3.2: Background - Five Decades of Economic Globalization

Learning Objectives

By the end of this section, you will be able to:

• Recognize key historical trends which created our contemporary global economy
• Identify major institutions supporting economic globalization
• Survey major technological breakthroughs that have shaped the global economy

Two Historic Turns

Economic globalization gained significant momentum during the final decades of the Twentieth Century. Two major developments fueled these changes. The first was China’s shift away from a planned national economy and embrace of a market economy. During this period of dynamic economic transformation, China’s integration with the global economy has led some to wonder whether China’s economic reforms drove globalization or vice versa. In other words, the significance of China to the story of economic globalization cannot be overstated. The second major historic development was the collapse of communist party-led regimes throughout the world, notably the Soviet Union, over several tumultuous years from 1989-1991. This heralded the end of the Cold War and ushered in the near-universal embrace of a global economy, one that was liberal and capitalist (as discussed in Chapter 2). Let’s explore each of these historic turns and their implications for understanding economic globalization.

China’s momentous decision in 1978 to engage in “reform and opening up” led to changes that have reverberated worldwide since. Its shift to liberalize its economy (“reform”) and embrace market mechanisms of supply, demand, and profit motivation generated an economic boom of unprecedented, historic proportions. During its initial four decades of reform, an astounding 800 million people were lifted out of extreme poverty, accounting for nearly 75 percent of the global reduction in extreme poverty (World Bank & PRC State Council Development Research Center, 2022). This was accompanied by a turn toward external trade (“opening up”) and export-led development.

Goods made in China, the “factory to the world” made their way into the lives of billions of people around the globe and made China the world’s top trading country, measured in terms of total imports and exports. By 2018, China had surpassed the United States as the world’s biggest trader, accounting for 13.5 percent of global exports, followed by the U.S. at 9 percent and Germany at 8.5 percent (China Power Team, 2019). In 2023, China was the top trader to over 120 countries around the world (China International Import Expo, 2021). 

Figure \(\PageIndex{1}\): Revelry in Shenzhen during a light show in 2019. Shenzhen became an urban hub for exports and foreign investment during China’s “reform and opening up” (CC BY-SA 4.0; Sparktour via Wikipedia)

A second major global event shook the world economy a decade after China’s reforms. Globalization of economic life gained momentum following the collapse of the Soviet Bloc (also known as the Eastern Bloc, Communist Bloc, or Socialist Bloc) at the end of the 1980s. Countries within this bloc were led by communist parties under the patronage and protection of the Soviet Union. Communist party rule lasted over four decades in many of these countries, compared with seven decades in the Soviet Union. The rapid, and largely peaceful, revolutions which overthrew communist regimes in half a dozen countries of Eastern and Central Europe signaled the end of their command economies. (These revolutions were followed by the bloodier and much more fractious dissolution of Yugoslavia in the 1990s, but by then Yugoslavia was no longer a satellite state of the Soviet Union.)

The Soviet Union itself imploded soon thereafter and broke into fifteen separate countries. The causes for this are myriad and interrelated, ranging from military and economic overextension to brittle bureaucracies unwilling to adapt to new realities. All post-Soviet countries embraced, to varying degrees, a market turn in their national economies. This meant privatization of public or state-owned industries and the introduction of market-determined prices. Importantly, all began to integrate with the larger world economy as the Soviet trade bloc, Comecon, faded away.

 

Figure \(\PageIndex{2}\): Countries led by Communist Parties (prior to the Tito-Stalin split of 1948) (CC BY-NC-ND 2.0; Mosedschurte via Wikipedia)

 

Together these two historic turns heralded a period of economic globalization that has persisted for decades, from 1978 to the present. The integration of China, the former Soviet Union, and countries of the Soviet Bloc into the global economy led many to theorize that the world had converged on the market economy as a common organizing principle.

The Supporting Cast: Global Economic Institutions

Several major intergovernmental organizations (IGOs) support and enable economic globalization. Typically their membership consists of governments which provide funding and other resources to the IGOs. Member governments also shape IGO policy through member-state representation. The United Nations is the most prominent IGO, and it serves as the umbrella organization for additional IGOs which have encouraged global economic growth and regulated the global economy. The most significant among these IGOs are the World Bank, International Monetary Fund, and World Trade Organization (previously the General Agreement on Tariffs and Trade). All have roots in the 1940s and have persisted into the present. As with virtually all other aspects of globalization, IGOs are a topic of heated debates about the merits and perils of economic globalization.

The stated mission of the World Bank is to “end extreme poverty and promote shared prosperity in a sustainable way.” It represents the world’s largest international development bank, with 189 member states and projects in over 170 countries. Countries apply for World Bank funding to support development projects. The World Bank’s portfolio is wide-ranging, with projects in the following sectors: agriculture, education, energy, finance, health, industry, communication, public administration, transportation, water, and waste management.

