An alternative view of Globalization 4.0, and how to get there

Professor Richard Baldwin presents Globalization 4.0 as an oncoming era dominated by international arbitrage in services. I would like to reiterate an alternative - or perhaps complementary - perspective that draws on recent work and is inspired by the economic historian Karl Polanyi.

Professor Baldwin calls the pre-1914 period Globalization 1.0, the post-1945 era Globalization 2.0, and implies that our most recent era was Globalization 3.0. The latter is characterized, in his view, by “factories crossing borders”. Since he sees Globalization 4.0 as distinctively disruptive - notably due to the “globotics upheaval”, the blend of globalism and robotics - one might suggest that 4.0 should be followed by 5.0, analogous to Globalization 2.0, which overcame the worst excesses of the preceding disruptive phase.

Here is the alternative or complementary view. If one takes a Polanyian approach, then what Polanyi depicted as the "dis-embedded phase" of the Great Transformation in the 19th and early 20th centuries was Globalization 1.0, which was about the construction of national market economies. Led by the UK as the dominant capitalist power, it was an era of laissez-faire economics, trade in complementary goods, a technological revolution and, critically, domination by nation-based financial capital.

It involved labour commodification, as workers were torn from the land and rural support systems. And, though economic historians scarcely discuss it, it involved a plunder of the commons, via enclosure and privatization. It led to a form of rentier capitalism. The results were rising inequalities (with wealth inequality rising more than income inequality), widespread insecurity and a new class structure with a bourgeoisie and a mass class, the proletariat.

We will not dwell on Globalization 1.0 here, beyond noting that, as with all subsequent phases of globalization, it involved a shift in geopolitical economic dynamism. Europe floundered, and accused the United States - the emerging centre of capitalism - of stealing its intellectual property, which was perfectly true. The declining powers - the UK, Germany and France, mainly - also lashed out with protectionism and "trade wars", which may sound familiar.

The crisis of Globalization 1.0 was what Polanyi depicted as "the threat of the annihilation of civilization": the horror of the Great War, the Depression and the Second World War. What emerged after 1945 was Globalization 2.0, the re-embedded phase of Polanyi’s Great Transformation. This was the era of social democracy, in which new systems of regulation, redistribution and social protection moderated inequalities and labour-based insecurity. Rentier capitalism was curbed and finance was regulated. It was no “golden age”, but for a while it offered widely shared improvements in living standards in OECD countries. For reasons elaborated elsewhere, it could not last.

The result was Globalization 3.0. This was the dis-embedded phase of the Global Transformation, the painful construction of a global market economy. As with the corresponding phase of the Great Transformation, this was initially dominated by zealous advocacy of “free markets”, led by the neo-liberalism of the Mont Pelerin Society and its twin political enforcers, Margaret Thatcher and Ronald Reagan.

They rolled back social democratic regulations and systems of redistribution. They liberalized finance, which again came to dominate economies, but in an unprecedented, international way. To give just one indicator: in the 1970s, the financial assets of US financial institutions equalled 100% of GDP; now they are more than 350%. As in the pre-1914 period, finance is sucking up rental income.

Globalization 3.0 has other similarities to Globalization 1.0. Ironically, neoliberalism bred the most unfree market system ever constructed, via an international architecture of institutions. If there is one symbol of the era, it is the passage in 1994 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, or TRIPS. It was orchestrated by the World Trade Organization, but shaped by US multinational corporations and bolstered by the World Bank, the IMF and other international bodies, helped by what were to become more than 3,000 trade and investment agreements.

TRIPS essentially globalized the US intellectual property rights system. It enabled big pharma, big finance and big tech to acquire vast rentier income from around the world. In particular, patents proliferated. One cannot describe this era accurately without giving pride of place to the tide of intellectual property rights, and behind that the facilitatory role of global finance. Again, one indicator must suffice here. In 1994, fewer than one million patents were filed; that annual number has since more than trebled, each guaranteeing monopoly profits for 20 years or more. What free market?

For a while, the primary beneficiary was the US, followed by Japan, the European Union and South Korea. But they underestimated China. It was not a member of the WTO in 1994, but joined in 2001. Very quickly, China caught up, and by 2011 was filing more patents than the US. They may not have been as valuable, but it was a symbolic moment, signalling that China was emerging as a geopolitical centre of globalism. By 2015, it was filing more patents than the US, South Korea, Japan and the EU put together. Having been used as a cheap labour pool for big tech, China emerged as a primary rentier state.

