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Globalization’s Three Unbundlings – Harvard University Press Blog

Richard Baldwin had one goal in writing The Great Convergence: to change the way you think about globalization. His central argument is that revolutionary changes in communication technology fundamentally changed globalization around 1990, setting in motion a reversal of the “Great Divergence” that had propelled the rise of today’s rich nations from the early nineteenth century. In the excerpt below, Baldwin offers a broader view of the history of trade, industrialization, and growth that sets the stage for his full consideration of the logic of the new globalization.

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The Great ConvergenceWhen transportation involved wind power by sea and animal power by land, few items could be profitably shipped over anything but the shortest distance. This fact made production a hostage of consumption since people were tied to the land. Production, in other words, was forcibly bundled with consumption.

Globalization can be thought of as a progressive reversal of this forcible bundling. But the bundling was not enforced by shipping costs alone. Three costs of distance mattered: the cost of moving goods, the cost of moving ideas, and the cost of moving people. It is useful to think of the three costs as forming three constraints that limit the separation of production and consumption.

One of this book’s core assertions is that understanding the evolving nature of globalization requires a sharp distinction among these three “separation” costs. Since the early nineteenth century, the costs of moving goods, ideas, and people all fell, but not all at once. Shipping costs fell radically a century and a half before communication costs did. And face-to-face interactions remain very costly even today.

Thinking about why the sequence matters is facilitated by a new view of globalization—what I call the “three cascading constraints” perspective. The new view is best explained by lacing it onto the back of a quick gallop through history.

The Pre-Globalized World and Globalization’s First Acceleration
In the pre-globalization world, distance isolated people and production to such an extent that the world economy was little more than a patchwork of village-level economies. Things started to change when the cost of moving goods fell. Transport technologies improved in a process that fostered and was fostered by the Industrial Revolution.

With easier international shipping, more people bought faraway goods. Middle-income Britishers could, for example, afford to dine on bread baked with U.S. wheat while sipping tea brewed from Chinese leaves and sweetened with Jamaican sugar—all set on a tablecloth made of Indian cotton. Oxford economist Kevin O’Rourke and Harvard economist Jeff Williamson date the start of this process to 1820. I refer to this separation of production and consumption as globalization’s first unbundling.

While shipping got cheaper, the costs of moving ideas and people fell much less. This unbalanced reduction of separation costs triggered a chain of causes and effects that eventually produced enormous income differences between today’s developed nations (called the “North” for short) and today’s developing nations (the “South”). First, markets expanded globally but industry clustered locally. As history would have it, industry clustered in the North. This Northern industrialization fostered Northern innovation, and since ideas were so costly to move, Northern innovations stayed in the North. The result was that modern, innovation-fueled growth took off sooner and faster in the North. In just a few decades, the resulting growth differences compounded into the colossal, North-South income asymmetries that define the planet’s economic landscape even today. In short, the Great Divergence was produced by the combination of low trade costs and high communication costs.

Globalization’s Second Acceleration (the Second Unbundling)
Globalization accelerated again from around 1990, when the information and communication technology (ICT) revolution radically lowered the cost of moving ideas. This launched globalization’s next phase—call it the “second unbundling” since it involves the international separation of factories. Specifically, radically better communications made it possible to coordinate complex activities at distance. Once this sort of offshoring was feasible, the North-South wage gap that had arisen during the first unbundling made it profitable.

The offshoring of production stages to low-wage nations changed globalization, but not just because it shifted jobs overseas. To ensure that the offshored stages meshed seamlessly with those left onshore, rich-nation firms sent their marketing, managerial, and technical know-how along with the production stages that had been moved offshore. As a consequence, the second unbundling—sometimes called the “global value chain revolution”—redrew the international boundaries of knowledge. The contours of industrial competitiveness are now increasingly defined by the outlines of international production networks rather than the boundaries of nations.