Figure \(\PageIndex{3}\): Attendees at the Western and Central Africa Ministerial Roundtable on Gender Equality, convened during the Spring 2023 Meetings of the World Bank and IMF (CC BY-NC-ND 2.0 DEED; World Bank Photo Collection via Flickr)

The International Monetary Fund (IMF), in contrast, is an IGO focused on global financial stability. It issues loans to governments, typically when they are experiencing a financial crisis. Financial crises can take many forms. A government may have trouble servicing its external debts or engage in excessive deficit spending. Its currency may collapse due to currency speculation. These and other crises may require external bailouts by the IMF in order to stabilize the national economy and keep the crisis from spreading internationally. In addition to crisis assistance, the IMF also provides economic policy advice and technical assistance to governments. The IMF has a membership of 190 countries, with member-states contributing to the Fund and voting on Fund policies.  

The newest of these IGOs, the World Trade Organization (WTO), began as an international agreement to lower tariffs, or taxes on imports, and encourage international trade. WTO member-states engage in negotiation “rounds” to discuss and agree on international trade law. The WTO also contains a trade dispute mechanism; tribunals help to settle trade disputes between various member-states. In 2022, for example, China initiated a WTO dispute settlement case against the United States regarding U.S. trade restrictions on exports of advanced semiconductor chips to China, claiming that this violated several WTO agreements.  

Complementing these UN-affiliated IGOs are several newer IGOs, some of which have moved away from the transatlantic focus of the World Bank, IMF, and WTO. China founded the Asian Infrastructure Investment Bank (AIIB) in 2016 as a global development institution similar to the World Bank. Its membership stands at just over 100 state members. It is headquartered in Beijing, representing a shift away from the North American and European focus of other IGOs.

Debates swirl around all of these organizations. One central question is whether they have advanced global prosperity in a just and sustainable way. The concept of prosperity is multi-faceted and there does not exist a single accepted measure for it. Critiques of economic globalization, and the IGOs which support it, often focus on questions of power, fairness, and justice. The IGOs surveyed here concentrate economic and political power – on an international scale – in wealthy countries, especially the United States. It is no coincidence that Washington, DC, is the headquarters of both the World Bank and IMF, while WTO headquarters are in Geneva, Switzerland. The Group of 77 (G77), an organization of developing countries, has publicly decried the unequal negotiating terms of the WTO. In the 1990s, anti-globalization protests against the World Bank, IMF, and WTO drew attention to how these organizations further entrench the power of wealthy countries of the Global North while countries of the Global South fall further behind, even though all have registered economic growth in the era of economic globalization. Other critiques have honed in on weak protections for labor and continued marginalization of minority groups. Still others have focused on exploitation of indigenous resources. Climate justice groups have called for stronger environmental laws and environmental reviews across all of these organizations.

Figure \(\PageIndex{4}\): Anti-globalization protesters converged on Seattle in 1999 to disrupt ministerial meetings of the WTO (CC BY-SA 2.0; Steve Kaiser via Wikipedia)

Technological Change

Technology is a major driver of human prosperity, and technological frontiers expanded in several significant ways to enable this current period of economic globalization. The Third Industrial Revolution mentioned in the previous chapter comprises the computer age, which was well underway during the Twentieth Century. It was the advent of the digital age, combined with the rise of the internet and World Wide Web, that created the conditions for a new kind of economic globalization. E-mail, video telephony, e-commerce, and online platforms for all manner of communication and information-sharing emerged during the internet age. The internet itself was borne of a desire by U.S. military scientists and researchers to share computing power during the Cold War (Science+Media Museum, 2020). Since then, it has become as integral a part of contemporary life as electricity or indoor plumbing.

 

Figure \(\PageIndex{5}\): Copy and Paste Caption here. (Copyright; author via source)

 

Older technologies which drove previous periods of economic globalization, and earlier Industrial Revolutions, such as breakthroughs in shipping and communications, have also been updated. The containerization and standardization of trade in goods dramatically reduced the costs of trade and supply chain management. While the economic globalization before the First World War saw mass consumption of transoceanic transport and dramatic increases in the speed of communications, there were repeats of these breakthroughs in the late Twentieth Century as well. Flight times and costs continued to plummet, along with the costs of long-distance communication. Trade volume grew exponentially as shipbuilding advanced. The largest container ship in 2017 had a maximum capacity of 21,413 twenty-foot containers, compared to a capacity of 1,000 in 1964, representing a more than twenty-fold increase in capacity (Saxon & Stone, 2017). All of these breakthroughs, which have seemingly undone the constraints of geography, have led some scholars to theorize that the “world had become flat” (Friedman, 2005).