Lecture 16 The Tripartite World

Years Present Dominant pattern of global economy Beginning of modern economic growth in Europe and the challenge to the rest of world Globalization Mark I: Networks under European hegemony Civil war among the economic leaders; financial turmoil and Depression The Tripartite World Globalization Mark II: Networks under Sovereignty, with U.S. predominance Global PoliticsEuropean Political change; European challenges to traditional empires European dominance; Colonial rule or quasi-colonial rule. Independence in Americas Crisis and war in Europe; imperial rule in other regions; new statism (bolshevism, fascism) First, second and third worlds Cold War Adoption of market economies; collapse of second world; Third-wave of democratization Technological advance First industrial revolution Second industrial revolution (electrification, chemistry, transport) Continuation of second industrial revolution Third industrial revolution (biology, information and communications, transport) Intensification and acceleration of technological change International economic management Treaties among European powers Unequal treaties between Europe and rest of world First attempt at global cooperation (League of Nations) Global cooperation in Bretton Woods institutions, GATT Stronger harmonization of policies, especially birth of WTO Global Monetary arrangements multiple arrangements, not harmonized Predominance of the gold standard, beginning of international cooperation collapse of gold standard; failure to reconstruct the gold standard Bretton-Woods system of currencies ( ); mixed floating and fixed afterwards Floating exchange rates, new currency areas, especially Euro

The Tripartite World, First-World reconstruction After WWII 2.Second-World increase in scope (China, Eastern Europe) 3.Third-World search for a political and economic “Third Way”

Some Milestones on the Reconstruction of the “First World” Economies Bretton-Woods Institutions, 1946 GATT (General Agreement on Tariffs and Trade), 1947 NATO alliance, 1949 Marshall Plan, Aid to Japan, 1946-early 1950s Treaty of Rome 1957 Convertibility of European Currencies 1958 Convertibility of Yen 1964 Multilateral trade rounds under the GATT Establishment of WTO, 1994

Some Milestones in the rise and decline of the “Second World” Economic system 1917 Bolshevik Revolution 1928 First Five-year Plan in the Soviet Union 1945 Soviet occupation of Central and Eastern Europe 1949 Chinese Communist Party victorious in Civil War 1950s Wars of revolution in post-colonial countries 1960s Early experiments on market-type reforms in socialist economies; crushed by end of decade 1970s Bankruptcy of some socialist economies (e.g. Poland) 1978 Beginning of Chinese economic reforms 1986 Perestroika reforms under Soviet system 1989 Fall of Berlin Wall, collapse of Socialism in Central and Eastern Europe 1991 Fall of Soviet Union

Some Milestones in the Rise and Decline of the “Third-World” Economic systems State-led industrialization under Ataturk, 1920s-30s Heterodox economic policies in Latin America during Great Depression Post-colonial independence (e.g. India, 1947; Indonesia, 1950; Egyptian Revolution, 1952) Indian National Planning, 1950 onward Non-Aligned Movement, Bandung Conference 1955 Dependency and structuralist theories, beginning 1950s Demands for “New International Economic Order” 1970s Developing Country Debt Crisis, late 1970s and generalized in 1982 Structural adjustment era, , involving widespread Liberalization of trade and financial arrangements

The Tests of “Convergence” 1)Do poorer countries grow more rapidly than richer countries (absolute convergence)? 2)Do poorer countries grow more rapidly than richer countries controlling for other factors, such as economic policies and institutions, geography, etc. (conditional convergence)? Three main reasons to expect convergence: Higher rates of return on investment in capital-scarce economies Inflows of investment into poorer economies Adoption of technologies and narrowing of technological gaps by the poorer economies Main reasons for divergence: pace of technological innovation; and “disconnectedness” (through autarkic economic policies)

The Gains from Trade: Specialization (and comparative advantage) Transmission of Technology imports of capital goods integration into global production Increased competition Increased incentive to innovate

Possible Downsides of Trade: “Infant Industries” don’t mature (temporary protection could, conceivably, give them time to learn) Increased inequality Geographical advantages; skill advantages

The Problems with Infant Industry Protection 1. The domestic market is too small to promote innovation or learning Consider the following cases: Ecuador $16.2 billion (1999) Ghana $7.4 billion Bolivia $8.2 billion Thailand $121 billion Vietnam $28.2 billion NYC $338 billion Rochester $30.4 billion Springfield $16 billion Ann Arbor $18.8 billion

2.The Protected Industry lacks the incentive to innovate and develop 3.The “infant” never grows up 4.The needed technology, at least for critical inputs, can only be obtained from the rest of the world

Growth, Exports/GNP, 1999 Equitorial Guinea8.4 China8.122 South Korea6.542 Thailand5.757 Singapore Hong Kong4.8>100 Vietnam4.844 Indonesia4.654 Malaysia Chile4.127 Fastest Growing Countries in the World (per capita GNP, )