A sports analogy helps explain how this could so thoroughly transform globalization’s impact. Imagine two soccer clubs sitting down to discuss an exchange of players. If a trade actually occurs, both teams will gain. Each gets a player of a type they really needed in exchange for a type of player they needed less.

Now consider a very different type of exchange. Suppose on the weekends, the coach of the better team starts to train the worse team. The outcome of this will surely make the league more competitive overall and it will surely help the worse team. But it is not at all sure that the best team will win from this exchange—even though their coach will profit handsomely from being able to sell his know-how to two teams instead of one.

The parallels with globalization are plain. The Old Globalization can be thought of as swapping players. The New Globalization is more like the cross-team training with the offshoring firms playing the coach’s role.

Putting it differently, ICT-enabled offshoring created a new style of industrial competitiveness—one that combined G7 know-how with developing-nation labor. Because this high-tech, low-wage combination turned out to be a world beater, the easier movement of ideas sparked massive North-to-South flows of know-how. It is exactly these new knowledge flows that make the New Globalization so different from the Old Globalization.

Curiously Concentrated Effects and the Commodity Super-Cycle
Importantly, G7 firms own this know-how, so the new North-to-South knowledge movements should not be thought of as some enormous “Kumbaya moment.” Rich nations are not sending their know-how to poor nations in a burst of caring and sharing. G7 firms work hard to ensure that their offshored knowledge stays within the confines of their production networks. According to the three-cascading-constraints view, this is why the manufacturing miracle happened in so few developing nations. To use the sports analogy, the New Globalization only boosted the manufacturing fortunes of the “teams” that the G7 coach decided to “train.” But why was the training so curiously concentrated?

The answer, in my view, turns on the cost of moving people, not goods or ideas. Airplane fares have fallen, but the time-cost of travel has continued to rise with the salaries of managers and technicians. Since it is still expensive to move people—and international production networks still need people to move among facilities—offshoring firms tend to cluster production in a few locations. Again to economize on the cost of moving people, these locations tend to be near the G7 industrial powerhouses, especially Germany, Japan, and the United States. India is an exception, but mostly because India has engaged in international production networks primarily via the types of services for which frequent face-to-face interaction is less of an issue.

While the second unbundling’s impact on industrialization was hyper-concentrated, the Great Convergence was a much broader phenomenon due to knock-on effects. About half of all humans live in the developing nations that are rapidly industrializing, so their rapid income growth created a booming demand for raw materials. Booming demand, in turn, created the “commodity super-cycle,” which subsequently sparked growth takeoffs in many commodity-exporting nations that were untouched by the emergence of global value chains.

Globalization’s Next Big Thing: Globalization’s Third Unbundling
The three-cascading-constraints narrative plainly admits the possibility of a third unbundling, if face-to-face costs plunge in the way coordination costs have since the 1990s. Two technological developments might provoke such a plunge. Really good substitutes for people crossing borders to share “brain services” is the first. Such technologies, known as “telepresence,” are not science fiction. They exist today but they are expensive. The second would be the development of really good substitutes for people traveling to provide manual services. This is called “telerobotics” and it involves people in one place operating robots that perform tasks in another place. Telerobotics exists, but it is still expensive and the robots are not very flexible.

Taken together, these developments may dramatically change the nature of globalization in coming decades. Both allow workers from one nation to perform service tasks inside another nation without actually being there. Such “virtual immigration,” or international telecommuting, would radically expand the range of jobs that are directly subject to international competition. Many menial and professional tasks in rich nations could be performed (remotely) by workers and professionals sitting in poor nations. It would also allow rich-nation professionals to apply their talents on a much wider basis. For example, Japanese engineers could repair Japanese-made capital equipment in South Africa by controlling sophisticated robots from Tokyo. Some people would win from this new competition/opportunity; others would have to find something else to do.

Thus globalization’s third unbundling is likely to involve workers in one nation providing services in another nation—including services that today require physical presence. Or to use the unbundling theme, globalization’s third unbundling is likely to allow labor services to be physically unbundled from laborers.

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