The Evolution of the World Economy 1000-2000 AD
by Ronald Findlay and Kevin H. O’Rourke
We are all familiar with the idea that today we live in an age of ‘globalization’, in which all the countries of the world are linked tightly together by trade in goods and services, migration and capital movements. When, however, did this age of globalization begin? Is it only as recent as the Internet and the new information technology? Does it go back to the Industrial Revolution of the eighteenth century, or even further to the European ‘voyages of discovery’ of the late fifteenth century? In Power and Plenty: Trade, War and the World Economy in the Second Millennium (Princeton University Press, 2007), we find it necessary to go back all the way to the year 1000 in order to provide a satisfactory answer. In the 624 pages of this book, we give the first unified account of the history of world trade over the last thousand years, in order to explain the complex set of forces that have shaped the emergence of the modern world economy.
In 1000 the Americas, Australia and Oceania were isolated from the ‘Old World’ of Europe, Asia and Africa. We therefore begin our analysis with a division of the interactive world economy of the time into seven ‘world-regions’, defined by a mix of cultural unity and geographic contiguity. These regions are Western Europe, Eastern Europe, the Islamic World of the Middle East and Southwest Asia, Central Asia, South Asia, Southeast Asia, and East Asia. Religion plays an important role in defining these regions: Islam in the Middle East, Roman Catholicism in Western Europe, Greek Orthodox Christianity in Eastern Europe, Hinduism in South Asia, Buddhism in Southeast Asia and Confucianism in East Asia, with Central Asia as a zone of religious transition. Though restricted by high transport costs to commodities with a high ratio of value to weight, such as spices and silk, all these regions, as well as sub-Saharan Africa, were linked together by trade, both overland across the Silk Road and overseas, via the South China Sea, the Indian Ocean, the Red Sea and the Persian Gulf. The only region that was linked to all the others was the Islamic World, which was then undergoing what has been called its ‘Golden Age’. Along with China, then experiencing the economic miracle of the Sung Dynasty, it was the most highly urbanized of all the regions, its economy sustained by a veritable ‘green revolution’ in agriculture and flourishing luxury industries. Western Europe, on the other hand, was the least connected, with direct contacts limited to the Islamic World and Eastern Europe.
These early trade links were substantially expanded by the establishment of the Pax Mongolica as a consequence of the conquests of Genghis Khan and his successors in the middle of the thirteenth century, extending across Eurasia from the shores of the Pacific to Russia and Iran. It was not only goods, but ideas and techniques as well, that were transmitted along pacified trade routes. Unfortunately, so were the plague germs that resulted in the catastrophe of the Black Death, which carried off at least a third of the population of Europe and the Middle East in the middle of the fourteenth century. The consequences of this massive shock were highly asymmetrical for Western Europe on the one hand, and for Eastern Europe and the Islamic world on the other. In Western Europe the sudden fall in population raised per capita incomes and real wages substantially for the survivors, leading to a slow but sustained recovery of population and total output, and favorable institutional developments such as the decline of feudalism and the greater freedom of towns and cities. In Eastern Europe the stronger relative position of the large landowners led to a strengthening of serfdom and the weakening of the position of the towns. In the Islamic world the Mamluk sultans responded to the initial fall in their land revenues by increasing the tax squeeze on peasants, merchants and urban industries, choking off recovery with disastrous long-run consequences for the position of the lands of Islam relative to the West.
Demographic recovery and economic expansion in Western Europe, also accompanied by a native Chinese revival under the Ming Dynasty, fostered what has been called an ‘Age of Commerce’ in Southeast Asia. Based on the emergence of Melaka as a successor entrepôt to the earlier Srivijaya, this was stimulated in the opening decades of the fifteenth century by the remarkable voyages into the Indian Ocean of the Muslim admiral Zheng He. These ventures proved that while the Chinese lacked the same incentives for overseas expansion as those that motivated the later European voyages of Vasco da Gama and Christopher Columbus, they certainly did not lag behind in capability, since their ships were much larger and more seaworthy, and their navigational techniques at least as advanced. The European voyages can be seen at least in part as the outcome of a long-standing Genoese desire to circumvent their Venetian rivals by accessing directly the source of the lucrative spice trade, as well as of a similar desire on the part of Iberians and others to circumvent the Muslim middlemen controlling access to sub-Saharan gold supplies. However serendipitously, these voyages unlocked for Western Europe the access to the vast resources of the New World. Among the major consequences of this event were the unleashing of a fl ood of silver around the world and the introduction of new crops that increased food production and population, notably in China. American silver not only fi nanced the activities of the English and Dutch East India Companies in the early seventeenth century, but monetized the economies and revenue systems not only of Europe but of the Ottoman, Safavid, Mughal and Ming Empires as well. After silver the next major commodity exported from the New World was sugar, grown in the slave plantations of the Caribbean islands, Brazil and the southern colonies of the North American mainland. Africa thus made her tragic entry into the early modern Atlantic economy as one corner of the infamous ‘triangular trade’. The resources of the New World and their signifi cance for trade with and within the Old World led to a prolonged global struggle between the major European nation-states over their possession and control during the ‘Age of Mercantilism’, in which the Iberian pioneers, Portugal and Spain, were eventually replaced by the Dutch, the French, and ultimately by the British.
