UCLA Conference Papers Title Globalization and its Impact on Core-Periphery Relations Permalink https://escholarship.org/uc/item/5zn164xm Author Berend, Ivan T Publication Date 2004-02-04 eScholarship.org Powered by the California Digital Library University of California 1 Ivan T. Berend Globalization and its Impact on Core -Periphery Relations Characteristics of globalization Globalization is probably the most often used term in social sciences nowadays. Several colleagues, however, maintain that there is nothing new in globalization. The entire early modern and modern history were periods of permanent development of globalization, especially after the discoveries, building colonial empires, later railroads, and establishing laissez -fair system an the international go ld standard. The world, no doubt about it, became more international, if you want global all the time. During the last quarter of the 20th century, nevertheless, new trends and changes emerged. Many experts speak about a new chapter of history, the age of globalization. In my view, we, indeed, may speak about a new period in the history of the world economy. Economic interactions between various countries and continents: trade; capital investment; establishment of subsidiaries, production abroad, and fi nancial transactions all existed before and characterized modern capitalism. A permanent quantitative increase, higher value of trade and foreign investments, indeed, accompanied the 19th and 20th centuries. In the last quarter of the 20th century, howev er, a further dramatic quantitative change of these interactions transformed the world economy. What actually happened? 2 Trade, pushed by international agreements, developed by leaps and bounds. Originally the bitter lessons of two world wars and the gl oomy interwar decades led to the initiation of an open, interactive world economy. The postwar General Agreement on Tariffs and Trade (GATT), with its multilateral, non-discriminatory character, played a positive role in ending interwar protectionism, eco nomic warfare, and hostility. The Western great powers, most interested in exporting, launched major new initiatives to open markets during the last quarter of the century: the Tokyo Round, concluded in 1979, and most importantly, the Uruguay Round, launc hed in 1986, led to the Punta del Este declaration, which paved the way for the foundation of the World Trade Organization (WTO) and the opening of a multitude of markets. Forcing worldwide free trade was also helped by sharply declining cost of transportation and communication. The cost of a three -minute London-New York telephone call decreased from $53 in 1950 to $0.9 by 2000. The cost of an air transport passenger mile was $0.30 in 1950 and $0.11 by 1990. Exports, mostly as a consequence of free trade agreements and cost reduction, soared. Its value represented 9% of the GDP of the Western World in 1950, but increased to 30% of it by the 1990s. In Western Europe this share reached 36% of the GDP, twice the world average. In 1950, exports were va lued at $0.3 trillion, but increased to $1.7 trillion by 1973, and, by the end of the century, jumped to $5.8 trillion; an increase of 350% during the last quarter of the century. (Chart 1.) (Maddison, 2001, 127, 362). Direct foreign investment (FDI), a phenomenon well known since the second half of the nineteenth century, also increased in an unparalleled way. Foreign investment 3 amounted to $107 billion per annum in 1980, and more than doubled over the next fifteen years, growing four-times faster than foreign trade and eventually reaching 6% of domestic capital accumulation, three -times more than in 1970. The major players behind this tremendous increase in economic transactions are multinational companies —those companies that have operations in two or more countries. Multinationals, though they appeared nearly a century before, became dominant in the world economy in the last quarter of the twentieth century. The emerging dominance of multinationals was closely connected with technological and managerial development, and was, in part, a consequence of the rise of economy of scale and the movement of resources from less to more productive uses, decreasing the cost of production and transportation. According to Al Chandler this constitutes a genuine company development trend (Chandler, 1986; 1990). The quantitative changes are shocking in this respect as well: in the early 1970s, multinationals numbered around 7,000, at the end of the century, 44,000, with 280,000 foreign subsidiaries, producing one -quarter to one-third of world industrial output. By the mid -1990s, their global sales represented 40% of world trade and 75% of manufactured goods trade. The 500 largest multinationals control about 80% of all foreign production (Eden, 2000, 341), and the 100 largest global multinationals control roughly 20% of total foreign assets, employ 6 million people, and account for nearly one - third of total multinational sales. “Today, most of the 40 million or so vehicles that roll off production lines each yea r [throughout the world] are made by just 10 global corporations” (Knox and Agnew, 1998, 209). Summing up: the quantitative increase in global economic transactions has, indeed, created a new quality of economic interactions. 4 Economic interactions, howev er, not only increased but also changed the traditional international division of labor. Multinationals established subsidiaries in highly sophisticated branches in other advanced countries. This trend was closely connected with the new phenomenon of specialization within industries, rather than between them. Intra -industry trade’s share steeply increased from the 1970s on. As one of the OECD reviews reported in the late 1980s, during the last twenty years, intra - industry trade increased from 44% to 66% of total industrial trade in Germany and from 46% to 76% in Britain. Both in France and Belgium this share reached three -quarters of total trade (OECD, 1987, 273). The typical pre -globalization investment in developing, agricultural and raw material producing areas shifted more and more toward investment in other highly developed countries. The geographical destination of German FDI is very characteristic: in 1961, 46% of German investment abroad was channeled to developing or less developed countries. By 1990, less than 20% went to these areas. In 1990, only 2% of German FDI was channeled into mining industries, while nearly 40% was going to trade, banking and insurance business, and another one -third to chemical, electrical, machine building, and ca r industries. In 1961, only 14% of German investments went to other European Community countries, by 1990, already 41%. Altogether, as a striking new phenomenon, three -quarters of the stock of the world’s FDI are located in advanced countries. (Chart 2.) In Great Britain, the chemical, paper, and car industries were modernized by multinationals, and nearly one-third of the British industrial output is produced by multinationals. The same is true for the Netherlands. In rapidly developing Ireland, the 5 numbers are even more striking, with 70% of exports being produced by multinationals. American subsidiaries in Europe produce one-third of European imports from the United States, and European subsidiaries in the US are responsible for 38% of American imports from Europe (Pollack and Shaffer, 2001, 12-4). Intra -West European trade, as a natural consequence of the new type of division of labor, also became dominant: in 1958, only 30% of the trade was intra -regional. By 1989, trade between the countries of Western Europe jumped to nearly 60% (Busch and Milner, 1994, 261). The new division of labor also changed the traditional economic connections between the advanced core and the less developed peripheries. Instead of investing in raw material extraction, the core countries relocated certain labor-intensive and highly polluting industrial branches to peripheral countries with cheaper labor cost and less restrictive environmental regulations. Dutch multinationals are employing three -quarters of their labor-force abroad (Jones and Schröter, 1993, 25). As a consequence of this phenomenon, a strong trend of de-industrialization became characteristic in the most advanced countries. The percentage of the labor force employed in manufacturing sharply declined: between the mid -1960s and mid -1990s, in Britain, the Netherlands, Italy, and Sweden the percentage fell from 40-48% to 16-20%. (Chart 3.) The top, science - and knowledge-intensive processing branches, nevertheless, remained in their territories. Basic heav y chemicals, iron and steel, some preparatory branches of leather industries were relocated to peripheral countries, but fine processed chemicals, pharmaceuticals, top level engineering, sophisticated leather ware mostly remained in the core. It is even more so regarding research and development (R&D), the real engine of 6 economic development, which are highly and one -sidedly concentrated in the hands of multinationals. Over the course of one -and-half decades from 1980, employment in this sector increased by 34%. Western Europe in the mid -1990s employed 1.6 million people in the R&D field. Multinationals account for roughly three -quarters of R&D expenditures for the entire advanced (OECD) world, thus they are the prime movers and monopolists of new technology. Globalization dramatically increased foreign exchange transactions. International bank loans, closely connected to economic activities,