Academic journal article NBER Reporter

Globalization and New Comparative Economic History

Academic journal article NBER Reporter

Globalization and New Comparative Economic History

Article excerpt

Globalization is probably one of the most overused words in economics, as it is in many other realms of academic and public debate. Nonetheless, it cannot be avoided, if only because an understanding of the modern world requires us to confront it. Economically, its potential benefits seem all too apparent: for example, the fast growing industrializing economies of Asia are well connected to global markets for goods and capital. Conversely, no economically isolated country has prospered. As UN Secretary General Kofi Annan has pointed out: "The main losers in today's very unequal world are not those that are too exposed to globalization, but those who have been left out."

My recent research has focused on the causes and consequences of globalization, and is based on an interdisciplinary approach that straddles international economics, economic growth, and economic history. Methodologically, an historical approach has appeal because the global "economic laboratory" provides data not only across space (for cross-country comparisons) but also across time (from previous centuries to the present era). Historical data contain more variation than contemporary data alone, providing a wealth of information to be exploited. An emerging sub-field of New Comparative Economic History is devoted to exploring relationships in the very long run in the economic environment (institutions, regimes, policies, and so on) and economic outcomes (growth, inflation, trade, capital movements, and so on).

In that vein, I have been working to address several important questions that help us understand economic globalization over the last 100-150 years, allowing us to understand the economic outcomes of today with a deeper perspective. In this research summary I highlight two strands of this work: the evolution of global capital markets and the evolution of world trade. These topics address such issues as: how can we measure the extent of globalization? What explains the rise and fall of globalization in different eras and in different countries? What are the costs and benefits of globalization?

The Ebb and Flow of Global Capital

The forces of economic globalization appear particularly strong at present, but economic historians have been at pains to point out that we are now living in the second era of globalization, not the first. The first stretched from roughly 1870 until the start of World War I in 1914 and saw unprecedented integration in international market for goods, capital, and labor. Since a key issue for the intellectual enterprise of New Comparative Economic History is whether the past can provide useful lessons for the present, we have first to answer the question of whether this past era in any way resembles the present. A first challenge is to assess quantitatively when and where the extent of market integration in the past bore any resemblance to that seen today.

Much of my own research, including a large project in collaboration with my fellow NBER Research Associate Maurice Obstfeld, has been concerned with this question of measuring market integration over time, with a focus on global capital markets. (1) There is no agreed upon method for evaluating market integration, although we have made some progress recently using nonlinear theoretical and empirical models to better estimate transactions costs in markets using high-frequency price data. For most applications both price and quantity criteria remain relevant. Each have their weaknesses--quantities may flow, and prices may converge, between locations despite large obstacles--and auxiliary assumptions and information must be carefully considered using either criterion. Yet what we find, broadly, is that global capital markets were just as impressive in their degree of integration a century ago as they are today. Some very simple quantity criteria can sum up the story.

For example, we can look simply at the ratio of the stock of foreign investment in the world to global GDR Plotted over time, this series has a distinctive shape. …

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