As pointed out long ago by Jacob Viner the twin objectives of Mercantilist policy, ‘power’ and ‘plenty’, were not in confl ict with each other. The naval power of the state sustained its trade, while economic success enhanced military prowess. Great Britain proved herself to be the most formidable contender in this global competition, with victories over the Dutch in the second half of the seventeenth century and over the French in the eighteenth, fi nally crowned by the defeat of Napoleon in 1815. By this date the Industrial Revolution was already underway, but the technological innovations associated with this crucial transition had a much greater economic impact as a result of the global trading empire that the Royal Navy had secured through the defeats of its Dutch and French rivals. The spearhead of the Industrial Revolution was the Lancashire cotton textile industry, which arose as a result of protection against imports from India supplied by the East India Company. After struggling to compete with the Indian handloom weavers, the Lancashire industry boomed after the wave of technical innovations that applied steam power to the spinning and weaving of raw cotton imported from the slave plantations of the New World, with the fi nished products largely exported back to Britain’s present and former overseas possessions. The elasticities of both raw material supply and fi nal product demand were much higher as a result of Britannia ruling the waves after the Age of Mercantilism, permitting the expansion of output and exports to occur without being choked off by too steep a rise in input costs and fall in final product prices.
Assured of both naval and industrial supremacy, Britain could safely move to adopt free trade for herself and advocate it for the rest of the world after repealing the Corn Laws in 1846. This shift took place within the context of the ‘Great Specialization’, which saw manufactured goods being exported from Britain and other European countries, while Asia, Africa and Latin America exported primary products, and North America, Argentina and Australia exported grain and meat. The new technology of the Industrial Revolution dramatically lowered transport costs via the railway and the steamship, while its application to military uses enabled European powers to extend their imperial sway in Asia, Africa and the Middle East, and thus impose more or less free trade upon the rest of the world. The fall in transport costs and the movement to lower tariffs caused the relative prices of tradable goods to converge within narrower limits than ever before, while the prices of productive factors such as labour, land and capital were determined by international trade and factor mobility, instead of national endowments, as before. This created a backlash, with tariffs being raised in France and Germany to protect farmers from the grain flooding in from the Americas and Russia, while industrial protection was adopted in latecomers such as Germany and the United States. Tensions created by global competition contributed to the outbreak of the First World War, belying predictions that the growth of interdependence would make armed confl ict unlikely. The aftermath of the war saw an increase in economic instability that culminated eventually in the Great Depression of the 1930s. This saw a catastrophic decline in the volume of international trade and a collapse in the terms of trade of primary producing countries, many of which were colonies of the European empires. The globalized world of 1815-1913 appeared to have gone forever in a wave of trade protection and exchange controls.
The end of the Second World War saw political independence for much of Asia and Africa, while the Cold War broke out between the eastern and western blocs. Freer trade and investment occurred within the developed capitalist ‘fi rst world’ but the newly independent developing countries and the Soviet bloc did not join in. It was only after the success of the ‘outward-looking’ development strategies of the East Asian economies and the collapse of the Soviet Union that the world moved strongly towards freer trade and capital movements. While from one perspective this might be regarded as merely the restoration of the globalization of 1870-1913, the period saw a historic shift in the pattern of trade, with the remarkable expansion of manufactured exports from the former ‘third world’. These were originally highly labourintensive, but became increasingly less so over time.
Once again continents are being connected in a manner that threatens the living standards of substantial sections of their populations, in this case particularly less skilled workers in developed countries. History warns us that there is no guarantee of an absence of protectionist backlashes, or even of major armed conflicts. The extent of globalization has historically been determined as much by geopolitical considerations as by anything else, and this will remain true in the future.
Ronald Findlay is the Ragnar Nurkse Professor of Economics at Columbia University. He is the author of Factor Proportions, Trade, and Growth and Trade, Development, and Political Economy. Professor Findlay is a member of the WIDER Board.
Kevin H. O’Rourke is Professor of Economics at Trinity College, Dublin. He is the coauthor of Globalization and History.
This article is based on the book Power and Plenty: Trade, War, and the World Economy in the Second Millennium published by Princeton University Press, 2007.