INTRODUCTION TO ECONOMIC GEOGRAPHY

Notes to slides of Lecture 3:

This lecture attempts to accomplish three tasks:

1. To illustrate differences between distinctive phases of globalization. Baldwin (2013) identifies

two periods of “unbundling” of various forms of economic activities. We want to know how it
came to the “first unbundling” and the “second unbundling”.
2. Understand how globalization results in winners and loosers.
a. Prebisch-Singer hypothesis -> winning and loosing countries
b. Stolper-Samuelson theorem –> winning and loosing people
c. Rodriguez Pose / Discussion –> winning and loosing regions/cities/places
3. Speculating on the questions: “Has globalization gone too far?” (Rodrik 2013).

One of the conclusions of lecture 2 was that a capitalist system necessitates globalization (which in
turn, produces localization or city-growth), as geographic of economic activity constitutes one way of
increasing profits. It helps us understand why globalization occurs and why there is pressure to speed
it up. It tells us less about how and when this process occurs and why there are different phases of
globalization. Here some useful arguments by Richard Baldwin (2016) from his book “The Great
Convergence” are introduced. Notice that Baldwin (2016) does not offer a complete account of
globalization, but that he focuses on particular aspects of the globalization process that is also
interesting to geographers which are related to the cost of overcoming distance for commodity
trade, information exchange and face-to-face communication. (see figure on the three cascading
constraints). This is related, in his view, to various key technological changes.

Prior to those technological changes, producers had little choice but to buy inputs and labor from
local sources and sell their products to local consumers. Given the existing infrastructure at the time,
everything else would have been too expensive (this is his pre-globalized world). The first
unbundling occurred with the advent of the steam engine resulting in steam ships and railroads and
so reducing the amount of time it took to get raw materials and other inputs to the place of
production and ship final products to the market. It also reduced the cost of goods trade
dramatically. As a result of the stream revolution we saw the emergence of the “old division of
labor”, where different countries started to specialize in production and export of different kinds of
commodities. Broadly speaking, countries of the Global North focus on industrial/manufacturing
exports and countries of the Global South focused on the export of raw materials and food products
(eg. Argentina trades beef for English iron and steel, etc.). This world is described by Ricardian trade
theory illustrating the efficiency gains for the global economy if countries focus on the production
and export of commodities in which they have a relative comparative advantage. It is the Ricardian
argument that still explains why many economists’ have a positive view of globalization. Notice also
that Ricardo recognizes that some countries may actually loose in the process and that winners
should compensate the loosers. Only then all can gain (or at least not loose out) from globalization.

The next slide (page 7) offers a simple scheme to think about the spatial and organizational
alternatives of organizing the production process. The vertical axis refers to the geographic
dimension (dispersed or concentrated), the horizontal axis to the organizational dimension
(production of the whole value chain within a single firm or spread of the value chain across many
firms (subcontracting)). The first unbundling still required that value chains were still largely
concentrated in space and products then shipped across the globe. Depending on industry value
chains were either concentrated in a single firm (think large integrated car, steel, etc. production) to
take advantage of increasing internal economies of scale because of an increasingly detailed
technical division of labor (Adam Smith – pin factory example) or through a geographically
concentrated network of highly specialized small firms to generate external economies of scale by
taking advantage of a detailed social division of labor (Alfred Marshall – gun manufacture in
Birmingham; cutlery in Sheffield, etc.). It is called social, because it requires that use of markets
(make contracts/deals with other producers/consumers outside the firm boundary) to source inputs
and sell outputs. The first process works if there a large market for relatively standardized products
enables companies to invest in expensive machines and buildings to supply those markets (“The
extent of the division of labor is limited by the extent of the market”, Adam Smith 1776). The second
form of organizing value chains occurs primarily in industries with markets that are more volatile,
craft- and design intensive industries. Guns in Birmingham were basically hand-made and each gun
was different. That meant that you had highly specialized producers of flints, gun barrels, etc. that
produced differentiated products to cover the needs their customers that concentrated in the city to
take advantage of specialized suppliers). More in the fifth unit (see also slide 8).

According to Baldwin (slide 9), the second unbundling had to do with new Information and
Communication technologies (ICT). This lowered communication costs and increased the speed at
which information can be passed on across the globe. This meant that value chains could be broken
up and an individual stages of the production process and particular tasks could be cost-effectively
outsourced to a large number of places across the globe. This resulted in the “new international “old division of
labor”
division of labor” (Fröbel, Heinrichs und Kreye (1977): Die neue internationale Arbeitsteilung) where
countries in the Global South no longer specialize in raw materials and food products or countries in >> Ricardo,
the Global North focus on industrial products. Instead, countries now specialize in those tasks in the comparative
advantage
production process in which they have a competitive advantage (for instance, design of clothing
taking place in Paris because this is where the best designers are, while sewing the pieces (low-skill, >> Global Nord -
manufacture;
labor intensive task) takes place in locations with relatively low labor costs such as Indonesia, China, Global South -
Mexico). Slides 10-13 show some of those technologies that reduced shipping and ICT cost/time agriculture
since WWII. Baldwin dates the begin of the second unbundling with early 1990s (introduction of
user-friendly web browsers, mobile phones and widespread commercial use of satellite technology),
but in labor intensive industries, new transportation technologies (container shipping) enabled the
new international division labor (outsourcing of labor intensive industries) much faster than that.
Here we are less concerned with when exactly the second unbundling began but rather what the
technologies are and how they enabled task outsourcing.

