May 30, 2005

And another one…

Here's the last World Economy essay i wrote too…

What Were the Different Aspects of International Economic Integration in the 19th Century? What were the Factors That Helped to Bring it About?

The 19th Century was arguably the most dynamic and ground-breaking century in the development of the Western world as we know it today. The period that saw the Industrial Revolution, the mass expansion of imperialism and rapid technological advances was foundational to the capitalist world system that is so dominant today. Much emphasis is given to globalisation in modern political literature, but the 19th century also saw extensive economic ‘globalisation’, in terms of the extensive economics integration that took place between nation-states. The purpose of this essay is to assess the different facets of that economics integration, as well as analysing the factors that were behind this integration.
However, before starting this analysis, it is necessary to define a number of key terms. Economic integration is the process by which the economies of several countries develop closer links whether by increased trade or other processes which will be looked at later. Economic interdependence is likely to be a consequence of sustained integration. Free trade is defined in the Collins Economics Dictionary (Pass et al., 2000) as “the international trade that takes place without barriers…being placed on the free movement of goods and services between countries.”
Having defined these terms, it is helpful to give a brief overview of the history of economic development in the 19th Century. Having been preceded by the French Revolution of 1789, the American Revolution in 1776 and the spread of the ideas of the Enlightenment, the 19th Century was a time of great social change. Adam Smith’s hugely influential ‘Wealth of Nations’ had been published in 1776, advocating the advantages of free trade and specialisation. This was a time of rapid population growth, and increasing levels of rural-urban migration. The Industrial Revolution, which spread from Britain to the rest of the developed world, led to immense technological advancement and the transformation of the economies of the Western powers into industrialised, capitalist systems. Furthermore, the increasing prominence of the nation-state and imperialist ambitions gave the Western powers a greater international presence, leading to stronger trade links with other parts of the world.
Having thus introduced the topic, it is now time to examine the different specific aspects of economic integration. Firstly, the spread of liberal free trade thinking. Central to this were the theories of Adam Smith, and David Ricardo, regarding specialisation and ‘comparative advantage’. Smith (1776) argued that it would be beneficial for countries to specialise in the production of those goods in which they had the lowest absolute costs of production, and then trade these with other countries. Ricardo (1819) extended this by developing the theory of comparative advantage, which says that countries will find it mutually beneficial to specialise and trade in the goods that they have the lowest opportunity cost in, even if one country has an absolute advantage over the other in all goods. They will still benefit from specialising in the good with the lowest opportunity cost, choosing to import the other good abroad. This theory has been called “the foundation of modern international trade theory” (Cameron & Neal, 2003), and it was these purely logical arguments that led to the gradual influx of free trade economic policies in Western Europe and beyond.
There was opposition to free trade thinking, notably from Hamilton (1791) and List (1841), but Smith and Ricardo won the argument, symbolised in the UK with the abolition of the Corn Laws in 1846, which had been the bedrock of the British system of protectionism. Michel Chevalier helped to spread these ideas in France, which led to the Cobden-Chevalier treaty of 1860, which abolished and lowered many tariffs between the two countries, with the exception of wine, brandy and other luxury goods. Also important was the insertion of a ‘most favoured nation’ clause, which meant that any trade deals struck with other nations by either party automatically applied to the other party as well. Such agreements spread across Europe, creating a network of treaties that led to a general reduction of tariffs, so much so that in the 1860s and early 1870s, there was close to total free trade in Europe (Cameron & Neal).
However, recession in the 1870s led to a return to protectionist thinking, while the US had not signed up to free trade ideas in the first place. Only Britain out of the major economic powers stuck with free trade, thus liberal free trade thinking was not the sole cause of this rise in trade integration.
Another aspect of this proliferation of economic integration was the increase in international capital flows, particularly from the capital abundant countries in the West to the capital-scarce countries in the developing world. This is largely because greater returns can be gained on such investments, risky as they may be. Britain alone invested between £9–10,000 million abroad in this period, in such investments as railways and mining. This substantial investment from Britain was possible because of the high rate of saving in Britain. Investment was directed at areas that were rich in natural resources, as well as those areas with a high immigration-to-population ratio. This injection of foreign direct investment (FDI) led will have led to an increase in the GDP growth of that country, as well as significantly aided in the construction of the country’s infrastructure. (Eichengreen, 1996)