Then came a predictable historical irony. Just as European nations accused the US of stealing their industrial secrets to gain competitive advantage in the Globalization 1.0 era, today the US accuses China of stealing its intellectual property. The hypocrisy is breathtaking. Charles Dickens would be smiling, having lost considerable income because the US refused to honour European copyright, much to his chagrin. Samuel Slater, the Englishman described as the “father of the American industrial revolution”, stole industrial secrets from his base in Derbyshire, and is known in England as "Slater the Traitor".

There are other parallels between today’s Globalization 3.0 and Globalization 1.0. In the dis-embedded phase of the Great Transformation, labour was commodified - made subject to market forces, and paid in money wages - while workers as persons were commodified, no longer having the ability to refuse wage labour. In the re-embedding phase, or Globalization 2.0, labour was partially decommodified, in that more of the payment took non-wage forms, such that the wage became a smaller part of workers’ remuneration, undermining the incentive to labour.

In the dis-embedded phase of the Global Transformation, Globalization 3.0, labour has been re-commodified, with the erosion of non-wage benefits and labour-based state benefits, and with the emergence of cloud labour and the platform economy. For a sensible market economy, labour should be properly commodified, not decommodified. But the problem arises in that workers too feel commodified. They have no security outside the labour market. Those coming to terms with Globalization 4.0 will have to address that, or our societies will face the consequences.

This leads to another parallel, which Professor Baldwin’s essay addresses. The predominant pattern of trade has changed in the different eras. In the dis-embedded phase of the Great Transformation, Globalization 1.0, the main thrust of trade was in complementary goods, between primary products and manufactured goods, corresponding to the Ricardian principle of comparative advantage, albeit mediated by colonialism and imperialism.

In the embedded phase of the Great Transformation, the industrialized economies effectively acted like closed economies, in which trade in potentially competitive goods was controlled by regulations that took labour costs out of the reckoning, since standards were similar in countries trading in industrial goods. This broke down in the dis-embedded phase of the Global Transformation. In Globalization 3.0, relative labour costs have become pivotal to trade to an unprecedented degree.

This relationship has characterized the period. Governments everywhere have striven to gain competitive advantage through labour reforms designed to increase "labour market flexibility", and through all sorts of subsidies, such as tax credits, which GATT rules have been unable to arrest. One consequence of a “beggar-my-neighbour” trade policy - combined with technological advances that have made the technical and geographical redivision of labour and production much easier - is that the defining feature of trade under Globalization 3.0 has been growth of trade in components of goods and components of services.

I have one small grumble with Richard’s analysis of the changing pattern of trade. He predicts that future trade will depend on “global arbitrage opportunities” shaped by “wage rates in the service sector”. It will not be wage rates per se that matter, but labour productivity and labour costs. Chinese wage rates may rise towards the OECD mean average, as they are doing so, but if the Chinese state can squeeze more productivity out of their labourers and if they subsidize non-wage labour costs more effectively, arbitrage would not depend on relative wage rates. The trouble is that in Globalization 4.0, the state in emerging market economies may well take on an increasing share of labour costs. How OECD countries respond will be a major challenge.

A final analogy is crucial to our understanding of the more general challenge ahead. In the dis-embedded phase of the Great Transformation, a new class structure took shape, with struggle by the proletariat defining the age. The subsequent re-embedded phase, or Globalization 2.0, entrenched the agenda of that mass class. By contrast, in the dis-embedded phase of the Global Transformation, or Globalization 3.0, the proletariat has shrivelled along with social democratic politics, while a new class structure has taken shape. The mass class is now the precariat.

If a re-embedded phase - a desirable Globalization 4.0 - is to be anticipated, it will be the needs and aspirations of the precariat that will shape it. They will forge a new politics of paradise, geared to reducing inequalities and insecurities, and rolling back rentier capitalism. The historical challenge for the precariat is to force governments to construct an ecologically sustainable economic system in which the rewards for technological progress are shared more equitably, and in which the threat of "extinction" is overcome. The new protest movement called "extinction" may prove to be pivotal.

In a sense, one may say that the commons were plundered in Globalization 1.0, revived in Globalization 2.0, and plundered more extensively in Globalization 3.0. In Globalization 4.0, they must now be rescued and dramatically revived.