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Essay: How International Factors Facilitated & Hindered Globalization in the Golden Age, Interwar, and Post-War Periods

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In order to discuss the history of the modern world economy, the theoretical framework used in class can best explain the “international” factors that have facilitated and/or hindered globalization during the Golden Age, the interwar period, and the postwar era. The Golden Age started in 1870 and ended in 1913, right before the first World War and is best characterized as being the start of globalization. The interwar period begins in 1919, right after the first World War and ends in 1939, immediately before the second World war. This time period is defined as being a time of global economic protectionism. The post war era starts in 1945 and runs into present time, a period of economic globalization. The pendulum shift between state and market can best describe the state of the global political economy.

The “international” factors that have facilitated and/or hindered globalization include the global political conditions, global economic conditions, and technological change during the time periods listed above. These variables are used in order to create an explanatory framework for how nations shaped their policy to fit the global economy. Examples of the global political conditions include the variations in military, trends in colonization and decolonization, and the existence of a dominant global power. Global economic conditions include global price trends and financial crises, like recessions. The periods of globalization are characterized by rapid industrialization, making technological change an important variable. The second part of this paper will use the theoretical framework to explain the “domestic” factors that discuss how certain aspects of a country influenced the way that policy decisions were made.

The first period in the history of the modern world economy is the Golden Age, which starts in 1870. The repeal of the Corn Laws in 1846, arguably, is considered to be the spur of globalization. However, 1870 was when the major economic powers at the time began to open their economies to each other. Using the theoretical framework, there are varying factors that have facilitated globalization in this time period. In terms of global political conditions, Europe was in a time of peace better known as the Hundred Years’ Peace. After the Napoleonic wars Britain rose to become the hegemonic political state of Europe and its strong Navy opened up an avenue for business and trade; this was known as Pax Britannica. The Scramble for Africa and the rapid colonization of non-western countries is another political condition to consider when discussing the Golden Age. Another facilitator of globalization was the rapid technological and industrial change occurring globally. Some examples include the iron hull, refrigerators, and the telegraph. Most importantly, however, was the way goods were being produced. Mass production rose with the advent of steam, chemical, and electrical machines. Goods were being produced effectively and with the rise of railroads which now moved raw materials to ports, products were being transported and manufactured at a higher rate. The movement of raw materials also allowed European countries to specialize and manufacturing and exporting fully produced goods.

Though the political and technological factors were facilitators to globalization, the global economic conditions during the Panic of 1873 served as a hindrance to globalization. The Panic caused countries to become protectionist in their economic policies in order to protect their national industries. The laissez-faire orthodoxy and the gold standard’s “correction mechanism”, running a trade deficit by spending more gold than earned and importing more than exporting, caused countries to fall into an economic recession. The price of wheat dropping from $1 to sixty cents also demonstrated that the US economy was beginning to take over with the mechanization, further threatening European economies. Germany, specifically, closed off its economy in order to combat the rising American power (Frieden, Ch.1).

By the early 1900s the world economy seemed to be balanced with the global economic-political conditions and the rapid technological change. However, unstable political conditions during the first World War set up the protectionist interwar period. Several economic and political factors hindered globalization during this time period. To start off, the US began to balk at the idea of being a global leader. The United States congress failure to ratify the League of Nations created a weak international structure that would soon deteriorate. In addition, the US refused to forgive war debts which created economic pressure on the Allies and Germany.

To deal with the Great Depression countries either turned to an autocratic authoritarian system or a social democratic system. Creditors generally turned to a social democratic system and debtors turned to an autocratic authoritarian system. Social democratic states often turned to aggressive monetary and fiscal policy in order to stimulate the economy.The orthodoxy before the Great Depression was largely laissez-faire, relying on the self correcting mechanism of the business cycle and gold standard. To combat the Great Depression, the government in social democratic states were characterized by their interventionist policies, like expanding social programs and increasing government spending. Doing this would break the orthodoxy and created a new role for the government called “counter cyclical demand management”. This would increase investment, employment, and output. In contrast, autocratic-authoritarian governments tended to close off the state by controlling capital movements and currency trading in order to force domestic investors to keep their money in the state. These governments wanted to have complete political, economic, and military control over the state which stifles globalization (Frieden, Ch.9).  