Slide 14 shows that the second unbundling facilitated the outsourcing over longer distances. This
could be done either through a break up and distribution of different parts of the value chain in
different countries (but still owned by the same company) or by subcontracting and outsourcing of
the value chain, i.e. independent subcontractors are used in different parts of the world. The clothing
industry is a classic case of that (NIKE as an example of an early successful outsourcer can me
mentioned here).

It is important to mention that a “third unbundling”, the reduction of cost of face-to-face contact has
not happened yet. While we have technologies such as skype, zoom or MS Teams these technologies
cannot yet replace face-to-face contact required for complex transactions or the exchange of
complex knowledge. Hence, many management functions, R&D (research & development) facilities
are still in cities of the Global North (more on that in unit 5). Baldwin strongly focuses on the
technological enablers of different forms of globalization, but neglects to a large extent political
changes. Also, enabling globalization does not mean causing it! For most explanations in the social
sciences there is no unique cause but multiple causal processes/mechanisms coming together in
particular historical-geographic contexts leading to particular outcomes.

Since the 1980s, the process of globalization is linked inseparably to the processes of
neoliberalization and financialization (slide 16). We briefly focus on neoliberalization here and leave
financialization to unit 6.

Neoliberalization is an ongoing process (but probably slowing down with the political and health
crises that illustrate the limits of free markets as sole arbiter of the “correctness” of decisions or
“efficient” allocation of resources) that has its ideological and intellectual origins in Vienna and
Geneva in the 1930s (Slobodian (2019) The Globalists, David Harvey (2005) A brief history of
neoliberalism, or Jamie Peck (2010) Constructions of neoliberal reason offer interesting accounts),
but required the crisis of the 1970s to be implemented as economics policy in Chile, the United
States and United Kingdom prior of being spread through international institutions such as the World
Bank, IMF and WTO. While liberalism goes back to Smith, Hume and Locke in the 18th century and
markets have been understood as important coordination mechanism to aid the efficient allocation
of scare resources to the most productive use, it was also clear to the liberal economists that there
are limits of what the market can do (as we see during the current health crisis, where “efficient”
markets call on governments to bail them out). Neoliberals do not only see market as coordinating
devices employed to improve our lives, but the creation of markets as the goal of economic policy.
Where markets are constrained by regulations and barriers (eg. Trade barriers) they need to be
removed. Where markets do not exist (social housing, water, education, pensions, etc.) they need to
be created (real etate markets, privatization of water and other utilities, privatization of education
systems, financialization of state pensions,….) (see slides 17-19). The link between globalization and
neoliberalization is made in form of declining trade barriers, removal of capital account controls,
homogenization of accounting rules and economic policies, trade treaties that guarantee property
and ownership rights even if in the disinterest of the majority of people in particular countries, the
ability of large corporations to sue governments for “market distorting” measures, etc.). All of those
changes further facilitated globalization.

While there are undoubtedly benefits to globalization (who does not like cheaper television sets,
cheap clothes, cheap toys, access to global cultural products, the ability to go to university in other
countries,….), globalization also has distributional consequences – some countries, regions and
people will benefit while other will loose. This is the topic of the remaining slides and the discussion
of the article by Rodriguez Pose.

PREBISCH-SINGER

Ricardo and all other classical trade theory does not make a distinction between products that
countries have a comparative advantage in. Prebisch-Singer argued instead that specialization in raw
materials and primary products has disadvantages because of declining terms of trade for countries
exporting those commodities. The arguments for this and an example of declining terms of trade
(coffee – car example) are summarized in Slides 23-26. There is also criticism of the thesis as primary
commodity prices fluctuate a lot and can actually increase substantially during periods of global
economic growth (think of raw materials prices during China’s rapid economic expansion). Also, we
know from Baldwin, that many countries in the Global South now export manufacturing products
(not only primary products). But the basic idea remains. Unique high-tech products will experience
less pressure on their prices than primary commodities. The result of the hypothesis is increasing
divergence between levels of economic development in the Global North and Global South. This is
partially but not universally true as the rise of the East Asian Economies and relative
decline/stagnation of many African economies show.

STOLPER-SAMUELSON

The probably more interesting and, for our discussion, particularly relevant theoretical argument is
the one put forward by Stolper and Samuelson (p.27-32). The key is that the factor that is used
intensively in the importable good must experience a decline in its real earnings. The model was
designed prior to the second unbundling, but the point can now be extended to include the impact of
workers with particular skills that are required to perform particular tasks. Hence, if certain tasks are
replaced by computers or workers in China then the wages of workers with skills sets required to
perform those tasks (eg. manual tasks required to stitch together pieces of cloth) will come under
pressure, while workers with skill sets required to perform tasks that cannot be outsourced to
countries in the Global South (manual tasks such as those performed by cleaners in office buildings
or abstract tasks such as those performed by IT personnel) are not affected by increased import
competition (or routine-skill biased technological change).

The impact on the global income distribution is illustrated in the so-called Elephant Graph by Branco
Milanovic. Please have a look at the two graphs and see if you can interpret them (in light of Stolper-
Samuelson). We will also talk about it in the discussion of the Rodriguez Pose paper as it is one
argument why we see an increase in the populist vote in countries and regions in the Global North.
Please have a look at the remaining slides and the paper for the discussion on Tuesday.

Please read the paper for the quiz and discussion. The quiz will take place on Tuesday, March 24,
from 10am to 10.05am. There will be no exception to the rule.

Jürgen Essletzbichler, 23.03.2020