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Book Review: The Great Convergence: Information Technology and the New Globalization (Richard Baldwin)

This book mostly claims to be a book about “globalization,” today’s trendy word, but really, it is a book about industrial revolutions through time and space.  The author, Richard Baldwin, offers a new framework for understanding how the world has developed since the Great Divergence, led by England, that created centuries-long worldwide economic dominance by European cultures.  In particular, he offers an explanation why, since 1990, the relative share of the global economic pie held by the West has decreased, when it had never decreased before.  All this is interesting and valuable, in particular Baldwin’s conclusion that American critics of globalization are at least partially correct.  But it’s incomplete in the end, since Baldwin’s analysis completely omits the critical role of culture and institutions as related to a country’s capacity to develop.  Instead, he treats all humans as interchangeable members of homo economicus:  a fatal error, but one common to academic economists.

Baldwin’s “Great Convergence” is the recent partial rollback of the centuries-long total domination of the global economy by Europe (and America, which for these purposes and all purposes in this book counts as Europe—basically, Baldwin focuses on the G7 as the “developed world”).  More specifically, the Great Convergence is the relative rise of China, Korea, India, Indonesia, Thailand, and Poland (the “Industrializing Six,” or I6).  While a few other countries (Japan, Hong Kong, Taiwan, and Singapore) industrialized rapidly before 1990, the real proportional drop in the G7’s share of global income has come since 1990 (though half of the total shift went to China).  Baldwin’s goal is to explain how this came about and what the implications are for the globe.

The core of Baldwin’s book is therefore contrasting histories of two sequential globalizations.  The “Old Globalization” was the result, mostly, of lowered costs of transport resulting from the First Industrial Revolution.   The “New Globalization” is present-day economic structures that are creating today’s Great Convergence, mostly the result of cheaper communications.  Baldwin begins with well-worn history, outlining the slow economic development of the world until 1750 A.D. or so.  The entire world lived in the classic Malthusian Trap, where per capita income never increased by much, and often went the wrong way.  At that point, Europe’s share of the total world economy was small, simply because Europe’s population was a tiny proportion of the global whole.

From here, Baldwin proceeds by outlining his framework of “three cascading constraints” to globalization—i.e., structural barriers that collectively prevent a true world market from existing.  The first constraint was the constraint of transport distance, which was mostly eliminated by steam and rail in the First Industrial Revolution, thus permitting the G7 (minus Japan) to use comparative advantage to dominate global trade by manufacturing goods consumed by people far away.  (Baldwin dodges the question of why this first unbundling happened in and benefited primarily Europe, and not other places, which seems highly relevant to his analysis.  More on this later, though.)  Baldwin calls this “globalization’s first unbundling—the physical separation of production and consumption.”   The result was not just European wealth, but close physical clustering of manufacturing in Europe, since excellent high-bandwidth communications were necessary to industrial production and innovation, but were very costly over distance—thus distances for communication in production were shortened as much as possible.  And the resulting increasing innovation (“spillovers from manufacturing”) further increased European comparative advantage, thus even more preferencing Europe (this “agglomeration” theory is Paul Krugman’s, who was a real economist before he became a fifth-rate political hack).

So far this is mostly yet another straightforward explication of comparative advantage, with a giant statue of Ricardo taking center stage, along with a smaller one of Krugman.  But Baldwin then turns to his “second unbundling.”  (This is explicitly the same thing as the “New Globalization” and the “global value chain revolution”; Baldwin’s tendency to use multiple buzzwords for the same concept is annoying and makes the book often confusing to read.)  This unbundling is removing the geographic tie between communication and production, which had resulted in clustering of manufacturing.  It means removal of the second constraint, expense of long-distance communication, made possible and driven by the “ICT Revolution.”  In essence, this is the technology of computers and communication, combined with the network effect (i.e., one fax machine is useless; many are useful), resulting in nearly universal, cheap, high-bandwidth communication.  The drop in costs has been huge, as we can all personally attest.  (Baldwin says, without citation, that just between 2006 and 2007, the volume of information transmitted increased by an amount 1.06 x 10^36 times the amount of all information collectively transmitted in the 1990s.  This seems extremely unlikely and must be an error—that number is inconceivably large.  It’s not quite the number of protons in the universe, but it’s not that far off either.)  The ICT Revolution also included a few items that are not strictly technology, such as air cargo, which does not make transport cheaper, as in the Old Globalization, but is revolutionary because it means it is possible to do things quickly that simply couldn’t have been done quickly before.  The result of this second unbundling, Baldwin says, was the Great Convergence, since production no longer had to be done in clusters in Europe, with expensive local labor, but could be outsourced instead to countries with cheap labor, and necessary “know-how” exported via newly cheap communications, cutting expensive European labor mostly out of the equation.  This meant economic boom times for the countries which were new production centers.  Thus, the I6 grew rapidly since 1990, and took global GDP share from the G7.  But they did not fully industrialize, as had the G7.  Instead, they joined “regional production networks.”