Though the interwar period was a generally protectionist time era, the United States attempted to facilitate globalization through the Reciprocal Trade Agreements Act of 1934 (RTAA). This act would create bilateral trade agreements with other countries and lower tariffs, thus facilitating freer trade. This marks a shift in US policy, the beginnings of becoming a global economic leader.

The second World War and the post-war economic era brought on large changes to the global economic order. In terms of political conditions, the United States emerged as a global leader because of its military hegemony and the fear of Soviet expansion. This created an unprecedented economic system, Bretton Woods. Bretton Woods was created in 1944 and had three pillars: the General Agreement on Tariffs and Trade, which would be the new international trade policy for the next decade, the International Monetary Fund, which created a fixed-but-adjustable exchange rate and pegged all currencies to the dollar and the dollar to the gold standard, and the World Bank. Because the US was against the colonization, many European countries began to decolonize in order to fall under the economic security blanket. The Truman Doctrine which rallied the west against the Soviets along with NATO secured the fight against the rise of communism.

Former colonies attempted to protect themselves from the world economy by turning to Import Substitution Industrialization (ISI). ISI attempted to grow “infant industries” by creating protective barriers against foreign markets. The lack of specialization as well as the increasing prices of imports caused ISI and many Latin American countries to fail. This is an example of a hindrance to globalization (Frieden, Ch.13).

The failure of the Bretton Woods system in 1971 served as a small economic and political roadblock to globalization. The Bretton Woods system failed due to the lack of US monetary discipline and rising capital mobility. From the Bretton Woods system, the IMF and the World Bank survived. This ensured capital mobility and domestic policy autonomy, while Bretton Woods attempted to ensure capital mobility, domestic policy autonomy, and a fixed exchange rate. This proved to be impossible and called the “Trilemma”. The World Trade Organization eventually was created and took over the GATT also facilitated multinational corporations (MNCs) and foreign direct investment (FDI). Both MNCs and FDI strengthen developing countries by creating jobs and deals with the government.

Technological changes supplemented these economic and political conditions. The rise of the internet, cell phones, social media, and effective transportation all create a more cohesive international economic system. Through rapid and continuous technological change, general political peace (meaning no World Wars), and an integrated and efficient economic system, globalization has been and will continue to be facilitated in this post-war era. Though economic conditions could change due to financial crises and shocks, it is doubtful that globalization will come to a halt in this era.

Overall,  the explanatory framework using the “international factors” of global political conditions, global economic conditions, and technological changes can be used to discuss the modern world economy. The next part of this paper discusses the “domestic” factors.

Domestic Factors

The first part of this paper identifies the “international” factors that have facilitated/hindered globalization in the three time periods defined above. In this part of the paper “domestic” factors such as endowments, interests, and institutions will be used to discuss the explanation of national policies. This explanatory framework will be used to discuss the German case study looked at in class “Coalition of Iron and Rye”.

During the Golden Age, Germany had an endowment which was comparatively high in capital. It was comparatively scarce in land and capital, mainly due to the fact that the US was rising in the global economic market. Because the US was becoming competitive towards the German grain market, the nation created policy to protect itself.

The interests groups involved at the the time were: junkers, small farmers, manufacturers in heavy steel or the iron industry, and manufacturers in finished goods. Junkers wanted high agricultural tariffs and low industrial tariffs. Small farmers wanted tariffs in the middle. Manufacturers in the heavy industry wanted low agricultural tariffs and high industrial tariffs. Manufacturers in finished goods, shippers, and shopkeepers wanted low tariffs for both. Specific industries wanted these specific tariffs in order to have and produce high quality goods.

In regards to institutions, the position of Prussia was so dominant in German politics which resulted in the Junkers having a large role in deciding policy. The end result being high tariffs in both industries. This proves that there is common international pressure but the national response varies due to differences in endowments, interests, and institutions. In this case, the interests of the junkers were a high priority due to Prussian dominance, resulting in high tariffs in both industries.

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