The Great Convergence | Richard Baldwin

Summary of: The Great Convergence: Information Technology and the New Globalization
By: Richard Baldwin

Introduction

Embark on a fascinating journey through ‘The Great Convergence: Information Technology and the New Globalization’ by Richard Baldwin, as it unfolds the historical trajectory of globalization. This book summary delves into the three essential economic activities that have shaped cross-border trade over the past 200 years. It navigates through the cascading effects of innovations like steam power, information and communication technologies (ICT), and the global value chains (GVCs) they created. Examine the compelling narrative of globalization’s first and second unbundling, which ignited the Great Divergence and eventually led to the transformative Great Convergence.

The Cost of Globalization

Globalization has progressed over 200 years by overcoming three “separation” costs. The first obstacle, the high cost of moving goods, was removed in the 1800s with the utilization of steam power. This led to an increase in trade and economic activity despite geographical limitations. However, high costs of moving ideas and people prevented global manufacturing, and nations specialized in sectors where they had natural advantages. This specialization and the asymmetric paths of trade and industrialization led to wealth concentration in G-7 countries, causing a Great Divergence. Understanding the evolving nature of globalization requires distinguishing among these three “separation” costs.

The book highlights how the cost of globalization is composed of three essential factors that limit the separation of production and consumption in cross-border trade. The progression of globalization over the last two centuries has been punctuated by overcoming these “separation” costs in a cascading manner. The cost of moving goods was the first constraint to fall away in the early 1800s when steam power was harnessed, leading to lower transportation expenses and resultant industrialization. However, the costly movement of people and ideas remained a restriction to global manufacturing, causing nations to specialize based on their natural advantages. This specialization and asymmetric paths of trade and industrialization led to wealth clustering in advanced economies, forming a Great Divergence. To fully understand globalization’s evolving nature, it is crucial to distinguish these three “separation” costs.

The ICT Revolution and the Great Convergence

The book describes the impact of the innovation of information and communication technologies (ICT) in the early 1990s. The ICT revolution transformed the way companies, suppliers, and consumers interacted, facilitating the proliferation of global engagement and the exchange of ideas at a lower cost. The development of global value chains (GVCs) allowed emerging markets to command a greater share of manufacturing and industrialization. This “second unbundling” of production reversed the industrialization trend of the G-7, with significant repercussions for the composition of national incomes. The proportion of global GDP of the G-7 went from two-thirds in 1990 to roughly half by 2010, and only 11 countries – China, South Korea, Indonesia, India, Australia, Mexico, Brazil, Venezuela, Poland, Turkey, and Nigeria – reaped considerable gains from this new form of trade.

Comparative Advantage and the Shift Away from Countries

The concept of comparative advantage is about producing a product or service more cheaply than competitors. This practice has traditionally been employed by nations to raise domestic wages and living standards. However, the shift in the digital era has now placed this advantage in the hands of companies. With the cost constraint on transferring information no longer an issue, developing economies are now providing expertise and technology. While this benefits emerging markets, it has had significant consequences for G-7 nations. Unskilled workers in these countries have seen their job opportunities vanish and wages decrease. The G-7 economies still retain high-skill technology jobs but outsource their labor needs to developing economies. This shift has disrupted the flow of goods, services, capital, and knowledge, drastically affecting national economies. In conclusion, comparative advantage has moved away from countries to companies, with developing economies now leading the way in expertise and technology.

The Impact of Globalization on Society and Work

Globalization has far-reaching economic effects, including altered production allocation and industrial configurations. However, it also brings social, cultural, and political pressures. Human capital and cities are essential to the modern work landscape. The social contract between states and citizens, worker wages, and economic growth are all affected by production sites and competition. First, urbanization increased during the Great Divergence as workers moved to manufacturing centers, and it’s happening again in advanced countries during the Great Convergence. Tech-savvy workers flock to tech hubs, while industrializing emerging economies move to factory sites.

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