And what are “regional production networks”?  They are a consequence of the third constraint, the high cost of actual face-to-face connections.  This still exists, even with videoconferencing and Skype, since those are not the same thing as being present with another person.  Baldwin thinks that this constraint may disappear, leading to a “third unbundling,” if telepresence ever becomes a reality.  But for now, this third constraint means that that in practice offshoring made possible by cheap communications still is optimally done where face-to-face communication is most easily possible—that is, where travel to the offshore site from the country with technology is easy.  This creates Baldwin’s “regional production networks,” which means low-wage offshoring in Central and Eastern Europe (for Western Europe);  Mexico (for the United States); and East and Southeast Asia (for Japan).  Africa and South America, located farther away from the G7, got and get nothing.

So, according to Baldwin, the ICT Revolution caused the Great Convergence, by lowering “the cost of coordinating complex processes across great distances,” which resulted in Western companies “moving labor-intensive stages of production from high-wage nations to low-wage nations.”  That is, the ICT Revolution allowed the I6 to industrialize, given that earlier efforts to duplicate the success of the West had failed (although Baldwin never addresses why only six countries really benefitted, given that his “regional production networks” could include a lot more countries than six).  Another way to view this is that the second unbundling meant a change in comparative advantage, which could now be sliced in new ways not requiring whole-country industrialization to compete on a global scale.  Thus, Vietnam (not an I6 country, but no matter) didn’t have to fully industrialize to advance its economy—it could advance through using “Japanese management know-how and Vietnamese labor.”  (Baldwin never defines “know-how,” which must mean to him some combination of technology and managerial capability.)  Where the Japanese had to obtain both themselves, Vietnam (and more relevantly, the I6 members) could jump start their competitiveness, and thus their industrialization, by using outside know-how, rather that developing it themselves.

Among all this talk about technology and communications, every so often Baldwin throws off an orphan reference to “commodity super-cycles,” which are a “boom in commodity exports and prices” resulting from “the soaring income growth in the rapid industrializers.”  Allegedly this has “sparked takeoffs” in unnamed countries.  This is not well developed, but his basic point seems to be that such “super-cycles” add to the Great Convergence formerly poor countries that are now relatively richer, even though they are not part of the “global supply chain revolution.”  But Baldwin names no such countries, doubtless because no countries have taken off based on commodities if they have otherwise deficient cultures or institutions—Africa, with its “curse of resources,” is the best example of that.  And as the saying goes, Brazil is the country of the future—and always will be.

The New Globalization has two key implications.  First, as long as the know-how is external, there is a cap to how far a country can rise in global trade using its new-found comparative advantage, since cheap labor will not remain cheap forever.  Thus, if the I6 is ever to approach the G7 in per capita income, they will have to develop, or steal, know-how, and be able to make such know-how internally self-perpetuating.  Of course, the only way that can happen is if the country’s culture is able to use external know-how to jump-start its own know-how and managerial competence.  The key question is the permanence of the local know-how, which is only possible to create if the receiving country is receptive and capable.  But the know-how of the West has been globally available for hundreds of years, at little or no cost, and very few countries have taken any advantage of it.  This suggests that some factor specific to each country ultimately determines if it can reach true, G7-type development, or will instead either not develop at all or remain stuck as second-tier value chain suppliers to G7 countries.  But Baldwin ignores all this, other than the existence of a potential cap to growth as labor costs rise.

Second, and very importantly for the United States and the rest of the G7, the country exporting know-how is reducing the relative competitive advantage of the exporting country—thus, the old Ricardian belief that comparative advantage magically lifts all national boats no longer holds true. The owners of the know-how profit; the workers, not so much.  Baldwin uses the clever metaphor of a top soccer coach who coaches the players of another country’s team in the off-season—the coach profits, and the other country profits, but not the coach’s country.  As Baldwin says, therefore, now “what is good for GM may not be good for America.”  The necessary conclusion is that American critics of globalization have a point, which is often ignored by free market boosters.

Baldwin ends by offering “rethinking” of G7 policies.  “The main point is that wise governments should distinguish carefully between factors of production that are internationally mobile and those that are internally immobile.”  The latter should be encouraged, because the former can be, and will be, exported, which will be to the detriment of most of the people of the country that encouraged and helped created those factors of production.  This implies that items that have received a lot of public support in the past, such as basic science, patents, and financial capital should (possibly) be de-emphasized, and high-skilled labor and human capital emphasized.