Another aspect of international economic integration is greater flows of labour between countries. The migration of skilled labourers from the more developed countries to underdeveloped countries brought about an important transfer of skills that helped to improve the educational base of the labour force in the underdeveloped country. Migration was greatest from Europe to the Americas and Oceania, exploiting the vast, largely uninhabited areas of land that were ripe for settlement. This was further fuelled by the lack of job opportunities at home, due to high population growth, as well as the prospects of high wages in the new countries.
The final aspect of international economic integration here is the flow of certain ideas and practices. This basically means the spread of technological advances and capitalist institutions that were shown to be advantageous for economic growth from the industrialised West to the less developed world. This was especially true of the spread of railways around the world after the Industrial Revolution, notably to India, where they were used to bridge the vast distances across the sub-continent.
Thus, having examined the different aspects of economic integration, it is time to switch focus to the factors that actually helped to bring about this process of integration.
One such factor was the improvement in transport links and technology. The introduction of steam ships and the development of the railways led to a dramatic fall in transport costs, as well as significantly shortening journey times. Nonetheless, transport improvements were not so very important in and of themselves; rather they helped facilitate the increase in trade that followed from greater demand for different goods from around the world. The new transport links enabled the import of meat from Argentina to Britain, coupled with the use of refrigeration. Better transport links undoubtedly helped encourage the growth in these areas. The building of the Suez Canal also revolutionised trade links with the East, slashing journey times and costs, leading to much greater volume of trade between West and East.
Another factor is the improvement of communications links between different parts of the world. Clearly, the improvements in making transport quicker and easier above had important ramifications for communications, in that this would have greatly improved the time it took, for example, for letters to get from Europe to Asia and back. Trade links between far flung corners of the earth were able to develop, leading to increased diplomatic relations between different countries. As the concept of the liberal ‘nation-state’ took prominence, then countries began to organise themselves into different alliances, before the start of World War 1 in 1914. As travel became easier between countries, it led to improved diplomatic relationships, which leads to possibly beneficial trading relationships between the countries.
The third factor to be examined is the international monetary system, which includes such things as the gold standard and floating exchange rates, and which was based around London as the world’s financial centre. Eichengreen (1996) outlines the process by which the gold standard was adopted, replacing the bimetallic standard that had existed previously. Britain was the first country to adopt the gold standard, followed by Germany in the 1870s, followed by France, Belgium, the Netherlands and others. Before long, it had spread to the whole of Europe, as well as Japan, Russia and Latin America. The gold standard created the basis for a multilateral payments network by providing a monetary standard on which to fix rates of exchange. The gold standard thus provided a strong basis for international monetary transactions, as all currencies were fixed against the value of gold, removing the inherent uncertainty that comes with floating, or otherwise, exchange rates.
The final factor that shall be looked at here is effect of specialisation in the ‘core’ and ‘periphery’ areas of the international economy, the core being the more developed countries in the West, and the periphery being elsewhere, particularly Africa, Latin America and Asia. Using Smith and Ricardo’s ideas of specialisation and comparative advantage respectively, different countries specialised in production of certain goods.
The core countries specialised in production of manufactured goods because of their high level of industrialisation, which were imported to the periphery countries, while the countries in the periphery specialised in agriculture and primary products. This was beneficial to both parties for a time, although before long, this caused problems for the periphery, as outlined in the Prebisch-Singer hypothesis, which says that there is an inevitable decline in the terms of trade for countries that are primary product dependent.
Thus, we have seen that the 19th century was a time of tremendous international economic integration, with a big increase in trade, and what could be called the first era of economic globalisation.
To conclude, the 19th century was a very important time in the development of the capitalist world system, with significant integration in terms of free trade thinking, capital and labour flows and technology. The factors affecting this include greater transport and communications links, as well as the creation of an international monetary system and specialisation of trade between different areas of the world. This paved the way for the continued economic development and integration of the 20th century.

Bibliography

Cameron, Rondo and Neal, Larry. (2003) A Concise Economic History of the World 4th edition (Oxford University Press)

Eichengreen, Barry. (1996) Globalizing Capital (Princeton University Press)

Kenwood, A.G. and Lougheed, A.L. (1999) The Growth of the International Economy 1820–2000 4th edition (Routledge)

Landes, David. (1998) The Wealth and Poverty of Nations (Little, Brown and Co.)

1819 words (1740 words without Bibliography)


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