
towards an analytical consensus

No. 98, April 1995 Z. KOZUL-WRIGHT The role of the firm in the innovation process

No. 99, May 1995 Juan A. DE CASTRO Trade and labour standards: Using the wrong
instruments for the right cause

No. 100, August 1995 Roberto FRENKEL Macroeconomic sustainability and development
prospects: Latin American performance in the 1990s

No. 101, August 1995 R. KOZUL-WRIGHT Walking on two legs: Strengthening democracy and
& Paul RAYMENT productive entrepreneurship in the transition


No. 102, August 1995 J.C. DE SOUZA BRAGA Financing the public sector in Latin America
& Sulamis DAIN

No. 103, September 1995 Toni HANIOTIS & Should governments subsidize exports through export
Sebastian SCHICH credit insurance agencies?

No. 104, September 1995 Robert ROWTHORN A simulation model of North-South trade

No. 105, October 1995 Giovanni N. DE VITO Market distortions and competition: the particular
case of Malaysia

No. 106, October 1995 John EATWELL Disguised unemployment: The G7 experience

No. 107, November 1995 Luisa E. SABATER Multilateral debt of least developed countries

No. 108, November 1995 David FELIX Financial globalization versus free trade: The case
for the Tobin tax

No. 109, December 1995 Urvashi ZUTSHI Aspects of the final outcome of the negotiations on
financial services of the Uruguay Round

No. 110, January 1996 H.A.C. PRASAD Bilateral terms of trade of selected countries from the
South with the North and the South

No. 111, January 1996 Charles GORE Methodological nationalism and the misunder-
standing of East Asian industrialization

No. 112, March 1996 Djidiack FAYE Aide publique au développement et dette extérieure:
Quelles mesures opportunes pour le financement du
secteur privé en Afrique?

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