At the same time, though, Baldwin very much objects to policies that actually act to keep advantages home.  The author’s ideal solution, or optimal solution under modern circumstances, is exemplified by the British manufacturer Dyson.  That company cut local manufacturing jobs and shipped them to Malaysia in 2003; then boosted employment back in England a decade later by hiring lots of “engineers, scientists, and people running the business.”  The alternative to this, says Baldwin, would have been for Dyson to lose all the jobs, so this is a good outcome.  Maybe.  Or maybe not—perhaps Sir James would just not be as rich (he is roughly eight times as rich now as he was in 2003).

But whether it was necessary or not, such actions imply an ever-increasing stratification.  Why did a majority of English voters choose Brexit?  In part, because they are tired of the “professional-management elite,” in the words of Joan Williams, that is, the types of people newly hired by Dyson, getting richer while they get poorer due to the New Globalization.  (On the other hand, Sir James supported Brexit, so maybe there is more to the story.)  Baldwin concludes that no matter what, “there will be factory jobs in G7 nations for high-skill workers and robots.  Low- and medium-skill workers will see their jobs eliminated or offshored.”  Baldwin’s “rethinking” is less fresh thought and more a placid acceptance of serfdom for most American workers, which is not likely to be a palatable political option.  The probable result is more Trump and more Brexits, whether or not that makes economic sense.  After all, there are many obvious ways a government could reverse the course of the New Globalization—among them, forbidding the export of know-how, or taxing profits upon their return.  Baldwin ignores these solutions, though, presumably because he believes they would be Neanderthal and economically inefficient—he says we must not “resist the changes,” though he never says why we must not.

Baldwin does a good job of laying out his thoughts.  It’s the things he omits from his thoughts that are my problem with the book.  The big omission is the one I identified in the first paragraph of my review.  It is a fundamental error to believe that all countries and cultures are basically the same and therefore are amenable to the same policies, which will necessarily produce the same results if applied in the same way across countries.  Baldwin does see that it is a critical question why the rest of the world failed to industrialize before the ICT Revolution was created by the G7.  He doesn’t seem to want to answer the question, though, and he most definitely doesn’t want to address any cultural reason that might imply European inherent superiority.  As a result he meanders.

First, he mutters about the West having, in effect, a first mover advantage for no stated reason—he repeatedly uses the evasive phrase “As history would have it,” which implies random chance.  He seems to think that it’s just coincidence that as transport costs declined, that Europe specialized in industry, while everyone else specialized in producing raw materials, or just stayed at subsistence level.  Realizing this is silly, and that given population shares Asia should have dominated the world, he then expresses sympathy for the idea that “colonialism and imperialism” kept those countries that would otherwise have led the world from leading the world.  This is also silly, of course, for many reasons, among them that if that’s true, why was the industrial might that allowed colonialism already solely held by Europe, at the beginning of this alleged process of deciding who was going to lead?  If there was a race, it was over before it began, and that must be for some other reason.

Baldwin notes that earlier industrialization efforts outside European cultures all failed.  He does not mention Australia, though, which did just fine, after all, even though it was very far away and thus transport and communications costs were highest of all there, so its success which must be due to its European culture.  Instead, he makes the wild claim that “Historically, all industrialization and growth takeoffs were government engineered—all except the first one (in the United Kingdom).”  He says all industrialization and growth in the G7 was due to a “standard set of four [government] policies”:  internal tariff elimination, (initial) imposition of external tariffs; chartering banks; and mass education.  Then he tell us, “[M]ost developing nations implemented this standard four-pack once the yoke of colonialism was lifted.”  But this does not answer the question—in fact, it highlights it.  Why did none of these developing nations get industrialization and growth in return, if it was so easy for nations with European cultures?  Ultimately, after some more evasive burbling, mostly about tariff policy, Baldwin weasels out, claiming “Surely the full answer lies in a combination of the political, economic, and geographic factors.”  At no point does he, even once, mention cultural factors as possibly relevant.

Baldwin would have done well to work in the thought of Thomas Sowell, or Toby Huff, Kenneth Pomeranz, or Francis Fukuyama.  Those thinkers offer detailed explanations that would fill in the gaps in Baldwin’s work.  But, as I say, a believer in Economic Man as the basic building block of the world simply won’t, or can’t, see that there is more to the story than the cost of transport and communications, and that ultimately substantially undermines the value of this book.

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