If that is globalization 4.0, what have been the opposite three?
“Globalization 4.0 has only just begun, but we are largely inadequately prepared for it,” wrote Klaus Schwab, founder and Executive Chairman of the World Economic Forum, last month when the Davos 2019 topic was announced.
In the world of buzzwords, globalization 4.0 should certainly follow Industry 4.0 (which referred to the digitization of manufacturing). In fact, the former has been used here and here before. The sentence raises two questions for international economists:
1) Does the new label have substance or is it just a distinction without distinction?
2) When the fourth globalization is around the corner, what were the first three?
Is there really any difference? (Spoiler: Yes, there is.)
I believe that the globalization of the future will be very different from what we know today and the globalization we have known in the past. Plus, it’s coming incredibly quickly – and in ways few expect.
In fact, I believe this strongly enough to have written a book on the subject that – strangely enough – will be published in time for the Davos meeting in January 2019.
Here is my economic case in brief. Arbitrage drives globalization. Whenever relative prices differ from country to country, people can make money with a two-way arbitrage of buy-low-sell-high. When it comes to goods, the arbitrage is known as trading. For centuries, technological limits meant that arbitrage mostly took place in goods. Above all, globalization meant that goods cross borders.
From around 1990 information and communication technology (ICT) enabled another type of arbitrage: factories that cross borders. The coordination technology enabled the G7 companies to distribute some stages of production to nearby developing countries while at the same time keeping the entire production process running smoothly and reliably. The enormous wage differentials made this location arbitrage profitable.
The largest remaining global arbitrage opportunities are service wage rates. The pay for similar tasks routinely differs tenfold in the individual countries. That’s a 10,000% difference – a very tempting arbitrage opportunity. But until now, few companies have been able to compensate for these differences due to technical barriers. The basic problem has to do with the basic reality of service and professional activities. For many of them, a personal exchange is necessary. Until recently, the cost of overcoming these prior art barriers was prohibitive. But digital technology is changing that reality. Digital technology – Digitech for short – is tearing down the barriers to wage arbitrage in the service sector.
Digitech makes it easier for people based in one country to do things in offices in another country. In my 2019 book The Globotics Upheaval: Globalization, Robotics and the Future of Work, I call it telemigration, but it’s actually just international teleworking and it’s already very common in some sectors like web development.
This new form of globalization – this new wage arbitrage, if you will – is made possible by international freelance platforms like Upwork.com, advanced telecommunications technology, and machine translation (as I mentioned in a previous blog post).
In the broader perspective of economic globalization, which I have been promoting since 2006, telemigration is the “third unbundling”. The first unbundling was the trade in goods, which was driven by a sharp decline in transport costs from the 19th century. The second unbundling was the geographical separation brought about by ICT. That makes the coming globalization the third unbundling; Digitech’s geographical separation of work and labor services, making teleworkers less remote. This begs the question: How did we get to globalization 4.0 if there were only three unbundling?
What were globalization 1.0, 2.0 and 3.0?
In my first writings on globalization, I viewed commodity-based globalization as having two very different phases. In 1999 Philippe Martin and I wrote an article entitled Two Waves of Globalization: Superficial Similarities, Fundamental Differences. If we revive this distinction, we will naturally see the first three globalizations.
Globalization 1.0 was pre-World War I globalization, initiated by a historic decline in the cost of trade when steam and other forms of mechanical energy made it economical to consume goods remotely. This globalization came with almost no government support. There was no global governance unless you count the British Navy as the UN, the Bank of England as the IMF and the British free trade stance as the WTO. And there was little domestic politics to share the gains and sufferings of more intense international commodity arbitrage.
Globalization then fueled the fortunes of a nation’s most competitive citizens and businesses, but broke the fortunes of the nation’s least competitive citizens and businesses. It took place in the context of very simple economic systems (laissez-faire capitalism, imperialism and various forms of autocracy). That combination didn’t end well. Two world wars, the Great Depression, and the rise of communism and fascism resulted in hundreds of millions of people being killed by other people.
Finally a solution was found. The face of capitalism was softened with the New Deal in the US and social market democracy in other rich economies. In another large part of the world, communism became a kinder, gentler version. Taken together, we can view this as a separate phase; call it globalization 2.0.
Globalization 2.0 is the post-World War II period when trade in goods was combined with complementary domestic policies that helped share the pains and gains of globalization (and automation). The market was responsible for efficiency; the government was responsible for the judiciary. At the international level, globalization 2.0 saw the establishment of an institution-based, rule-based international governance, in particular the UN, the IMF, the World Bank, the GATT / WTO and many specialized organizations such as the Food and Agriculture Organization and the International Labor Organization.
Globalization 3.0 is what I called the Second Unbundling or the New Globalization. Arvind Subramanian called it hyperglobalization, Gary Gereffi called it the global value chain revolution, and Alan Blinder called it offshoring. The key to this is that globalization is now leading factories to cross borders and – critically – bringing with it the know-how of the G7 companies. The result was a new manufacturing world in which high-tech was combined with low wages. This new combination disrupted the lives and communities of workers competing on high wages and high technology as well as those competing on low wages and low tech. Most affected were workers employed in goods producing sectors, as this unbundling mainly affected goods producing sectors. In particular, the G7 factory workers’ monopoly on G7 manufacturing technology was broken when their employers relocated jobs and expertise abroad.
The Globotics upheaval
I call globalization 4.0 the third unbundling. That will happen when Digitech allows the arbitrage of international wage differentials without the physical movement of workers. While globalization 1.0, 2.0, and 3.0 were mostly a concern of people who made a living (since globalization focused on things we did), globalization 4.0 will hit the service sector. Hundreds of millions of service and skilled workers in advanced economies will be exposed – for the first time ever – to the challenges and opportunities of globalization.
It is worrying that many workers in the service sector are also being displaced by AI-controlled automation. If the workers who are disrupted by Globalization 3.0 team up with the white-collar workers who are disrupted by Globalization 4.0, we may have a break – what I call the Globotics break. If you read the latest headlines, this upheaval may be wearing a vest.
Each great transformation creates triumphs for those who can seize the opportunities and tragedies for those who cannot. Future globalization will lead us to a better world if we prepare well and our governments make sure this doesn’t happen too quickly. In the past, explosive economic changes have led to explosive social upheavals. Our governments have to help people adapt and, if things go too fast, they have to slow it down.
Richard Baldwin, Professor of International Economics, Graduate Institute, Geneva