If this is Globalisation 4.0, what were the other three?

Richard Baldwin 19 December 2018

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On 5 November 2018, Klaus Schwab, founder and executive chairman of the World Economic Forum, explained the theme of the 2019 meeting in Davos would be "Globalisation 4.0". He warned that it "has only just begun, but we are already vastly underprepared for it.".

It was probably inevitable that the Davos buzzword bingo card would find room for 'Globalisation 4.0' once we created 'Industry 4.0'. (And it's catching on. Globalisation 4.0 has already been employed here, and here). The phrase raises two questions for international economists:

  1. Is this fourth globalisation just a distinction without a difference?
  2. What were the first three globalisations?

Is there really a difference?

Yes.

Future globalisation will be very different than the globalisations we know today or have known in the past. It is also coming incredibly fast, and in ways few people expect. 

I believe this strongly enough to have written a book on the theme, which handily will appear just in time for the World Economic Forum meeting in January 2019. I believe it enough to have given a TedX talk in 2018 to argue that, in future, globalisation will be radically different.

My reasoning: arbitrage drives globalisation. Whenever relative prices differ across countries, people can make money with a two-way, buy-low sell-high arbitrage. For goods, we call this arbitrage 'trade'. For centuries, technological limits meant that the arbitrage was mostly realised as trade. Globalisation was created by goods crossing borders. This was the first unbundling – the geographic separation of production and consumption.

From around 1990, information and communication technology (ICT) made a different type of arbitrage possible. Now factories could cross borders as well as goods. ICT allowed G7 firms to spread some stages of production to nearby developing nations while still keeping the whole production process running smoothly and reliably. Vast wage differences made this manufacturing-location arbitrage profitable. This was the second unbundling – the geographic separation of stages of production. 

This form of globalisation was especially disruptive in countries that had advanced economies but backward social support systems, especially the US. Their firms sent lots of their firm-specific knowhow along with the offshored factory jobs. In short, the monopoly that G7 factory workers had on G7 manufacturing technology was broken. This changed the impact of globalisation. It created a whole new reality in manufacturing competition, one where high-tech was combined with low wages. This new combination disrupted the lives and communities of workers struggling to compete with high wages and high tech (in developed economies) as well as those struggling to compete with low wages and low tech (in developing economies that didn’t get the technology transfers). 

Workers employed in goods-producing sectors were the most affected, since this second unbundling mostly affected goods-producing sectors. Future globalisation – the third unbundling – will, I believe be much more about the service sector.  

Service sector wages are the greatest remaining global arbitrage opportunities. The going rate for similar tasks can differ by a factor of 10 from one country to another. That’s a tempting arbitrage opportunity but, until now, few firms could exploit it because it was technically too difficult to be worthwhile. Historically, service and professional jobs required us to meet face-to-face and, until recently, the state of technology made the cost of overcoming these barriers too high. But digital technology (digitech) is now tearing down the barriers to wage arbitrage in the service sector.

Digitech is making it easier for people sitting in one country to do things in offices in another country. In The Globotics Upheaval: Globalisation, Robotics and the Future of Work, I call it telemigration, but it is really just international telecommuting. Some service sectors, such as web development, commonly work this way already. 

International freelancing platforms like Upwork.com, advanced telecommunications like telepresence, and machine translation make this new form of globalisation – this new wage arbitrage – possible.

The long view of economic globalisation that I first wrote about a decade ago is that telemigration is the 'third unbundling'. The first unbundling was trade, which exploded in the 1800s when there was a steep fall in the cost of moving goods. The second unbundling came when technology created geographic separation in manufacturing. Now we have another geographic separation, between labour and labour services, using digitech. 

That's three unbundlings, but since we are at globalisation 4.0, we have, apparently, sneaked in an additional globalisation along the way. Where?

Globalisation 1.0, 2.0 and 3.0

I argue that trade-in-goods-based globalisation had two distinct phases. In 1999, Philippe Martin and I wrote a paper titled, "Two Waves of Globalisation: Superficial Similarities, Fundamental Differences". That distinction is the key to identifying the first three globalisations. 

Globalisation 1.0 happened before WWI. Steam and other forms of mechanical power made reduced the cost of transportation, and for the first time made it economical to consume goods made far away. This globalisation happened despite almost no government support, because there was no global governance – unless you count the British Navy as the UN, the Bank of England as the IMF, and Britain’s free-trade stance as the WTO. Nor was there domestic policy to share the gains and pains of more intense international arbitrage in goods. 

Globalisation 1.0 made the fortunes of a nation’s most competitive citizens and companies. But it also destroyed the fortunes of a nation’s least competitive citizens and companies. The bare-knuckled economic system in which it took place (laissez-faire capitalism, imperialism, and various forms of autocracy) meant that it did not end well. Two World Wars, the Great Depression, and the rise of communism and fascism caused the deaths of hundreds of millions of people. 

Capitalism’s face was softened with the New Deal in the US, and social-market democracy in other rich economies. Communism also softened after Stalin and Mao. We can call this phase Globalisation 2.0. 

It started after WWII. Trade in goods rose, but this time there were domestic policies to share the pains and gains of globalisation and automation. The market was in charge of efficiency, and the government was in charge of justice. Globalisation 2.0 saw the establishment of rule-driven international governance based in international institutions like the UN and its specialised agencies such as the Food and Agriculture Organisation and the International Labour Organisation, plus the IMF, the World Bank, and the World Trade Organisation. 

Globalisation 3.0 is what I have called the second unbundling, or the New Globalisation. Arvind Subramanian called it hyperglobalisation, Gary Gereffi called it the global value chain revolution, and Alan Blinder called it offshoring. All of these definitions had one common factor: factories were crossing borders, bringing the knowhow of G7 firms to emerging economies. The monopoly that G7 factory workers had on advanced manufacturing technology was broken, creating a new world of manufacturing that melded high tech and low wages. 

Once more, globalisation disrupted the lives and communities of millions of working people. Both high-wage, high-tech workers, and low-wage, low-tech workers struggled to compete. Workers in goods-producing sectors were most affected. 

And so Globalisation 4.0, in my view, is the third unbundling. It will happen when digitech allows arbitrage of international wage differences without the physical movement of workers. Globalisation 1.0, 2.0 and 3.0 affected mostly people who made things for a living. For the first time, globalisation will mostly affect the service sector. For the first time, hundreds of millions of workers in advanced economies will be exposed to the challenges and opportunities of globalisation. 

Low-wage, high-quality service competition from abroad is not their only competition. AI-driven automation will also displace many workers in the service sector. If the blue-collar workers disrupted by Globalisation 3.0 join hands with the white-collar workers who will be disrupted by Globalisation 4.0, it could lead to what I call the 'Globotics Upheaval'. This upheaval may already have started with the gilets jaunes movement.

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Topics:  International trade

Tags:  globalisation, unbundling, services

Professor of International Economics at The Graduate Institute, Geneva; Founder & Editor-in-Chief of VoxEU.org; exPresident of CEPR

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